Investing in Value Stocks

Written By Brian Hicks

Posted August 26, 2014

During a recent trip to Asia, I learned that many wealthy Chinese families were setting up companies to buy upscale U.S. real estate.

This activity was driven by sky-high property prices in Hong Kong and a desire for assets outside of the reach of the mandarins in Beijing. I confirmed my discovery with data from the U.S. National Realtors Association that showed Chinese citizens bought up $22 billion of American property in 2013.

So as soon as I got home, I formed an alliance with an upper-crust real estate broker and quickly sent gorgeous brochures for some absolutely stunning properties in Aspen, Colorado to a friend at a private banking firm in Singapore.

I figured his clients would buy these trophy properties like hotcakes and I could soon retire in La Jolla with Mitt Romney.

Boy, Was I Wrong

My friend’s response hit me square between the eyes: “Carl, these are spectacular properties, but my clients will only be interested in distressed properties.”

Of course! How could I have possibly missed this innate instinct for a great bargain? After all, isn’t this how these buyers became wealthy in the first place?

This underscores the idea that almost every legendary investor has been a value investor. These guys are always on the lookout for great opportunities… but the purchase must come with a discount price tag.

I challenge you to come up with a great investor who did not follow a value strategy.

Even Peter Lynch, the darling of growth investors — while certainly not a pure value investor — invented the famous PEG ratio that measures stocks based on growth and valuation.

Benjamin Graham, John Templeton, Warren Buffett, Carlos Slim, Li Ka-shing, and Phil Carret (who never invested in anything that he didn’t expect to double) are just a few of the great value investors. Sir John Templeton became famous and wealthy by pioneering the strategy of scouring the globe for bargains.

So why don’t we all pursue more deep-value opportunities?

First, deep-value opportunities can be time consuming to analyze. And it takes guts to pull the trigger when average investors are heading for the exits.

Second, many of us lack the patience to wait for the cycle to turn or for a catalyst to kick growth into high gear and unlock the value of the company.

So Where Can We Find These Value Opportunities?

Broadly speaking, three situations will almost always present you with these bargain prices: an economic crisis, an out-of-favor industry, and a company or property in a distressed situation.

Put it all together, and the strategy pays off… handsomely.

The legendary J. Paul Getty was a master in taking advantage of great stock values in depressed and crisis markets.

Much of his great fortune can be traced back to the 1930s, when he scooped up resource stocks and properties at bargain prices. He chose his targets carefully and had the courage to jump in when others were too scared to move.

He put it this way…

The big profits go to the intelligent, careful, and patient investor — not to the restless and overeager speculator. The seasoned investor buys stocks when they are low, holds them for the long-pull rise, and takes in between dips and slumps in his stride.

A similar situation arose for Getty in postwar America, then in Europe, and later in Asia and the Middle East. Develop an instinct for a bargain, and start putting some value in your portfolio today.

Real Value

You can definitely find a number of these deals in the biotech sector — particularly in stem cell research.

In fact, our in-house biotech expert, Jason Stutman, has just put together a new report on some of the companies pursuing this research. One in particular is actually getting an enormous amount of media attention right now, as its technology is the one Denver Broncos quarterback Peyton Manning has used — not to mention Kobe Bryant, Tiger Woods, and Alex Rodriguez, too.

This is cutting-edge stuff — and at a tremendous discount.

Until next time,

Carl Delfeld for Wealth Daily

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