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Why I Think Emerging Markets May be the Next Biotech

Written by Nicholas Vardy, CFA.

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Back in August 1997, I found myself on an old Russian military helicopter flying from Almaty, Kazakhstan, over Lake Issyk Kul, on the first ever investor trip to Kyrgyzstan.

It was at the height of the emerging markets boom. Brokers were flying London portfolio managers literally to the ends of the earth, showing us the latest and greatest opportunities on the investment frontier.

It was just as we landed back in Almaty that we had heard that Princess Diana had been killed in a Paris car crash.

As off-the-wall as that trip sounds, there will again come a time when emerging markets will attract the same manic attention of foreign investors.

And as always, fortunes will be both made and lost.

Just two months ago, investors were fleeing emerging markets amid fears about the "Fragile Five" — Turkey, Brazil, India, Indonesia and South Africa. Central banks scrambled to prop up shaky currencies after political and economic concerns led to investors abandoning these markets. And I was writing about why I thought that this emerging markets crisis was a red herring.

Fast forward to today and the "Fragile Five" are some of the best-performing stock markets in the world. In the past month alone, Turkey soared 22.63%, Brazil jumped 20.81% and India rose 9.51%. In addition, Indonesia is up 20.04% for the year.

Contrast that with the fate of investors in the high-flying biotech sector. Since peaking on Feb. 24, the Nasdaq biotech index has tumbled 21.8% and it just dropped below its 200-day moving average.

What Emerging Markets and Biotech Tech Stocks Have in Common

Biotech and emerging market stocks have a lot in common.

Whether it's the prospect of curing the incurable or selling billions of widgets to the emerging middle class, both biotech and emerging markets promise a better future.

As such, they are both tailor-made to be "boom and bust" markets.

Both biotech and emerging markets can languish in the doldrums for many years.

But once sentiment shifts, stocks can run up extremely quickly and fortunes can be made overnight.

I believe we may be on the cusp of just such a phase.

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My Weekend in What Could Be the Next Russian Front

Written by Nicholas Vardy, CFA.

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I've just returned from a fascinating — and sobering — weekend in Estonia.

If you're like most Americans, you may not know that Estonia is one of the three Baltic States that until 1991 were part of the Soviet Union.

Today, the Baltic capitals of Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) are better known in Europe for the beauty of their women — and as "stag" ("bachelor") party destinations for British men looking for a good time.

Sure enough, the English guy sitting next to me on the plane to Tallinn was wearing a penguin suit.

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I first visited Estonia in 1989 in the bad old days, when it was still part of the Soviet Union. As I remember it, even the departure times at the train station were bizarrely set an hour later than local time, just so they would match Moscow's time.

Fast forward 25 years, and Estonia today is a full-fledged member of the European Union (EU), and it even adopted the euro as its currency in 2010. It is also a full-fledged member of the North Atlantic Treaty Organization (NATO).

Culturally, Estonians view themselves as eminently practical and hard working. With only a population of 1.3 million, scrappy Estonia punches far above its weight. Tallinn was Europe's cultural capital in 2011. It is home to the hyper-modern Kumu art museum, Europe's "museum of the year" in 2008. And as the original home of Skype, Estonia now boasts its own high-tech scene trying to mimic Silicon Valley's secret sauce of high-tech success.

Since it declared its independence from the Soviet Union in 1991, Estonia has become an icon of free-market capitalism. The Heritage Foundation's 2014 Index of Economic Freedom ranks it as the 11th freest economy in the world — one place ahead of the United States. As such, Estonia gets plenty of approving nods from the likes of Steve Forbes, who regularly praises Estonia for its flat-tax regime and free-market reforms.

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GLOBAL GURU CAPITAL – MONTHLY UPDATE

Written by Nicholas Vardy, CFA.

Untitled Document

GLOBAL GURU CAPITAL – MONTHLY UPDATE

March  2014

The "Ivy Plus" Investment Program dipped 0.28% for the month.
The "Global Gains" Investment Program rose 1.05% for the month.
The "Double Your Dividends" Investment Program added 0.97% for the month.
The "American Alpha" Investment Program gained 0.80% for the month.
The “Masters of the Universe” Investment Program fell 0.55% for the month.

THE "IVY PLUS" INVESTMENT PROGRAM
THE UNITED STATES ENDS FLAT FOR THE MONTH


The "Ivy Plus" Investment Program lost 0.28% for the month. The program is up 1.28% year-to-date, through March 31.

The Ivy Plus investment program closed nearly flat for the month of March. The previously unshakable rise in U. S. equities – particularly the US Large Cap, US Mid Cap, and US Small Cap – faltered last month, after many months of stellar gains.

