Error & misfortune: Traits of good investments

Dec 3, 2014

New York, New York

Dear Diary,

We are here in Lower Manhattan. It does not seem much like an urban jungle here. It is too cold and rainy. After a brief excursion outside, you have to warm yourself by a warm, artificial fire, with a coffee...or after 7pm...a glass of Jameson. Then, the fog of the outside world clears long enough to think about 'the hurtin' and other philosophical puzzles.

Nobody wants to be a-hurtin'. And nobody wants to own an asset in a sector that has the hurtin' on it. But that is usually the best thing to buy.

Man is not cut out to be a good investor. It goes against his most basic instincts. At the end of a battle, he wants to be still standing, like Caravaggio's David, a bloody sword in one hand and the head of Goliath in the other. He wants to win. And he wants to own the team that just won the Super Bowl. The alternative, at least in his atavistic race memory, is death.

But going with the winners is a recipe for losing in the perverse world of Wall Street, very near where we pen these words. The winners soon get as fat, stupid and overbought as a Senator. The losers, meanwhile, are lean...wise and oversold. Error and misfortune are what you look for in a good investment.

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"That which doesn't kill you makes you stronger," wrote Nietzcshe. [We like to quote the great German thinker from time to time. It gives these diaries the pseudo-intellectual tone we are looking for. But we admit; we don't know how to spell his name. So we put in all consonants you should need; reorganize them as you please.]

By Nietschze's logic, it may be time to buy Venezuela. Talk about losers! For 13 long years, while Hugo Chavez ran the country, investors in Venezuela were kicked and spat upon. Their capital was seized. Their profits were taxed away. Capitalists fled to Miami and output declined.

And now Chavez is dead and the hurtin' has moved from producers to consumers. The Financial Times reports that "lines of frustrated shoppers have replaced socialist rallies and posters of Hugo Chavez as the most ubiquitous images of the South American nation."

Venezuela loses about $700 million every time the price of oil drops a dollar, says the FT. Yesterday, oil dropped $2. Since January, it has lost $40 - a devastating loss for the country.

Will the hurtin' make Venezuela leaner? The FT coverage provided evidence. Elena Gonzalez, described by the newspaper as a 'pensioner,' said she lost 10 kilograms (about 22 lbs) standing in lines to buy food!

Ms. Gonzalez was looking on the bright side. So was president Nicholas Maduro. As we reported yesterday, he takes the present adversity as "an opportunity to end superfluous luxuries and unnecessary spending."

Unfortunately, superfluous luxuries and unnecessary spending are just what the voters want. That is why poor Nicolas has watched his approval rating get cut in half, from 55% a year ago to just 25% today. (This puts him between US president Obama at 39% approval and French president Hollande, with a 12% rating.)

That one out of four sentient adults in the country still approve of his policies suggests that they are putting something in the drinking water down there. Venezuela is an economic disaster area. The typical person spends hours lining up to buy basic food items, while 27,000 government aparatchiks inspect prices to make sure they are 'fair.' How they would know? Retail prices are rising at 63% per year....expected to reach 110% next year.

And so great is the threat of default that Venezuela's dollar bonds yield nearly 20% interest.

But when the going gets tough, the Venezuelans turn... to crime! People tend not to report crimes to the police. They believe the police are a bigger threat than the criminals. So crime rates have to be estimated. Murder rate estimates converge around 60 per 100,000.

In Baltimore, a great source of civic pride is the vigorous and self-reliant way its residents settle their disputes. But the Venezuelans have bragging rights. There were 'only' 198 murders in Baltimore so far this year. With a population of 600,000, this puts the city's homicide rate at only about half the South American pace setter.

What kind of hellhole is Venezuela?

"We are beggars of food, beggars of basic products, beggars of medicines, beggars of diapers for our children --- right now we are beggars of everything..." a person in a grocery line told the FT. " Inflation eats us up; we have hit rock bottom. We cannot get any worse."

As to that last line, we are skeptics. There is probably more hurtin' where that came from.

But rock bottom is out there somewhere. Today, it may be 'too early' to buy Venezuela...or Russia...or Greece...or oil...or gold. Someday, it will be too late.

Tomorrow...the kind of failure that leads to more failure...Amazon...Japan...and more!

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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