What are bargains?
Bargains are rare to find
in a market, thoroughly scanned by millions of investors every minute. By
nature, they are hated, discounted and neglected, or ignored completely.
They do not fit in a ‘respectable’ portfolio. No one wants to own
them. They are orphans and the very thought of putting them by the side
of darlings of the market in your portfolio would be a big blunder. If
the entire market is telling you a depressing, sad, and painfully long story of
less-promising companies, why would anybody want to invite them into a
party? Typically, they are like the uninvited guests in one’s
portfolio. A healthy portfolio, by nature, must consist of the best
candidates, leaving very little room for the lesser ones, and staying clear of
the worst. Bargains, in short, are unappreciated, unpopular, and unloved
candidates.
Why look at bargains at all?
Ultrasafe securities,
usually, deliver uninteresting returns. There is always a mad rush to
marry them in the marketplace. Because they are over-owned and over
worshipped, there is very little chance of such securities giving
mouth-watering returns. To outwit the market consisting of smart and
intelligent souls, you need to take a contrarian path. This is where
bargains matter. They are
· Unnoticed, ugly ducklings of the market
· Devoid of strong fundamentals
· Encircled by controversies of various kinds
· Apparently unworthy investment candidates
· Known for delivering consistently poor returns
· Perceived by all as useless investments
Why would anyone want to
marry such an ugly candidate? As the saying goes, if everyone feels good
about something and is happy to invest readily, it won’t be a bargain after
all. Bargains have fallen out of favor and lost their sheen and value for
valid reasons. If everyone thinks and feels bad about a company that was
once the darling of the marketplace, then certainly one must take notice of
such a company.
Where are those bargains?
Discerning investors look
for good buys. They constantly chase stocks where there is a price-value
mismatch, where the price is low relative to value, or the potential return is
high relative to risk. Investors chase stocks that consistently deliver
good results. When the demand for such stocks reaches maniac levels,
prices peak out. The seemingly good quality stocks, turn into bad buys
because of over-ownership. To make money, therefore, one must focus on
stocks that have gone out of favor due to irrationality or incomplete
understanding. Usually, bargains are found in situations where investors
fail to assess an asset fairly or fail to look beneath the surface to
understand it thoroughly or fail to look at the shining side of a scorned
asset. Such bargains are not topics of discussion at cocktail
parties. Usually, the price of such assets keeps on falling and
falling. They grab news headlines for the wrong reasons. The market
keeps on punishing the stock till it turns into a bottomless pit. Poor
performance would sink the stock price to rock-bottom levels. Capital
stays away from it or flees, and no one can think of a valid or solid reason to
own it under any circumstances or at any price. In short, the perception
about the stock has become worse than the reality. No one has a good word
to say about any of such companies.
Investing in bargains
Bargains, as is clear from
the discussion, offer deep value at unreasonably low prices. To make it
big, therefore, bargains deserve a closer look. Cycle-fighting,
contrarian investors have a golden opportunity to buy those distressed assets at
irresistibly low prices. if you hang on to bargain buys till the market
begins to assign a ‘fair value’ you would be laughing all the way to the
Bank.
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