Have you ever wondered why some investors got so wealthy? Their secret is simple. They buy assets at massive discounts and then wait for the price to appreciate.
The market is a fickle thing. Sometimes it will consider a capital item as being extremely valuable. And other times, it’ll discount their worth massively. The strange thing is that you never know which way things are going to go.
Just look at what happened during the crash of 2020. The Dow Industrial Average fell by more than 40 percent. But now it is back above its all-time highs. Investors got the pricing of assets wrong temporarily; it seems. And now we’re in a situation where a lot of people lost money for no reason.
Warren Buffett believes in buying assets when the price is low. That’s how he created his Berkshire Hathaway Empire. He realized that there was a difference in real and perceived value. Sometimes the market will undervalue stocks of companies that stand a very good chance of becoming highly profitable in the future. And sometimes it will over-value them.
Buffett was able to identify this pattern and then use it to his advantage over the long-run. He looked for assets in the market that were “on-sale” and identified them before everyone else. Then he just let the value of his equities rise over time. He managed to average returns in the 20 percent range over the course of decades, which is an incredible achievement.
What Assets Should You Buy?
How do you know, though, whether an asset is on sale? That can be more challenging.
Look For Signs Of Distress
The first thing you can do is look for signs of distress. Sometimes, people put their properties on sale because they’re trying to repay a debt or recoup losses elsewhere. In many cases, they are willing to sell at a lower price because they need cash right now. There is urgency.
For those reasons, you need to know the facts about the asset before you make the purchase. If a homeowner is trying to sell their property because they are in mortgage arrears, that can be a great time to buy. The same applies to a distressed company. Sometimes, you’ll find firms that are doing poorly financially but have a great product that will ultimately win in the long-run. It’s just a question of finding them.
Look For A Good Balance Sheet
Sometimes, you’ll want to go in the opposite direction and look for undervalued companies with excellent balance sheets. You can often find well-run but uninspiring companies that investors largely ignore. Remember, a lot of people are buying Tesla and Apple stock purely because they find those companies exciting. But that doesn’t mean that the value they contain is real and long-term. Problems in their balance sheets could deny them the opportunity to become profitable.
Look for companies that have low debt compared to their share price. These often have more room to run in terms of equity prices.