How to Buy Stocks for Less Than They’re Worth
Editor’s Note: Everyone loves a bargain, especially when it comes to the stock market. But what if you could buy a basket of stocks for less than they’re actually worth?
Well, my friend and colleague Jonathan Rose knows a thing or two about finding opportunities like these.
Jonathan has spent nearly three decades in the markets, including time as a professional market maker. He knows how Wall Street works, and he has a knack for spotting opportunities that most investors overlook.
That’s why I’m excited to share his insights with you today. Below, Jonathan reveals two funds trading at a discount – and explains how to tell whether you’re getting a real bargain.
But I also want to make sure you know about a special opportunity to learn directly from Jonathan.
Tomorrow, Wednesday, October 14, at 8 p.m. Eastern, Jonathan is hosting his free $10K to $100K Challenge.
He’s going to share the strategy he believes could help investors turn $10,000 into $100,000 or more over the next year.
Now, I’ve been in this business a long time, and I can tell you that finding someone with Jonathan’s experience and understanding of the markets is no small thing. I wouldn’t be sharing this opportunity with you if I didn’t think he had something valuable to teach you.
And with the event happening tomorrow, I don’t want you to miss your chance to hear what he has to say.
Click here to save your free seat for tomorrow’s $10K to $100K Challenge.
Now, I’ll turn things over to Jonathan.
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Hey, guys.
Back in early 2015, investors wanted a piece of Cuba.
Washington was restoring relations with the island. And so, retail investors started dreaming about American tourists, new business, and opportunities that had been off-limits for decades.
So they took to their laptops and went looking for something to buy.
And there it was, right on their screens: CUBA. A ticker practically handing them the trade they were looking for.
Except there was a problem.
The fund’s actual name was the Herzfeld Caribbean Basin Fund. And when I looked under the hood, it didn’t own Cuban stocks. It owned businesses operating around the Caribbean, including airlines and cruise companies, but there was no Cuba in the CUBA fund.
Zero.
Nevertheless, excitement about the island nation had pushed the fund’s share price well above the value of what it owned.
People were paying extra for the story.
I took a short position against that inflated price, and it became one of the biggest trades I’ve personally had.
Now, I’m not asking you to make that trade… or to short anything. I’m telling you this story because the same disconnect can work in the other direction.
Sometimes investors pay too much for a basket of stocks. Other times, Wall Street sells you that basket for less than the value of the stocks inside.
That’s where you want to shop.
Today, I’ll show you how buying stocks at a discount works, walk through two examples, and explain the comparison I make before I call anything a bargain — because a discount by itself doesn’t mean a thing.
To get these stocks at a discount, you don’t have to wait for the whole market to go on sale.
Buying a Dollar’s Worth of Stocks for Less Than a Dollar
Think about a basket of stocks worth $100.
You add up the holdings, subtract what the fund owes, and that’s what you have: $100 in net assets.
But investors are buying and selling shares of the fund itself. And sometimes the price they’re willing to pay represents only $85 of that $100.
That’s a 15% discount, and you’re buying your share of the basket for less than its underlying value.
The vehicle that makes this possible is called a closed-end fund. Don’t let the name intimidate you.
I actually used to teach this exact strategy under the name “closed-end fund arbitrage”… and nobody joined. Called it “hedge fund secrets” the next month, same exact content, and a crowd of folks signed up.
Moving on.
A closed-end fund’s shares trade on an exchange, just like a stock. But the share price can move away from the value of its holdings, creating a discount – or a premium.
Don’t get me wrong. This doesn’t get you a special price on individual shares of Microsoft Corp. (MSFT) or Nvidia Corp. (NVDA). Instead, you’re buying shares of a fund that owns those stocks.
And that gives us another price relationship to study.
And here’s the rule I never break: A discount by itself doesn’t tell you whether something is cheap. Nothing is ever cheap or expensive on its own.
It drives me crazy when people say a stock is “oversold” without telling me relative to what. It’s like that scene in Major League where the fan yells, “That can’t be a home run, it’s too high!” You can’t be too high. It’s a home run.
Suppose a fund is selling at a 20% discount. Sounds great, right? But what if it usually trades at a 20% discount? Then you haven’t necessarily found anything unusual. That could be a big old nothingburger.
If it normally trades at a 3% discount and now it’s sitting at 15%, now we’ve got something. Now I want to know what changed.
