Books Read in 2023

In my research and investing, I stress three things: people, structure, and value.  I look for companies controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests, and trade at valuations that are below fair value, if not outright cheap.

One of my more popular posts was a summary of books I read the previous year. This is a similar post that provides brief summaries of books read in 2023. Many deserve longer reviews, but I like to read more than write these reviews, so these short blurbs will have to suffice.

Entangled Life - How Fungi Make Our Worlds, Change Our Minds & Shape Our Futures; Merlin Sheldrake  Put first for a reason. It is one of the few nonfiction books I could barely put down. I was skeptical when my brother recommended it, but I was wrong. Mushrooms, lichen, and a whole lot more are covered in this easy-to-read and wonderfully researched book. How they help trees communicate, break down dead organisms, maybe the origin of life on earth, and much more.  Don't miss the 50 pages of notes at the end that are equally interesting and shed even more insight into this subject. Highly recommended. 

The Muslims of Sri Lanka, One-Thousand Years of Ethnic Harmony 900-1915; Lorna Dewaraja  I became interested in this minority group after meeting several Muslim businesspeople in Colombo, and I got a lot out of this easy and insightful read on one of Sri Lanka's most important religious groups. While focusing on Muslim and Sinhalese relations, it provides insight into Sri Lankan history, society, and Buddhist ideals of tolerance and accommodation. It also reaffirms trade as being better than politics to bring people together, 'Unlike in India where Islam made its entry as a conquering proselytizing force, in Sri Lanka it appeared as the personal faith of a peaceful trading people who in the course of time earned the goodwill, confidence, and trust of the indigenous people.'   Kudos to the author and publisher for producing this fine book, '...historians have traditionally been attracted by wars and rebellions whereas the peaceful co-existence of groups of people over long periods tends to be overlooked.' 

Cairo, A Cultural and Literary History; Andrew Beattie A well-organized and very readable history of one of the world's oldest cities. Breaks Cairo's history into five eras with good details on each - Pharaonic, Christian and Jewish, Islamic, Colonial, and modern. Good reminder of the central role that the city and Egypt played in the earliest days of human civilization and Abrahamic religions (Jewish, Christian, Muslim). Highly recommended.

Banking and Business in Sri Lanka, From a Plantation to a Diversified Economy; V.S. Nadarajah  Published in 2010, I got a lot out of this short book. It’s a concise history and summary of modern Sri Lanka's economy, politics, major industries, companies, and financial institutions. Highly recommended for those investing or doing business in Sri Lanka. 

When Money Dies, The Nightmare of Deficit Spending, Devaluation and Hyperinflation in Weimar Germany; Adam Fergusson  Blow-by-blow history of early 1920's German hyperinflationary period, which helped to pave the way for the Nazis. It's a depressing yet gripping read. Recommended, especially for those investing and doing business in high-inflation countries such as Argentina, Egypt, and Turkey.

The Futures, The Rise of the Spectacular and the Origins of the World's Biggest Markets; Emily Lambert  Readable history of the Chicago Mercantile Exchange and the Chicago Board of Trade. Their competitiveness and flexibility ultimately created the world's largest commodity exchange. 

Governing the Ungovernable, Institutional Reforms for Democratic Governance; Ishrat Husain Written by the former governor of the country's central bank, the State Bank of Pakistan, this is a good summary of the key institutions in Pakistan and why their weakness is preventing the country from advancing further and faster. The author notes that the military is the one institution that's professional and well-organized, which means it will likely continue to rule Pakistan somehow. Good read on understanding the world's fifth-largest country by population. 

Fragile Cargo; Adam Brooks An exciting history of saving a large portion of China's imperial art collection during a chaotic period of rebellions, warlords, colonialism, civil war, clashing ideologies, and World War II. Its back cover blurb sums up the book well, "16 Years, 15,000 Miles, 250,000 Works of Art".  The author's first non-fiction book makes this history book very readable. Hollywood should make it into a movie.

One Up on Wall Street; Peter Lynch I finally got around to reading this investment classic. It is good and highly readable, with insights for professional and non-professional investors. I like the author’s focus on companies rather than the market, his preference for long-term fundamentals over short-term trading, and his contrarian mindset. Full of great quotes and wisdom. "The trick is not to learn to trust your gut feelings, but rather discipline yourself to ignore them'. 'Pick the right stocks, and the market will take care of itself,' 'Several of my favorite ten baggers made their biggest moves during bad markets.' 

