Investing wisely often involves the principle of buying low and selling high, a strategy that promises profitability. However, many struggle to execute this effectively, frequently falling into the trap of purchasing high and selling low.
Take, for instance, the tendency to invest in high-flying stocks like Facebook at 80 times earnings instead of more stable companies like DOW Chemical at just 13 times earnings. The reality is that most investors fail to identify genuine value when it confronts them; for instance, they might overlook assets available at 80% off their peak value.
Price alone should not dictate investment decisions. A stock may appear cheap due to a decline, but if the company is fundamentally weak, it might not be a sound investment—especially if its value continues to plummet toward zero.
Warren Buffett, renowned as one of the most successful investors globally, wisely pointed out, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” He further emphasized: “A business or stock is [not] an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling.”
Such insights serve as crucial reminders of the complexities and hazards involved in seeking deep discounts in the market. Without careful consideration, one might end up with worthless assets. Yet, the allure of contrarian investments often tempts investors into risky, yet potentially rewarding, ventures. Here’s a noteworthy example.
One Man’s Perspective on Russian Debt
“Why It’s Time to Buy Russian Debt,” was a provocative headline from an article published by Bloomberg recently, piquing our curiosity. Why would anyone consider investing in Russian debt at this juncture—or at any time?
Leonid Bershidsky explains that Standard & Poor’s recent downgrade of Russia to just above junk status reflects a political reaction to events in Ukraine rather than an accurate economic assessment. He posits that Russian dollar-denominated debt may offer strong buying potential at present.
Bershidsky asserts that the capital flight prompting the downgrade should not be deemed a reliable indicator of Russia’s credit quality and anticipates a recovery once tensions ease in Ukraine.
“The only reliable metrics for assessing Russian debt are robust figures, such as existing debt levels, current foreign reserves, and fiscal health,” he states. “With a government debt ratio of 7.9 percent of GDP, in contrast to Brazil’s 59.2 percent, S&P predicts that Russian interest payments won’t exceed 2.3 percent of revenues by 2017. Moreover, Russia possesses the third largest foreign reserves globally, totaling $482 billion, which is sufficient for 20 months of imports.”
“Given this information, the undervaluation of Russia’s debt—rated only above junk—is based on political speculation rather than solid economic fundamentals. The yield of 4.1 percent on Russian five-year, dollar-denominated bonds, compared to Brazil’s 2.7 percent, suggests a buying opportunity in light of these mispriced assets.”
Putin’s Revenge?
Bershidsky makes compelling arguments, yet it’s equally crucial to apply Buffett’s wisdom concerning investments in companies to a nation’s debt. Just because Russian bonds are out of favor doesn’t guarantee they are a wise purchase.
What happens if the conflicts in Ukraine escalate further? How might Putin respond if cornered?
Just yesterday, the U.S. government announced additional sanctions against Russia, targeting seven high-ranking officials, including two from President Putin’s closest circle, alongside 17 companies associated with them. These sanctions involve asset freezes and visa bans, as stated by the White House.
Recall that last month, Sergei Glazyev, an advisor to President Putin, suggested leveraging Russia’s substantial holdings in U.S. Treasury bonds as a form of economic retaliation…
“We hold a significant amount of U.S. Treasury bonds—exceeding $200 billion—and if the United States dares to freeze accounts of Russian entities and individuals, we can no longer view America as a reliable partner,” stated Glazyev. “We will advocate for everyone to divest from U.S. Treasury bonds, abandon the dollar as an unreliable currency, and exit U.S. markets.”
While the feasibility of Glazyev’s strategy disrupting the dollar remains uncertain, given Putin’s track record, he may very well pursue such actions in a quest for economic retribution. Remain alert for his next move.
Fortunately, innovative technology and classic American resourcefulness are colliding to disrupt Putin’s energy dominance over Europe. Discover how you can contribute and thrive today.
Sincerely,
MN Gordon
for Economic Prism
