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.

Bitcoin - The View From Lagos

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 note is actually not about any of that and instead just a quick one about bitcoin and how my initial skepticism may have been wrong.  I usually don’t write “macro” or ‘thought pieces’ but I heard some interesting news about bitcoin and how it’s gaining traction in Nigeria.  I use "bitcoin" in the generic sense in this article, much like Nigerians use 'coke' to refer to all soft-drinks, as in 'what kind of coke do you have?'.

I never took bitcoin seriously but I’m now rethinking it.  My rethinking is due to a by-the-way comment  on a recent trip to Lagos.  It came from Ugodre Obi-Chukwu, a partner at Nairametrics, a Nigerian data provider and consultancy.  He mentioned that Nigerians are increasingly buying bitcoins.  Not for speculation or transactions, but as a way to store wealth (Nairametrics' website can be found here).

This was news to me.  I never considered something paying no interest, and with no government support, control or oversight to be safe. However, if the possibility exists that government policies and actions may destroy wealth, then perhaps it’s safer to store hard-earned money outside the system.  Many people in mismanaged developing economies may be feeling this way.  People are mostly rational.  Physical gold in the old days and now; bitcoin now and in the future?

Apparently, Nigerians, and Venezuelans, are turning to bitcoin for this and other reasons (for related article see here).

A similar characteristic of both countries is the big difference between the official and ‘parallel’ rate exchange rate. In Nigeria, the parallel rate vis-a-vis the USD is some 30% higher than the official rate.  In Venezuela it’s even worse.  The official rate is USD1 = VEF10, but Google-sourced news sites put it closer to VEF1,500 to 1,700 (or even VEF3,000+!).

I did some quick research on bitcoin and cryptocurrencies and found that they have a lot of positive qualities that make them particularly attractive to savers and others in the developing world.

Store of Value: Volatility.  A key argument for not storing wealth in bitcoin form is that bitcoin prices are volatile.  But so are many currencies in developing countries.  Most of bitcoin's volatility has been positive, with its price rising more than falling.  This is the opposite of many countries’ currencies vis-à-vis the defacto USD standard.  Egyptians who held bitcoin likely did very well versus their countrymen who stuck with the Egyptian pound (which is down by 51% in the last five months).

Store of Value: Gold. Gold is one of the few stores of value that is mostly outside government control.  It’s not entirely so however.  In 1934 under the Gold Reserve Act, Americans were forced to sell it to the US Government.  However gold is not a ‘fiat’ currency that can be printed at the will of government.  Like gold, bitcoin does not pay a return. However it’s much easier to buy, sell and store than physical gold.

Less Fees. Banks are charging a lot of money for their services.  Despite incredibly large net interest margins (10+%), Nigerian banks charge a central bank mandated 0.1% fee on current accounts called “Commission of Turnover” and a Naira50 fee for all non-current account transactions.  These are good for bankers, but not for savers.  Bitcoin does not charge these fees.

Easier, Faster and Cheaper. Changing money in Nigeria requires going to the bank and filling out forms, supposedly a lot of them.   It takes 3-5 days to transfer the funds through the bank versus seconds or minutes using bitcoin.  It also involves paying stamp duties, and telex charges. And it’s expensive.

Transferring money can cost up to USD100 in Nigeria.  Bitcoin charges 0-2% of the transaction from what I’ve read.  (Even in Asia it’s not cheap to transfer funds.  Transferring money via large banks located in Hong Kong and Singapore costs about USD35.  If done monthly this adds up to USD420 per annum. If weekly, close to US$2k.  I thought large, too-big-to-fail banks were supposed to have lower fees, not gouge their customers.  It's like a regressive moral hazard tax).

Freer. Nigerians are capped at transferring a maximum of US$10,000 per day.   Bitcoin does not have this restriction.  (Even  my big, supposedly very well-capitalized bank in Hong Kong has transfer caps and restrictions). 

Transferable. Bitcoins are increasingly being accepted as payment for other items.  According to a very well-written article on bitcoin published on Nairametrics, bitcoins can be used as a means of payment for many hotel and travel expenses, one of the key uses for USD presently by Nigerians.

More trustworthy?  Bankers don’t have a good reputation.  Nigeria had a banking crisis in 2008.  Lehman went bust and HSBC is under heavy scrutiny from US regulators. Look at the long-term share prices of Greek banks.  Cypriot banks took a large haircut from their savers.  Is bitcoin a reasonable option?

Once burned twice shy. 

Developing countries have a good habit of starting with the latest technology rather than upgrading. Leapfrogging is the term most people use.  With such a young demographic, I wonder if today's Nigerian teenagers will ever know what foreign exchange forms look like, just like they may never use a 'land-line'.

Better, faster, cheaper is a a powerful hat trick.  It has worked well with new in the past and there's no reason to think it won't in the future.  Wither the banks?

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(Many ideas for this article were taken from Manasseh Egedegbe's post on Nairametrics where he explains both the rationale and practicalities of using bitcoin in Nigeria.  His article is here)

Sisters Are Doing It For Themselves...And Others

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 people and how women are making big strides in developing countries.

One of the most important steps in my research process is checking the background and reputation of corporate leaders, politicians and policy makers. Basically anyone that may influence equity valuations. Over the past several years I seem to be spending more time researching and evaluating female leaders.

