Buying At The Right Time: The Payoffmarcuss
Yesterday, I told you about a company in Russia that I helped bring to the capital markets. It was LSR Group, a Russian real estate company – during what turned out to be the peak of investor interest in emerging markets, just before the global economic crisis in 2008-2009. The offering in late 2007 raised US$772 million, and was a big success. But then…
It all fell apart
It was a matter of months before the beginning of the end. The global economic crisis smacked economies and markets around the world… and it dealt a death blow to Russia.
The country’s economy contracted 8 percent in 2009, as the stock market fell 75 percent, top to bottom during the crisis (the U.S. economy shrank by 3.5 percent that year, as the S&P 500 fell around 54 percent).
And the shares of LSR Group – as the prospects of selling real estate to Russia’s emerging middle class dimmed, because it turned into the submerging middle class – fell a catastrophic 97 percent from the offering price of US$14.50, to a low of US$0.50/share in February 2009.
By then I had left my job and Russia… but I still watched its stock market. And I had continued to follow LSR closely – though not as a brokerage analyst any longer. And in early 2009, it was clear to me that an opportunity was emerging in the shares. The first sign: No asset collapses in value by 97 percent unless it’s on its way to zero – that is, it’s going bankrupt.
And thanks to my insight on LSR, cultivated over a brutal IPO process, I knew that the company’s business was wounded – but not dead. LSR wasn’t at risk of running out of cash. People weren’t buying apartments then – but they would again before long.
The value of some of the company’s assets was marked down, but LSR wasn’t going to sell them, so those paper losses didn’t affect profitability or cash flow. The mortgage market (which was small to begin with) had frozen, but would emerge and gain in time. And maybe most importantly, LSR management – which had experienced crises before – wasn’t panicking. They knew what they had to do for the company to live to see another day.
I had patience… which, as I’ve written before, is one of the greatest advantages that individual investors have over the “smart money” (that’s the same smart money that bought LSR’s IPO). I also had some cash. I knew that all that had to happen was that a few things turn less-bad for LSR Group.
A 20-fold return
So in March 2009 I bought shares of LSR. The shares could have still fallen another 50 percent, or 80 percent… but I was confident in my insight on the company, and I knew that any further decline would be a reason to buy more.
It wasn’t long before other investors – with a lot more capital behind them than me – also recognised that priced-for-death LSR wasn’t going to die. (See the chart below.) The shares, boosted by a recovery in the Russian stock market, steadily rose, to hit around US$10 in early 2010.
I sold on the way up, but some of my initial investment had made close to a 20-fold return. It was one of the best investments I ever made… and my only regret (inevitably) was that I didn’t buy more shares of LSR Group in early 2009.
What did I learn from it all?
- Believe in yourself. If you know more than anyone else… stand behind that. Or, better put, make your money stand behind that belief. Don’t go overboard, since you might be wrong for a while before you’re right. And any asset, even one that’s down huge, can fall by another 50 percent in value. But if after that it moves up 20-fold, it’s worth the wait – and believing in yourself.
- Markets overcorrect. There was no way that LSR was worth 97 percent less just 16 months after its IPO. That was a throwing-the-baby-out-with-the-bathwater reaction that is a defining characteristic of a financial crisis. Knowing when that overcorrection is happening is a gift.
- Use patience to your benefit. When I bought shares of LSR, I didn’t have to worry about my quarterly portfolio performance suffering if the stock didn’t recover quickly. Hedge funds and mutual funds, on the other hand, are generally hyper-focused on short-term performance – and many could not have afforded to wait. I would have been perfectly happy to park my money in LSR shares for a few years. And while I would have still paid the price of opportunity cost, the eventual enormous recovery in the share price would have made the wait worth it… for me.