Legendary investor Jim Rogers once wrote, "The way of the successful investor is normally to do nothing -- not until you see money lying there, somewhere over in the corner, and all that is left for you to do is go over and pick it up."
That money may have been lying around for a long time.
Consider "value traps." That's when a stock or a market is labeled as "cheap" (for example, on a P/E or P/B basis) and may look like a good buy. But it may be about to get cheaper, especially if the earning power (that is, the E of the P/E ratio) declines.
But other times, cheap means cheap. And that's when you need to go to the corner and pick up the money that's lying there.
Money sitting in the corner
Hong Kong's H-share market, where mainland Chinese companies trade on the Hong Kong Exchange, is among the world's cheapest markets.
In a nutshell, Chinese companies listed on mainland China exchanges (like Shanghai and Shenzhen) are known as A-shares. Only local Chinese investors can buy A-shares. Foreigners need special permission to do it.
Some of these companies also have shares listed on the Hong Kong exchange. These shares are regulated by Chinese law but trade in Hong Kong dollars. These are called H-shares. (For the full H-share story click here.)
A-shares often trade at a big premium to H-shares. At the moment, A-shares trade at roughly a 20% premium to H-shares. (This infographic shows how this works.)
Ninety-one mainland-listed companies trade on both the A-share and H-share markets. It's important to note that these are shares of the same companies. The only difference is that these two sets of shares are available to different investors.
Here's how the China H-shares discount plays out.
As a non-local Chinese, you can buy H-shares of a large Chinese resource company, Yanzhou Coal Mining, on the Hong Kong Exchange. Each share is selling for about HK$6.
To make things easier to compare, let's convert the H-share's value from Hong Kong dollars to U.S. dollars. The exchange rate is HK$7.76 for one U.S. dollar. So each H-share is worth U.S. $.77.
On the A-share market, the same resource company's shares are selling for roughly 11.79 Chinese yuan per share. So 6.89 yuan is worth $1. That means that a local Chinese investor will pay $1.71 for one of the company's shares.
If you compare the A-share price of $1.71 per share to the H-share price of $.77 per share, you can see that there's a 120% price difference. Remember, although the prices are different, they are shares for the same company.
The same resource company trades on the New York Stock Exchange as an American Depository Receipt (ADR). Shares of the ADR currently trade at about $7.69 per share. Each ADR contains 10 local shares, meaning that buying one ADR is like buying 10 shares on the H-shares market in Hong Kong (10:1 ratio).
The 10 shares traded in Hong Kong are H-shares (not A-shares). And remember H-shares cost HK$6 per share or .$.77 (U.S.). Multiply $.77 by 10 and that equals $7.70, which is almost identical to the ADR share price of $7.69.
The H-share discount won't be around for long
ADRs on the NYSE trade for the same price as H-shares on the Hong Kong Exchange and both shares trade at a discount to A-shares. Again, the company's A-shares trade at a 120% premium to H-shares and ADR shares.
How long will this pricing discrepancy last? As recently as November 2014, the A-share and H-share markets traded at the same price level (although some H-shares still may have traded at a discount or premium to their A-shares counterpart). There are good reasons to think that the discount will end soon. And shares of different companies will be affected differently when the discount closes.
In this post, Yanzhou Coal Mining is the example of a company offering both A- and H-shares. There are other Chinese companies offering the same opportunity, one you should take advantage of before this pricing anomaly ends. They're like money lying in the corner.
If you want to learn more about the best investment opportunities right now, click here.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.