How big gains can be found in surprising places
Sometimes with stocks, what is obvious later was not at all obvious at the time. A brilliant idea can feel deeply stupid before it works. Hindsight is a wonderful> READ MORE
Sometimes with stocks, what is obvious later was not at all obvious at the time. A brilliant idea can feel deeply stupid before it works. Hindsight is a wonderful> READ MORE
The unicorn is a mythical beast, described first in the fifth century BC by Greek physician and historian Ctesias. In his book Indika ("On India") he described them> READ MORE
There are a lot of reasons to buy Chinese stocks… For starters, in June, index provider MSCI announced that Chinese A shares (that is, shares listed on the local> READ MORE
On Sunday evening, I had the privilege of attending a small dinner with a handful of financial market gurus, plenty of whom had more experience in financial markets> READ MORE
One time I bought real estate without even laying eyes on it. It was a small property. I ended up earning a decent return on my investment. I was lucky. I’ve> READ MORE
“You never let a serious crisis go to waste. And what I mean by that is it's an opportunity to do things you think you could not do before.” Rahm Emanuel, an> READ MORE
I spent nearly six years on the derivatives desk at JP Morgan here in Hong Kong. I held the CEO Jamie Dimon in extremely high regard, as I think did most other> READ MORE
Would you drive with one eye closed? Of course not. So why do so many people invest in stocks with one eye closed? The numbers part of investing in a stock is the> READ MORE
Sometimes with stocks, what is obvious later was not at all obvious at the time. A brilliant idea can feel deeply stupid before it works. Hindsight is a wonderful thing, as they say.
I thought of this because of Russia’s banking sector, which right now is in a world of pain. Last month, the country’s central bank had to rescue Otkritie, Russia’s largest private bank, in a bailout that will cost taxpayers well over US$10 billion. Then, yesterday, B&N Bank, the country’s 12th-largest bank, asked the Central Bank of Russia for assistance, and will likely also be bailed out. Both banks had grown rapidly by buying the assets of other, weak banks – which was a nifty growth strategy until the shady loans of these banks went into default.
History doesn’t always repeat, but it rhymes – especially for Russia’s banking sector.
Back in the early 2000s, I worked for a Russian bank, as a Russian bank analyst. Shortly before I left the job (and country, and industry) – it takes a special person to be a research analyst for an investment bank for years and years, and I am not that person – Russia was finally emerging from the 1998 financial crisis.
That was the financial crisis (after a while they all tend to blend together) that started in July 1997 in Thailand – and, like a virus, eventually spread to Russia. The currency fell from 6.26 rubles to the dollar to 20.83 rubles to the dollar… the country’s stock market collapsed, falling 93 percent… and the government defaulted on its debt. The banking sector came within a whisper of completely collapsing. (I wrote about this a few weeks ago.)
Back then, there was only a handful of Russian bank stocks. The biggest and most important one by far was Sberbank, the country’s state savings bank. A relic of Soviet times – it was used to funnel money from the socialist government to state-owned companies – in 2002 Sberbank accounted for 24 percent of total assets of the country’s banking sector. It had a network of around 25,000 branches, and employed hundreds of thousands of people. After the financial crisis, investors had fled Russian stocks – and, in particular, the banking sector was as interesting to investors as a toxic waste dump.
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As my last hurrah as a Russian banking analyst, I took a close look at Sberbank shares. When no one is interested in what you’re doing – again, Russia’s banks had all the appeal of curdled milk – it’s easy to lose sight of the wood for the trees.
And I found the below – which is a chart that formed part of the report that I wrote then. It shows that the shares of Sberbank, at a price-to-earnings (P/E) valuation of around 3, were trading at an enormous discount to the banking shares of pretty much every other market.
The story was similar for price/book value (P/B), a valuation measure often used to value banks. Sberbank shares were ridiculously cheap.
Meanwhile, Sberbank was far more profitable than banks almost everywhere else, as the chart below shows. (ROA means return on assets, and ROE refers to return on equity, two important measures of banking profitability.) This was partly because Sberbank was majority controlled by the Russian central bank, and received preferential treatment and had a low cost of funding. But still, it made a lot more money than its competitors.
As I said, Russia, and its banks, were universally ignored by investors. So it wasn’t surprising that Sberbank shares were extremely cheap… and, given its privileged status, it was good at making money. And the entire bank – the largest bank of a country of 145 million – had a market capitalisation of just US$1.6 billion.
That’s not small… it’s tiny. It’s smaller than, say, the current market value of Sally Beauty Holdings, an American beauty salon supply company. Even though Russia, and Sberbank, were still recovering from a brutal financial crisis, neither was going to evaporate or sink into the core of the earth, leaving investors with nothing. Sberbank deserved to be worth a lot more than (say) Sally Beauty Holdings.
So, as a going-away present to my employer, I issued a report with a “buy” recommendation on Sberbank shares. After writing the report, I went on a road show to visit dozens of institutional investors around the world to tell them what I thought. I was greeted with a lot of suspicious muttering and side-eye looks.
