The Daily Reckoning
Gualfin, Argentina
Tuesday, April 25, 2006
The Daily Reckoning PRESENTS: 'Pay attention and learn from the mistakes
of the past, they are likely to repeat themselves,' we say to our dear
readers at least once a week. Unfortunately, very few people heed that
warning. Chris Mayer explains...FORGIVING - OR FORGETFUL?by Chris Mayer
Source"Investing in Russia [is] like entering a rich gold field studded with
land mines: laced with veins of rich treasure, and riddled with pockets of
pure poison."
- Mark Mobius, Passport to Profits
In my more optimistic moods, I look out over the world and think about
places like China and India. I look at the bubbling-up emerging markets in
Africa, the Middle East, Eastern Europe and South America. And I think of
all the potential in places like that. I think of all the economic growth
ahead of them, all the untapped and budding investment opportunities.
Then I read what investors were thinking 50 years ago. And I get
pessimistic, because they were thinking the same thoughts. Indeed, their
comments still retain their freshness today, decades later. That shows
you, among other things, how progress is hard fought and far from
certain.
Worse, the same moves tend to replay over and over. And always with a bad
ending for investors.
It was only a couple of years ago, 2004, when investors lost their shirts
in YUKOS - the biggest oil company in Russia. The Russian government
seized YUKOS for back taxes totaling more than $30 billion. The move was
widely regarded as a political act, checking the ambitions of its
billionaire CEO. Investors howled, but at the end of the day, foreign
investors lost over $6 billion.
You would think after that experience, any mention of Russia would be like
(as P.G. Wodehouse once wrote) trying to cheer up Napoleon by talking
about winter sports in Moscow. You would think any mention of Russia would
hurl investors into alternating fits of rage and despair. Not so.
Investors are forgiving or forgetful or both.
Now there is a new Russian belle capturing moneymaking imaginations. It is
state-owned oil giant OAO Rosneft. What makes this all the worse is that
this, in part, is the old YUKOS. Rosneft is the company the government
folded YUKOS into. In other words, it stole this asset from investors and
is now going to turn around and sell it back in an initial public
offering.
The Rosneft IPO could be the biggest in history - at more than $20
billion. This for a 49% stake in Rosneft, while the government retains a
controlling 51% stake. Vladimir Putin as your partner? Not me.
Incredibly, investors are lining up to get a piece. As The Wall Street
Journal reported, "Advisers including Morgan Stanley and J.P. Morgan took
Rosneft President Sergei Bogdanchikov to London in February for a
presentation. So many fund managers and analysts turned up that some had
to stand through lunch." I hope these people aren't investing your money.
Admittedly, the Russian stock market has been among the best performing in
the world of late - over the last 12 months, the RTS index (a common
benchmark of Russian stocks) has risen 137%.
I came close to recommending a Russian company last year. One year ago,
when I prepared the Five Cheap Stocks special report, there was one
Russian company that made the list of 16, but did not make the more select
cut to the final five (which, again, produced an average gain of 87% in
one year). That company was Tatneft, a Russian oil and gas company.
It's true. Tatneft was actually an NTAV stock a year ago (trading for less
than its net tangible asset value). It closed on April 1, 2005, at a price
of $34.30. Yesterday, it was $120.82. That would have made it the top
performer of the group, better than even Imperial Sugar.
Yet I don't regret the decision to pass over Tatneft. For one thing, the
financial statements available were old and the disclosures were terrible.
It was hard to know what you owned if you bought Tatneft. Over time,
passing on companies like this will save you a lot of money - because your
winners won't compensate for the inevitable disasters.
Also, I didn't buy technology stocks in 1998, either - even though they
went up in 1999 and finally flared to their glorious peak in 2000 before
getting seared like the wings of Icarus and tumbling back to earth. Russia
is a snake pit, where you can lose your entire investment seemingly
overnight because of government confiscation and corruption.
Why the enduring attraction to Russia? Russia's magnetism can be summed up
in two words: "cheap assets."
Russia is still the largest country in the world, in terms of land area.
The expanse covers 11 time zones and nearly every conceivable type of
landscape, from frozen tundra to hot deserts, from lush wet lowlands to
high dry mountains, from dense forests to open plains.
And buried amidst all that are rich veins of natural resources - Russia is
a veritable storehouse of Mother Nature's useful goodies. Russia is the
largest, or among the largest, producers of palladium, platinum, diamonds,
nickel and gold. Russia is also rich in oil and gas. Rosneft, for example,
has more proven oil reserves than Exxon. It's bigger than any oil company
in the world on this basis save for its sister company Lukoil. It is also
the world's biggest producer of natural gas.
I like Jim Rogers' line in his most recent book, Hot Commodities: "The
bright spot in the world's oil picture, according to most analysts, is
Russia - additional proof, in my opinion, of how bad things really are."
To me, investors lining up for a shot at an old dilapidated outfit like
Rosneft - with all its shady aspects - is a sign of a market that is
getting up there in the thin air of speculation. Investors have more money
than they have good ideas. Someone is bound to lose.
Hint: It won't be the Kremlin.
Regards,
Chris Mayer
for The Daily Reckoning
P.S. In Capital & Crisis, our focus is on understanding the individual
investments we are in and getting them on the cheap. Even so, this doesn't
mean we have to stick our heads in the sand and whistle out of our rear
ends.
Our battle plan is largely unchanged: to invest in sturdy businesses with
valuable assets, lots of resources and proven capabilities, able to
survive and even prosper in difficult environments. It also helps to have
smart people at the helm. Do all this at good prices and you'll make a lot
of money, even in a soft economic environment, even in a flat market. Our
track record proves it. We had a great 2005, even though the market went
nowhere.