Nick Giambruno: Doug, you’re one of the foremost authorities in the world on the topic of crisis investing. Tell us a bit about your background on this topic.
Doug Casey: After my second book, Crisis Investing, came out in 1979, I started publishing a newsletter of the same name. I used the Chinese symbol for crisis as the logo. It’s actually a combination of two symbols: the symbol for danger and the symbol for opportunity. The danger is what everybody sees; the opportunity is never quite so obvious as the danger, but it’s always there.
Speculating in crisis markets is the ultimate way to be a contrarian, which means buying when nobody else wants to buy.
It is true, as a general rule, that you want to “make the trend your friend.” But there always comes an inflection point when trends change because a market becomes either greatly overvalued or greatly undervalued. And when any market is down by 90% or more, you’ve got to reflexively look at it, no matter how bad the news is, and see if it’s a place where you want to put some speculative capital.
Nick Giambruno: Massive fortunes have been made throughout history with crisis investing. Was Baron Rothschild right when he said the time to buy is when blood is in the streets?
Doug Casey: That’s a very famous aphorism, of course. It was supposedly occasioned by the Battle of Waterloo, when he was buying British securities while the issue was in doubt.
He was able to pull off that coup because he made sure that he got the information as to whether Wellington beat Napoleon a day before anybody else did. He recognized that Europe was in a period of tremendous crisis; Napoleon, after all, was actually kind of a proto-Hitler.
But a key point here is that a successful speculator capitalizes on politically caused distortions in the market.
If we lived in a completely free-market world—one without government interventions like taxes, regulations, inflation, war, persecutions, and the like—it would be impossible to speculate in the sense I’m using the word.
But we don’t live in a free-market world, so there are lots of good, speculative opportunities that, in effect, let you turn a lemon into lemonade.
And a good speculative opportunity is both high-potential and low-risk—not high-potential and high-risk. Most people don’t understand that.
Nick Giambruno: That brings to mind the Russian oligarchs, who became oligarchs in the first place because they did some crisis investing, i.e., they bought when the blood was in the streets and picked up some of the crown jewels of the Russian economy for literally pennies on the dollar.
Doug Casey: It’s interesting with the oligarchs, because in the Soviet Union, everybody got certificates, which were traded for shares in businesses that were being privatized. The average person had no idea what they were or how to value them. The people who became oligarchs were able to buy them up for a couple of pennies on the dollar, taking advantage of the negative public hysteria following the collapse of the Soviet Union.
So this is a recurring theme—buying when the blood is in the streets. It’s what speculation is all about: namely, taking advantage of politically caused distortions in the marketplace, or taking advantage of the aberrations of mass psychology.
I mean, everybody knows the old expression “buy low, sell high.” Well, when are the prices absolutely the lowest?
When everybody else is afraid to look at the situation and, as Rothschild said, “when blood is running in the streets.” So, it’s not only more interesting, but it’s actually less risky, not more risky, because risk is a question of prices. And when prices are low, it’s less risky. So you can expect me to be looking for situations like this in the future.
Everywhere in the world, someplace, at almost any time there is a super ridiculous bubble bull market going on and some other place there’s a deadly bottom of the barrel bear market climaxing. So if you look at all these things, you can pick and choose what suits your investment style.
Nick Giambruno: Okay, Doug, let’s talk about some of the times you’ve made investments when the blood was really flowing in the streets.
What about the opportunity you had to buy a castle in Rhodesia (now Zimbabwe)?
Doug Casey: That was in 1978. Anyway, I wrote about that—so the numbers are accurate because I actually wrote them down—in the first edition of my newsletter, which was called, at that time, Crisis Investing.
This was when the war was going on. It was really the final stages. Still, when you flew into the country on Air Rhodesia you had to pull down the shades at night so as not to draw anti-aircraft fire.
There was all kinds of stuff going on. And, you know, I was young and invulnerable. I went all over the country, and I was the only tourist, at least the only tourist that wasn’t heavily armed. I was the only person at everything from Victoria Falls to the Great Zimbabwe Ruins. I took a bus across the country, a little mini bus which was actually kind of scary because they were shooting people and everything like that.
I wanted to go to Umtali, a city on the Mozambique border that has been renamed now to Mutare.
So anyway, I’m there, and the place looks like a military camp out of Mad Max, because they had all these homemade armored vehicles running around.
Everyone there said you might as well see the Leopard Rock Hotel. And so I did, and it was fantastic. It was a 12 room castle that Italian prisoners of war helped build around World War II.
It had 50 acres of coffee and it was just beautiful, and those Bvumba Mountains overlooking Mozambique… It had a nine-hole golf course… You know, all the stuff that you want on a resort hotel.
I could have bought that place with the linen, the silverware, everything for $85,000.
It would have worked out because as it turned out I went back to Zimbabwe a few years later and it had just changed hands by coincidence for $13.5 million. So that would have been a nice hit.
Nick Giambruno: Tell us about the time you invested in Hong Kong during the China crisis of 1986.
Doug Casey: That worked out very well, actually.
At that time, everybody figured that the Chinese were going to take the place over. I was able to buy a penthouse apartment in a building right above the Hong Kong Yacht Club. A fantastic view of the harbor, one of the best.
People told me at that time that my penthouse apartment was selling for less than a ground floor apartment, which would be horrible to live in with all the street noise. But the reason that it was selling so cheaply is that they were convinced that you would have to walk up 13 stories when the Chinese took over because they wouldn’t fix the elevators. I mean, that’s how things worked.
I bought that apartment for something like $40,000. That’s how cheap Hong Kong was then. It cost me another $40,000 as I recall to gut it and refurnish it and make it very nice.
A few years back, I got a call from my lawyer and he said something about an apartment in my building on a lower floor that sold for some ridiculous amount of money.
I told him, “Put it on the market and let’s hit the bid tomorrow morning.” So I think I sold that place for around $1.2 million. $80,000 to $1.2 million, a tremendous return on capital. In effect, I was paid for living there.
And that was a perfect example of buying when people were scared of Hong Kong. They were afraid that the Chinese were going to punish the Hong Kong people or something. So nobody wanted to be in Hong Kong, and actually that was the best time to be in Hong Kong because it was so cheap.
Nick Giambruno: Thanks for the insightful stories, Doug.
Reprinted with permission from International Man.