So what is possible when you discover markets like this? Can history teach us any lessons in this area?
Rather than attempting to eradicate the conditions of volatility, disruption and surprise, our objective is to capitalize on them by taking advantage of regions, countries and assets that have been negatively impacted by exogenous events. It is our view that a lot of money can be made when a region, country or asset-class moves from ‘catastrophe’ to merely ‘awful’.
Further, there are regions, countries and asset-classes that are at (or approaching) Lifetime Selling Opportunities - where we expect asset prices to fall over the longer term.
History provides us with a catalogue of solutions to the problem - so when do you enter a market?
Hong Kong Hang Seng Composite Index (USD)
Here’s a look at the Hong Kong share market from 1968, which marks the tail- end of the Cultural Revolution that gripped the Chinese nation. At the time, Hong Kong was a dangerous place to live and work. This period is labeled as #1, where daily life in Hong Kong consisted of terrorist attacks, bombings, kidnappings and political murders.
Hong Kong in 1968 wasn’t safe in virtually any sense of the word - politically, economically or socially. However, all this disruption and volatility masked the lifetime buying opportunity that Hong Kong assets offered. This is the irony of the investment game and the magic of asymmetric positions. Looking back, Hong Kong equities, bonds, and real estate have risen between 50-80 times in value since 1968.
This is where most get it wrong when sizing up opportunity ... most focus on the negative side-effects of volatility as it’s accompanied by uncertainty, violence, and political risks that are impossible to quantify. But as you can see by the performance of Hong Kong shares, the market had priced most of this drama into share values in 1968 and prices were about to enter a parabolic rising trend that would last nearly 5 decades (and counting).
This is a reminder that when looking to buy and hold an asset - you can’t use the same criteria when sizing up a family vacation. You are not looking for a safe place to travel to with nice restaurants and real estate agents on every corner.
South Korea KOSPI (USD)
At the end of the Korean War, assets in South Korea were devastated, hated, and completely misunderstood by the global investment community. #1 on the chart marks 1963, where Major General Park Chung-hee narrowly wins a presidential election. #2, General Park declares a state of emergency. Park eventually declares martial law and dissolves the National Assembly and suspends the constitution. #3, the Yusin constitution is adopted, removing presidential term limits and granting Park control over all legislative and judicial bodies. This was a period marked by huge unrest, which caused Park to declare a national emergency three times over a two-year period. #4, Park is assassinated by a close friend and former director of the Korean Central Intelligence Agency - Kim Jae-kyu. As an investor, had you stepped into this chaos and bought the Korean Kospi - today you would have more than 35 times your original investment.
Moscow Times Ruble Index (CPI Adjusted)
Russian shares - This is a more modern-day example of an asset-class completely misunderstood by the investment community and out of favor. #1, marks 1992 in Russia, which was near the end of the 1st constitutional crisis in Moscow as the “Voucher Privatization” scheme converted cash / collateral privatization scheme. This sequence of events ushered in the rise of the oligarch era in Russia. #2, the Asian financial crisis begins and hammers the ruble. #3, marks the beginning of the Russian financial crisis. All three points highlight successful entry points for Russian assets. The Russian stock market is 40 times higher today!