May 27, 2011
-- This month I am writing again from home after spending the previous weeks away. Here is a picture of my desk as it was when I sat down to write. Consider this the ¨Before¨ picture. The mate should get me to noon time when I will then light the pipe and start with the wine. In a couple of hours it will be Scotch and cigars and sometime around mid day on the first of July in Tokyo the final dram will be consumed and this edition will be on its way to you.
We have touched on Russia a time or two in these pages but never really talked about Russia as a place to invest or a place to live. For good reason. Lots of good reasons. I started my career in the Soviet business. My degree from West Point was in Soviet Studies. At least I thought it was. Years later when I needed a copy of my transcript I noticed that my major had been changed to geopolitics and cultural geography. Someone must have decided on my behalf that Soviet Studies was no longer marketable. I always joke that at West Point I majored in ¨graduating¨
with a minor in ¨on time¨. I was not a stellar cadet by any metric other than tomfoolery and irreverent sense of humor. In order to graduate, a cadet had to have a minimum of a 2.0 grade point average and pass a series of physical and leadership hurdles. I firmly believed that a 2.1 grade point average was .1 worth of fun missed out on somewhere along the way. Every cadet also had to have at least a minor in engineering. A cadet could major in history, philosophy or economics but you had to study engineering because the Army rightfully believes that the engineer´s problem solving methodology is essential. The idea is that under stress the ability to break down large pressing problems into smaller manageable elements is the basic requirement for a combat leader. It is quite effective. Calculus, differential equations, and statistical probability almost killed my career before it started. It was torture.
I would have gladly signed up for the water-boarding elective if it only meant there would be no more constant coefficients in my life. I am now grateful for the experience and knowledge and I use the rational thought process learned in those classes all the time. Unfortunately as a 20 year old exponentially ( a word I learned only the year before in plebe math) more interested in rugby, boxing and a certain freshman at Colombia University I chose to minor in computer engineering and management information systems. This was in the days of mainframes, punch cards and a proprietary top secret programming language called Ada which required a security clearance just to take the class. I had no idea that fortunes would soon be made in computers and while I had heard of Apple I had not heard of Microsoft. I simply picked computer engineering because it required less math classes than any other engineering discipline. This would allow me to concentrate on the important things for a future Green Beret and international man of mystery, like how many self propelled artillery pieces were manufactured in Kubinka and who were the rising stars within the politburo. In retrospect it is intuitively obvious to the casual observer that I majored in buggy whips and minored in typewriters. Within a few years of graduating there was no Soviet Union and my final project, a database programmed in Ada and probably still classified, had about one fiftieth the functionality of the first generation of Lotus 123 spreadsheets. But at least for a while people thought I was a Russia and computer ¨expert¨. Remember in those days both were obscure niche fields and the bar was set very very low. My first jobs in investment banking and fund management were as a direct result of my Russian ¨expertise¨
. I spoke German, could understand more Russian than most westerners and could build a fire without a match so I was put to work on privatization projects of Polish sewer plants and Ukrainian steel mills. Don´t question the logic, just accept it. I spent a good amount of time looking at Russian investments and always came away with the same conclusion. Bad idea.
I had good friends who made and lost fortunes in Russia and others who learned the hard way how violent the culture can still be. I have Russian clients who remain good friends. We have done deals together on several continents and they think foreigners are nuts to invest in Russia. Over the years the contrarian in me wanted…no needed to prove them wrong so I followed Russian economics and politics closely for a decade in search of an angle. Yet the more I learned the more I came to the conclusion they were right. So I simply retired my expertise that never really was and moved on to much more compelling opportunities. However, in the last few days my phone has rung off of the hook with calls from friends from my previous lives. About mid week the calls were from friends in the fund management world and investment banking world. President Medvedev´s trip to the US was the cause for the questioning. Do you think the Russian silicon valley idea has legs? We need to increase our BRIC allocation and need advice on Russia, can you help? How do we source venture capital opportunities in Russia? So I thought it was about time to write about Russia. Then the ¨Spy Ring¨ story broke and my phone really started ringing so I knew it was time to write about Russia. So this month is our Russia Issue.
What more can we say? The second leg down is coming! The Eurozone will not survive intact. Inflation will violently follow a prolonged period of deflation. Inevitable? Yes. Imminent? Looks that way. We remain comfortable with our precious metals and equity positions and we are still holding on to and building our cash reserves. This month we bring you an international energy company that is global, aggressive and often overlooked despite being a major producer. This is a contrarian play on several levels requiring a little patience but will perform well through the rough spots and pay out a nice dividend while we wait. Finally, friend and subscriber Mark R., a professor of Geography at the University of Hawaii, is staying with us. He is a very learned guy from whom I have personally learned a great deal. He is not a traditional academic. Far from it. Although a long time tenured professor, he is a critic of the painful divide between academia and the so called real world. Like many of our subscribers, he and his wife are international people. She is originally from Holland and together they have worked and lived in Latin America, Europe and the US. Our conversations range from business and economics to linguistics and etymology to steak and country music. His visit, like so many other visits from subscribers who become friends, reminds me what an eclectic and sophisticated band of intellectual adventurers we are. Not sophisticated in a pretentious way but sophisticated in a way that embraces a multitude of subjects.
The Without Borders subscribers are both interested and interesting and I am better for the experiences. I hope you feel the same way and I hope we can eventually figure out a way to cross paths in person. One other item of note: Mark, like many others before him, said at dinner last night, ¨I love your letter but you really need a proof reader or editor.¨ He then offered his help as have many of you before him. He is right. But did I mention it was already noon on the last day of the month? It is nobody´s fault but my own. Travel schedule, research, sloth and Uruguay´s run for the World Cup are reasons but not excuses. Scroll down to the bottom of the letter for the ¨After¨ picture if you need any further explanation. Until next time, thanks for joining us and thanks for your patience with the typos and dangling participles. We hope the insight, portfolio performance and sense of shared experiences with kindred spirits keep you coming back for more.
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