But over the next ten years, Sberbank was one of the best-performing large stocks in the world… it went up more than 3,700 percent. It helped that Russia’s economy recovered sharply, on the back of the commodities boom. But I had been right: Sberbank shares were absurdly cheap.
Sometimes you have to be lucky to find stocks that are in markets that no one likes… that – if you get a bit of perspective – offer extraordinary value. (I also wrote about this in another former Soviet country, here and here.) Other times, they’re right in front of you.
Publisher, Stansberry Churchouse Research
The unicorn is a mythical beast, described first in the fifth century BC by Greek physician and historian Ctesias. In his book Indika (“On India”) he described them as fleet-footed “wild asses” with a 28-inch horn.
References to the unicorn continued throughout the Middle Ages and the Renaissance. The word “unicorn” even appears in the King James version of the Bible no less than nine times, in five different books…
“And the unicorns shall come down with them, and the bullocks with the bulls; and their land shall be soaked with blood, and their dust made fat with fatness.”
And when it came to catching a unicorn in the wild, the primary method involved using a virgin as bait. As Leonardo Da Vinci wrote;
The unicorn, through its intemperance and not knowing how to control itself, for the love it bears to fair maidens forgets its ferocity and wildness; and laying aside all fear it will go up to a seated damsel and go to sleep in her lap, and thus the hunters take it.
In 2013, the term was applied by a venture capitalist named Aileen Lee, to startup companies valued at over US$1 billion. Purportedly the name epitomised the extreme rarity of such valuable private companies.
And because… well… this is Silicon Valley, the terminology didn’t stop there. A decacorn describes US$10 billion companies, and a hectocorn for US$100 billion valuations (not surprisingly these last two haven’t really caught on).
Unicorns – of the venture capital type – are far less mythical these days than they were back in Ctesias’s time. In fact today there are over 200 globally according to tech market intelligence platform CB Insights. The biggest, on-demand car app Uber, is also the most well-known. But you’re also likely familiar with, or even a user of, others like AirBnB, Pinterest, Spotify and Lyft.
But the well-known U.S. names only tell half the story. Take a look at the table below, which shows the largest 20 unicorns by valuation. You’ll see that not all unicorns live in the U.S.
In fact, 4 of the 10 largest, and 7 of the top 20, are Chinese. And in my experience, most investors in the west have never heard of them! Not only that, but they also don’t know that they also have some exposure to these non-listed companies in their portfolios.
For example, China’s version of Uber, Didi Chuxing (formerly Didi Kuaidi, formed by the merger of Kuaidi Dache and DiDi Dache) is the largest Chinese unicorn with a valuation of… well, we don’t know. The company raised US$5.5 billion in April but didn’t disclose its valuation.
But if you own shares of Apple for example, or any kind of S&P500 ETF (in Apple is the largest constituent), then you own some Didi. Apple invested US$1 billion into the company earlier this year.
To everyone who thinks the Chinese middle class boom is an ‘old story’ – this is why you’re wrong
LEARN MORE HERE.
Right now, China makes up 7 of the top 20 largest unicorns, with the U.S. accounting for 10. But it won’t be long before that ratio is reversed.
As I wrote back in May, China is far more advanced when it comes to technology than many investors in the West give it credit for. The notion that China is a nation of knock-offs, pirate software and shoddy copycats is simply outdated.
Just 20 miles north of where I sit in Hong Kong over the Chinese border, Shenzhen has become a Chinese Silicon Valley.
The CNY3 trillion (US$455 billion) technology giant Tencent’s new headquarters is testament to the kind of infrastructure being built in this technology hub.
And if you’ve ever considered buying a drone, you would have likely considered one of the DJI Phantom series – DJI being a Shenzhen-based drone and camera maker (number 15 on the unicorn list).
I recall a group of investment analysts visited Peter and myself in Hong Kong last year. Peter took them out on his yacht and one of them had a new camera. I pointed out it was made by DJI. The American owner had never even heard of DJI, let alone realise that it was a US$10 billion company (sorry, a “decacorn”) based right next to Hong Kong.
As of the end of January this year, there were 790 million 4G mobile phone users in China… just two years after 4G was rolled out in the mainland.
People in China use their mobile phones for everything. Paying with cash, for example, is almost quaint in major Chinese cities.
And to give you an idea of the scale I’m talking about here, consider this: in 2016, the U.S. did US$112 billion in mobile payments. By comparison, China did US$5.5 trillion…. That’s a 50-fold difference.
Even people who busk (play music) on the streets will put up their personal digital wallet QR code on a sign for people to send them payments with their phone, instead of a hat for notes and coins.
In addition to an enormous mobile-savvy population user base, China is generating millions of graduates every year. In 2017, some 8 million students will graduate from Chinese universities.
