The US Senate has confirmed Janet Yellen for the top post at the Fed. Your editor has given up hope.
We had thrown our hat in the ring, hoping to at least get a free chauffeur service as the new Fed chief. But our hat was not even noticed. Our phone never rang. And the person not calling was none other than the POTUS, Barack Obama.
Rejected, ignored and cold-shouldered by the powers that be, we have turned our attention elsewhere.
To China, for example…
Putting this in perspective, we also provide advice to members of our small family wealth advisory, Bonner & Partners Family Office, where we serve as chairman. Said advice may be sage, or not. It may turn out to be good advice, or not. But at least it is consistent.
“Stock market profits are made in the buying,” is the essence of our approach and our advice. (The aim of our little advisory, don’t forget, is to help folks protect and grow family wealth over the long run.)
“Buy cheap. Buy good. Don’t worry about what happens to the price.”
This last piece of advice was also a fastball we threw at our family recently, hoping it would get by them without notice. Our advice at the start of 2013 was to ignore expensive US stocks and buy cheap emerging market stocks – particularly those of Russia and China. By the end of the year, US stocks were even more expensive. Russian and Chinese stocks, on the other hand, were even cheaper.
Price Doesn’t Matter
Another twist to our approach at Bonner & Partners Family Office: “Price doesn’t really matter. As a long-term investor, what matters is value. And price doesn’t tell you what the value is. You have to look deeper.”
We interrupt this investment commentary with a look at a deep absurdity. If price is a measure of value, a work of art by Christopher Wool called “Apocalypse Now” is worth $26,485,000. That is the price that a willing, and presumably compos mentis, buyer paid at auction in New York last November.
The masterpiece, for the benefit of readers who don’t know it, can be described as a painting with “SELL THE HOUSE SELL THE CAR SELL THE KIDS” (a reference to a letter Colonel Kurtz writes to his wife) emblazoned on it. As a decorative object in the Bonner household, this would be worth maybe $15. Or it would be tossed out with the empty pizza boxes.
A critic describes it as “singular, strong, organic… as deep as it might appear shallow.”
We doubt it is THAT deep.
But what do we know? From our point of view, if profit is made when you buy, this buyer just lost $26,484,985. The buyer of Russian or Chinese stocks, on the other hand, made money. (Despite the price movement.)
Looking more deeply into the Chinese and Russian markets, we find lots of value. We also find, under the surface, lots of trouble, which explains why there is so much value still lying around on the ground.
Endemic Corruption
One of the benefits of running a global publishing business is having contacts in interesting corners of the world. (It’s also one of the benefits of membership of Bonner & Partners Family Office – we regularly tap into this network to get a better idea of what is going on in the world.)
“It is very hard for Westerners to appreciate how corrupt Chinese business and political life is,” said one of our contacts, who will remain nameless lest the Chinese revoke his visa.
“Almost every rich person in China owes his fortune to some criminal activity. Because, when the country first took the capitalist road after 1979, you almost had to break a law or two. There was no getting around it.”
In China, as in Russia, the sudden release of billions of dollars of state-owned property into (quasi) private hands was a rough-and-tumble affair. It helped to know people in high places. It helped, too, to have a flexible view of right and wrong.
At the millionaire level, corruption on the local level was endemic. Still is. Building projects, contracts, licenses, bribes…
“You cannot do business in China without some connections at the local level,” our friend continued.
“China is a big place. The national government sets the agenda. But local leaders often pay no attention. They have their own agendas. And everybody expects to get something…
“At the highest level, the ‘princelings’ – typically, family members of powerful party bosses – are often billionaires.
“There’s so much money in China. China is even more reckless with its easy-money policies than the US. The money supply is now $17 trillion. That’s in an economy only half the US size.”
As a point of reference, the US money supply is $10 trillion.
328% Gains on Russian Stocks?
Will the Chinese economy blow up? Will its markets melt down?
We don’t know. But you make your money when you buy. Buy China and you will likely make money now.
The same can be said for Russia – another longtime favorite of the Bonner & Partners Family Office research team (led by British former investment banker Robert Marstrand). We first recommended members allocate part of their family wealth to Russian stocks in March 2012.
Colleague Steve Sjuggerud, at Stansberry & Associates, likes Russia too:
Russian stocks soared the last time they were this cheap. Our database shows a 328% gain from 2001-2004 and a 167% gain from 2008-2011. We have the potential for a similar move right now.
Second, the dividend yield on Russian stocks is very high. That, too, has only been this high twice in the last 12 years – in 2001 and 2009. Those peaks led to an 83% gain in six months and a 119% gain in 15 months, respectively.
More to come in future updates…
Regards,
Bill
Market Insight:
How to Profit from ‘On Sale’ Russia
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Today, one of the most important (and counterintuitive) lessons you can learn as an investor… The higher markets go, the more you should reduce risk exposure and raise your cash balances.
That’s because, over time, assets are mean reverting. Simply put, prices – and returns – may move to extremes, but eventually they move back toward the average.
This is irrelevant for the short-term investor – who may invest for a matter of months… or years at most. But to the long-term investor, it is key. For instance, in Russia the stock market rose tenfold between 1992 and 1997.
Should you have hopped on the momentum train in 1996/97?
No. The smart move would have been to take your money out and wait for prices to mean revert.
This is something that most investors – who are essentially crowd-chasing creatures – will never understand.
But holding cash when assets are cheap is expensive. And holding cash when markets are expensive is cheap – because you can deploy that cash when markets mean revert… or even better, when they crash.
Right now, the Russian stock market is cheap (on a trailing P/E of just 5.6 versus a trailing P/E of 19.7 for the MSCI USA Index). And its dividend yield is high (5.6% versus 1.9% for the MSCI USA Index).
Holding cash while Russian stocks are this cheap is expensive. Our advice: Put that cash to work. Buy Russian stocks at a big discount to their US counterparts. Then raise your cash balances again when Russian stocks once again start to become expensive.
