Cover of MoneyWeek issue 407

Spotting a bargain

24 October 2008 / Issue 407

How to pick quality stocks. PLUS:

  • How the credit crunch is killing world trade
  • The Russian billionaire stirring up British politics
  • Bill Bonner on why shares will outperform cash


Why I’m ignoring Warren Buffett

What’s the difference between investing in a property and investing in a share? In essence there isn’t one. We buy both in the expectation that a) they will produce an income and that b) the market’s expectation that the income will rise will bring capital gains. In the case of the buy-to-let flat, the income comes as rent. In the case of an equity it comes as a dividend. There are all sorts of minor complications around the edge of course, but investing in both is basically a bet on a rising income.

So here’s the question. Would you buy a buy-to-let flat right now? Of course not. Why? Because you know that property is in a serious bear market and that prices will keep falling. You might think you see value all over the place, but that doesn’t tempt you back into the market because you know that as a whole it remains overvalued. You know that confidence across the board is shot. And you know that markets always overshoot to the downside anyway. If you think you see value now, you know you’ll see better value next year.

So why, if you wouldn’t buy a house now, would you buy an equity? After all, conditions are much the same.

That said, I know that many of you would rather go with Buffett’s gut feeling than mine (which seems reasonable…), so this week we look at equities that on conventional measures look like they represent real value.

Read the full editor’s letter here: Why I’m ignoring Warren Buffett