Where To Find Bargains In The Market

I’ve been meaning to get my gate fixed. Trouble is I’m not the handiest of men. I’m not really sure how to use most power tools.

I guess it’s not really just mine. We share it with our neighbours. But they want it fixed soon. They’ve got an auction coming up.

In this market…? I know what you might be thinking. Surely they should wait. Banks are creating less money, especially for investors, which has led to declining demand for property.

It’s not that people don’t want to buy property. A lot of them just can’t. Their serviceability might be maxed out under new lending policies.

I, for one, am very excited to see what their place goes for. My wife and I purchased our place a little over two years ago.

I’m guessing prices haven’t changed all that much, but auctions bring out the worst in people. They end up bidding far more than they wanted to. And, with a little coaxing from realtors, bidders might even go a little over their limit.

Whatever it goes for, it will directly impact the market price of our place.

Almost no one values property by the income it generates, which can sometimes lead to ridiculous sales prices. Most homeowners look at what similar houses sold for in the area. This figure then becomes an anchor, which they add to and subtract from based on the qualities of the house.

So what happens if our neighbours sell their place for 50 or 100 grand less than what we purchased our place for?

Should I ring up the real estate agent to sell our place immediately? What if prices drop lower? If I sell now I could save myself from further drops…

Where the bargains hide

Of course that would be a dumb idea.

Who cares what our neighbours sell their property for? Even if it’s lower than the price we originally purchased ours for.

We’re very happy about the rental income we receive. There is no point selling something we’ve bought for a loss when it’s making us money in the process.

I think most of you would agree with me.

But had I said the same thing about stocks, I’m guessing a lot more of you wouldn’t.

There are thousands of businesses on the ASX. All of them are falling, not because earnings are falling, but because prices are down and investors want to escape their bleeding portfolios.

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I get it. It hurts when you’re down.

The majority are telling you you’re wrong. And the majority probably has a lot of smart people on their side. So maybe you are the one who’s wrong…

The easiest thing to do is sell and forget you ever bought a given stock.

But the majority is not right all the time. In fact, they are often wrong about a lot of things. And it’s exactly why billionaire investor, Howard Marks, has jumped into China.

Most investors are convinced China is a bad place to be, whether it’s for debt or stocks. But that’s exactly why Marks is loading up. South China Morning Post writes:

Oaktree Capital Group, one of the world’s largest alternative investment firms, says it will continue to invest in distressed debt and equities in China where non-performing loans are piling up amid slowing economic growth and declining stock markets.

For Howard Marks, co-chairman and co-founder of Los Angeles-based Oaktree Capital, rising non-performing loans in China and improved legal infrastructure made it attractive to invest in Chinese NPLs.

‘…Marks also said Oaktree Capital was “actively investing in Chinese equities” despite the benchmark Shanghai Composite Index falling some 21 per cent so far this year.

Chinese stocks have taken a beating because of the ongoing trade war with the US and the consequent slowdown in economic growth. Third-quarter growth came below expectations at 6.5 per cent.

Psychology plays a very important part in the Chinese market and I think at the present time, it is very negative. Some of it is a genuine reaction to negative events like slowing growth, global tensions, and some of it is probably a strong emotional reaction and perhaps an overreaction.

When you find a market and you have negative events, and negative psychology then that is a good starting point to search for value.

Buy my local bakery

Of course, you should be buy low and sell high. And there are a lot of low prices at the moment. But now might not be the time to buy anything and everything.

So what should you buy?

I’ve told my wife if the company she works for ever lists on the ASX, she needs to tell me immediately.

If you’re not familiar with building surveyors, they basically hold the keys to the castle when it comes to development.

To build anything, from an office building on Collins Street or a fit out in Bourke’s shopping district, you need a building permit. And guess who gives them out?

Building surveyors are there to check everything is built to a certain standard. Yes, they’re a roadblock to building a 20-storey office building. But they ensure that building won’t collapse, catch fire…you can fill in the blanks. And they take any of the financial risk if something terrible does happen.

Because premiums for this kind of work are so high, there are massive barriers to entry. In fact, most insurers will only do work with existing building surveyors. New kids on the block are simply too risky to even consider.

What this means for current building surveyors is a whole lot of dollar signs.

Of course, the firm my wife works for has competitors. Yet the industry is growing so fast, with so few competitors, everyone is a winner…for now.

I’ve also told the owner of our local bakery, if they ever list on the ASX they should call me immediately. Not only are their breads, pastries and coffee to die for, they do anything and everything to make customers come back.

Whether that’s the free samples out the front, the rustic, stylish look and feel of the building, or the free Wi-Fi they make available for everyone. The owners know it’s not hard for any of their customers to go across the road to Bakers Delight. So they go that extra mile to please customers. As a result, the bakery is packed from the time it opens to when it closes.

While you or I can’t buy either of these businesses, we can look for businesses on the ASX with similar qualities.

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Most haven’t seen earnings drop sharply. In fact, a lot are still growing. Yet their stock prices continue to fall.

If you’re holding cash, maybe now is the time to think about loading up.

Happy hunting,

Harje Ronngard,
Editor, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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