Harvey Sawikin runs the Firebird Fund. Firebird has been one of the top-rated funds of the last five years – netting investors a 35% annual return. I heard Sawikin speak at a recent luncheon.
Firebird focuses on the Russian stock market in the old Soviet Union and Eastern Europe. And those markets have been on fire over the past few years. Anybody who invested in Russia over the last 24 months has done extremely well. Listening to him talk, however, it is pretty clear that Sawikin knows these markets. He’s also been doing this since 1994. So he’s no spring chicken, as the saying goes.
A few points stand out from his talk and I’d like to share them with you here. They speak to the profound changes taking place in the world today, those that rear-view-thinking investors will likely miss.
The first big change is the idea that the U.S. markets will no longer lead other markets. For a time, it was true; as U.S. markets went, so went the rest of the world. However, the facts no longer bear this out.
As The Wall Street Journal recently reported: “During the two-year period that ended in February, correlation between U.S. and other developed markets was 0.63, according to ING Asset Management. That is a big decline from 2003-2005, when they practically moved in lockstep, at 0.93.”
Sawikin’s own boots-on-the-ground experience backs these bloodless statistics. He believes business and growth in the Russian stock market and other overseas markets are robust enough that they are not as dependent on the U.S.
Sawikin’s opinion is that the price of crude oil is one example of the effect of this weaker link. “Why isn’t the price of oil higher?” he asks, given the relatively tight supply and demand for it. Based on his own observations, Sawikin believes the U.S. economy is already in a slowdown. Yet the price of oil is still in the $60s because of the demand from China and India. “The U.S. is not the driver anymore,” he says.
He gave some interesting insight into Russian oil production. Sawikin says the Russians want to increase production, but not at these prices. “They don’t want dollars at the current valuation,” Sawikin notes. “Officials have said so explicitly.” We are at the point where people would rather hold tangible things – such as a barrel of oil, or acre-feet of water or a stretch of timberland – than accept the dollars they can get for them.
Which gets us to the second point: We are all going to have to pay attention to the weakening U.S. dollar, which has had a big impact on returns and how markets behave. “We’ve had ideal conditions for dollar alternatives,” Sawikin says. The fall in the dollar is no longer a topic reserved for doomsayers.
Even Warren Buffett, at his last annual meeting, said that the days when Americans could ignore currencies are long gone. “Look at oil going from $30 to $60 and the euro from 83 cents [per dollar] to $1.35,” Buffett said. “So the price of oil for Europeans has gone up very little – 25% versus 100% for us. It’s easy to anchor on your own currency. You’ll have to think more about currency than you have. Around the world, others think about currencies, but the average American hasn’t had to.”
Beyond these points, Sawikin also had many interesting anecdotes on the Russian stock market specifically. This is a market that fascinates me, but I am far from pulling the trigger on a Russian investment.
Sawikin talked about traditional measures such as EBITDA. For Russia, his firm has a humorous variation called EBITDAS – which stands for earnings before interest, taxes, depreciation, amortization and stealing. In Russia, investors must consider the impact of thieving managements, which is a unique twist, to say the least.
He also found success investing in nonstrategic markets – such as consumer goods and banking. And he has stayed away from oil, gas and most of the metals, in which Russian oligarchs have muscled out foreign investors. In consumer goods, for example, Sawikin talked about making 75 times his investment on a company that produces vodka. “Selling vodka to Russians and Ukrainians,” Sawikin joked, “that’s a perennial.”
He also talked about the manipulative tactics of some Russian stock market managers. One involved talking down a stock and scaring and insulting investors, thereby pushing the price down so the insiders could buy it. Sawikin calls them “Scooby-Doos,” after the cartoon in which some guy would try to scare the kids away so they wouldn’t find, say, the gold hidden in the old mine. For this reason, Sawikin doesn’t even want to talk to management in some cases. “I don’t even want to hear the misinformation.”
Sawikin did not tip his hand on any specific investment ideas, but I found his perspective valuable nonetheless.
In any case, investors should not discount the importance of the Russian market and other overseas stock markets. Increasingly, investors will want to pay attention to what happens in Moscow or Dubai or other once-backwater investment arenas. More and more in this world of ours, opportunities respect no national boundaries.
for The Daily Reckoning Australia