Complex Made Simple

Reading Warren Buffett: spotting bargains in bombed-out markets

After six months of global financial turmoil it ought to be easy to spot bargains. But with even Warren Buffett warning that stocks could get cheaper, most cautious investors are sitting on cash piles, and fretting about the devaluing US dollar. So is it really possible to see through the clouds now and find a silver lining?

The celebrated contrarian Dr. Marc Faber suggests that it is always an error to go looking for bargains in sectors that have recently boomed. His argument is that yesterday’s hot pick almost never bounces back far enough for a good investment, and that you should always look for the next big thing.

To take an example, the Nasdaq still trades at a huge discount to levels reached in 2000, although a handful of tech stocks have outperformed. Or look at Abu Dhabi Investment Authority’s purchase of Citi stock in the sub-prime crisis, which is currently worth less than it paid.

No, what you really want to find are market anomalies created by the financial crisis in sectors that are on the way up.

Wall Street crash

For instance, if Wall Street takes another tumble when a US recession is finally and officially declared then you could find an asset sell-off across the board that produces some excellent bargains.

That is what the world’s richest private individual Buffett means when he says that shares are not cheap enough yet. So this is a good time to draw up a hit list of stocks that you would like to own and wait for the right moment to buy, most likely when there is a serious slump on Wall Street.

The good will get dragged down with the bad. And probably the best approach will not be to buy former boom stocks like real estate and the financial sector but to try to spot the next big investment opportunity.

These frequently flow from what has gone before. The housing bubble followed the tech crash because interest rates were slashed to support the economy. In turn the tech bubble followed the loosening of liquidity to meet the Asian financial crisis of 1998.

Therefore you might ask: which sectors will benefit from the massive liquidity injections now being administered by the central banks to deal with the financial crisis?

Property plus

Property in certain markets like Dubai, Abu Dhabi and Hong Kong is clearly one beneficiary due to local dollar pegs; and local real estate and financial stocks should also thereby benefit eventually.

Globally it is apparent that energy prices and commodities in general and food in particular are gaining in price on the back of this monetary expansion. And gold, silver and platinum are doing exceptionally well.

If you had to take a guess on what Buffett might do next is it not obvious? He will be waiting for depressed stock prices to emerge in these sectors after a serious bout of depression in global financial markets when the reality of a US recession dawns, and the markets speculate wildly on just how long it might be.

See also:
Drawing investment lessons from turbulent capital markets
Warren Buffett watching for investment tips
Top gold and property Feng Shui tips for the Year of the Rat