Let's talk about value investing and undervalued assets

Discussion in 'Economics' started by amylase, Feb 20, 2008.

  1. amylase

    amylase

    I am a faithful disciple of Ben Graham. I seek long term investments in undervalued asset classes with sound fundamentals.

    I am trying to diversify my mostly U.S. dollar cash assets into diversified undervalued asset classes. I am hoping to achieve excellent results in long term.

    Please share your idea on what believe to be an undervalued asset class with great long term potential.

    I will start with mine.

    Japanese real estate: either buy property directly (more difficult) or through J-REITs (easier).

    17 years of declining land prices in Japan makes it a very undervalued asset class. More than half of the J-REITs are trading below their net asset value at the moment. Thanks to the large net sales by foreigners and wall street investment banks repatriating fund to fill sub prime mess back home.
    Currently J-REIT yield is about 8%

    Right now i have allocated about 10% of my assets into J-REITs. I'm seeking other asset classes to diversify.

    Thanks for sharing.
     
  2. fader

    fader

    i like the 17 years of declining prices and the discount to nav part of the story. but i am missing the sound fundamentals part of the equation in your arguments. if the u.s. economy goes into recession, my guess is japan will follow. just because something has substantially declined in price isn't good enough a reason to buy.
     
  3. Good idea. I had the same question as the poster above. How do J-reits fit the BG model?

    Here's another one - are you using "classic" or "modified" BG?
     
  4. I agree. Japanese real estate is definitely bargain basement at the moment, and one of my core long-term positions. Out of interest, what J-REITS have you selected, or have you just bought a basket of them?

    Here are a few more areas I see value:

    German Real Estate, especially Berlin. Land values are very low compared to other G7 countries and capitals. Land prices fell throughout the 90s. I went out there a while ago to look through records and investigate. I found a plot of land selling for 60,000 Euros, that in 1997 had sold for 225,000 Euros - a near 75% fall. And Berlin in 1997 was not exactly a gigantic real estate bubble. This pattern was repeated across many plots. IMO the real estate there is even cheaper than Japan. Prices per square foot there are cheaper than they are in Prague. Mortgage lending standards are very conservative there, deposits of 30%+ are the norm. Also, with the current global subprime worries and real estate bearishness, this sector is overlooked.

    Agriculture: there are less values now that the bull market is clearly underway. However, the fundamentals are very strong and prices are not yet discounting the potential. ADM for example is on a very low P/E. It is somewhat reminiscent of homebuilders in the early 2000s, where they sold dirt cheap for years despite being in a raging bull market for their underlying product. Each year they would go up, but the earnings would keep pace and so the multiples remained cheap.

    Japanese equities: on most valuation measures such as price to book, these are amongst the cheapest equities in developed the world. There was a 13 year bear market from 1990 to 2003 which scarred an entire generation of equity investors. The Nikkei is off significantly from its 2007 highs on the global credit woes, yet the domestic economy has no property bubble (quite the opposite), no systemic credit crunch, and is unlikely to see more than a brief slowdown (exporters and banks may get hit, but the domestic economy is fine).

    US dollar: this is more controversial, but on a PPP basis the US dollar is pretty darn cheap. It is held down right now thanks to the easy Fed policy and subprime/recession concerns, but once that passes, I think there is scope for a large revaluation back to levels more in line with purchasing power partiy.
     
  5. Thai small cap equities. Some at 98 lows and paying dividends. Index value relative to historical is misleading as half the market cap is PTT and it's petrochemi ndustry associate companies. Banks have been in a fairly steady uptrend but the small cap stuff is on the floor. Thailand has issues in terms of ongoing political uncertainty, sensitivity to US recession and China coming up underneath its industry faster than it can upgrade itself. While the requisite catalyst is not readily identifiable, a re-rating from these depressed levels is due at some point.
     
  6. For value investing you don't actually need sound short-term fundamentals - in fact it helps if they are extremely bearish, because it means the price will be even lower. What you need is sound long-term fundamentals (so you can be sure the business will be around in 5 years time, rather than bankrupt), and a hefty discount to the likely economic value.

