Editor's note: Whitney Tilson has accomplished a lot over the past three decades...

He earned two degrees from Harvard, helped start the nonprofit organization Teach for America, and became one of the most famous hedge-fund managers on Wall Street.

He's also an avid mountaineer, competes in marathons and other races, and is the all-time record holder in the 50-and-up age group at the 24-hour "World's Toughest Mudder."

Earlier this year, Whitney launched his latest venture – Empire Financial Research. A corporate affiliate of Stansberry Research, Empire aims to provide advice, commentary, and in-depth research and analysis to help people around the world become better investors.

In this weekend's Masters Series, we're sharing two lessons Whitney has learned over his more than two decades on Wall Street. Today, he details three steps you can take to become a successful investor over the long run...

I Guarantee These Three Simple Steps Will Dramatically Improve Your Investing Results

By Whitney Tilson, founder, Empire Financial Research

It's extremely difficult to generate superior investing performance over time. Nearly every study shows that few investors can do so.

If you seek to be one of them, my first bit of advice is to keep things super, super simple.

Investing isn't about running big spreadsheets and complex valuation models. Rather, the trick is to think sensibly about businesses... project what's likely to happen to them in the next few years... and compare this with other investors' expectations.

There are three possible ways to achieve investment success: be a good stock-picker, be a good market timer, and/or use leverage.

I've tried all three... They're all hard, but from my experience, the second two ways are the hardest. Few people are consistently good at timing the market, and leverage will eventually blow you up.

But I do know many people who are capable of finding the occasional undervalued stock – the proverbial 50-cent dollar...

1. The first step to becoming a good stock-picker is to develop a sound strategy.

To start, you need to answer a handful of questions...

What are your interests and strengths? Where might you have an edge? What countries, industries, and market caps will you focus on? Are you going to be short-selling? Will you be fully invested at all times, or will you sometimes hold substantial amounts of cash? How much trading do you plan to do? How long will you hold your positions?

The key is to develop a well-articulated, well-defined strategy that differentiates you from the millions of other investors in the market.

There are many ways to do this...

One of them is size. If you're investing with a small pool of capital, you can invest in the nooks and crannies of the market – areas with more inefficiencies.

Time arbitrage is another. The vast majority of money in the world is managed by people who are evaluated on a short-term basis, so investors who can look a year down the line have a big advantage.

Then you can consider concentration. Most professional investors (think index funds and institutional money) are required to be super-diversified.

If you invest in 10 stocks and put on the occasional 15% – or even 20% – trade with high conviction, this can be an advantage... But operate with caution, as excessive concentration can be deadly when you make a mistake.

You can also find an informational edge. This is especially valuable in less-developed markets, which are much more inefficient than in the U.S., the most picked-over stock market in the world.

Never underestimate the power of "boots on the ground" research. You can gather information from interesting sources, like by talking to friends in a given sector or even walking into a store and speaking with a company's employees.

Even if you don't have access to proprietary information, you can still develop an analytical edge by taking the same information as everybody else and analyzing it better.

Experience is an edge you can earn over your career. As an investor, it takes years – even decades – to develop your instincts... But once you have it, it can be the most valuable edge you have.

You can develop an emotional edge as well. Human beings are hardwired to be irrational when it comes to financial and investment decisions. If you can control your emotions, you will have a distinct advantage over your competition.

Finally, you can build relationships. Smart investors build and maintain a network of contacts to exchange ideas and information with others in order to gain valuable insights before everyone else.

Once you've developed a strategy and are clear about your edge, you need to...

2. Apply a consistent, simple framework to evaluating stocks.

The first step is determining whether it's within your circle of competence.

You need to ask – and correctly answer – whether you truly understand a company and its industry. Do you have an edge, or are you just the proverbial sucker at the poker table?

You don't need a huge circle of competence, but you must understand its boundaries. Straying outside of your circle of competence is one of the deadliest mistakes you can make.

The second point on my cheat sheet is company and industry evaluation.

Before you buy a stock, you need to evaluate the underlying business and determine its quality. Does it have sustainable competitive advantages, a high return on capital, steady growth, a strong balance sheet, and good free cash flow?

Careful investors should also take a step back and look at the industry in which a company operates. Are there favorable trends behind it or not?

