Before we bust out of the gate you need to know something important about Warren Buffett. He doesn't "play" the stock market -- at least not in the conventional sense of the word. He is not interested in current investment trends, and he avoids the popular investments of the day. He doesn't chart stock prices, nor does he partake of the current Wall Street rage known as momentum investing, which dictates that a stock is attractive if its price is rising fast, and unattractive if it is quickly falling. This is the most unusual aspect of his investment philosophy, for throughout his investing life he has made it a point to sidestep every investment mania to sweep the financial world. He happily admits to missing the Internet revolution and the biotech bonanza, and he will tell you with a sly smile and a wily chuckle that he has probably missed all of the big Wall Street plays. Then again, he has managed to turn an initial investment of $105,000 into a fortune that now exceeds $30 billion, solely by investing in the stock market.

Here is the big secret: Warren Buffett got superrich not by playing the stock market but by playing the people and institutions who play the stock market. Warren is the ultimate exploiter of the foolishness that results from other investors' pessimism and shortsightedness. You see, most people and financial institutions (like mutual funds) play the stock market in search of quick profits. They want the fast buck, the easy dollar, and as a result they have developed investment methods and philosophies that are controlled by shortsightedness. Warren believes that acts of shortsightedness have great potential to unfold into investment foolishness of huge proportions. When this happens, Warren is patiently waiting with Berkshire's billions, ready to buy into select companies that most people and mutual funds are desperately trying to sell. He can buy fearlessly because he knows which of today's corporate pariahs the stock market will covet tomorrow.

Warren is able to do this better than anyone else because he has discovered two things that few investors appreciate. The first is that approximately 95% of the people and investment institutions that make up the stock market are what he calls "short-term motivated." This means that these investors respond to short-term stimuli. On any given day they buy on good news and sell on bad, regardless of a company's long-term economics. It's classic herd mentality driven by the sort of reporting you'll find in the Wall Street Journal on any given morning. As goofy as it sounds, it is the way most people and mutual fund managers invest. The good news -- the news that gets them to buy -- can be a headline announcing a prospective buyout or a quarterly increase in earnings or a quickly rising stock price. (It may seem insane that people and mutual fund managers would be enthusiastic about a company's shares simply because they are rising in price, but remember, "momentum investing" is the current rage. As we have said, Warren is not a momentum investor. He considers the approach sheer insanity.)

The bad news that gets these investors to sell can be anything from a major industry recession to missing a quarterly earnings projection by a few cents or a war in the Middle East. Remember that the popular Wall Street investment fad of momentum investing dictates if a stock price is falling, the investor should sell. This means that if stock prices are falling, many mutual funds jump on the bandwagon and start selling just because everyone else is. Like we said, Warren thinks this is madness. On the other hand, it's the kind of madness that creates the best opportunities.

Warren has realized that an enthusiastic stock price -- one that has recently been going up -- when coupled with good news about a company, is often enough to push the price of a company's shares into the stratosphere. This is commonly referred to as the "good news phenomenon." He has also seen the opposite happen when the situation is reversed. A pessimistic stock price -- one that has been going down -- when coupled with negative news about a company, will send its stock into a tailspin. This is, of course, the "bad news phenomenon."

Warren has discovered that in both situations the underlying long-term economics of the company's business is often totally ignored. The short-term mentality of the stock market sometimes grossly overvalues a company, just as it sometimes grossly undervalues a company.

The second foundation of Warren's success lies in his understanding that, over time, it is the real long-term economic value of a business that ultimately levels the playing field and properly values a company. Warren has found that overvalued businesses are eventually revalued downward, thus making their shareholders poorer. This means that any popular investment of its day can often end up in the dumps, costing its shareholders their fortunes rather than earning them a bundle. The bursting of the dotcom bubble is the perfect example of this popular here-today, gone-tomorrow scenario.

Warren came to realize that undervalued businesses with strong long-term economics are eventually revalued upward, making their shareholders richer. This means that today's stock market undesirable can turn out to be tomorrow's shining star. A perfect example of this phenomenon is when the insurance industry suffered a recession in 2000 that halved insurance stock prices. During this recession Allstate, the auto insurance giant, was trading at $19 a share and Berkshire Hathaway, Warren's company, traded as low as $40,800 a share. One year later Allstate was trading close to $40 a share and Berkshire popped up to $70,000, giving investors who bought these stocks during the recession quick one-year returns of 75% or better.

What has made Warren superrich is his genius for seeing that the short-term market mentality that dominates the stock market periodically grossly undervalues great businesses. He has figured out that the stock market will sometimes overreact to bad news about a great business and oversell its stock, making it a bargain from a long-term economic point of view. (Remember, as we said earlier, the vast majority of people and institutions like mutual funds sell shares on bad news.) When this happens, Warren goes into the market and buys as many shares as he can, knowing that over time the long-term economics of the business will eventually correct the negative situation and return the stock's price to more profitable ground.

The stock market buys on good news and sells on bad. Warren buys on bad news. This is why he made sure to miss the good-news bull markets in such popular industries as the Internet, computers, biotechnology, cellular telephones, and dozens of others that have seduced investors through the years with promises of riches. He shops when the stocks are unpopular and the prices are cheap -- when short-tem gloom and doom fog Wall Street's eyes from seeing the real long-term economic value of great businesses.

Key Point Speculating in good-news bull markets is something that Warren leaves to the other guys. It's not his game. He never owned stock in Yahoo!, Priceline, Amazon.com, Lucent, CMGI, or any of the other high-tech companies of the Internet boom. Warren's game is to avoid the popular, to wait for short-term bad news to drive down the price of a fantastic business, then jump on it, buying as many shares as possible. As Warren once said, "The most common cause of low stock prices is pessimism -- sometimes widespread, sometimes specific to a company or industry.... We [Berkshire Hathaway] like pessimism because of the stock prices it produces." Pessimism, not optimism, is the fountain that produced all of Warren's fantastic wealth.