Taking center stage was the continued solid performance of Emerging Markets – a asset class that had stagnated for many months, confounding the expectations of even the most enthusiastic of global investors. This uptick in performance benefited the other emerging markets asset classes, including Emerging Markets Small Cap and Emerging Markets – Low Volatility.

Fixed income ended flat, as well as did US Real Estate, which had come off a stellar month in February. The Hedge Fund allocation underperformed broadly.

The “Ivy Plus” investment program positions performed as follows:

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My #1 Pick in the World’s Most Hated Stock Market

Written by Nicholas Vardy, CFA.

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Russia is the market that investors love to hate.

George Soros lost over $1 billion investing in Russia after the Russian government defaulted on its bonds in 1998. When asked about Russia, Charlie Munger, Warren Buffett's partner at Berkshire Hathaway (BRK-B), harrumphed: "We don't invest in kleptocracies." One investor famously declared after the market's meltdown in 1998: "I'd rather eat nuclear waste than invest in Russia."

Russia's image hasn't improved since. Fifteen years ago, when you heard "mafia," you thought of the Godfather. Today, you think of a Russian "biznisman." If India is embodied by a highly educated, dedicated high-tech worker, Russia is the thug you cross the street to avoid. India is Bill Gates. Russia is Scarface.

With Russian President Vladimir Putin annexing Crimea at his whim — and lining tens of thousands of troops along Ukraine's border as a thinly veiled threat for a future invasion of Ukraine — chances are you feel the same way.

Certainly, you wouldn't be alone.

Russia: Always a Contrarian Investment

Foreign stock investors pulled $3.2 billion from Russian investment funds in 2013. That's alongside $63 billion of capital flight from Russia by Russians themselves. The World Bank expects capital outflows to hit $150 billion this year — exceeding the $120 billion in capital flight that Russia saw in 2008 during the global financial crisis.

And with the Russian stock market down 16.90% so far in 2014 — making it the single worst performer among the 44 global stock markets I track on a daily basis at my firm Global Guru Capital — on its face, that looks to be the right bet.

The irony is that buying Russia precisely at the time news is the worst has been one of the most successful investment themes around.

As Bill Browder — once the biggest foreign investor in Russia — put it in 2006, "Russia sucks. But if over time, it sucks a little less, I make money." Indeed, Browder himself pocketed over $130 million in 2005. That was right before he was banned from re-entering Russia, eventually forcing him to wind up his firm Hermitage Capital a few years ago.

Browder's statement contains a profound insight.

It's easy to invest in a sexy biotech Chinese Internet growth story.

It's hard to invest in countries and companies everyone hates.

In the mid-1990s, Browder realized that if Russian natural resource stocks were trading on 1-2% valuations of their Western counterparts, over the long term, there was only one direction they could go. More importantly, he had the psychological stamina to tough it out during periods of gut-wrenching volatility like this past month.

As a personal example, I bought a Russian oil company Tatneft (now delisted) at $1.50 in September of 1998 — and sold it in a couple of weeks after tripling my money at around $5.00. It later reached a peak of $120 in 2006.

Stomach that kind of volatility and you deserve to get rich.

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My Top Two Investment Strategies That “Beat Buffett”

Written by Nicholas Vardy, CFA.

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Last week, I wrote about my $25,000 bet against famed investor Warren Buffett.

You may recall that I placed a bet with St. Louis-based money manager David Rolfe that a low-cost U.S. small-cap index fund like Vanguard Russell 2000 Index ETF (VTWO) would outperform Warren Buffett's Berkshire Hathaway (BRK-B) over the next decade.

That's also why I recently recommended VTWO to subscribers of my monthly Alpha Investor Letter.

(You can also read about David Rolfe's side of the bet, as well as Mark Hulbert's take on today's Marketwatch.com.)

On its face, it may seem like that it would be a rare investment strategy that could outperform the "Oracle of Omaha."

I disagree.

I believe that, because of its size, Berkshire has morphed into a surrogate for the S&P 500.

If you invest in Berkshire — as I do for myself and on behalf of my clients and Global Guru Capital — you can expect to generate S&P 500-like returns.

Berkshire does have one big advantage.

With a "beta" of 0.57, you'll generate these returns with lower volatility than the S&P 500 itself.

Nevertheless, just as I think there is more than one way to skin a cat, there's more than just one way — like investing in U.S. small caps through VTWO — you can "beat Buffett."

My #1 Strategy for Beating Buffett

Buffett is not the only investment game in town.

@NickVardy