Find the best bull markets in the world. Get in early. Buy the best assets. Ignore the volatility. And enjoy the ride.
That was the basic formula Harris Kupperman, CEO of Mongolia Growth Group, presented at the Value Investing Congress in Las Vegas.
Below are some notes from his inspiring presentation…
A Tale of Two Markets
Harris suggested that the best places to find ideas are in assets not yet ‘financialised’. By this, he means assets for which there is no ready public market. No easy way to invest. An example would be farmland in 2004.
In 2004, Harris saw a big opportunity in farmland. The outline of the idea was simple and seems obvious now, but at the time it was often overlooked. There were four main parts. First, rapidly growing and industrializing emerging markets raised the demand for food.
Second, existing stockpiles were tight. Third, prices for agricultural goods were low versus inflation. And finally, mandated ethanol usage almost guaranteed corn prices would go up. This would have a spillover effect on many other crops.
The question was: How do you play it? You could buy fertilizer stocks, seed companies, irrigation stocks and the like. While all were plays on the agricultural sector, none had pure leverage to farmland prices. Exposure to farmland is what Harris wanted.
For good reason, as it turned out. Farmland prices would take off. Take a look at the nearby chart – ‘Iowa Farmland: Prices per Acre’ – which Harris used in his presentation.
But there was no way for an investor to buy it…short of buying the asset itself. And that was the point of Harris’ presentation. How you should have played agriculture in 2004 was to build a company yourself that owned farmland.
As Harris said, ‘Stop attending ‘ag’ conferences looking for ideas if you know the answer: Build it yourself.‘
A Lesson from Mongolian Real Estate
It may sound impractical, but this is exactly what Harris did in Mongolia. When he arrived in 2010, Mongolia had a $7 billion economy. It was building one mine that would produce $8 billion in copper and gold per year. It had a few dozen other things that would total $30-50 billion. And its commodity exports were set to grow from $2 billion in 2010 to $20-80 billion by 2020.
How would all that fit in such a small economy? The answer is: it would force asset prices way up. How to get exposure? Much as with farmland in 2004, Mongolia was not yet ‘financialised’. There was no easy way to get exposure to Mongolia. So Harris built it himself along with a business partner and team.
He focused on real estate, which has strong leverage to economic growth. Rents increase in a growing economy. In Mongolia, cap rates (or rental yields) were in the high teens. These would compress as the economy matured, sending prices higher. In 2010, Mongolia real estate was worth less than 10% of comparable real estate in Kazakhstan or third-tier cities in China.
Harris created Mongolia Growth Group to get exposure to the Mongolia bull market, which was set to be one of the world’s best bull markets.
So far, things are playing out more or less as expected. Cap rates have started to fall and are now in the midteens. Prime rents have more than doubled since 2010. And Mongolian real estate is still cheaper than most of the rest of Asia’s. Real estate prices have increased at a rate three times faster than economic growth. The platform is set and the potential upside is enormous.
Harris did not pitch Mongolia Growth Group at the conference. His talk was mainly one of sharing his experiences of building a public company and the lessons learned. When you see a great opportunity and there is no way to play it, don’t give up. Build it yourself.
Chris Mayer
Contributing Editor, Money Morning
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