This investment idea is a little different than my typical stock idea. I almost exclusively focus on the smallest of small stocks in The United States and Canada. I like investing in geographies I know and in jurisdictions where I know my assets will not get seized. That being said, I have started to purchase the VanEck Russia ETF (RSX).
Investment Thesis: The Russian equity market has collapsed to extreme lows. Russian stocks are trading at deeper valuations than the COVID-19 pandemic, the 2008 Great Recession and haven’t traded at this steep of a discount since the post-USSR era. Any improvement in the sentiment on the Russia and Ukraine front, and investors will revalue Russian businesses at much higher valuations.
I haven’t taken a large position in RSX as it is only around 1.5% of my portfolio. My average cost basis is $7.21 per share and I plan to add to the position in small increments if the value continues to plummet. My thought is to keep the position size small so if I am wrong and it goes to zero I walk away with a scratch. But if I am right and Russian equities are revalued by professional investors I could 4-5x my money.
I’ve seen lots of noise around RSX that the ETF is trading under NAV and is likely to drop another 70-90% from here. Investing in RSX I am expecting an insane amount of volatility where the asset value can drop another 50-70% from here. I am not a market timer as think trying to time something like this is utterly useless. If any positive news forms from the Russian/Ukraine front asset prices will revalue hard and fast.
In terms of the NAV premium, valuing RSX based on a NAV valuation makes zero sense. The Russian stock market has been closed and all investors outside of Russia are rapidly dumping shares without asking questions. As Ben Graham stated in Security Analysis:
Institutional fund managers under pressure from regulatory agencies dump deeply discounted securities that have temporary problems for big losses, as individual investors buy them at temporarily depressed prices for big gains later.
When institutional investors across the globe dump equities, not based on fundamentals, a NAV valuation doesn’t matter. What is NAV when Lukoil, one of the largest Russian energy companies, goes from $107 per share to under $7 per share pretty much overnight? What is NAV when the Russian version of Walmart is down over 97%?
What I am trying to say is that valuations are at such bombed out basement level lows that NAV just doesn’t matter at this point. Nothing matters when equities across the entire Russian landscape are trading at $0.10 on the dollar.
What keeps me level headed owning something that no one else wants to own is the fact that I am buying real companies that generate real cash flow. As one of my favorite investors Harris Kupperman stated:
I’d like to purchase a handful of Russian equities outright, but I have been unable to find a broker that will allow me to do it. Even RSX is untradeable on most platforms already and will likely be restricted across all brokers. If anyone has a good broker to purchase Russian equities I am all ears. This seems to be a once in a lifetime opportunity where you can buy equities for ten cents on the dollar and potentially hundred bag your capital. If I am wrong, so what, I walk away with a scratch.
If anyone goes down this rabbit hole with me I would encourage you to read up on Bill Browder. Mr. Browder started Hermitage Capital in 1996 and returned a 2,697% return through 2007 by investing in deep value Russian equities. Browder even wrote a book called Red Notice which documented his journey buying Russian equities that eventually led to his lawyer getting murdered by the Russian mod because he became an activist investor in Russia.
Now I know I may get some push back on investing in Russian stocks with the current situation in Ukraine going on. Just remember, there are thousands of small Russian businesses that employ millions of individuals across Russia. This war is a likely not supported by the majority of Russian individuals and businesses as they were drug into this mess by the political class at the top.
Buying Russian equities is the ultimate contrarian investment in today’s market. I’ve made a lot of money in the past with bold contrarian bets that few wanted to touch. When valuations get to extreme lows the only thing that matters is fundamentals. Equities are valued off all future free cash flows they can generate through the life of a business, not just over the next few months. 24 months from now there is likely to be good news that comes out of this entire situation. When the good news arrives, valuations will not stay at bankruptcy type levels.
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