By Chris at www.CapitalistExploits.at [11]
We've received quite a few emails from many of you over the past few weeks. I'll answer some of the questions you've had and touch upon your comments here as I think they might be relevant for the others to read about. Let's just dive right into it, shall we?
Question: Dear Chris. For some 5 years now I've had a sick feeling that there are more problems in the world, problems worse than that which the global financial crisis brought us, and yet I couldn't put my finger on it.
I began searching for answers and have burned through many bloggers and resources since then. I have a low tolerance threshold for BS and people selling their book. Your content is easily one of the best I've come across. You make complex matters understandable.
I literally only read you and Martin Armstrong who you've referenced before and I've subscribed to dozens of publications. Martin is somewhat difficult to understand and I find the combination of your and his work to provide me with a contextual framework on which to firstly grasp the enormity of the problems and subsequently to be able to logically and thoughtfully allocate my resources. I have noticed most bloggers writing up to once a day. I'd suggest you write more.
I actually first came across the blog from an article forwarded to me by a colleague and I couldn't agree more about your thoughts on technology and how it's killing and will kill many jobs.
My business partner and I are both relatively highly paid accountants in Boston and in just the last 3 months we've lost two of our largest corporate clients to outsourcing of US tax work to India. It was at this time that I read an article of yours and you made me mad as hell. At first I was angry, which lasted a few months but then I realised that being angry wouldn't do me any good. If I was one of my clients I have had to admit that I would do the same. Thanks for making me angry.
Answer: Wow, thanks! I'm blushing like a schoolgirl. Lots to cover here...
I think you're missing out if you're only reading Capitalist Exploits. Martin is excellent but there are many very smart people out there.
I would go so far as saying it's even worth reading those who you disagree with. There is a real risk to failing to stress test ones own biases, and we all have bias in some shape or form. Markets don't give a damn about your or my bias.
I know exactly zero successful investors who are simultaneously arrogant. It is of course possible to be momentarily arrogant but markets have a way of humbling arrogance. As such it's better to have alternative ideas to whatever your bias happens to be. Only by looking intently at such ideas is it possible to keep stress testing your own ideas. Also, always remember the very, very best in the business still get it wrong! None of us can afford to be cavalier about that.
On writing more. We never set out to be bloggers. It sort of fell into what it is. We're extremely busy so I write when I can - between flights, at the end of a day, 4AM when I can't sleep... It helps me to clarify my thinking.
Also realise that Capitalist Exploits is merely a blog and our real business involves much more than me (or Mark) digitally vomiting my ideas onto a page. We have a core organisation of great intellect and a network of members and friends that covers the globe. I'm extremely fortunate to be involved and driving this.
You're probably referring to "professional bloggers" who spend a ton of time writing. If I did that then I'd not be getting a whole lot of anything else done and quite frankly not have anything to write about as a consequence of that.
In my meetings with people, there is a constant theme that keeps rearing its head and that theme is centred on disruption. The extent of truly disruptive trends we come across is staggering. Some of it may take time and some of it may well morph but it is happening and what can't be predicted is what is just around the corner.
Who knew, for example, 10 years ago that Uber would put such pressure on taxi operators? Who knew for example that the physical map would cease to be used as GPS made it redundant?
Question: I see you are talking about Colombia. I'm really interested. Some guys I read are talking about condos. Can you tell me what it is you guys looking at and why?
Answer: Firstly, let me say that it's impossible to be an expert in everything, everywhere all over this ball of dirt. It's simply not possible to do so. Wherever we go we look for partners on the ground. We've managed to build an amazing network and as our business has grown we've now taken on additional partners with really incredible networks of their own. This is the only way I know of accessing opportunities globally.
Even when you're a large firm with offices and staff scattered around, it's wise to find quality partners. The trouble with large corporates is that the individual country operations are rarely as smart and hungry as dedicated domestic outfits.
It's a trend that we'll see more of (smaller sized companies leveraging technology will outperform behemoths). Coupled with this on ground knowledge a better decision can be made.
Personally, I don't like apartments unless you're looking at trading them. As an apartment owner you end up being an unsecured shareholder in a building. You've got no real management rights and if the HOA is crap, you're hosed.
What's more, management can change so even if you buy something that is well managed that can change. If the building you own starts falling into disrepair it's a headache trying to rally all owners to the cause, ridding yourself of existing management and getting your investment out of deep water.
Buying single apartments in buildings means you're always going to be a passenger and your control/risk is therefore different. I've traded in and out of apartments but really only on opportunistic transactions not for any long terms strategy. Buy the entire block of apartments, not one or two!
