The Rude Awakening
Baltimore, Maryland
Thursday, May 24, 2007 ------------------------- - How not to invest like a conquered general,
- Russia's energy surplus and vodka shortage,
- The value to be extracted from history's great mistakes, heads on stakes in London and plenty more…
------------------------- From Scotland, Joel Bowman reports… Seven hundred years have passed since Scottish hero William Wallace was hung, drawn and quartered in London for his role in the battles for Scottish independence. Emboldened with patriotism, captured with betrayal and "Oscared" with Gibson (Mel), the "braveheart" of the Scottish people was martyred for a crime that had not yet been defined in the English Law that condemned him. Had Wallace been allowed representation at his own trial (King Edward I had earlier had him declared an outlaw by the Scot parliament) his lawyers would find that a definitive outline of treason, for which Wallace was to be found guilty, was absent from the books. It would be another 50-years before they inked that one. Of course, Wallace did ride under an opposing flag against the King's army…and employ guerilla tactics to pillage English villages…and commit string of murders… Overlooking these and other misdemeanors, misdemeanors any old Johnnie Cochran could have fashioned into an acquittal (if the chainmail doesn't fit…) is seems Wallace was the victim of some rather crafty methods. The means by which he was caught, for example. Believing, as he rode out of Glasgow late one evening, that he was on his way to have a secret meeting with Robert the Bruce (his successor and eventual King of Scotland), Wallace was snared by the English. It seems there was a Judas in the rebel ranks. Perhaps Wallace could have spared his own head from the ignominious fate of impalement and display on London's Tower Bridge had he a little more technology on his side. What if the "treasonist" had access to a pistol? How about a tank or a plane, a machine gun or a cruise missile? What if he have been able to lob a few long range WMDs at his enemies down south? Would he still be enshrined as a martyred champion of the people? Or would he be remembered as a vicious victor? According to one knighted warrior, these technologies are of little use to those in warfare anyway. In the column below, Chris Mayer explains Sir Douglas Haig's ludicrous conclusion and the lessons we as investors can learn from his costly mistakes. Enjoy… ----------------------------------- Fighting the Last War
By Chris Mayer You have probably heard the expression about generals always "fighting the last war." Many investors do the same thing. In both cases, the consequences are costly. British Field Marshal Sir Douglas Haig is an example of that kind of general. World War I was the first mechanized war. Yet Haig still believed in the frontal assault and the power of cavalry. He discounted the trappings of modern war, such as the effectiveness of the machine gun. Haig's ideas on warfare were hopelessly out of date. As historian Geoffrey Norman wrote: "His fantasies of cavalry charges across open country were matched by his insistence on sending infantry against the enemy in neat ranks at a slow walk, to better maintain discipline." Even against machine guns! Therefore, when he led the British in the Battle of the Somme, the result was disastrous -- nearly 60,000 casualties on the first day. Haig's army suffered more than 400,000 casualties over a four-month stretch. It was one of the bloodiest battles in history. Haig, though, seemed completely unrepentant and learned nothing from the experience. As late as 1926 -- years after the horror of World War I ended -- Haig still clung to old-world notions of warfare. He wrote the following, which I reproduce because it is so unbelievable, so astonishing, that it makes one wonder how the human race ever got as far as it has: "I believe that the value of the horse and the opportunity for the horse in the future are likely to be as great as ever. Aeroplanes and tanks are only accessories to the men and the horse, and I feel sure that as time goes on you find just as much use for the horse -- the well-bred horse -- as you have ever done in the past." Haig was a fool and it cost Britain the lives of many men, who surely would have gone on to do better things than die in some muddy field in northern France. The stakes are not so high for you as an investor, of course. Yet the idea of generals fighting the last war is a good metaphor for investors who are slow to realize -- or refuse to realize -- how the world has changed right before their eyes. Harvey Sawikin suggested that investors today might be like those generals who are always fighting the last war. Harvey Sawikin runs the Firebird Fund. Firebird has been one of the top-rated funds of the last five years -- netting investors a 35% annual return. Just last week, Sawikin addressed a luncheon meeting of the Baltimore CFA Society. I attended the event along with my colleague, Dan Amoss, editor of Strategic Investment. Firebird focuses on the old Soviet Union and Eastern Europe. And those markets have been on fire over the past few years. Anybody who invested in Russia over the last 24 months has done extremely well. Listening to him talk, however, it was pretty clear that Sawikin knows these markets. He's also been doing this since 1994. So he's no spring chicken, as the saying goes. A few points stand out from his talk and I'd like to share them with you here. They speak to the profound changes taking place in the world today, those that rear-view-thinking investors will likely miss. The first big change is the idea that the U.S. markets will no longer lead other markets. For a time, it was true; as U.S. markets went, so went the rest of the world. However, the facts no longer bear this out. As The Wall Street Journal recently reported: "During the two-year period that ended in February, correlation between U.S. and other developed markets was 0.63, according to ING Asset Management. That is a big decline from 2003-2005, then they practically moved in lockstep, at 0.93." Sawikin's own boots-on-the-ground experience backs these statistics. He believes business and growth in overseas markets are robust enough that they are not as dependent on the U.S. Sawikin opines that the price of oil is one example of the effect of this weaker link. "Why isn't the price of oil higher?" he asks, given the relatively tight supply and demand for it. Based on his own observations, Sawikin believes the U.S. economy is already in a slowdown. Yet the price of oil is still in the $60s because of the demand from China and India. "The U.S. is not the driver anymore,"
he says. He gave some interesting insight into Russian oil production. Sawikin says the Russians want to increase production, but not at these prices. "They don't want dollars at the current valuation," Sawikin notes. "Officials have said so explicitly." We are at the point where people would rather hold tangible things -- such as a barrel of oil, or acre-feet of water or a stretch of timberland -- than accept the dollars they can get for them. 