The Struggle for Egypt; From Nasser To Tahrir Square; Steven A. Cook. The first 2/3rds provide a decent enough history of modern Egypt. It reconfirmed my impression of the country after a trip to Alexandria...not much has changed since the end of the British Era. "It was a system founded in the ideological and power politics of the early 1950s when the Free Officers discovered they could dispose of their opponents through non-democratic laws, rules, regulations, and decrees." 

When McKinsey Comes to Town; Walt Bogdanich and Michael Forsythe   Easy to read book on helping the rich and powerful to make even more by gaming people and the system. If there’s a global elite, McKinsey is their champion. The chapter on how they helped pump up opioid sales in the US is particularly alarming and depressing. McKinsey management says they'll do better, but ultimately, they shill for money. Cronyism Western style

Midnight in Cairo, The Female Stars of Egypt's Roaring '20s; Raphael Cormack  Interesting summary of female stage actors and personalities when Cairo and Alexandria were more international than today and the center of the Arab-speaking world. It is a good reminder that Egypt is more than just pyramids and ancient Pharaonic artifacts. It's a bit of a narrow topic for me, though. 

The Story of Ceylon Teamaker; Merrill J. Fernando Ok autobiography of one of Sri Lanka's wealthiest people.  Mr. Fernando created and built the country's best-known brand, Dilmah Tea. Unlike blended lower-quality bulk products, Dilmah produces and sells high-quality single-origin Sri Lankan tea. He was obsessed with keeping the value-adding processes like blending, packaging, and marketing within Sri Lanka. Mr. Fernando passed soon after the book's publication in May 2023 at age 97.  

 

 

 

 

No One Left to Sell - Longriver Podcast Interview

In my research and investing I stress three things: people, structure, and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.

Instead of writing something original as I usually do, this post is a link to an interview I did recently with Graham Rhodes for his very informative Longriver podcast. It explains why I look for out-of-favor markets that are trading at what could be generational low prices (value), and also provides insight into how I determine quality (people and structure).  I’ve been using this investment style personally and professionally for about 10 years and think it’s the best way to invest long-term. It’s not for everyone of course so please see the disclaimer/caveats notice below.

https://www.longriverinv.com/podcast/michael-mcgaughy-no-one-left-to-sell

Many thanks to Graham Rhodes for having me on and conducting such a great interview. Longriver is a must follow podcast. It’s available on a variety of apps and at the following link:  https://www.longriverinv.com/podcast.

Normal caveats apply: This is in no way investment advice nor does it make any recommendations.  It’s just for informational and entertainment purposes. I may or may not have financial interests in the companies mentioned.

Trip Report: Cairo, Egypt, October / November 2016

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.  This post is about a recent trip to Cairo, Egypt and touches on people, structure and value – as well as lots more - in that country. 

The purpose of the trip was to generate a short list of quality companies I’d like to own stock in if/when the currency is revalued.  Egyptian equities appeared on my value screens back in March, but corporate responsibilities kept me tied to home.  

I was also concerned that Egypt’s currency was going to be devalued.  There was a large and growing gap between the official and black market rate.  Russian stocks popped higher soon after their currency was floated in early December 2014, and I wanted to get my ducks in line in case the same thing happened in Egypt. 

Readers are advised to note that it was my first time in Egypt as well as my first time in the Middle East.  Most of what’s not referenced below comes from on-the-ground meetings rather than from verified sources.  The people I met were mostly financial and corporate professionals, who are generally more conservative, educated and less willing to rock the boat.

Meet the New Boss. Same as the Old Boss?

One of my first impressions of Cairo was the heavy security presence on the way from the airport to my hotel.  There were suited ‘undercover’ security men standing every 400 meters or so on the access road’s median strip and straight through the tony Heliopolis neighborhood.  Toward the end of my trip I was politely told not to take pictures at a major intersection near my hotel by a serious, well-dressed man with a walkie-talkie.

Despite having one the world’s oldest continuous parliaments, the country has been basically under military control since the 1950s.  Nasser, Sadat, Mubarak and now Sisi all come from the military.  And this doesn’t seem likely to change.  Nobody I talked to had anything positive to say about Morsi’s and the Muslim Brotherhood’s short stay, and there does not seem to be any other decent sized and well organized opposition.  I was told that most Egyptians feel that the military provides welcomed stability in volatile region.

While nobody I met had anything good to say about Morsi and the Muslim Brotherhood’s brief government, I’m sure this view is not shared by all.  Members of Hasm, reportedly a new group aligned with the Muslim Brotherhood, certainly don’t feel this way.  They recently took time and effort away from more productive activities to bomb and kill six police who were stationed on the road leading to the pyramids (see here).

