Posted by: donmihaihai | August 19, 2007

Where are the real bargains?

As an investor, our minds and souls are always looking around for bargains. As a stock investor, our faces brighten up with the stock market shift lower by 15% or so. By looking at stock market as a whole, 15% is nothing much if some figures are known. STI is still trading at around 3000, more than double from the low of around 1400 in 2003. But if STI dropped from 1400 to 1190(a drop of 15%), then that mean something as STI was trading at around 2400 in 2000. When come to individual stock that is another story. There are always bargains around, before the drop or after the drop. The different is just a handful or huge load lying around, or perhaps how big the bargains are. Here huge amount of skills are required as to identify what is the future of the company.

When there is a crisis, there is an opportunity is sure to ‘pop’ out of many people mind where the latest crisis in subprime/credit market which subsequent hit the stock market. Asia equity and global property market are being pointed out my many as the opportunities for buying i.e. bargains. It might be true but looking at market as a whole, with the example of STI index, if it is a bargain, it won’t be a real bargain. The real bargains are always in places where it hit the hardest, places where no one want to be there. This at this point is no other than the mortgage loans, CDO as what many are known. Beside that, financial institutions in US which deal direct with the origination of the loan may provide another. Beside that, on a lesser extend, corporate junk bonds, especially those from issue to finance LBO.

Seriously, most of these are not available to many small time retail investor and not even funds. If there are fund trying to incorporate here, either they are shot down by MAS or face rejection from investor. Our choice is most likely to limited to only the financial firm in US that are directly in the business of origination of mortgage loans. But this require someone who able to ascertain that the company able to withstand the current crisis. Not an easy skill to master as someone who can do it quite well is already working in the top manager or analyst of some top managed fund.

In short, to take advantage of the bargains, besides knowing where the opportunity is, skills and guts is required. Is these highly profitable? History says yes. And that history does not pointed to crashed of 2000 or 1987 or 1970s of stock market in US.

Examples:

1) In 2001 and 2002, due to the blown up of Enron, WorldCom, etc. Yields of Junk Bond surged as many of these companies issue load of corporate bond, some yield as high as 20 to 30% at the darkest point. Warren Buffett did as he did many times in the past, load up billions of junk bond. In 2004 and 2005, these junk bond yield 7 to 8%. What more he bought lot of them in European currency which he was able to profit from currency appreciation too. It is not just that he got the guts to buy at the point of crisis, he is able to figure out that the companies are able to keep paying their debts and the depreciation of US currency.

2) During 1997/98, Asian Crisis cause Asian currencies to depreciate and stock market to crash. That followed by Russia default their debts and the fell of LTCM. US stock market slumped but not much. So where the bargains were back then? Asian market? More developed market like STI almost increased by 4 X from the low of 800 to 900. Market like Indonesia increased by 10 X from their low. Looking back, the real bargains were in Russia, the country that default their loan. If one was to invest in the stock market, 40 X the initial money in less than 10 years.

3) Lastly, there is an article on US S&L loan fallout in 1990. There are smart investors who load up lot of mortgage loan when the dusts settle. $0.15 on a dollar anyone? 

Looking at all the outsize gain, is it magic? It happened so there is no magic about it but if one follow what being common known and teach such as risk and return, portfolio or assets allocation will not going to benefits from these kind of situation. It is just pain common sense and the psychology to go in when everyone want out.

Think about it this way, in 1998, everyone was running away from Russia, selling at whatever price they can. You take your time and bought all shares of the strongest companies with solid Balance sheet that can handle any kind of stress. Forward 6 and 7 years later. After gaining 40 X the initial money, those fund managers/houses, some who dumped their holding back then are knocking at your door, smiling with greet, willing to purchase your securities at almost any price.

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Responses

  1. Yours is the only blog on SG stocks that I really enjoyed reading. Even though the English/Singlish leaves something to be desired, the content is intelligent and interesting. Please keep it up, you’re the best so far! In fact, I clicked on the link to Beauty China and found that it had been removed. If you could put it back up that would be great. Thanks very much.

  2. Eric,

    Thank you. You make my day and destroy it. Living up to expectation and floating around is not what I like to do. There are a few interesting local blogs around and can be a good read. But seriously, the best one doesn’t write blog in local context.

    Besides having problem with my language, I am having problem with IT as well. My last blog was hit by spam and I deleted it away together with some past writings on Beauty China.


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