Which gets us to the second point: We are all going to have to pay attention to the weakening dollar, which has had a big impact on returns and how markets behave. "We've had ideal conditions for dollar alternatives," Sawikin says. The fall in the dollar is no longer a topic reserved for doomsayers. Even Warren Buffett, at his last annual meeting, said that the days when Americans could ignore currencies are long gone. "Look at oil going from $30 to $60 and the euro from 83 cents [per dollar] to $1.35," Buffett said. "So the price of oil for Europeans has gone up very little -- 25% versus 100% for us. It's easy to anchor on your own currency. You'll have to think more about currency than you have. Around the world, others think about currencies, but the average American hasn't had to." Beyond these points, Sawikin also had many interesting anecdotes on investing in Russia specifically. This is a market that fascinates me, but I am far from pulling the trigger on a Russian investment. Sawikin talked about traditional measures such as EBITDA. For Russia, his firm has a humorous variation called EBITDAS -- which stands for earnings before interest, taxes, depreciation, amortization and stealing. In Russia, investors must consider the impact of thieving managements, which is a unique twist, to say the least. He also found success investing in non-strategic markets -- such as consumer goods and banking. And he has stayed away from oil, gas and most of the metals, in which Russian oligarchs have muscled out foreign investors. In consumer goods, for example, Sawikin talked about making 75 times his investment on a company that produces vodka. "Selling vodka to Russians and Ukrainians," Sawikin joked, "that's a perennial." He also talked about the manipulative tactics of some Russian managers. One involved talking down a stock and scaring and insulting investors, thereby pushing the price down so the insiders could buy it. Sawikin calls them "Scooby-Doos," after the cartoon in which some guy would try to scare the kids away so they wouldn't find, say, the gold hidden in the old mine. For this reason, Sawikin doesn't even want to talk to management in some cases. "I don't even want to hear the misinformation." Sawikin did not tip his hand on any specific investment ideas, but I found his perspective valuable nonetheless. In any case, investors should not emulate Haig's stubborn insistence on floundering, old-world ideas. Specifically, investors should not discount the importance of overseas markets. Increasingly, investors will want to pay attention to what happens in Moscow or Dubai or other once-backwater
markets. More and more in this world of ours, opportunities respect no national boundaries. Joel's Note: Mistakes are tremendously valuable things…especially if they are the mistakes of others. That way, you can learn from them without the inherent suffering that comes from experiencing them first hand. We wouldn't wish a mistake upon anyone merely for the benefit of our further education, of course…but we certainly won't waste the opportunity to learn from them when they inevitably occur. As a former investment banker, Chris Mayer has been around long enough to learn from a great many mistakes. One might say he has been finely educated in the school of other's hard knocks. Today Chris uses this knowledge and his years in the industry to uncover seldom discovered, though often sought value in the stock market. His keen eye for a bargain means that, while your possible upside is increased, your potential loss is severely mitigated. With this in mind, there are two services that Chris offers to Agora Financial readers. The first, Capital & Crisis, is a value-oriented newsletter. It's published once a month both in print and online and updated regularly. It's what you want if you are just getting started and seek some timely guidance from a seasoned professional. Chris' second service is called, Mayer's Special Situations. In this, his more advanced service, Chris offers detailed analysis for more instructed investors with the same fundamental discipline of his newsletter. If you believe having Chris in your corner would benefit your investment decisions (and save you some of those costly mistakes) you can learn more about these services right here: Capital & Crisis
Mayer's Special Situations
Cheers, Joel | 