But crucially, according to the World Economic Forum (2016 data), over half of these graduates (4.7 million) specialise in Science, Technology, Engineering and Mathematics (STEM). That’s 4.1 million more, or 8 times as many STEM graduates as the U.S.
And with good reason. Take a look at the top university graduate salaries in China in the chart below. The top 5 highest paying graduate jobs are in tech, and 7 of the top 10 are in tech. (Note: CNY5,000 a month is around US$9,250 a year).
China is churning out a tech-skilled workforce, millions of graduates every year, and millions more than the next largest country, India.
Everything points to Chinese unicorns breeding over the next few years. In other words, you should be long Chinese technology stocks.
There are a lot of reasons to buy Chinese stocks…
For starters, in June, index provider MSCI announced that Chinese A shares (that is, shares listed on the local Shenzhen and Shanghai stock exchanges) will be included in MSCI indices. MSCI is the world’s most important index provider. Its decisions affect trillions of dollars of trading in the stock market. Fund managers and investors use its indices as a benchmark to build emerging-market portfolios. So global emerging market funds are adding more and more exposure to China.
And this is just one of the reasons we’re bullish on China. The country’s economy is also changing from manufacturing focused to services focused… and its middle class is booming.
But there’s another reason you should buy Chinese shares… it could be the biggest long-term driver of all. And you’ve likely never heard of it…
I’m talking about Chinese investors themselves.
Individual Chinese investors took a lot of the blame for the 2015 speculative bubble – where stocks soared 68 percent from February to June… and then crashed 49 percent over the next six months, on the back of Chinese investors essentially gambling.
And it’s true that Chinese investors account for the vast majority of the domestic equity market. Although it’s become a lot easier for foreigners to invest in China, according to some estimates foreign investors account for less than 2 percent of total Chinese equity market ownership.
So you’d be forgiven for thinking that most Chinese own a large amount of Chinese shares.
Would You Have The Guts To Invest… Here?
It’s corrupt, violent, and bleak… like the backdrop of a James Bond movie. Yet places like this have generated some of the most profitable moneymaking opportunities in the world—like 1,000%… 5,000%… or more.
But the reality is that compared to their peers in other countries, Chinese people are enormously under-invested in stocks.
As you can see in the chart below, cash represents 72 percent of all household financial assets in China – that’s five times more than the U.S.’s 14 percent and two times more than the EU’s 36 percent. (All data excludes real estate assets.)
And relative to developed economies, stocks and funds only represent 9 percent of Chinese household assets. That’s a fifth of what U.S. households have. In short, compared to developed countries like the U.S., Singapore and those in the Eurozone, China’s citizens are seriously underinvested in stocks and funds. So Chinese citizens have a lot of catching up to do.
Of course, the capital markets of developed countries are much more evolved than those of China. And individual investors in the U.S., Singapore and EU have a lot more capital to invest, because they’re wealthier.
That explains part of the big cash-holdings discrepancy. But there’s more to it. For starters, there simply haven’t been that many avenues for people in China to invest. There is not a big mutual fund industry. Pension schemes and other insurance-linked investment vehicles are only just starting to take off. Capital controls restrict investors’ ability to buy foreign stocks or bonds. And the stock market’s reputation as a gambling den has dissuaded many less speculative investors from entering the market.
However, this is changing as the domestic equity market continues to mature – and over time, this will lead to more people in China investing more of their wealth in equities. For example, as recently as 2015, Chinese pension funds weren’t even allowed to buy stocks in the local equity market. But that’s changing, and pension funds have gradually been allowed to increase their asset allocations into domestic equities. Over time, this will provide the foundation for a steady flow of long-term investment into China’s stock markets.
Also, the regulatory infrastructure of China’s markets is steadily improving – which will in time give individual investors in China more faith in stock markets. China’s main securities regulatory body, the China Securities Regulatory Commission (CSRC), has pledged to crack down on speculative trading, especially in small-cap stocks. It’s also been active in reducing leverage in the financial system, which should help reduce the kind of wild swings that have characterised previous booms and busts.
On a related front, there are an increasing number of structures and vehicles available to Chinese investors to put money into the stock market. The easier it is to invest, the more people will do just that.
This doesn’t mean that the proportion of household wealth that’s invested in stock markets will increase to be close to developed markets anytime soon. But small changes in relative terms can result in big inflows in absolute terms. And over time, China’s domestic investors will become a critical foundation of the country’s stock markets. And that will help drive market growth.
One of our favourite ways to invest in China is through an exchange-traded fund like the KraneShares Bosera MSCI China A ETF (New York Stock Exchange; ticker: KBA). KBA tracks the MSCI China A International Index, which tracks the equity market performance of large-cap and mid-cap Chinese securities listed on the Shanghai and Shenzhen Stock Exchanges.
Publisher, Stansberry Churchouse Research
On Sunday evening, I had the privilege of attending a small dinner with a handful of financial market gurus, plenty of whom had more experience in financial markets than I have years on the planet. And for the most part, they are all gold bugs of varying degrees.
