Investing The Vampire Way

02 May 2001

Looking For Blood In The Streets

I just returned from a wedding in China, which one of my clients was attending among an international crowd. This client, having read our papers assiduously for several years, had already been intellectually converted to our contrarian/value philosophy. Now, having escaped the recent Wall Street bloodbath, he has become such a proselyte that I have little hope of living up to the reputation he is creating for me.

As a result of this build up, however, many wedding guests approached me for predictions about currencies, stock markets and individual stocks. I had much trouble explaining that, on most of these subjects, I simply had no particular opinion.

Investing, no matter how knowledgeable one is, remains a matter of odds and batting averages. For this reason, the only two ways I know of beating the competition, over time, are:

1. To invest in situations where we feel our understanding is different from, and our knowledge clearly superior to, that of other market participants; and

2. To invest when there is “blood in the streets”, as goes the old adage, e.g. when the majority of investors are too scared to exercise judgment.

These two approaches are best combined, as they often are still risky when followed separately. So, unless I have the benefit of some combination of the two conditions on a given subject, I basically have either no opinion or, at best, a very weak one. (For more on this, see Opinions and Convictions).

Today, from a macro perspective, there are two opportunities to invest the vampire way (where there’s blood in the streets): Japan and Indonesia. Their degrees of bloodiness differ considerably, of course, and I am purposely not including the Philippines in this short list even though, at this writing, blood is quite literally flowing in its streets.

My reason for excluding the Philippines is that, until recently, it still benefited from an unwarranted investment premium simply because its population speaks English. As I have argued before (see: Business and Cultures), understanding a people’s language is quite different from understanding the people itself and may, in fact, create a false sense of security. The Philippines is a mess, having adopted many of America’s worst habits and few of its best. Yet, it retains some affective investment premium despite the recent political chaos and market collapse, simply because American businessmen and investors feel more comfortable investing in countries that speak their language.

Indonesia is just as messy but, benefiting from no affective premium (it is, in fact, constantly maligned by the Western media), it offers incredible investment values. The shares of many financially sound and profitable Indonesian companies are now selling at a fraction of what they would command if a semblance of political stability returned to the country. In a word, the Indonesian stock market is selling as if the country were about to disintegrate, while the odds of such a breakdown remain quite low in the opinion of most knowledgeable locals.

In Indonesia last week, I did notice some weariness on the part of businessmen with regards to the political antics and, particularly, their detrimental impact on the Rupiah. But, basically, the economy is still functioning quite well. The important low-end retailers enjoyed good business in February, March and early April, and motorcycle sales, a good indicator of middle class demand, have remained quite strong.

With the economy so resilient, any good news on the political front could conceivably trigger a rapid doubling of the stock market, although I would not want to officially predict the timing or starting level of such a bonanza! (I’ve already been waiting far longer than I had expected)

Japan is quite different, as it is difficult to argue that its shares are statistically dirt-cheap. But the market is down some 60% from its highs of ten years ago, and the prophets of gloom have been having a field day predicting deflation, massive banking crises and the like. In other words, the bad news has had plenty of opportunity to be reflected in stock prices, as we pointed out in February (See: Japan: Looking For The Silver Lining).

Yet, much as America’s New Industrial Revolution got underway, in the early 1980s, when experts were lamenting the death of American manufacturing, corporate Japan is undergoing a true cultural revolution. This revolution cannot be measured against America’s earlier one, because Japan is not America. But, against attitudes that prevailed in Japan only a few years ago, the transformation is truly revolutionary. Over the next ten years, it is plausible to envision a doubling or tripling of return-on-capital rates for many companies, so that today’s stock prices may well look to have been dirt-cheap in retrospect.

Except for my feelings about a bottoming process in the United States (possibly W-shaped, as argued in recent issues of Headlines & Bottom Line), there are many other investment subjects on which I have no strong opinion at this time. These are still lean times for investment vampires…

François Sicart

© Tocqueville Asset Management L.P.
May 2, 2001

The information contained herein has been obtained from sources believed reliable, but is not necessarily complete and cannot be guaranteed. Tocqueville Asset Management L.P., their affiliates and their officers, directors, employees, advisors or members of their families as well as the clients for whom they manage portfolios; 1) May have positions in securities or options of issuers mentioned herein and may make purchases or sales of the securities or options while this publication is in circulation; 2) May hold directorships in corporations discussed in this publication. Affiliates of Tocqueville Asset Management L.P. may, in the last three years, have been manager or co-manager in a public offering of securities of issuers discussed in this publication.