Nick: Okay Doug, so looking around, what
markets look cheap to you today?
Doug: I saw recently that many stocks in
Greece are selling at around four times earnings. But I don’t know what the
quality of their earnings are. Of course, the dividend yield on Greek stocks
isn’t very high, and dividends are, I think, the best real indicator of how
much free cash flow there actually is in a company.
Nick: One market that has struck me as
cheap—with a decent dividend yield—and that’s accessible is Russia. What are
your thoughts on Russia?
Doug: I think that things might get better
there. That they’re doing this big natural gas deal with China is a plus. The
fact that the Russians have apparently been continuing to buy a lot of gold
is a plus.
As far
as Ukraine is concerned—with the proviso that I don’t believe in the sanctity
of any nation-state, and so I don’t cheer for any of them—you’ve got to be on
Putin’s side of that situation from an ethical and a practical point of view.
So I’m not terribly afraid of Russia. I don’t think there’s going to be a war
of any type with Russia, and because the market there is now so cheap, it
could be very interesting.
In any
event, the colors of the world map have been running since the first map was
drawn. And Ukraine isn’t even a coherent country to start with—it’s an ethnic
intertidal zone. It’s certainly no place where the US government should stick
its nose, which is only making things worse.
One thing
I’ve learned in years of wandering around the world, trying to figure out how
things actually work, is that few things are either as good or as bad as you
might have been led to believe, whether it’s an idyllic paradise or a war
zone.
Nick: What’s interesting about Putin’s
Russia is that it’s one of the few countries in the entire world that’s
actually capable of resisting bullying by the US. We’ve seen this with
Russia’s granting of asylum to Edward Snowden, among other things. Russia is
also one of the very few countries that the US would hesitate to bomb. And I
think that makes it an exceptional place. My first visit to Russia was in
2006.
Doug: Mine was in 1977. By the next time,
in 1996, the country had changed radically. In 1977, the only places open to
foreigners were Moscow and Leningrad, which were, I assure you, as grim as
anything Orwell ever imagined. By 1996—just five years after the collapse of
the USSR—those cities had been transformed. They were almost
indistinguishable from any Western European metropolis. Even the old
factories along the river have been converted into fashionable lofts.
But
outside of Moscow and Saint Petersburg, which attracted all the money and
talent, Russia in 1996 was still a depressing Third World country. But today
it’s well past the stage when the main imports were stolen cars and the main
exports were prostitutes. I really should have gone there to live in the
early ‘90s. That’s when the streets were paved with opportunity, but I
believe recent events have again set the table for making serious money in
Russia.
Nick: That brings to mind the Russian
oligarchs, who built their mountains of money through crisis investing. By
buying when Russia was in chaos, they were able to pick up some of the crown
jewels of the Russian economy for just a few pennies on the dollar.
Doug: It’s an instructive example. The
post-Soviet government gave everyone vouchers that could be traded for shares
in the state-owned businesses that were being privatized at the time. The
average person had no idea what his vouchers meant or what they were worth.
The few who did—today’s oligarchs—profited enormously from that confusion and
from the fear that followed the collapse of the Soviet Union. They bought up
the vouchers and paid just a tiny percentage of their value. The good thing
about Russia being as screwed up and volatile as it appears is that there
will be opportunities to do nearly the same thing with publicly traded
shares.
Nick: As it is now, no matter what happens
in the West, Russia has some big positives working in its favor—like the gas
deal with China you mentioned earlier, and also Putin’s Eurasian Union. So
despite the overwhelmingly negative sentiment about Russia in the mainstream
media and the cheap valuations, it doesn’t seem like Russia is going out of
business. Does that make it a good crisis investment market, in your opinion?
Doug: The examples of extreme opportunity
I like to bring up are from the mid-1980s, when stock markets in Belgium,
Hong Kong, and Spain were all selling at two to three times earnings, half of
book value, and with dividend yields on the order of 12-15%. That shows how
cheap things can actually get. Today, markets around the world are overpriced
because interest rates are so low. At this point, I think Russia is a place
you ought to be watching from the long side a lot more than, say, the US.
Nick: Another market that might have
seemed interesting from a crisis perspective is Thailand, with its recent
military coup. However, coups aren’t exactly rare. This is Thailand’s twelfth
since 1932; the previous one came in 2006. Thai stocks essentially shrugged
off this year’s rotation of power.
Doug: You’re right. During the Asian
crisis of 1997, Thai stocks collapsed, and dividend yields jumped above 10%,
in some cases close to 20%. So I guess there’s a lot of money out there that
runs scared, but this year’s coup didn’t seem to unsettle anybody.
Nick: In your view, are dividend yields a
better gauge of value than other measures?
Doug: I think you’ve got to look at
dividends, because reported earnings can be fictional, and book values can be
subject to accounting tricks. But dividends are actual cash in your pocket.
They are real. So I’d have to say that if there were one really quick
indicator of value, dividends are at the top of the list. It’s incredible
what you can get in dividends alone when a market is at a bottom—something a
lot of people have forgotten.
Nick: I totally agree. Thanks for sharing
your informed perspective.
Doug: My pleasure.
You’ve
just read an excerpt from Crisis
Speculator, International Man’s new
publication dedicating to identifying crisis-born investment opportunities.