“Gold bugs” are those for whom gold is less of an asset class, and more a belief system… for them, gold is the only real form of money – one which cannot be debased by profligate central bankers who can print more paper money with the snap of their fingers.
I was fortunate enough to sit next to one of the world’s pre-eminent gold authorities, an individual who’s up there with the likes of investment gurus and financial commentators like Jim Rogers, and Jim Rickards, author of 2016’s The New Case for Gold.
Somewhat inevitably, discussion turned to bitcoin. I shared what I believe is one of the most overlooked factors affecting bitcoin’s future prospects…
You see, the mistake that the likes of Jamie “It’s a Fraud” Dimon and Warren “It’s a mirage” Buffet make when it comes to bitcoin is that they fail to realise that bitcoin isn’t some digital trinket. And it’s not a fad or a craze (although there is plenty of speculative participation).
Rather, when you scratch beneath the surface, you’ll find that bitcoin is an asset that has not only survived but thrived, because at its core sits a community of what I’ll call “bit bugs”.
The T.V. talking heads, newspaper articles and mainstream media frequently overlook the existence of this community and its conviction. And once you spend any time in the bitcoin community (in chat groups, internet forums, conferences, meetups and social media), you’ll see that bit bugs share many traits with their gold bug cousins.
First, as mentioned earlier, both “bugs” adhere to investment rationales that are underpinned more by a belief system, an almost religious affectation, that outweighs any cold, hard analysis. You will never, ever hear a gold or bit bug say you shouldn’t own gold or bitcoin respectively. A real “bug” never capitulates.
If the price goes down? Then, “Buy more, it’s cheap!”.
Price goes up? “I told you so, if you don’t own some then you should!”
The second commonality is the overlapping shared political philosophies of libertarianism and anarcho-capitalism – this might sound scary but it is just an advocacy of individual sovereignty over the state, i.e., personal liberty as a core principle.
And the third commonality is a deep scepticism (to put it mildly) towards government and central banks.
Both gold and bitcoin camps are deeply cynical when it comes to the motives of banks in general and central banks in particular, and both will point with disgust to the waves of money printing and trillions of dollars of fiat debasement that was carried out in the wake of the Global Financial Crisis as a key reason for owning their respective favourite assets.
As for bitcoin, one only needs to read the second paragraph of Satoshi Nakamoto’s original communiqué that accompanied the release of the bitcoin whitepaper in 2009, the original “road map” for developing the Bitcoin blockchain:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Where the bitcoin and gold worlds collide, and in fact assume diametrical opposition to one another, is here: Gold bugs see gold as a physical, tangible and real asset.
You can pick it up and feel its satisfying weight in your hand. Gold has unquestionably been money for thousands of years.
Bitcoin? That’s just a piece of code. The government will eventually close it down – right?
As for the bit bugs? Well, bitcoin is the ultimate in freedom of asset ownership. The government can’t confiscate it from me as it did to owners of gold in 1933 in the U.S. under Executive Order 6102.
I can cross national borders with bitcoin in my possession, on a USB-stick device, a piece of paper… or if I can memorise my private key, with no physical object in my possession of any kind.
Whether my bitcoin is worth US$100 or US$100 million, it makes no necessary difference to how I move and store it (which is clearly not the same with gold). I don’t need a trusted middleman to send it from me to you, and I can send it around the world, securely, in a matter of minutes.
…a little bit of both. Like I said a couple of months ago:
“Gold has stood the test of time as a medium of storing value. For that reason, it deserves a place in your portfolio. Bitcoin’s time, on the other hand, is just beginning. Blockchain is the future, and when you have an opportunity to buy the future and tuck it away, you should take it.”
But don’t underestimate the bit bugs. The price of bitcoin may have gone from US$600 to US$4,000 over the past 12 months – a fact that understandably garners the most attention – but there have been five corrections of 25 percent or more along the way, including in the past week or so a correction of 40 percent. Yet bitcoin endures for the time being. The bit bugs are nothing if not resilient…
One time I bought real estate without even laying eyes on it. It was a small property. I ended up earning a decent return on my investment.
I was lucky. I’ve lost count of the number of friends and acquaintances of mine who’ve been badly burnt by buying real estate that looked good on paper – what was something else entirely in reality.
This happens a lot in Asia. Investors in this part of the world are ripe for the picking for developers in cities like London, New York, San Francisco, Vancouver, and Sydney. Asian buyers are cash rich, and love luxury new-build property.
Investors in Asia real estate – full stop. And many Asian real estate investors like to buy properties in countries that have lower political and legal risk than they experience at home.
Asian buyers are also used to closing a deal quickly. Hong Kong property investors will sign sales and purchase agreements within an hour or two of a viewing.
Often, they’ll sign there on the spot. I once bought four apartments on my American Express card in such a situation. Overseas developers and agencies love to tap into this trait.