    You mention a Japan recession. Firstly I don't think it follows that a US recession will cause a Japan recession. Do you have any analysis to back that up? The US is facing recession because of the biggest real estate and credit bubble in living memory. Did Japan have a real estate and credit bubble in the last few years? No. Did Japan even have a moderate boom in lending and real estate? No, the market has been in the doldrums for 18 years. Standards are extremely conservative and lenders & developers are fairly cautious. Now let's examine the figures - Q4 2007 Japanese GDP was up 3.7%. Does that look like an economy tottering on the brink of recession? Also, what sectors are exposed to the US economy and subprime? Exporters, and banks that lent overseas. The rest of the economy has pretty much no exposure to the US problems. So, I would say most likely is a temporary slowdown in the exporting sector, and a few writedowns at banks that lent to subprime, but that is it. This will probably drag down growth for 6-9 months, but it's no way near enough to cause a recession IMO.

    Now, let's look at the worst case and see what the impact of a recession would be. How long would it last? Probably the norm - 6-9 months. Since there were prior excesses in Japan, a longer recession would be very unlikely. So, what effect will a short recession have on the long-term fundamentals and values of J-REITS, which are already selling for half their book value? Let's say real estate takes a big hit and falls 15% in 2008 - so now the REITS are only trading for 59% (50/85) of their true value, as opposed to 50% (50/100). Wow, sure looks like a terrible investment to me! And this is on the worst case scenario. Now what will happen once the recession stops? Real estate will be a veritable bargain, and buyers will swoop in as the economy recovers. It will make back all the decline, probably within no more than 2 years, and will then go to new highs. So by 2012, 2013, REITS will be *even cheaper* than they are now, assuming no price change. And remember, this is on the disaster scenario. What if Japan does not have a recession, as is likely? You will have 5 years of consecutive growth in real estate prices. Even a conservative 5% per annum will give you a 27.5% return, assuming no dividends and no closing of the discount to net assets. If the discount closes from 50% to say 10%, you are looking at a 130% price appreciation, and you will collect dividends while you wait. On the upside scenario of a property boom from these depressed levels, prices could advance 10% or even 15% per annum (USA prices went up far faster than that during 2000-2005, for example). This would provide a 190% and 300% return respectively over 5 years.

    Your point would have some substance if Japan was facing a major real estate bust as a result of a prior bubble, as has happened in the USA. But that is not the case, quite the opposite. The long-term fundamentals look pretty sound, the values are extremely cheap, and the temporary blip that might come from the US problems will if anything be a great buying opportunity, a chance to add more at even cheaper prices, rather than a reason to stay away.
     
  7. fader

    fader

    I didn't say anything about short-term vs long-term. I presume it's common knowledge that value investing is long-term oriented. I don't have at my hand the statistics on correlation between the U.S. GDP and Japan GDP, but my guess is that there is some correlation. I am not a macro expert, but from the press I gather if the U.S. enters a recession, it will have a negative impact on the economies globally. I am making perhaps a crude assumption that the bottom of a global recession will roughly coincide with the bottom of the U.S. recession. I don't see any reason for Japanese RE to go up during a global recession. I am guessing the bottom of a recession may come in a couple of years time. I am simply saying that the timing of investments is as critical as anything else, and a much better return can be achieved by waiting to invest until the U.S. recession unravels.
     
  8. Are there any farm REITS?

    That might be a good opportunity for someone to put them together. Buy Iowa farmland and rent it out to rich farmers. :D
     

  9. Value investing may ass. All that Junk you can buy cheap, gets cheaper soon, and sometimes you are handed Bankruptcy papers from these compnaies and you are done.

    Take the case of DELTA FINANCIAL which Mohinsh Pabrai a value investor used to own. God only knows he got out or took a hit on 4.6 million shares which he owned. Thats about 23 million dollar dump. I am not sure.
     
  10. Yes, I'm not sure what the hell Pabrai was thinking when he started accumulating Delta, Sears and ABX air. Especially ABXA, I once had a modest amount and even nosed around the property and talked to management/employees/vendors many times. I wasn't comfortable with what I saw in 2005. I did a two stage liquidation 2005/2007.

    I still can't figure Pabrai's logic here.
     
    #10     Feb 20, 2008