Bargain Investment

Here’s How To Tell If You’ve Stumbled On A Bargain Investment

Great investment opportunities don’t just come to you when you’re sitting on your couch. You have to look for them.

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Q2 hedge fund letters, conference, scoops etc

I chanced upon one of my best investments about six years ago during a weekend drive out of Manila – the capital of the Philippines, where I live.

It was a vacant lot in a 300-acre gated residential subdivision near the mountains. Without traffic, it’s a 30-minute drive. Although just about 20 percent of the lots had houses built on them, this place had just about everything you’d want to make a home for yourself.

It had wide paved roads… visible security… a hilly, rolling terrain carpeted with mango, mahogany and molave trees… two 18-hole golf courses… a fantastic international school… and a breathtaking view of Manila.

An abundance of birds also made it feel more like a wildlife reserve than a residential development.

And you could buy a sprawling 20,000 square-foot piece of land in this exclusive subdivision for the price of a luxury SUV (about US$100,000). By comparison, just 10 kilometers away in Manila, vacant land inside gated villages was selling for the equivalent of US$1,000,000 or more.

So for a fraction of that amount, I could buy choice real estate big enough to fit a 20-room mansion with space for a swimming pool and a five-car garage.

There must be a catch, I thought.

Ask the right questions

I started digging deeper and doing more research. I spoke with security guards at the gates about safety. I chatted with the grass cutters, street sweepers and a few caretakers. Then I went to the local city hall to ask about annual property taxes. There were no red flags.

When I asked a few property investment friends their thoughts of the area, they said it was too far away, there was no running water there, the place was dangerous at night, and one even said it was an area known for having ghosts.

But most of them had never even set foot there – and their “insight” was based on false word-of-mouth. And those who had been there before hadn’t been back in a while. But in any case, they viewed it as a no-go zone.

This reaction had a lot to do with home market bias, which plays a big factor in investment – even within a country. Most people living in Manila aren’t familiar with what’s outside the capital. They either didn’t grow up there, they didn’t have relatives in the area, or they never felt the need – or urge – to explore.

That was reflected in real estate investment. For the best part of the last four decades, investors and home buyers poured billions of dollars into real estate in Manila – while shunning nearby towns and cities like this one.

Manila had most of the jobs, all the good hospitals, the best schools, lots of shopping malls (including, at one point, Asia’s biggest) and an international airport. The government had spent more on infrastructure in Manila than the rest of the country combined. So, most people weren’t interested in living anywhere else. It’s when buyers and investors get complacent, and think that what’s in front of them is the only thing worth buying, that opportunity is created. This was a perfect example.

Before I came across the property, the town hosting this development had grown into a small city. Over the years, much-needed public infrastructure was built. And contrary to what my friends thought, the entire place already had a clean, reliable water supply. Several new malls, schools and hospitals also opened.

I figured other people would soon catch on to this opportunity, so I grabbed it with both hands.

Since then, the government has announced a new elevated mass transit railway project connecting this city to Manila. The Department of Public Works and Highways expanded the width of the main highway going there by 50 percent. And they’ve just broken ground on a six-lane elevated expressway that cuts the travel time to the central business district from 1.5 hours to just 30 minutes.

And recently I’ve heard others talk about it during cocktail parties – a sure sign that it has caught on.

Since I invested six years ago, the price of this plot of land has almost tripled.

Relative valuation is a starting point

When looking for investment opportunities, whether it be in real estate or the stock market, it’s always a good idea to consider relative valuation. That is, how much cheaper or more expensive one particular investment is relative to other similar assets.

In the case above, I compared the price of real estate in the area to Metro Manila and found a gaping disparity – as much as 90 percent.

That led me to find out if this difference was warranted. If not, it presented a unique investment opportunity.

The same can be said for investing in stock markets, where cheap usually beats expensive.

For example, the table below shows the valuation for a number of stock markets.

Bargain Investment

You’ll notice that the first three markets (U.S., Denmark and Switzerland) are trading for three times more than the last three (South Korea, China and Russia) and twice as much as Hong Kong, Japan and Singapore.

On a price-to-book basis (how much stocks are trading for relative to their book value, which is the value of all their assets minus all their liabilities), the U.S. trades for 3.7 times more than stocks in China and Russia, and 3 times more than Singapore and South Korea.

On a price-to-earnings basis (how much stocks are trading for relative to their earnings), Switzerland trades for 3.3 times more than China and Russia.

And on a price-to-sales basis (how much stocks are trading for relative to their revenues), Denmark is four times more expensive than China and double that of Singapore.

Yes, the U.S., Denmark and Switzerland are expensive for good reasons.

The U.S., for instance, is home to many of the world’s most highly-valued technology companies (i.e. Netflix, Amazon, Google, Facebook, Twitter and Apple) that trade for multiples over the average listed stock.

All three countries rank the highest in the world in terms of financial assets per capita. And because of home country bias, much of their growing financial assets tend to remain inside their countries, pushing up asset values well beyond the global average.

All three countries do have stable financial systems and governments, and they have strong currencies, which is why smart money usually prefers to stay within their borders.

But except for not having a strong currency, much of the same holds true for South Korea, China and Russia. And in the case of Hong Kong and Singapore, they have all the same benefits and advantages to investors as in the U.S., Switzerland or Denmark.

Moreover, the biggest companies in these relatively undervalued markets are just as profitable – sometimes even more so! – than their Western counterparts.

According to Fortune’s Global 500 list for 2017, 19 out of the top 50 most profitable companies in the world are from China, Japan, South Korea or Russia.

So it makes sense for investors to give these markets a closer look, especially when you consider that they’ve outperformed their global counterparts. Soon, others could start to see the value most people have yet to notice.

Good investing,

 

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