Cashing in on distortions


Boiling thunder and nature's roar. White water splashing on brown torrents that rage and swirl. This is how nature showed our 20 delegates an economic reality in a most powerful way!

Twenty delegates joined Merri and me to fill up our summer Inspired Investing course here at the farm. They represented knowledge and deep experience from all over the world, New Zealand, India, Canada, England, Denmark, Argentina and across the USA. The weather could not have seemed worse. We have had the most glorious summer, and then sheets of rain began pouring the day they arrived and each day continued to pour. Then on the last day a dam burst above our property and a wall of brown muddy water swept down the creek, sweeping across meadows, wreaking havoc with any structure that got in its way.

We had been completing the building of a new covered bridge into the property just last week. For this one week we had been the proud owners of the largest (and perhaps only) covered car bridge in Ashe County. This was a county that was filled with these beautiful old bridges at the turn of the century. Not any more! The wall of tumbling water crushed through the road, swept the foundation apart and turned the bridge into a pile of rubble and lumber.

Yet this was perhaps the best course we have ever conducted. There was so much energy that rain nor flood could dampen our spirits or learning and sharing a bit! Despite the water logged loss there was a great lesson as well from the flood. The key theme in this course had been how to make money from investing in contrasts and distortions. We reviewed ways to spot distortions in markets where investors did not want to go. We looked at how distortions when negatives seem real, can often collapse and new opportunities and profits rise to sweep the negative market sentiment away.

Few of humanity's doings are more a distortion in nature than a dam. Who dares hold back water! At this course we were given this dramatic example of how (when all seems solid and strong, the laws of nature can correct a contrast and sweep an apparent order away.

We looked at Argentina in the course and how everyone thinks the country is on the verge of collapse. But we noted that everything is still there, the people, the cars, the factories, the stores, the schools, the education, the legal system, the democracy. All of it. Argentina will not likely disappear over the next 27 years so long term dollar denominated bonds yielding 27% may be a good deal.

This is why I have also continued to recommend Ecuador as a place to invest and live in as well. Yes Ecuador has had a liquidity crisis. Ecuador's banking system is shaky and yes there has been a 15% drop in GNP. Yet all the fundamentals, all the institutions, the infrastructure of a lively, peaceful, capitalistic democracy remain. This distortion makes Ecuador a friendly, incredibly inexpensive and beautiful place to live. Rich in resources, oil, bananas, shrimp, flowers and 365 days a year of direct sunlight, I am betting that this place is not going to disappear.

There are clues that progress is also being made. Manta is home for a new U.S. military base. A new oil pipeline is in the works and other privatization is coming along as well.

For example Ecuador's bureau of state modernization recently opened a data room containing information on 17 power distribution companies that are slated to be put on the auction block in September. Conam, as the bureau is known, said in a press release that the data room has legal and financial information about the companies, as well as information about the country. So far, Argentine energy company Perez Companc SA (PC), Spain's Union Electrica Fenosa SA (E.FEN) and AES Corp. (AES) of the U.S. have expressed an interest in bidding for the assets. Conam also said Tuesday that AES last week purchased the legal documents needed to participate in the Sep. 28 auction. The 17 utilities will be divided into two groups for the auction. The government can legally sell up to 51% of its ownership in the utilities to each private business.

The government estimates that Ecuador's electricity sector needs investments of around $3 billion, and you can learn more about this in an article by Mercedes Alvaro; Dow Jones Newswires. Another recent article pointed out that the city of Houston is considering helping Quito, the capital city of Ecuador to run its airport. Proponents say the move would put Houston "on the map" in Ecuador, a country with about half as many people as Texas and an economy less than one-tenth the size of Houston's. Houston's goal is to establish a greater presence in the Latin American and Ecuador is seen as a steppingstone to larger countries such as Brazil.

Houston's consulting services would include improving the airport's security, management and physical condition. Eventually the consultants would help Ecuador build a new airport in Quito.

Each of these little steps are one more piece to a puzzle we as investors and business people can use. There are no guarantees of course, as we learned when our bridge collapsed here at the farm. For example the August 6, 2001 article in Time magazine entitled "Recovery at Risk", states, "Last week Argentina moved closer to technical defaulting on its $128 billion of debt, an amount equal to half its GDP." When one looks at this they can feel very gloomy. Yet the article also points out that Argentina's fall will create great risks for Mexico (12 billion invested in Argentina and Brazil ($24 billion invested) plus thousands of US firms who have invested heavily there. Plus a real default will make the global economy (already shaky) even worse.

Will the global economy bail Argentina out? Those who gamble they will can make over 20% per annum!. If you are looking for adventure in your investing and can afford to take a risk (and only of you can afford it) for the chance to increase your returns, look for distortions such as this.

For more detail about Ecuador real estate go to http://mantarealestate.com. For details about Ecuadorian business or law contact accountant and business consultant Rolf Stern at rstern@bdoconsulting-ec.com or attorney Dr. Andres Cordova at afcordova@accessinter.net.

Merri and I usually cannot arrange such dramatic demonstrations to get a point across to our delegates, but the message is clear. The only thing in life that is certain is change. Those who embrace change are well rewarded. As for us, we started out on a bright clear Monday morning dismantling the bridge, preparing the wood, stacking the usable materials, and both jumped into a new construction with more clarity, more strength and more determination. This is what adversity can do, here as well as in Ecuador and Argentina!

Until next message, good investing and business.

Gary


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