Cities in Asia are constantly hosting agents and developers flogging shiny new properties “off plan”. The numbers of advertisements I see in the local press touting projects in London, Sydney or some other favoured destination says a lot about the conditions in that market.
Advertisements for London property are the most numerous. London is a valued “rule of law” country, and viewed by many Asians as the most important financial centre in the world. It is also known to be more tax and regulation friendly than the U.S. For decades it has been the preferred destination for people from all over Europe, the Middle East, Asia wanting to buy and hold some real estate as a hedge against conditions in their own countries.
Investors may have a general idea of the area they are buying into, but many don’t. They become victims of what can be a sophisticated sales exercise.
On paper, you can’t see the smoke belching factory just down the road, or the noisy freeway running past the end of the block, or the rail line rattling past the back window. Or that soon-to-be high rise next door that just received planning permission.
A number of people I know have recently been tempted into buying brand new properties off plan in a certain area of central London. This area is undergoing a regeneration, a rebirth that has been more than twenty-five years in the making, and which is getting off the ground now.
It sounds good. The only problem, though, is that the number of new apartments that will be hitting the market over the next three to five years is unprecedented for central London.
Oversupply is a certainty. And with it, prices and rentals are going to come under pressure.
Yes, it will be a successful regeneration – over the next generation or so. In the meantime, prices will fall… and, but only with time, recover.
My guess is that it will be a decade, maybe more, before the market for these properties reaches today’s levels.I say this having experienced a similar cycle in London myself.
The people who have asked me about investing in this area of London may have some knowledge of the city. But have not been and visited the area where they are looking at buying.
They are simply unaware of the massive amounts of building going on in the area, and the impact that this is likely to have on property values.
And of course, the developers and agents do not want to come forward with this kind of information.
Just think about it. Why is the developer peddling his new building off-plan to buyers located thousands of miles away? Simple. He doesn’t want you to visit the site – and he thinks overseas buyers will buy what his local buyers won’t!
Why else go to all the expense of advertising his London or New York property in Hong Kong, Singapore, or Beijing? He reckons that overseas buyers will pay a price that the domestic market won’t – because they’d check it out and know better.
This is particularly true of London, where thousands of new high-rise apartments are springing up and being sold all over Asia, the Middle East, Eastern Europe. Why? Well the simple fact is that London folks really do not like living in high-rise developments. It does not suit them. Maybe they’ll get used to it, but that would be a slow process.
In the meantime they prefer low-rise living, with greenery on the side.
Asians, on the other hand in fact prefer high-rise living. They like the feeling of security that living in a safe, well managed apartment block can bring. The “lock up and leave” aspect of high-rise housing also has attractions.
Judging by London property advertisements I see in the local media in Asia, I’m amazed at just how big “Prime Central London” has become!
Remember… if it looks too good to be true, it almost always is….
“You never let a serious crisis go to waste. And what I mean by that is it’s an opportunity to do things you think you could not do before.” Rahm Emanuel, an American politician, was talking about politics when he said this. But he may as well have said it about investing in troubled financial markets.
If you’re looking to invest when the odds are in your favour then look for a crisis. When asset prices collapse it creates life-changing opportunities to buy (the right) assets on the (very) cheap.
But if you’re a victim of home market bias – and you’re over-invested in your “home” market – you might have to wait a long while for a nice ripe crisis. And even once it comes, chances are that you’ll be too caught up in it yourself, unless you were smart or lucky enough to sell early.
You might have cash to buy cheap assets… but you might have already been holding them on the way down.
Investing in markets or companies in crisis, then, requires leaving what you know, and running towards the fire. (That’s part of what I’ll be doing in our new investment research service… lifetime subscribers will have the opportunity to join me on investment research trips to off-the-radar – and big-upside – destinations around the globe. Find out more here.)
What follows are three of my favourite examples of markets in crisis that were fortune-making for savvy investors. The exciting thing is that the “before” part of each of these situations exists today – in some market or sector or company… it’s just a matter of finding it – before it becomes the “after” of the examples below.
Today, it’s strange to think of Spain as a fascist dictatorship. However, from the 1930s through the 1970s, its markets and economy were largely isolated from the rest of the world. Europe effectively ended at the Pyrenees, the mountain range separating Spain and Portugal from France.
When Spain’s longtime dictator, Francisco Franco, died in November 1975, the country’s future was up in the air. For several years, civil war and chaos looked like a real possibility. (I lived in Spain at the time… and though as a pre-adolescent I didn’t realise it, the country was at a true crossroads.)
But Spain slowly evolved into a democracy. It adopted a new constitution in 1978, and the government put down a coup attempt in 1981.
The 1982 elections solidified Spain’s transition to democracy and its eventual position in the western military alliance, NATO.