Last but not least, we come to evaluating management.

Before you invest in a company, ask yourself the following three key questions: Are they good operators? Are they good capital allocators? And are they trustworthy and shareholder-friendly?

Let's say I find a company that scores highly on all three metrics: It's within my circle of competence, it's a high-quality business in an attractive industry, and management is top-notch.

Time to buy the stock, right? Not so fast...

The problem is that most companies that meet these criteria for me also meet the same criteria for every other investor – and thus, it's reflected in the stock price!

That's why it's critical not to forget the last step...

3. Be patient and clever enough to wait for a stock to become significantly undervalued, with a big margin of safety.

The fundamental way to value most assets – whether it's a company, bond, piece of real estate, etc. – is discounted cash flow. It simply means estimating the future free cash flows that the asset will generate, and then discounting them back to the present.

The concept and the math are simple. The hard part is correctly predicting the future free cash flows. But this is what you must do to value something. If you can't, that's OK – just move on and focus your energies elsewhere... But there's an even simpler way to think about valuation when it comes to stocks.

Just think about expectations.

Almost every stock price reflects the consensus expectations that investors have about a company's future. It's not hard to figure out – just read a few analyst reports if you'd like to know the consensus viewpoint.

Once you know what the expectations are, what determines whether a stock price goes up or down is whether a company's performance exceeds or underperforms those expectations.

Sometimes, you can make money buying the stock of a company that investors love, in which expectations are high, but the company exceeds them – think Netflix (NFLX), Amazon (AMZN), or Adobe (ADBE). This is typically known as growth investing, in which paying up for a stock is, over time, offset by a company's high growth rate, resulting in a successful investment.

But numerous studies show that investing in richly priced, popular stocks generally doesn't work out so well. It's difficult for any company to grow at a high rate for an extended period, and most don't.

For most of my career, I did the opposite: I looked for out-of-favor companies in which investor expectations were low, such that any hint of good news – or even stabilization – would send the stock soaring.

This is classic value investing. The goal is to identify companies that are encountering difficulties that the market thinks are permanent, but instead prove to be fixable.

Electronics chain Best Buy (BBY) is a good example.

The stock was trading above $50 a share in early 2008 before the Great Recession and before increasing competition from Amazon and other online retailers crushed the company. The company started to lose money and the stock was trading below $12 a share by early 2013.

Investor sentiment couldn't have been worse. Its chief brick-and-mortar competitor, Circuit City, had gone bankrupt, and everybody was expecting Best Buy to follow. Many analysts questioned what role physical retailers had in a world where everyone was buying everything on Amazon.

But then a new CEO, Hubert Joly, came along in 2012 and engineered a remarkable turnaround...

While most electronics consumers were switching to online shopping, many still wanted to speak with a salesperson and see the phone, tablet, computer, or TV before they bought it.

With Circuit City and many other brick-and-mortar competitors out of business, Best Buy was the "last man standing" and had these customers to itself. It has served the company well... Today, the stock is up more than 600% from its lows in 2013.

Another way to think about expectations is the term "variant perception." Hedge-fund manager Michael Steinhardt coined the phrase, which simply means "what do you believe that's different from the consensus view?"

It's easy to develop a variant perception. What's hard is being right because the market is superefficient. That's especially true more than a decade into a bull market, with a lot of smart people out there – many using super computers – looking for even the tiniest mispricing.

When asked about the most difficult part of being an investor, Steinhardt said...

The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view.

It's especially hard because it can take years before your variant perception is proven right. In the meantime, you are bombarded by the conventional wisdom as expressed by the market. (As French investor Jean-Marie Eveillard said, "It's much warmer inside the herd.")

But if your goal is to develop superior investing performance over time, you must put in the work to find undervalued stocks. And by following the three simple steps I shared in today's essay, you'll be off to a great start.

Regards,

Whitney Tilson

Editor's note: Whitney's storied career on Wall Street has taught him that you can make an absolute fortune – and worry far less about your finances – if you find one truly great stock idea and then "back up the truck" at the right time. And right now, he sees one of those opportunities in what he has nicknamed "America's No. 1 Retirement Stock." Whitney recently put together a detailed presentation in which he gives away the company's name and ticker. Watch it and learn his favorite stock idea for free right here.