Why the best time to invest is when things are at their worst

By Kim Iskyan

It’s one thing to read about a disaster. It’s quite another to live through one.

Everyone living in Russia in the 1990s experienced total economic collapse firsthand. I was there – the devastation was rife everywhere.

But a few investors (myself included) also recognised the opportunity. We saw the seeds of one of the world’s greatest stock market rallies… and pounced.

This wasn’t just any rally. It resulted in a 6,500 percent increase in the market’s value. A US$5,000 investment would have grown into US$326,000 in just under 10 years.

Last one out the door, turn off the lights

The Soviet Union collapsed in the early 1990s, leaving behind 15 republics desperate to survive the chaos. Russia, the largest of these republics, spent the next decade searching for a new economic identity.

During most of the 20th century, Russians lived under repressive communist regimes. The government prohibited private property and market-driven businesses. After the Soviet Union dissolved, Russia tried to adopt a form of free-market capitalism. It was like a child learning to walk.

Russia made terrible mistakes. Inflation skyrocketed and impoverished the middle class. The government amassed huge debts. The price of commodities (which represented the majority of Russia’s exports) sank to new lows, adding to the country’s economic troubles.

In August 1998, the Russian government defaulted on its debt. Within a month, the currency fell from 6.26 rubles to the dollar to 20.83 rubles to the dollar. The country’s banking sector imploded. Millions of people lost their life savings.

During the crisis, the Russian stock market fell 93 percent from the previous year’s high. Local daily trading volumes sank to less than US$1 million per day.

“Last one out the door, turn off the lights,” read the headline of one broker’s weekly market update in the depths of market despair a few months later.

Russia hit rock bottom

At the time, I was in Moscow working as a stock analyst for a local investment bank. To get to my desk, I had to walk through what felt like acres of empty cubicles, some with the photos of loved ones on abandoned desks.

In the midst of the crisis, if you found an ATM with cash, you quickly took out as much as possible and told your friends about it.

I spent hours writing letters of recommendation for Russian colleagues applying to graduate school abroad. They all wanted to escape the sinking ship.

This was the point of maximum pessimism. It was one of the biggest financial disasters of the century. Things couldn’t get any worse.

Things can only get better

But when things can’t get any worse for a country, investors flee and prices become extraordinarily cheap. You can find assets that are trading at enormous discounts, which can lead to life-changing gains… it’s one of the world’s greatest investment secrets.

The Russian stock market hit bottom in October 1998, in the middle of the worst investor sentiment imaginable.

But, over the next 10 years, the Russian stock market rose 6,500 percent.

 

Kim Iskyan
Kim Iskyan is the publisher of Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. Kim has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets. He's been quoted in the Economist, The New York Times, the Wall Street Journal, Barron's, and Bloomberg, and has appeared on Fox Business News, China Central Television, and Bloomberg TV, and has written commentary for the Wall Street Journal, Slate.com, Salon, TheStreet.com, breakingviews.com, and other publications. For more of his insights, Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free.

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