Biggs on Investment and Clayton on Investment opportunities in Cambodia – January 1, 2013

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This report is divided into two parts: I. Advice to investors by investment expert Barton Biggs and II. Investment opportunities in Cambodia. Barton Biggs was a hedge fund pioneer who passed away last July at the age of 79. According to the Financial Times Briggs was “an early proselytizer of emerging markets, a dominant force for more than thirty years at Morgan Stanley, famed for warning investors out of Japan in 1989 and dotcom stocks long before they were exposed as a bubble in 2000.” Apart from writing books on financial subjects such as Hedgehogging in 2006, he wrote a weekly missive from Morgan Stanley which the Financial Times felt was “the best possible introduction to business journalism one could have had at the turn of the millennium.” Biggs declared that the investment process –all that local research, the poring over market analyses, testing of valuation metrics and so on- all that is only half the battle. “The other weighty component is struggling with yourself and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition and the loneliness of the long distance runner.” The Financial Times concludes by reproducing the following Biggs meditation: “as investors we always have to be aware of our innate and very human tendency to be fighting the last war. We forget that Mr. Market is an ingenious sadist and that he delights in torturing us in different ways”. [Comment: As a non-specialist who follows global political and economic trends, I would say that investment decisions are neither an art nor a science. One becomes a successful investor through common sense allied to experience and not through putting all your faith in complex investment simulations. As one analyst put it pithily, “take the quantitative analysts responsible for Goldman Sachs’ notorious ‘25 standard deviation’ episode…at the beginning of the financial crisis the chief financial officer of Goldman Sachs explained that the firm was seeing ‘25 standard deviation moves, several days in a row’ – a statement that translated into English means ‘according to our models what we’re seeing is very unlucky’ … the quantitative models didn’t produce very good forecasts.” While our desire to peer into the future cannot be sated, forecasting according to the Financial Times “is a poor test of expertise as luck is the overwhelming success factor.”] II. Investment opportunities in Cambodia The New York Times (NYT) recently carried an expose´ on Douglas Clayton, an American investor and founder of Leopard Capital, an investment fund focused on Cambodia. Despite the global financial crisis of 2008-09, which also affected economic activity in Cambodia, Clayton persisted with that country when most investors had fled to more inviting countries. He raised $34 million for investment in Cambodian companies. He is quoted as affirming that “high risk also means potential for higher returns.” The NYT article informs readers that persistence can pay in this frontier market of 15 million people. The three investments sold so far by Leopard Capital have generated annual returns of 36 percent. Clayton made his first trip to Cambodia in 2005 during a period of “personal reflection.” Weary of the frenetic pace in Asian hot spots like Singapore, India, Thailand and Hong Kong, Cambodia was different. “It reignited his drive.” Building on his successful Cambodian experience Clayton is expanding into other regions with similar characteristics. This year Leopard Capital started the first big investment fund in Haiti, backed by the International Finance Corporation. In coming months he plans to start portfolios focused in Myanmar, Bangladesh and Mongolia. Interestingly, he also plans the first investment fund for Bhutan, which has been reticent about inviting outside capital. Clayton is most bullish about Myanmar, which is going through major political changes. A few weeks back Myanmar hosted the first ever visit to their country by a US President – Obama – a clear signal of US political and economic interest in a country which is transitioning to democracy after decades of military rule. Clayton stated that “this [Myanmar] will be a real core country for Leopard in the future.” Placing his focus on the long-term picture for these frontier markets Clayton offers the following advice: “These places can be good for investment. You just need to do your research, build good local teams and make the right deals.”

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