In 1986, Spain joined the European Economic Community – now the European Union. (People rang in the new year, marking the official entry into the EEC, with the cry, “We’re Europeans!”) At the time, new EEC members received massive infrastructure investments in order to help lift their standard of living to be on par with the rest of the union. These funds fuelled a two-decade economic boom in Spain that only ended with the 2008-2009 global economic crisis.
Investors who saw the opportunity for enormous positive change in Spain in the 1970s could have made returns of 4,300 percent in subsequent years.
In 1983, Sri Lanka, a small island nation south of India, entered a prolonged civil war. The conflict between the Sinhalese ethnic majority and the Tamil ethnic minority lasted 26 years. (It was one of history’s more brutal conflicts… the Tamil Tigers reportedly invented the suicide vest – and pioneered suicide bombing as a war tactic.)
The long war stunted the country’s economic growth and created political uncertainty. Suicide bombings and other terror tactics by the Tamils posed an ongoing threat to the rest of the island. This fueled a steady migration out of Sri Lanka and strongly deterred foreign investment.
Meanwhile, excessive government spending fostered high inflation and constant budget deficits (when governments spend more money than they take in). As a result, Sri Lanka’s stock market suffered low turnover and minimal foreign interest. Sentiment toward the country was overwhelmingly negative. In fact, to much of the rest of the world, Sri Lanka’s civil war is what they know of the country… I’ve often been asked, “Oh, are they still at war?” after I mention that I lived there for a few years.
3,700% Returns… In the Footsteps of a Dead Man
Most people think it’s corrupt, violent, and bleak… like the backdrop of a James Bond movie. Yet places like this have generated some of the most profitable moneymaking opportunities in the world—like 1,000%… 5,000%… or more. Would you have the guts to invest?
FIND OUT HERE.
In 2002, Sri Lanka’s economy began to slowly improve, and the country made some progress toward political harmony. The turnaround was strong enough to trigger a sharp rally in the Sri Lankan market. In November 2005, the election of President Mahinda Rajapaksa, coupled with a strong public mandate to end the civil war, further fueled the rally.
Then the global economic crisis hit, along with the final and most ferocious chapter in Sri Lanka’s civil war, and in early 2009 the country’s stock market fell sharply.
The Sri Lankan stock market didn’t re-rate until the Tamils were definitively defeated in May 2009. The northern and eastern regions of the country – previously off-limits to investment and economic development because of the war – were gradually re-integrated into the economy, bolstering growth.
Investors who bought Sri Lankan stocks amidst negative sentiment could have made gains of 2,000 percent – though with plenty of volatility along the way.
The sugar industry experienced multiple price shocks throughout the 20th century. That’s not unusual for commodities, which tend to go through cyclical “boom and bust” periods.
Sugar boomed from 1962 to 1964, after the U.S. suspended imports of sugar from the Caribbean island of Cuba. (Socialist Fidel Castro led the Cuban Revolution that ousted President Fulgencio Batista in 1959, and the U.S. imposed a multi-decade economic blockade on the country, as part of its failed effort to undercut Castro.)
In 1964, the price of sugar started to fall. By 1966, the price had collapsed to close to a penny per pound. Finally, sugar was so cheap that demand started to rise. Then, in 1969, the U.S Food and Drug Administration banned cyclamate, a common sugar substitute, after researchers discovered it was carcinogenic. This pushed demand for sugar even higher.
Over the next four years, consumption outpaced supply, and inventories dwindled. This triggered a dramatic increase in sugar prices. Sugar hit a high of $0.64 per pound in October 1974.
Investors who got in at the 1966 low could have made just upwards of 5,000 percent through late 1974.
Today, many markets are close to all-time highs. But there are plenty of assets that are in crisis… or – maybe even worse – are unloved and ignored, and as a result are trading at crisis-like levels. I’ll be looking for those types of markets, and companies, in our new service, International Capitalist, and the life-changing price gains that can go with them… find out more here.
Publisher, Stansberry Churchouse Research
I spent nearly six years on the derivatives desk at JP Morgan here in Hong Kong. I held the CEO Jamie Dimon in extremely high regard, as I think did most other employees, and many others in the finance industry. He’s probably one of the most highly respected bank CEOs around.
But at a conference, yesterday, Jamie had some pretty strong opinions about bitcoin, saying:
“It’s a fraud”
“It’s just not a real thing, eventually it will be closed”
“It’s worse than tulip bulbs. It won’t end well”
“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars”
None of this makes sense to me… I hardly even know where to start.
If you’re a murderer, then “you are better off doing it in bitcoin”?
Likewise, if you’re a drug dealer – then you should be using bitcoin?
His comments were absurd.
If bitcoin is the currency of corruption and crime… I have to wonder, when JP Morgan’s fellow global bank, HSBC, was fined US$1.9 billion for laundering money for Mexico’s Sinaloa Cartel and Colombia’s Norte del Valle cartel… how many bitcoin were involved? That would be… zero.
But less logical than all of that is Jamie’s suggestion that “eventually [bitcoin] will be closed”.
