INVESTING: Distressed assets today lead to profit tomorrow

Two real estate guys told me recently that the market might be able to grab some traction if the banks would face reality about the true worth of the stuff on their books. Write-offs are large, with an estimated $450 billion written down worldwide this year to date. And if you make an offer for real estate that is less than what the bank has written it down to, most likely your offer will be rejected. The bank is still stuck with the bad loan, and another deal didn’t get done.

The majority of time spent in a bear market is filled with hopes and wishes. This goes for equities, real estate, the job market, you name it. Each time the stock market bounces after getting hammered for a few weeks, the world is filled with experts telling us we’ve hit bottom. Government officials say that while the near term may still be a little difficult, the worst is behind us. People who are trying to sell their house hope if they hang on a little longer, they won’t have to lower the price, again. And businesses are slow to react with sharp defensive moves as they wait for economic conditions to improve. It’s not the fault of one particular bank or another; it is the entire culture.

Eventually, though, the prevailing opinion changes from one of eternal hope to fear. Investors are long past simply throwing their statements in the trash every month. Toward the end of the bear market, panic sets in. People throw stocks out no matter the price. Corporations announce huge layoffs. And regulators are finally forced to seek truer values from the banks. OK, now we are getting somewhere.

At this last stage, anyone holding a strongly underperforming asset is likely to look favorably at a low-ball offer. They just want it off their hands. And if you’ve been smart during the entire downturn, you might be just the person to take it from them.

Stories abound about people who are wealthy today because they practically stole things during the bad times of the middle to late 1970s. Stocks bottomed in 1974. Warren Buffet figuratively backed up his truck and loaded it with stocks. In my opinion, he continues to live off that tremendous hit today. Jim Rogers, a hedge fund manager who worked with George Soros, bought a condo in New York City in 1977 for $150,000 that he sold last year for $20 million. Richard Branson, the British CEO of the Virgin brands, bought an island in 1980 for about $500,000 that is said to be worth more than $100 million now. That’s the kind of coin I’m talking about!

Without having to make heroic moves like those mentioned above, everyday folks like you and me can still take tremendous advantage of this bear market. First, it is not too late to get defensive. We haven’t entered the panic stage yet, and that is typically where the largest losses are experienced. Second, begin to build a watch list of stocks you think can make strong sustained moves when a recovery sets in. A few months ago, I mentioned companies like Intel and Boeing.

Also, begin talking with a few local banks. Find out the types of distressed stuff they are holding. Think a few years into the future, and try to see if they make sense if you can buy them at really cheap prices. The most important thing is to not jump too early. At a true bear-market bottom, discounts will abound. Your patience today will allow you to take full advantage of the scene when it arrives.