Much of the outward appearance of stability could be due to suppression of the press and dissidents.  The government is not shy about keeping the press under control by jailing journalists, and some reports note that the present government is more repressive than previous ones (see here, here and here).

Foreign Exchange Nirvana

Virtually all discussions on the economy focused on the currency.  Egypt imports a lot and virtually all trade is done in USD (United States Dollars).  It’s one of the world’s largest wheat importers for instance.

Virtually every meeting with corporate executives began with a discussion of the currency - how they are sourcing dollars from the ‘parallel’ market, how much of the higher costs they can pass onto customers, and how and when the situation will end.  All were adamant that the situation was unsustainable and had to change.  None thought the change would come so quickly. 

It happened when I was there which, for an emerging markets geek like me, made it a super exciting week!!  So please forgive me if this section is a bit long-winded.

When I arrived on Sunday USD1 bought EGP8.88 at the official rate (EGP stands for Egyptian Pounds). However, the black market rate was EGP15, up from about EGP12 just a few months ago.  This means that people who exchanged their USD to EGP on the black market could buy twice as much as if they exchanged their currency at the official rate. 

It also means that companies that import raw materials, equipment and finished products needed twice as many EGP to buy the same thing when using the black market rate.  Few non-government companies could get enough USD at the official exchange rate so they relied on the parallel market.

By Tuesday – just two days after I arrived - the black market rate shot up 20% to EGP18, before falling by 33% to EGP12 the next day (Wednesday).  The dramatic one day fall foreshadowed the next day’s news that the currency was going to be set free (Thursday).  It fell to EGP15 by the time I left (Saturday).  It has declined further and, as this is being written, is trading a little over EGP18.

To put this in perspective, my daily breakfast at the Hilton cost EGP205.  At the old official rate of EGP8.88 to one USD, my breakfast cost USD23.08.  By the time I left it cost USD13.53, and at the current rate it cost USD11.39, or 50% less than it did at the old exchange rate.  Not as cheap as I’d like, but certainly not as expensive as before. 

Second cheapest Big N' Tasty meal in the world?
USD3.20, Cairo, 5 November 2016

After the change, prices in Egypt are not very expensive.  In fact, after Ukraine it has the least expensive Big Macs in the world.  At the hotel across the road from my hotel it cost EGP26, or about USD1.50 at current exchange rates.  (Link to The Economist's Big Mac index is here).

A quick stop at Carrefour confirmed this.  A 1kg bag of pasta cost EGP10 (US$0.66), pre-cooked large salami pizza EGP22 (USD1.46), and a French baguette, EGP5.75 (US$0.38).  This was a month ago and right after the devaluation, and with inflation expected at 25-40% next year, it’s unlikely they’ll stay so cheap. 

Stocks on Sale Too

Carrefour's Inexpensive Pasta
Cairo, 5 November 2016

Another way to look at this is that all the stocks were at a 50% sale for USD investors on Thursday as compared to Wednesday.  And who doesn’t like a sale? 

Investors certainly do and have bought heavily with the headline stock index increasing some 30% in the month since the currency was freed.

For foreign investors there is an additional problem of getting your money out and into the currency you want.  It’s easy to transfer USD into Egypt, but it may take a while to get it out as government approves all foreign currency outflows.  There have been signs of this improving, and with the currency now freely exchangeable, theoretically there should not be any problems.  However, governments everywhere are loath to give up power and fiddling with the currency exchange plumbing may be around for a while.  

Other potential inflationary reforms have also been implemented.  In August Egypt’s 150-year old parliament approved a 13% VAT tax, and more recently the government halted many subsidies on food and oil which had been in place for decades. 

In addition to freeing its currency, the central bank raised interest by 300 basis points (i.e. 3 percentage points), and Egypt now has some of the world’s highest interest rates at over 15%.  This was done in a bid to shore up the currency and in an effort to stem inflation.  

Long term these reforms should be good for the Egyptian economy, but there’s going to be a lot of short term pain.

Going Underground

One saving grace may be Egypt’s large underground economy.  It’s believed to be as large or larger than that tracked by official statistics.  Senior bankers note that only about 10% of Egyptians have bank accounts, which means that for the vast majority, Egypt remains a cash based economy.  Except for the minority very few Egyptians had access to the official exchange rate, so one could argue the dramatic fall in Egypt’s currency had already been absorbed by the majority of the population.  The new rate reflects what most Egyptians are already dealing with.

Meeting with consumer goods companies seemed to confirm this.  They have been steadily raising prices to cover USD purchases of raw materials like sugar and wheat.  Several noted that there was little decrease in demand despite higher prices.  Perhaps the economy is more resilient than the official figures suggest. Hope springs eternal.

