There is a local legend here in the mountains about a poisonous spider.
At our recent inspired investing course we learned we can never know everything. We sometimes need to “look behind the mirror” to spot distortions and trends. One way to do this is by understanding that everything is connected.
I learned this over the years through the privilege of working and speaking at seminars with and studying some of the world's best known and best investors, (John Templeton, Peter Lynch, Ian Dalrymple, Michael Keppler, etc.) . The experience they shared helped me learn this excellent insight. This departure from the normal financial point of view separates losers from good investors. Separation is a perfect word too, because good investors do not separate events in life from financial opportunity. Everything is an economic event . You can read more about this at my article entitled, What Makes a Good Investor”.
So how does the legend of the spider relate? The story goes that one time three hunters came up to the mountains and set up camp. They brewed a pot of coffee that night without looking inside the pot and cooked a poisonous spider with their java. Next morning the locals found them all dead. True or not, there is a message here. First always look in your coffee before you cook up a brew, but second that fear is so easy to spread. If we let it, fear can paralyze us!
This is so true in investing and many of you have felt fear from my writing about investing in places like Argentina and Ecuador. There seems so much bad news that it is easy to be afraid.
Yet bad news almost always contains seeds of good. A look at the web site http://www.ft.com/argentina/ (this site is great for looking in the Argentina pot) shows what appears to be really negative news. Yet there is much positive here as well. As the July 31 article in the Financial Times newspaper entitled “Austerity Bill Boosts Argentine Stocks” states: “Argentina's markets rallied after senators passed a key austerity bill. The benchmark bond rose by more than 2%. The interest spreads versus US treasury bills fell by one percent. Relief spread through the region.” The article points out that the a new Zero Deficit Argentina law binds the government to spending only what it earns in tax each month.
Argentina is suffering from doing what all countries should do. They have pegged their currency to the US dollar so the government cannot inflate through the printing press. Now they have stopped themselves from borrowing. These are two of the most powerful economic reforms anyone could ask for. Every intelligent businessmen should beg their politicians to take such wonderful steps.
Because neighboring countries (such as Mexico and Brazil) have continued to spend and borrow and devalue their currencies, Argentina has appeared to suffer. I reckon this is more like three people who had heart attacks brought on by bad habits. Two take pain killers and keep at their frantic pace and bad ways. One gets their life in order and makes change that will really help in the long run. Short term the one making the change may appear to be sick, but who do you trust will make it for the long haul?
So it may be with Argentina. Their moves are correct. Sure they have a huge debt overhang and you have risk investing in Argentina. But you are paid a 15% risk premium for taking this risk. According to the Financial Times, Argentina's risk is rated lower than every country today except Nigeria. Yet the infrastructure and reform indicate that this view may be more fear than reality.
Look again in Argentina's pot. There may be something better than spiders lurking there.