As it happens… Bitcoin can’t be “closed”. It’s not an overleveraged credit derivative fund. It’s a distributed blockchain running on a global network of computers.
As for “fraud” and “tulip bulbs”… it’s a statement from someone who would appear to know fraud well. The US$66 billion-dollar current value of bitcoin in circulation is only 5 times bigger than the US$13 billion then-record settlement that JP Morgan bank paid for its alleged role in underwriting fraudulent securities prior to the 2008 financial crisis. That should help put the numbers in perspective.
Just to clarify, bitcon is a terrible currency for crime.
As many people know, every bitcoin transaction is recorded on the blockchain for anyone to see. A suitcase of cash, albeit impractical, is less traceable than bitcoin. Gold is an even better for criminal value transfer, as it resides completely outside of government issuance, and doesn’t even touch the digital realm.
When it comes to bitcoin, there are companies that specifically help law enforcement to follow digital money trails and track down suspected criminals that use bitcoin.
Bitcoin is just a relatively uncomplicated, cryptographically secure medium of exchanging value. It’s scarce by design, unlike fiat currencies which can be created in their trillions at the push of a button.
Is bitcoin volatile? Absolutely. Is it in a short-term price bubble facing correction? It could well be.
But Mr. Dimon’s commentary reeks of a lack of basic understanding of not only the mechanics of bitcoin. It also helps explain why there is such a passionate, and growing, base of users.
Bitcoin was born in banker discontent
Any blockchain has a first “block”, known as the genesis block. On July 3, 2009, the person (or persons) known as Satoshi Nakamoto, responsible for the bitcoin whitepaper (the technical roadmap for the bitcoin blockchain protocol), released the genesis bitcoin block.
This block (effectively a ‘block’ of data) includes the headline from the front page of British newspaper The Times, “Chancellor on brink of second bailout for banks”.
It’s unknown whether this was simply intended as a form of time stamp, or as a nod to the disarray that engulfed the financial system at the time – in particular, the hundreds of billions of dollars paid to bail out banks. (Note: Jamie Dimon told the U.S. Senate Banking, Housing and Urban Affairs Committee back in 2012 that JP Morgan did not need bailout funds but that he was instructed to take them.)
Either way, the American public in general retain a pretty dismal view of U.S. banks (see chart below).
Since a high of 60 percent in the late 1970, popular confidence in the U.S. banking system has fallen to just under 30 percent.
More importantly, a substantial proportion of the global population simply doesn’t have faith in the fiat currency issued by its respective government as a way to store value.
Now, you might be fine sitting in a Wall Street office, content with your U.S. dollars, and running a bank that is profiting from the relentless money printing largesse on the back of perpetually low interest rates and financial asset inflation. (Earlier this year, Mr. Dimon’s JP Morgan announced that it had earned US$26.5 billion in profit over the preceding 12 months, a record by any major U.S. bank.)
But the 1.3 billion people in India who were told last November that nearly all the cash they were holding was now invalid and needed to be exchanged for new ones – they have a little less confidence in their currency.
Bitcoin can’t be printed by a central bank. There’s no “fraud” unless it’s perpetrated by dishonest users of bitcoin, which is no different from any other form of value transfer. It can’t be “closed”. It’s just an alternative that offers a huge number of advantages over traditional fiat currency.
I wrote the other day that I relish hearing the counterarguments, the reasons not to own bitcoin. But I don’t think Mr. Dimon has presented any valid ones yet.
So until he does, Mr. Dimon’s bitcoin eulogy takes the top spot on this bitcoin obituaries website (well worth a browse to see how many financial luminaries have announced the death of bitcoin over the years).
Would you drive with one eye closed? Of course not. So why do so many people invest in stocks with one eye closed?
The numbers part of investing in a stock is the easy part. Is the stock cheap or expensive – relative to the market, the sector, and its history? How do the financials look? What’s the cash flow like? These are all crucial to the stock analysis process.
But for a lot of people, that’s where the analysis ends. That’s not good. If you’re driving with only one eye, you can see what’s right in front of you, but you can’t see the motorbike creeping up on your side, or the truck growing larger in your rear view mirror. And when you’re trying to understand a stock, if you’re only looking at the numbers, the chances that you get rear ended – or, worse, lose a lot of money on a bad investment – are a lot higher.
What follows are three questions that are part of a “second eye”… asking questions beyond the numbers in high-risk, high-return emerging and frontier markets, as well as the most boring and stable stocks in dull, developed markets.
(We’re in the midst of the charter offer for a brand-new research service… where I’ll be asking these sorts of questions for asymmetrical investment opportunities in the most exciting and fast-growing economies on earth. And you can also join me as I visit one of those markets in just a few weeks. Find out more here.)
In late 2014, to great fanfare, the United States and Cuba – an island 177 kilometres off the coast of Florida that (according to some) posed a grave and existential threat to American sovereignty – re-opened relations, after a 54-year freeze. Eager stock investors raced to invest in Cuba – even though it had (and has) no stock market. Instead, a conveniently named closed-end fund with the ticker symbol CUBA had a ready answer.