Crowded House

One big problem could be crowding out by Egypt’s state and military owned companies.  Egypt's largest fertilizer producers, telecommunications company, and its tobacco monopoly are government owned.

I’ve not come across any credible figures but it’s speculated that the military and the companies they control account for 5-40% of the economy and that they crowd out private enterprise (see here). 

This is not unusual in developing countries.  China’s PLA and Indonesia’s ABRI were also heavily involved in business not that long ago.  Troops need to be paid and if the government doesn’t have the budget, smart generals do what smart people all over the world do – make do.

  

An example of this is the military backed cement plant that’s being built by a subsidiary of China government owned Sinoma (see here).  According to meetings with cement company executives, Egypt’s cement supply is already in surplus and a new plant that doubles capacity is not needed. Governments and state-owned-companies are typically bad at allocating capital and I doubt that two together will be any better.

In addition to curtailing the government and military’s business ambitions, Egypt can do a lot more to level the playing field for entrepreneurs and business people.  It’s ranked 122 out of 190 countries in the World Bank’s “2016 Doing Business Report”, which looks at the factors that impede or assist in business formation, construction permits, etc.  Big macro reforms like those written about above make the headlines, but making it easier to do business by cutting down on the time and costs of starting and running a business is just as much if not more important.

The Only Thing to Fear is Fear Itself

Egypt’s reputation is not very good these days.  Before my trip literally everybody said I should be very careful there.  Between the bombing of a Russian plane last October, continued problems in the Sinai, and fighting in nearby Syria, Iraq and Yemen one will naturally feel nervous.  The recent bombings near the pyramids and a Coptic church certainly won't help (see here).

Selfie With the Locals,
Giza Pyramids, 4 November 2016

Tourism is way down and I was told it’s not just the Russians and Europeans who are staying away. Regional visitors have curtailed trips for the same reasons.  According to the locals, Cairo was a fun destination where Arabs from stricter countries used to go to let their hair down.  Alcohol is available, there are no dress restrictions, and the Internet is free and open from what I can tell.

So my guard was up when walking around Cairo and visiting the pyramids. But I encountered no problems besides the usual pesky salesmen. The only people who approached me were overly friendly teenagers wanting to practice English and take selfies with a foreigner.  This reminded me of traveling in China some 30-years ago when foreigners were a rare sight and nervous kids yelled a friendly hello to the passing ‘laowai’.   

My fears seem to have been misplaced.  Egypt was recently taken off the US State Department’s travel warning list.  According to their ranking, traveling in Egypt is safer than anyplace in Europe, if recent reports are accurate (see here).

Investing

For US investors Egyptian stocks are not very expensive.  Measured in USD, its headline index, the EGX30, is bumping along close to the 10-year low levels it reached in 2009 and 2011.  However, when measured in EGP the index is at a 10-year high.

Egypt reminds me a lot of Indonesia, a country I’ve written about before (see here, here, here, and here).  Like Indonesia its demographics are very young with about 30% of its population below 14.  Both are the most populous countries in their respective regions.  Egypt is the largest in the Middle East and third-most populous in Africa.

Both are overwhelmingly Muslim – about 90% in Egypt.  Both are moderate Islamic countries.  An example of this is its current domination of women’s squash where all three top spots are held by Egyptians (see here). 

While parts of society seem modern, one is also reminded that Egypt has one of the world’s highest rates of FGM – female genital mutilation.  Despite laws against it, many websites report that it’s still widely practiced (see here).

While Egyptian stocks are now close to the cheapest they’ve ever been for USD investors, it does not feel like the fat pitch of Indonesia in Sep 1998. This is when the Indonesian index reached its lowest point ever in USD terms.  It fell a stunning 93% from July 1997 when the Thai Baht and Indonesian Rupiah collapsed.  The low point coincided with widespread riots in Jakarta and other cities, and the stepping-down of then long-term president and military strong man Suharto.  One should note here that there were 14 months between the initial currency fall and when the market and currency hit bottom.  It’s only been one month since Egypt changed its exchange rate, and instead of the market falling, it’s increased.  With more inflation to come to an already frustrated and increasingly poor population, political and societal uncertainty are still high and may not be fully reflected in the market.

A big difference is that Indonesia’s depreciation was unplanned.  All the business people I met in Cairo were anxiously waiting for the currency change so they could get back to business instead of spending time skirting the law in a search for USD.

The change can also help Egypt to become more competitive.  I was impressed with the managers I met at one of the world’s largest carpet manufacturers, and the lower and free currency means that they can compete very favorably with their biggest competitors in Turkey.

