|
| The Gold
Coast - Making Millions In Ghana |
| I was fresh
out of college and working at my first job, selling medical insurance
to businessmen in Washington, D.C.:, one of my prospects was an Israeli
entrepeneur named Jehuda Ben-Jehuda, who turned out to be an old Africa
hand. Even then, I had an abiding interest in Third World countries, so
I pursued the subject with him. One thing, he said that impressed me was,
"Mr. Casey, if you go to the Gold Coast, spend a few years, and stick
your nose into everything you can; by the time you leave you can have 5%
of everything going into the country, and 5% of everthing going ot of it."
I never took his advice, although I have since visited over half of the
world's 220 countries, and lived in seven. But my recent visit to Ghana
(which used to be called the Gold Coast before it became the first African
colony to become independent in 1957) underlined that Ben-Jehuda knew
what he was talking about. There's no doubt the opportunities there now
are as great as they were years ago. |
|
| Like every
country on the continent, without exception, when independence came the
"natives" took over the government and proceeded to treat it like
a magic cash cow which could not only be milked around the clock, but made
to supply filet mignon for dinner every night besides. |
|
|
|
|
| Huge
public works projects, burgeoning bureaucracies, punitive taxes, nationalizations,
and onerous regulations became the order of the day. These countries were
transformed from peaceful, prosperous gems to hellholes where political
rhetoric became a staple in the diet, replacing ordinary food for most
people. |
|
| I've spent
a lot of time in tropical Africa over the past few years, for a number
of reasons. This time it was at the invitation of the Accra Polo Club,
to engage in a series of marches under the sponsorship of General Tire,
American Airlines, and a number of local businesses. Winston Churchill
once said, "A polo handicap is an automatic entree into every society
in the world", and he was right. In the two weeks we spent in Ghana,
we met most of people who move and shake the country. Photo ops, nightly
parties, a State dinner. Even Stevie Wonder (who lives in Ghana half
the year) came to one of the games. |
|
| Are there
any relevant opportunities I can relay to you as a result of this pleasant
junket? Absolutely - but they're not for everyone. Presumably,
however, that's why you subscribe to this letter ["The International
Speculator,"] and not Money magazine, which specializes
in regaling its readers with things everyone but the chronically ignorant
already knows. And, unfortunately, things which everybody knows aren't
worth knowing. |
|
|
| Third World
investing, revisited |
|
| Over the
last few years, I've tried to draw attention to the extraordinary returns
available from investing in Less Developed Countries (LDC's). Most
people can understand that LDC's offer far higher potential returns
than are available in the developed world. But contrary to popular belief,
they offer far lower risk as well. That's true for several reasons. |
-
First,
relative reisk is a function of price. That's another way of saying that
it's a lot smarter to risk $1 with a resonable prospect of making $10 than
it is to risk $10 with a prospect of making $1. Asset values are so cheap
in much of the Third World (because of decades of capital flight, endemic
corruption, nationalizations, socialism, and grotesquely pathological misgovernment)
that they can almost seem "free" to someone from a developed country.
-
Second,
the fact these governments have already run their economies into the ground
has actually reduced absolute risk; although they're slow learners, most
have actually learned something from the experience. Unlike advanced countries,
which are still on the slippery path leading to the gutter (e.g., look
at the loony, tired old Bold New Ideas now emanating from the Billary White
House) the LDC's are now forced, by dire necessity, to lay out the
red carpet to opportunity seekers.
|
| Unfortunately,
most opportunities are "hand on" in nature. Passive investments
which can be monitored from a distance are few. But you should be aware
of what can be done, if only because of the perspective it offers. And,
perhaps, you may be ready for a radical (and potentially very enjoyable)
change in lifestyle. |
|
| A
few examples |
|
| Making a zillion
dollars in a country like Ghana is potentially much easier than making
it in the U.S. |
|
|
|
|
|
| That's because
you have unique experiences, connections, knowledge, and capital that -
while they're commonplace here - go a long way in an LDC, where you're
automatically a big fish in a little pond. (On the other hand, smart
people from LDC's should move to advanced countries, where they can gain
the capital and experience they need to improve their stations. It's a
perfect arbitrage, where everyone wins.) |
|
| Here are just
a few business ideas, to pique your imagination. |
|
| Hotels
-
All three of Accra's first-class hotels experience near full occupancy,
and at a room rate of $100 or more per night; international class hotels
and restaurants charge international class rates worldwide, regardless
of their low costs. One acquaintance of mine is putting in an apartment/hotel,
with multiple bedrooms, a kitchen, and office facilities for the increasing
numbers of foreign businessmen spending time here. It will cost him $10,000
per unit, including furniture; he'll get all his capital back in less than
a year. Perhaps you should buy a few as condos from him, and have them
managed in a rental pool. |
|
| Oil refinery
- Mobil built a $150 million refinery, and then abandoned it during
the bad old days. |
|
|
| An acquaintance
is buying it for $1 million, getting a loan from the World Bank for $15
million to renovate it, and should net about $10 million per year thereafter. |
|
| Residential
property - An excellent house in Accra (the type a wealthy person
would live in) can be bought for about $80,000. But it can be rented
for about $2,000 per month, meaning it's fully amortized in just over three
years. This is a lingering consequence of decades of no construction, and
nonmaintenance of existing properties. |
|
| Resort
properties - Ghana never experienced wholesale nationalization of land;
most of the country is owned by local tribal units, and can be purchased
from them. The beaches are among the best in the world, and eventually
they'll be filled with European tourists. Right now, most are totally empty
and pristine. Another aquaintance, who can read the writing in the sand,
is going through the tedious efforts necessary to buy them. |
|
| The list could
go on and on. Ghana is typical of the opportunities in Africa, but each
country is a world of its own. And most places aren't nearly as mellow
and investor-friendly as Ghana. One place I've always heard horror stories
about, for instance, wherever I've traveled on the continent, is Nigeria.
