Very occasionally, sifting through the wreckage of bombed-out assets… you find something that you know is going to work.
Countless fortunes have been lost on sure-thing investment opportunities. But sometimes a truly exceptional idea presents itself and you know it’s the type of situation where the only regret you’d have would be ignoring it. You understand the situation intimately… and you know that you’re at that point where things change.
Let me explain.
When there’s a lot of money looking for a home, asset bubbles rotate around the world… from tulips to garlic in China, to cryptocurrencies to Renaissance art to Beanie Babies. Emerging markets regularly have their moment in the sun. And in 2007, Russia (whose stock market is now a poster child for the term “value trap”) was basking in the warm bath of waves of global investor cash.
At the time I was co-head of research and an analyst at a Russian brokerage house in Moscow, where I analysed Russian stocks for an institutional investor client base (including big hedge, mutual and pension funds). I covered a number of sectors myself, including the fast-growing universe of real estate stocks.
- Current total market cap: US$60 billion
- 2025 industry forecast: US$1.2 trillion
That would amount to an extraordinary 2,000% increase in the value of this market over the next 7 years.
A big oil price boom – Russia is one of the world’s biggest oil producers, and the price of oil mattered (and still matters) a lot to its economy – had resulted in an explosion of wealth and spending throughout the economy… and real estate prices were rising fast.
Real estate companies were eager to take advantage of the flood of investor interest in the Russian stock market to raise capital by selling shares to investors – to expand their land banks, construct new developments, and build factories to make construction materials.
The bank I worked for got the mandate to help take public on the London Stock Exchange a Russian real estate company called LSR Group. Based in St. Petersburg, Russia’s second-biggest city, it focused on residential real estate there, and was investing in factories to produce building materials.
My crash course in LSR
As the lead analyst for one of the underwriters of the deal, it was my job to immerse myself in every last detail of the company. I visited the company’s facilities, wandered around their aerated concrete factory, explored empty fields, quizzed numerous members of senior management… and spent long nights with a small team of analysts to produce a ridiculously intricate financial model – and an exhaustive 104-page pre-IPO report on the company. (The one thing I can positively guarantee about that report: No one but my editor and me read the whole thing.) And everything had to be finished yesterday – since everyone knew that the easy-money bonanza would be over soon, and wanted to get the deal done before then.
Selling the deal
Then came the more difficult task of selling the deal to investors. These were hedge, mutual and pension fund managers who invested hundreds of millions of dollars, if not billions of dollars, in emerging markets. Since they controlled so much capital, they received choice insight and research from analysts at brokerages all around the world, all of whom were vying for their business.
As a result, many of the clients I dealt with were (1) amazingly arrogant, (2) jerks also because they acted as anyone fortunate enough to win an audience with them should feel as if he was touched by the hand of God, and (3) extremely well informed and knowledgeable. (As I explained here, many of my colleagues were similarly full of themselves.)
It’s a toxic combination that made for a lot of aggressive questions and unpleasant conversations during the three-week, five-meetings-a-day, three-continent road show to market the deal. (Some people – miserable, small-minded people – get their fun by making other people feel small… in my experience, a disproportionately large number of these sorts of people work in the finance industry. That’s reason #1 that I’m a publisher and independent analyst now… and don’t work for a bank.)
…Because it could turn every $50
you invest into $2,000 or more.
At the end of the whole process – the battering that my belief in the fundamental goodness of people suffered notwithstanding – the LSR offering was a success. The company raised US$772 million, at US$14.50 per share. Pop the champagne, and everyone is happy.
And then… it all fell apart. Not fell apart: But shattered into a million pieces with the global economic crisis. At least that’s what it felt like at the time.
But I put my brainful of insight on LSR to good use. I’ll tell you what happened next tomorrow.
Publisher, Stansberry Churchouse Research
P.S. Sometimes… when things look the very worst is the best time to buy. I’ve put together a presentation about this… I think you’ll see what I mean if you check it out here.