Bargains

"being less expensive does not qualify something as a bargain"

Bargains can be classified as "comparative bargain" and "absolute bargain".

For Comparative Bargain, one usually looks at the PRICING of similar objects and makes comparison to the asset of interest, drawing conclusion that it is overpriced or underpriced. I will contrast that with Absolute Bargain below. For an investor looking for Comparative Bargain, his focus would be the TRANSACTION PRICES. For example, if HDB flats are transacted at 800K for over a certain period of time, comparative bargain hunters will take it that the VALUE of such flats is 800K each. Sadly, this basis of valuation, a close-looped circularly referenced feedback mechanism, does not reflect the actual value of the asset. The other problem with this type of valuation is that when reference prices taken are inflated, like in a property bubble, investors detach the intrinsic value from the prices - much like the internet stock bubble. And as prices escalate, the idea reinforces itself that the asset is really worth that price.

For Absolute Bargain, we are talking about a discount to the intrinsic value of an asset. Ben Graham had so eloquently explained it in Security Analysis and I shall not repeat his words. Using stocks as example: If both TSE and NYSE are traded at PE of 100 and SGX at PE of 70, it does not automatically qualify SGX as a bargain stock. Bargain only exists if the price of the stock is below its intrinsic value, derived after careful analysis of its earning power, assets and future competitiveness. In fact, Absolute Bargain investors would shun all three stocks, knowing that prices are irrationally high for whatever reasons. When TSE and NYSE eventually trade lower, the Comparative Bargain for SGX immediately disappears. Such is the pitfall of neglecting the intrinsic value. Such "dangers" do not exist if investor adopts the concept of Margin of Safety. Using property as the example: In a very large farm land in Australia, if it cost $100K to buy a land parcel and build a house, and someone is selling a ready-built one to you at $50K, that's a bargain. However, if the neighbour 30km away recently sold his for $500K, it will not be a bargain to buy the one that costs only $50K for $300K - you can build it yourself even though paying $300K may save you some time. This example may not relevant in the Singapore context but it brings light to what a bargain is - comparative or absolute.In conclusion, bargain in HDB is a misnomer. The reality is that HDB is expensive - some being more expensive. So that brings us to the quote "being less expensive does not qualify something as a bargain".

HDB flats should be purchased on the basis of affordability if one is buying a home. If "comparative bargain" exists but the flat is still unaffordable, PASS. If it is for investment purpose, I believe Graham would also call it a pass.