Wrapping Up

I was impressed by the people I met in Cairo as well as the numerous Egyptians I met during a short stay in Dubai.  The country has a lot of educated and switched-on people.  It should be to Egypt's benefit if their government and military is there to support rather than compete with them.

I don’t envy the changes, struggles and hardships that my Egyptian brothers and sisters will likely go through in the next few years.  Saying that short term pain leads to long term gain rings hollow when parents have to tell their children they can't afford meat, or to attend the university they expected to go to, or even delaying marriage because there’s not enough money.

But as we’ve seen before, economic reforms can and do work.  Indonesia’s per capita income fell from USD1,100 to US$560 between 1997 and 2000, and its poverty rate increased from 17% to 23% over roughly the same time according to the World Bank.  Now at USD3,440, Indonesia’s per capita income is more than 5 times higher and its poverty rate at 11% has never been lower (see here).

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Postscript
For a very good discussion of the recent currency change, other reforms, and Egypt's economic and political structure, readers are encouraged to watch/listen to the very good Al Jazeera episode, "Can Egypt's currency devaluation boost its economy" (see here).

A More Stable Pakistan

Seemingly lost in all the talk and turmoil of Syria and Egypt, the first full-term peaceful transfer of a democratically elected leader in Pakistan was reported yesterday: "Pakistani President Asif Ali Zardari has officially stepped down at the end of his five-year term, becoming the first democratically elected president in his country's history to complete his full tenure in office."  (I added the bold).

This is the best news I've heard for a long time.  To me this decreases political risk in Pakistan and the Indian sub-continent.

I liken democracy to investments.  The key take-away from my time in fund-of-funds was that good investors stick to their process.  Great investors seem to be more in love with their process and strategy than the companies they invest in.

I think this is similar to democracy.  Democracy to me is a process.  Sticking to the democratic process is more important than having a good leader at the helm. "People power", makes for good headlines - especially if the media's preferred party is being supported by the crowed.  But it is easy to overweight the loud protests in the capital's center.  What about those who live elsewhere in the country? 

Consider the US. George Bush had just about the lowest approval ratings of any US president during his last few years in power.  At the time I remember feeling that anybody would be better than him and that he should be replaced immediately. But the US stuck to its process. 

America was lucky. Its first leaders stepped down when their time was up. George Washington seemed to be one of the rare military and political leaders who willingly gave up power and retired. He set a precedent that has served the country well.  He is rightly called the Father of the country. 

I was among a handful of investment analysts covering the Indian sub-continent in the early 1990s.  Most of my time was spent in Karachi and Lahore as few institutions were able to navigate India's 'badla' system. 

In Pakistan I met many smart, switched-on people and managements.  Most business leaders and CFOs I met were very good and knew what they were doing.  Political instability seemed the biggest hindrance to growth. 

It has been about 20 years since I was last in Pakistan and I am very much out of touch with the place.  There could be more instability down the road, but a milestone seems to have been reached, a precedent set. 

The market seems to like this stability. The main Pakistan index - the Pakistan KSE 100 Share index - is up about 35% year-to-date and 3.3x since its January 2009 global financial crisis low. It is up almost 26x since its 1998 Asian financial crisis induced low. 

Green Shoots in Greece

Some green shoots in Greece were reported yesterday.  The most significant is that the Greek economy shrank by 3.8% in the second quarter of 2013 compared to the year before.  This is not good, but better than the 4.6% that was initially expected.

As pointed out in the article, one of the reasons for the less-than-expected decline was an increase in tourism.  Revenue from tourism increased by 39% in the first five months of 2013 compared to last year.  A big factor here may not even have been Greece itself, but the unrest in Egypt.  But I suspect it is as much a change in the perception of Greece.

Typically most forecasts overshoot on the way up as well as on the way down.  This is prevalent in both macroeconomic as well as earnings forecasts.  I don't see why Greece would not fit this general trend and I suspect we will likely have more upward economic revisions in the future.

For me another statistic I think is much more important : Greece's ranking in the World Bank's Doing Business 2013 report.  This reports ranks countries on the ease of setting-up and keeping a small and medium business running.  Greece moved up 11 places from a rank of 89 to 78 - the largest increase of any developed market.

As several of my readers know I'm a big fan of Greece.  Especially its equity market, which despite its good performance, is still one of the least expensive in the world on some long-term valuation measures.

Please note that I'm biased.  One of the best weeks of my life was spent learning about the country, its stock market, and its listed companies.  The people I met in Athens last year are smart, switched-on and, from my very limited number of contacts, genuinely feel things need to change.  My write-up is here.