Want to be at the Mercy of Armed Bandits? Choose Safe Countries for Investing. Avoid Unnecessary Risk
Scary Stories from South America
Cymorfund www.cymorfund.com has long advocated a policy for investors of avoiding political risk. The investment community often uses the same metrics to value the shares of exploration and production of resources companies in different parts of the world. This is so very wrong, yet it continues.
Why Safety from Political Risk Warrants Little Attention
The reason that Analysts and Investment Houses give little emphasis to investing risk in unsafe jurisdictions, is that they are in the business of selling product. As I have revealed before, Investment Houses need product to sell. They make their money not from successful investing. No, that would be too logical (sarcasm). They make their money when they sell something to you. It doesn’t matter if it is a good investment or a bad investment. When you buy, they earn a commission. It is as simple as that.
IF YOU WANT TO UNDERSTAND HOW THE BUSINESS WORKS, read some of my earlier blogs.
As we have said so many times, there is enough risk in investing without the added risk of political instability.
I list below some news reports published last week that clearly illustrate this. Countries want investment dollars and downplay the risk of investing in their country. Here are reports from two countries – Argentina & Columbia – who have had problems in the past, and until recently were considered “safe”. How “safe” they are is all of a sudden in question.
June 16, 2012 CARACAS, Venezuela — Colombian commandos in disguise spirited 15 hostages to freedom on Wednesday, including Ingrid Betancourt, a French-Colombian politician held for six years, and three American military contractors.
Insurgents, bandits, or just poor people jealous of supposedly richer foreigners, are often resentful of people taking their resources, or enjoying their country. This results in criminal acts such as hostage taking, extortion, robbery and so on. The justification for these acts is almost always the jealousy of foreigners ‘robbing’ their country.
Jun 14, 2012 New York Times. Columbia – Involvement of armed men has been a part of the history of mining in the country. Guerrillas and their paramilitary adversaries use mining to launder money and to extract extortion payments.Credit: Stephen Ferry for The New York Times.
As the “War on Drugs” makes drug trafficking more dangerous for the drug cartels, they are turning to other activities including kidnapping for ransom and extortion. More and more miners in the country are paying extortion money in order to stay in business. There are now stories of heavily armed men guarding the areas being mined to ensure that they are paid properly by the companies for any activities.
June 17, 2012 Argentina: Expropriation Of YPF Shares By: Latinamerica Press,, By Hernán Scandizzo
In early May, Argentina’s Congress passed the Executive-driven Hydrocarbons Sovereignty law by an overwhelming majority. The entirety of the ruling party and a large part of opposition parties approved the legislation, which expropriated 51 percent of YPF’s shares that were held by Spanish oil firm Repsol. It also declared self-sufficiency in hydrocarbons as well as in exploitation, industrialization, transportation and marketing to be “of national public interest and a primary objective of the country,” and created the Federal Hydrocarbon Council.
The Bottom Line
When investing in the stock market, ALWAYS discount the value of the stock that you are considering buying if the jurisdiction is not historically safe, stable, and economically strong.
Next: Some thoughts on safe places to invest.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. Larry Cyna and/or the CymorFund have positions in the shares of companies mentioned.