“Are you crazy...?”
That was the reaction I got from a London investor I spoke with at a recent summer drinks party.
I had made the mistake of revealing that I thought it was a good time to start looking at investing in the Russian stock market.
His reaction was understandable.
After all, everyone knows that Russia -- both politically and economically -- is going to hell in a hand basket.
And with new U.S. and European Union sanctions inevitable after last week’s tragic downing of a Malaysian airliner over Ukraine, only a fool and a knave would risk his money investing in Russia.
Frankly, I’d heard it all before.
And his reaction merely reinforced my decision.
I actually left that summer party early, to make just such a recommendation in a very public way on the “After the Bell” segment on Fox Business last Friday.
Are You Crazy?
“Are you crazy?” is a reaction I often hear when I speak about Russia.
After its collapse in 1998, everyone from Warren Buffett, George Soros and Jim Rogers concurred with one investor’s sentiment that “I would rather eat nuclear waste than invest in Russia.” (Ironically, Rogers has since changed his mind -- and has been a big buyer of Russia since it annexed Crimea.)
Even with that, last week’s events were a game changer in terms of making investing in Russia morally repugnant.
The U.K.’s Sunday Times reported yesterday that Russian rebels on the ground were now claiming that it was a Ukrainian fighter that shot down the Malaysian airliner, which was already pre-loaded with dead bodies.
The level of denial boggles the mind.
The State of the Russian Market
Just to be clear: I’m looking at the Russian stock market purely from the perspective of a short-term trading and long-term investment opportunity.
First, let’s get some perspective.
We’ve all heard about how the BRIC countries, Brazil, Russia, India and China, are set to take over the world. Looked at through the right set of economic lenses, their collective economies are already larger than that of the United States.
Yet, the BRICs collectively have hardly put any money in investors’ pockets over the past five years.
In fact, Russia’s much-hated stock market has outperformed media darlings Brazil and China by a mile over the past five years. India has just caught up to Russia in the past month -- and that’s after Russia’s collapse and India’s recent remarkable run this year that thus far has made it the #1 performing global stock market in 2014.
Ironically, then, until the recent crisis, Russia has been the BRIC country kindest to investors.
Second, Russia is both hated and cheap.
In fact, Russia is the second-cheapest market in the world on a long-term Cyclically Adjusted Price Earnings (“CAPE”) basis. (Greece is the cheapest.)
Trading at a Price Earnings (P/E) Ratio of about 5.5, and a Price to Book ratio of 0.65, the Russian market trades at about half of the level to the broader MSCI Emerging Markets Index.
Gazprom, the world’s largest natural gas producer, trades at a P/E ratio of 2.42.
Subscribers to my trading service Bull Market Alert who took my recommendation to invest in Gazprom the very day after Russia annexed Ukraine on March 17 are sitting on gains of 25% -- and that’s after the recent sell-off.
The “Are you Crazy?” Rule of Investing
This has led me to formulate the “Are you crazy?” Rule of Investing.
Here’s what it says:
“The more people think you are crazy for investing in something, the more money you are likely to make.”
When you describe an investment to your friends, the best reaction should not be:
“What a great idea! How can I get in on this?”
It should be:
“Are you crazy?”
So what’s my recommendation to you?
Ignore all the negative news on Russia this week, hold your nose and invest in Russian stocks.
In three to six months' time, you’ll be glad you did.
In case you missed it, I encourage you to read my e-letter column from last week about how you could profit from investing in "frontier markets." I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
Nicholas Vardy, CFA
Editor, The Global Guru
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Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.