News Highlight (2)

Value Hunting

Since the start of the sub-prime meltdown, investors' confidence has been at an all time low. In fact, investors' risk aversion has never been so low in the past decade. The US $/Jap Yen cross rate used often as a risk aversion barometer by the market, reached a historic low earlier this year. For a value investor, such times represent a once in a decade (if not a lifetime) chance to pick up beaten stocks at very cheap valuations. It's like your favorite departmental store offering more then 50% discount. In the financial market however, there appears to be a tendency for investors to go against such a logic. They tend to buy only as prices rise, however they will be better off behaving like the rational departmental store shopper and buy only when assets are on sale.

A tired and proven method of successful investing is to buy stocks selling at a low multiple of their earnings. Earnings are what a company has left after it has paid its expenses, a company selling at low earnings multiples is very often a better value pick then say another which is selling at a high earnings multiple.

Of course we have to compare the price-earnings multiple to its peer companies in the same industry( or/and its historical PE ratios) and also the broader indices to determine whether this company us indeed a value buy. Also a company's price to book value (PBV) is an important measure of a company's value.... those companies trading at a very low price to book ratios tend to outperform those with a high price-to-book ratios over the long run (then again, the chances of a low PBV survival rate for the next 5-10years is lower then those with a higher PBV).

And as many good old value investing books will tell you, having a "margin of safety" is imperative, especially in markets like this where it is possible to buy way below your perceived value of the stock if one is patient. This will not only minimise your gains in the long run when the market recovers-as long as one is patient and disciplined enough to follow this strategy religiously.

Many investors aim to buy only at the market bottom (especially those with limited capital), but many fail simply because it if often harder to predict the market bottom then to chose a value stock. Instead given the current conditions right now when many fundamentally strong stocks are priced at cheap valuations, it might be time to start nibbling on some of these value stocks, rather than attempt to catch the market at its bottom and risk missing out on this opportunity entirely.

Value investing is no rocket science, but it requires more effort than brains to discover the best value stocks out there. Just be warned that value investing is not for those looking for a quick gain. Only those who are patient enough to see out the end of this entire sub-prime crisis and the start of the next bull run will make a decent gain on the value stocks that they have picked up today. Caveat emptor.

Writtern by Jason Low end of 2008