The increase in the number of women leaders in ‘emerging’ and ‘frontier’ markets is particularly noticeable. I've been spending a lot of time looking at companies in these markets as for the last few years as they've been trading at valuations significantly less expensive than their counterparts in the ‘developed’ markets.

This is a large and long-term positive development.  Theoretically a larger pool of candidates should lead to better leaders. This should ultimately benefit companies and countries that make full use of their resources.  I read years ago in The Economist that educating girls and young women was almost a sure-fire way to increase a country’s living standards.

The increase in female executives was most noticeable on a research trip to Romania last year. As I've written before, stocks traded in Bucharest were some of the world’s least expensive and I went to see if they were merely cheap or had value (see here). 

On the last day I realized that at least half of my meetings were with women.  This was especially surprising considering that most of them are leaders in the traditionally male-dominated energy companies, the largest sector by far on the Bucharest Stock Exchange.

In fact, three of Romania’s largest listed companies are led by women.  OMV Petrom – the country’s largest private oil and gas company is headed by Mariana Gheorghe.  Transelectra – the country’s largest electricity transmitter is headed by Carmen-Georgeta Neagu, and Nuclearelectrica – the country’s largest electricity generator and sole nuclear generation company, is headed by Daniela Lulache.

At my last meeting – with two women executives – I asked what policies Romania had enacted that led to such a large proportion of female executives.  The response was pretty blasé.  They couldn’t think of any, but suspect it had to do with Romania’s communist past.

This could be true.  Eastern Europe and Russia have a higher percentage of women corporate leaders than any other region in the world if the 2015 Women in Business report by Grant Thorton is accurate (see here).

The report notes that 40% of senior business roles in Russia are held by women, which is significantly higher than Western Europe’s 26%.  The report also notes that seven of the top eight countries with the highest percentage of women in senior roles are in emerging European countries. In addition to Russia, these are Georgia, Poland, Latvia, Estonia, Lithuania, and Armenia.  Another factor could be the high proportion of women to men in the ex-Soviet Union (see here).

Interestingly, one thing that the warring brother countries (sister countries?) of Russia and Ukraine had in common until recently were highly respected female finance ministers. Russia’s Elvira Nabiullina is spoken of as being one of the best in the world and someone who has Putin’s confidence; while Natalie Jaresko is one of the few people in Ukraine’s cabinet who seems competent (see here and here).

The Soviet and communist past likely doesn't explain it all. Half-way around the world there are many women in leadership positions in Jamaica. As I wrote in last year’s post, this includes the mayor of its largest city, the head of its stock exchange, its largest bank as well as its largest electric utility (see here). While the female Prime Minister recently lost to her male rival, a recent article on corporate merry-go-rounds in Jamaica emphasizes the prevalence of women in the country’s private sector (see here).

Further south, trends in Latin America also point to more women in corporate leadership positions.  According to a study by Mercer, by 2025 Latin America should lead the world in the proportion of women in professional jobs.  The report notes that in contrast to the developed markets, where the focus has been on recruiting women for top positions, Latin American companies are adding female workers across the board (see here).

I don't know if female leaders will do any better than their male counterparts over time.  I’ve read articles saying women make better investors, financial consultants and political leaders than males.  This could be true, but I suspect that given all the sexism that exists, the ones that make it to the top faced a much higher barrier to entry so have to be that much better.  As more women enter the workforce and obtain leadership positions, I suspect they will prove no better or worse than men.  Regression towards the mean works in just about every other large sample set, and I suspect it will work here.

Another way to put this: for every Sheila Dikshit (the highly respected Mayor of Delhi), Tri Rismaharini (Surabaya), and Michelle Bachelet (2x President of Chile), there’s a Dilma Rousseff (close to being impeached President of Brazil) and Cristina Kirchner (controversial ex-President of Argentina). 

It’s been over 20 years since I very briefly met Benazir Bhutto on my second investment trip to Karachi in 1992, and over thirty years since Aretha Franklin and the Eurythmics released this blog’s soundtrack (see here). Since then women throughout the developing world have made great progress.  I notice this on an on-going basis as I look for value around the world.

In some countries, the proportion of female corporate leaders has leap-frogged developed markets.  I suspect this trend will continue and if anything provides yet another reason for investors to look at developing countries as a long-term investment just as they do for ‘developed’ countries.

  

Other Influential Women in Emerging Markets (I suspect I just scratched the surface. Please leave additional insight in the comments section below):

• Ellen Johnson-Sirleaf – President of Liberia
• Sheikh Hasina Wajed – Prime Minister of Bangladesh
• Ewa Kopacz – Prime Minister of Poland
• Ngozi Okonjo-Iweala – Economist and ex-Minister of Finance of Nigeria
• Sri Mulyani Indrawati – Managing Director of World Bank Group, ex- Finance Minister of Indonesia
• Nguyen Thi Phuong Thao – CEO of VietJet and Vietnam's first female US$ billionaire 
• Chandra Kochar – CEO of ICICI Bank, India
• Dong Mingzhu – President of Gree Electronic
• He Qiaonu – Founder and Chairperson of Beijing Orient Landscape and China's most generous philanthropist in 2015 
• Valeriya Gontareva, Head of the National Bank of Ukraine