CUBA invests in the shares of companies that stand to benefit from economic opening and growth in Cuba. With Cuba all over the news, in late 2014 investors piled into the lightly traded CUBA fund, doubling its share price in two weeks. The premium of the shares (relative to the underlying value of the portfolio) peaked at an incredible 71 percent, meaning that investors were paying $1.71 for every $1 of assets. (Needless to say, neither the earnings or the forecast earnings of the stocks in CUBA doubled during those two weeks.)
I visited Cuba a few months later… and as was clear to pretty much everyone (who wasn’t rushing to buy CUBA shares), Cuba had, and has, a very long and difficult path in front of it. The excitement of renewed relations with the U.S. was more than public relations, but – contrary to what the CUBA share price suggested – it had very little immediate relevance to the financial performance of companies that stood to benefit (eventually) from the opening of Cuba.
At the time I told my readers to stay away from CUBA.
And what’s happened since? CUBA shares are down 43 percent from their “oh joy Cuba is opening up” euphoria peak in late 2014. Cuba (the country) is still opening… and will do so for another generation or two.
Are you getting caught up in the moment? Cuba, and CUBA, were a great story, but a terrible investment.
Russia’s Gazprom is the world’s largest gas company, based on total reserves (of an impossible-to-comprehend 36.4 trillion cubic metres). It supplies one-third of the natural gas consumed by Europe. Back in Soviet times, Gazprom was big enough to be an entire government ministry on its own. It has supported entire remote cities in Siberia and sponsored football teams.
That’s all fine for Gazprom and for Russia. But it’s not great for minority investors – people like you and me.
You see, Gazprom – which is controlled by the Russian government – accounts for around 8 percent of Russia’s GDP, and a large chunk of Russian government revenues. When the Kremlin needs money to plug a budget deficit, it turns to Gazprom. The company is as much a geopolitical hammer – used to threaten or cajole its customers from Europe to China (twist a few taps, and no more gas for Ukraine, say) – as it is a gas company. And, of course, Gazprom is also a convenient source of cash to top up well-placed ministers’ retirement plans. (Persistent rumours suggest that Russian President Vladimir Putin is one of the richest people in the world, a remarkable feat given his US$136,000 annual salary.)
I’ve seen any number of investors get excited about asset-rich Gazprom without asking the critical question: Who benefits if the company makes mountains of money?
In the case of Gazprom, lots of people benefit – but minority shareholders rarely do. The shares are down 86 percent from their all-time high in 2008.. There are a lot of reasons for that bad performance… many of which lead to the fact that the company is managed like a big ATM for the Russian government and friends.
If you’re investing with one eye, though, you’d see Gazprom as a cheap gas stock…
Gazprom shares are very cheap on a valuation basis. It trades at a P/E (price-to-earnings ratio) of around 4. Other gas companies trade at multiples that are 3-10 times higher. Gazprom shares are also a fraction of the price of global oil producers… ExxonMobil shares, for example, trade at a P/E of 24. Chinese producer China Petroleum & Chemical Corp. trades at a P/E of 11.
But the problem is, Gazprom shares have been cheap forever… and certainly since May 2008, when the stock reached an all-time high at a market capitalization of US$366 billion – compared to US$50 billion today. And in recent years the only time that the shares have not been cheap was when earnings collapsed (which is the worst reason for a P/E ratio to rise).
We’ve talked before about value traps, which are stocks that seem cheap on a valuation basis (that is, using the price-to-earnings ratio or a similar measure)… but in reality aren’t that cheap at all (or else remain “cheap” indefinitely). Gazprom shares have been cheap for as long I can remember. (And I’ve been keeping an eye on the stock ever since I first started working for a Russian brokerage in Moscow back in 1996.)
What could change that? A value trap can stop being a value trap – and become an attractive, under-valued investment – if there’s a trigger for change. A change in management, a big change in the industry, higher commodity prices, a regulatory change – all of these things can turn a value trap into a great investment.
However, the Russian stock market has been cheap forever too – so in context, Gazprom shares aren’t all that cheap. And is there a catalyst? Perhaps… but I’ve seen generations of Russian stock analysts (going back to when I started to be one myself more than 20 years ago) think that things are really changing in Russia, in a way that would permanently improve the valuations of its stock market. And it hasn’t happened yet. Holding those perma-cheap stocks represents a steep opportunity cost.
So when you’re looking at that cheap stock… ask yourself, why is it cheap? And how much (more) gray hair will I have before there’s a reason for that stock’s valuation (and price) to be higher?
Of course, these three questions are only a start. And investing with both eyes open isn’t easy. It takes work and research and experience… and even if a stock passes the “both eyes open” test, there’s no guarantee that its share price will rise. But at least the chances are better.
Publisher, Stansberry Churchouse Research
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