Don’t Cry for me Argentina

by | Dec 26, 2001 | Archives

How to find the profits in Argentina's crash.

Dear International Friend,

You have probably read that Argentina's President resigned, then another and that the third President in just two days stated that Argentina's debt would not be repaid.

You may also be aware that I have recommended, in some circumstances, investing in Argentina debt. If not you can look back.

Looks like I was wrong. Right? Not quite. First whether an investment makes a financial profit or not, there is still a profit. We have looked at this concept again and again in our philosophical musings at this site, but here we get a chance to see these ideas turn into action.

One of the great investment gurus of America, Jeremy Grantham, once wrote about how investors generally shy away from any area where they have been burned. He became a great guru because he took the opposite tact. As a young investor, he was caught in the 1968 Wall Street crash. Instead of shying away he took his losses as lessons and asked why he had lost and what he could have done differently.

So here, instead of quietly forgetting an recommendation that might lose, let's look at what happened and see what profit is laying in the loss. We'll do this tomorrow, but here I want to make one more point.

The investment may not be lost and this is why these bonds have made sense for some time. Governments do not just default on the repayment of debt. In other words Argentina is not going to just walk away and say okay we are not paying back the trillion or so dollars of debt we owe. They cannot afford to do this because they still want to do business with the rest of the world. The word default really means renegotiation.

When I recommended investing in Argentine bonds they were selling for about 35 cents on the dollar (to yield up to 26%). Imagine your position if you bought a $10,000 bond paying 8%. You paid less than $3,500 for this bond. The $800 interest (8% on $10,000) created the 26% return.

The point is that the previous investor who paid the $10,000 in the first place has already taken a 65% loss! Now lets see what happens in the renegotiation if Argentina decides to pay back half its debt across the board, what does this mean to your $10,000 bond that you paid $3,,500 for. Does it mean that they pay back $1,750 (half of $3,500)? No! They pay back $5,000 (half of $10,,000)! The loss has already been absorbed.

We are looking at generalities here and I do not yet know what the final outcome will be, but what we do know is that in a situation that the press makes look like a total disaster, there may still be substantial profit.

I have asked eClub advisor Steve Rosberg for his thoughts on this. We'll share what he has to say tomorrow. One thing for sure is that there are profits in what appears to be a total loss for those who seek them. This is when most investors run away, leaving the best plums to be picked. But we'll be among those who stay to see what is really going on and I look forward to sharing what we discover with you!