Did something happen to the holdings? Are the fees too high? Or have investors pushed the fund’s price down more than the underlying portfolio?
We compare the fund to itself. Then we do the research.
Two Places to Look for Discounted Stocks
One of my favorite examples right now is Eaton Vance Enhanced Equity Income Fund II (EOS).
Look inside and you’ll recognize the names immediately: Alphabet Inc. (GOOG), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Broadcom Inc. (AVGO), Microsoft, and Nvidia.
As of October 6, EOS closed at $21.56 while its net assets were worth $24.87 per share. That’s a 13.31% discount. Its one-year average discount is around 8%. That gap is what gets my attention.
Now, EOS uses an income strategy that can limit some upside versus owning the stocks outright. You’re buying the fund’s approach along with its holdings. Understand what you own.
But right now? I haven’t seen a discount this wide on EOS in quite some time. This is one of the better closed-end fund setups I’ve seen in a while.
But let’s use some round numbers to explain the discount opportunity.
Imagine a basket worth $100. You buy your share for $87.
Now suppose the basket stays worth $100, but the discount narrows. Investors become willing to pay $92 for it. Your investment has gained about 5.7%, even though the underlying basket hasn’t increased in value.
That’s a hypothetical example, before fees and distributions. It isn’t a prediction.
It shows you why I watch the relationship between those two prices. The stocks don’t have to do all the work.
The second example I walked through recently on Masters in Trading LIVE was ASA Gold and Precious Metals Ltd. (ASA). This fund invests primarily in companies involved in precious metals mining. So you’re looking at a very different basket from EOS.
During the broadcast, the screen showed ASA at roughly a 20% discount, versus an average around 13%. Again, that comparison gives us a reason to investigate.
If you want exposure to precious metals stocks, this could be a better entry than paying full value for the basket. But you still have to like what’s inside.
A discount doesn’t make mining stocks safe. And buying technology stocks through EOS doesn’t remove their market risk.
These are candidates to research, not automatic “Buys.” Check the latest prices and holdings before making a decision.
Find the Discount, and Then Find the Reason
This is also a good time of year to build a watchlist.
Late-year tax-loss selling can put additional pressure on some funds as investors sell losing positions. That can create wider discounts worth investigating.
I’m not buying every fund that falls. But I am looking for a few opportunities where the price relationship has become unusually attractive.
On my show, I pulled up a free screening tool and worked through these comparisons with viewers. You can check the current discount, compare it with the fund’s history, and look at what it owns.
Then ask the questions that matter:
Why is it discounted? What would make the discount narrow? How much am I comfortable risking? What would tell me the trade isn’t working?
Because the discount can widen. The holdings can fall. And there’s no guarantee you’ll ever be able to sell at the full value of the underlying assets.
That’s why we need a plan.
The Cuba trade worked for me because I looked past the ticker and compared the price with what I was actually buying.
Looking for discounted stocks requires that same habit.
Let’s Take the Next Step Together
That’s the kind of thinking I want to teach you: how to get beyond an interesting headline and work through an actual trading opportunity.
Tomorrow, October 14, at 8 p.m. Eastern, I’m holding my free $10K to $100K Challenge. (Click here to reserve your free spot.)
Buying discounted baskets is one approach I’ve taught. During the Challenge, I’ll go deeper into the strategy behind my Advanced Notice trades, including how I look for signs of large investors positioning before the broader public catches on, and how I turn those signals into specific trades.
You’ll also learn why, despite the event’s name, you don’t need $10,000 to begin using the strategy. I’ll show you how a trade can be structured with less than $500 at risk.
Back in the Cuba frenzy, investors found an exciting name and paid extra to own it.
I want you to develop a different instinct. Look inside. Compare the prices. Understand the risk.
And when you find stocks you want to own, ask one more question: Is there a way to buy this basket at a discount?
Remember, the creative trader wins.
Jonathan Rose
Founder, Masters in Trading
P.S. Jonathan’s Cuba story makes a useful point: An exciting investment story and an attractive purchase price are two different things. I encourage you to keep learning from him at his free $10K to $100K Challenge tomorrow, October 14 at 8 p.m. Eastern. He’ll explain the signals behind his best trades and how he evaluates the opportunity and risk, giving you a closer look at the process behind his ideas. Save your spot here.
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