What we typically like is raw land. Well placed raw land has historically appreciated far faster than anything else in a boom town. There are some truly massive infrastructure projects underway, not least of which a highway cutting straight through the Andes linking Medellin to ports, both on the Caribbean as well as the Pacific. For some background I suggest this post on "front running infrastructure" [12].
If you want yield then blocks of apartments, not single units, and commercial (too broad a topic to discuss here) is where you need to focus attention. This goes for pretty much anywhere, not just Colombia.
One of our contacts in Medellin tells me that there is a real opportunity in boutique hotels. Those require management, though. We're holding a Seraph Meet Up in Medellin in August to explore opportunities on the ground. More info on that shortly...
Question: You guys were one of the first out there to highlight Mongolia which was how I found you. My wife actually found you as she was researching Mongolia for a vacation. I, on the other hand, got interested in the investment opportunities such a place can bring. We traveled there on vacation in late 2000s and loved it.
Great call on TRQ recently! I actually bought some literally about a week prior to your rec. There is just not a whole lot to buy. What do you recommend?
Answer: We've been very fortunate. The power of a network is not to be underestimated. Mongolia Growth Group is trading below NAV. Well run, transparent, liquid.
There are a bunch of mining plays and we invested in an MSE listed equity. We're in the process of looking at some other assets which if they pass due diligence will go to our Seraph members [13].
The overall sentiment is still negative and valuations reflect that. It's a cautious optimism from a very small crowd. That crowd, however, includes some incredibly successful people who know the politics and country better than anyone else.
I wouldn't go clapping hands just yet. You only clap your hands when you've sold and banked your gains, and that hopefully is a time when the risks seem vanishingly thin and we see new Mongolia focused funds being setup every Tuesday. My gut tells me there is a ways to go before we get there.
Question: There has been a lot of positive postings about the Oyu Tolgoi mine coming to the table with the Mongolian Government signing the expansion agreement for the U/G Development.
What is not mentioned is that at the end of May, 300 Contractors and 300 Company employees from the Surface Operation are going to be laid off. The results of the U/G agreement will probably not be felt until early 2016 or later. While this is a step in the right direction the celebrations should not commence yet.
Answer: Capital usually arrives far slower than it runs away. I don't expect capital to flood back into the economy from retail investors. What will take place is that the previously agreed upon credit lines from large institutional/banks will now be opened. Given the prices currently, I'm inclined to be positioning ahead of "sheep money".
Remember that TRQ can generate value in a number of ways. In the last earnings call you'll note that they are looking at selling their stake in South Gobi which is probably worth about $110 million. That would be a positive for TRQ in itself.
Of the 15 banks involved in financing stage two, 14 of them have recently agreed to extending commitments till 30th September which allows time for all outstanding issues with the GOM and Rio to be completed.
This will provide the billions needed to progress the project. In other words, though the strong commitment to move forward and resolution of the major hurdles has been accomplished we're not out of the woods yet.
Question: Thanks for the debt report [14] you put out. Hard to imagine this not ending badly. You guys were one of the first calling to short the yen based on the bond bubble in JGB's. I didn't believe it and should have. Urgh! What's your view now?
Answer: It is indeed quite frightening when you look at the math.
And the yen? I was chatting this morning with Brad [15] as we watched the yen break all the way through 123, as shown in the chart below. Technically, it's now overbought but new base levels are being created here.
I think it's back to weakening after taking a little breather. Clearly when we called it in the 70s that worked for us, even though we were in the red for a bit there. It wasn't so much a factor of knowing that it was going to fall then.
Like any good trade it was a factor of probability - what you pay for something relative to what your potential outcome is. I can't tell you how important this concept is and many don't get it. The concept is paramount to risk exposure in a portfolio.
Back to Japan. Their fiscal situation is untenable and they're trying to kill the deflationary monster by devaluing their currency. I still think the currency goes first before they let the bond market go. Long term both are screwed but timing of such an event is anyone's guess.
Also, the bond market is basically not accessible unless you've got a $100 million balance sheet to play with. Sadly we do not. Where to next? 140 by year end?
Question: Hi Chris. I just wanted to say that I've been reading your articles and love them. I don't read a lot of stuff that comes to my email but every time I get one from Capital Exploits I make sure I read it!
Although I'm not thinking about investing in Mongolia and Colombia yet, I'm following your reasoning closely to learn how to think about these topics. Very interesting ideas and written in a very entertaining way. Look forward to reading more of your articles.
Answer: Thanks! Mongolia is looking interesting again as mentioned here [16] and here [17]. We will have more on Colombia over the next few weeks.
Let us know [18] if you found this Q&A valuable and we'll do it more often in the future.
- Chris
"I don't pretend we have all the answers. But the questions are certainly worth thinking about." - Arthur C. Clarke