The corruption is so ingrained, and crime so endemic, that the place is
a legend even in Africa. |
|
|
|
|
| Uniformed
police, or thugs impersonating them (perhaps a distinction without a
difference) regularly ask visitors for their passports for "inspection",
and then dissappear with them, to be sold in the thriving market for stolen
papers. |
|
| One common
scam is to get a visitor in without a visa, pretending he's "special",
and then shaking him down for $10,000 to avoid imprisonment for illegal
entry. |
|
| Visitors can
plan their lives around having their baggage pilfered at the airport, having
things stolen from their rooms even in good hotels, and likely being mugged
on the street. The best story (I'm assured it's true) is about a
British Airways 747 that had its engines stolen overnight while the crew
slept. This dystopia of nearly 100 million people is not the best place
for a novice to gain experience. |
|
| Then there's
Zaire, perhaps the world's leading kleptocracy, where Mobutu has personally
appropriated virtually every penny of the $20 billion the country has received
from the West since its bloody independence in 1960. Even though the Army
is currently on one of its periodic episodes of looting, possibilities
exist in Zaire, and returns on capital are very high. A fine house in Kinshasa
would cost about $60,000, and rent for about $2,500. You can get good title
to 100,000 acres of rain forest for about $100,000. |
|
|
| The Ghana
Stock Exchange |
|
| I could go
on and on with Old Africa Hand stories. But I'd need a book to cover all
the countries. Perhaps I'll update
The International Man next
year, after my upcoming book, Crisis Investing II: The Rest
of the 90's, comes out in June. But Ghana is clearly a country
that hit bottom at least a couple of years ago, and is making a strong
comeback. One indicator of that is the existence of the Ghana Stock Exchange,
formed January 11, 1991. |
|
| "Emerging
markets" have been all the rage over the last few years, in form of
closed-end funds; we've had excellent luck with Korea Fund and Brazil Fund.
But the available funds deal, almost necessarily, with secondary (but
welll developed) markets. There are, however, a couple dozen very small
tertiary markets as well, in places like Paraguay, Tunisia, Zimbabwe, Peru,
and Ghana. They often present excellent value. Ghana certainly does. |
|
| Their exchange
is open two days a week, for about an hour. During that time, brokers sitting
around a small round table match incoming buy and sell orders. Volume of
trading is small, as in tiny - typically only $50 or $100 worth of a given
company's shares trade in a session. Values, therefore, have almost no
relationship to market prices. This (like all tertiary markets - or
the NYSE for that matter) is a place where you must look at the underlying
value of the business, and then pretend you're Warren Buffett, buying a
company as a business, in disregard of its market price. |
|
|
| There's actually
extensive information available on the 15 companies currently traded in
Accra, published by the exchange. (Send $10 for the Ghana Stock Exchange
Handbook, Kingsway Building, Kwame Nkrumah Ave., P.O. Box 1849, Accra,
tel. (233-21) 669908, fax (233-21) 669913, and $5 to Databank, the local
equivalent of Standard & Poors, for a copy of their Stock Exchange
Fact Book, Tower Block, Pension House, Private Mail Bag, Ministries
Post Office, Accra, tel. (233-21) 669110, fax (233-21) 669100). [Escape
Artists will note that we have links to the Ghana Stock Market as well
as every other stock market in the world on our website in our Stock
Markets of the World section.] |
|
| About half
the companies were privatized by the government, which owns from 20% to
40% of their shares. The others were always private. Soon the government
will be privatizing its half of Ashanti Goldfields, which is shortly going
to a million ounces of production per year, with as much as 100 years of
reserves at that rate. Inerestingly, Africa and South America used to touch
(several hundred million years ago) where Ghana and Surinam now
are. That explains the similar geology, and huge gold deposits in both
areas. I'll keep my eye out for Ashanti, which will also trade in London.
The other half is owned by Lonrho, a company I can't get a grip on, since
so much depends on Tiny Rowland, its founder. |
|
| I got to
know
the management of one listed company, SCOA, a French outfit that's been
in Ghana since 1917, kselling cars, textiles, household items, and industrial
equipment.
It employs 350 people, nets 12 million cedis on revenues of about 3 billion
cedis (the cedi is currently about 600 to the dollar, and is losing
ground at about 20% per year), but has a market cap of only 400 million
cedis (10 million shares out, at 40 cedis per). A quick analysis
shows it selling at over 30 times earnings - not very interesting. But
its market cap is less than 15% its turnover - a very low ratio, showing
that margins might be improved radically. What is really interesting is
that the company owns a bunch of real estate, acquired decades ago, and
carried on its books at cost. |
|
|
|
|
|
| That property
would be worth about 3 million cedis if it was liquidated, which means
that you can buy the company for 15% of what its real estate alone is worth,
and get the business for free. |
|
| Other examples
are Guinness Ghana, a brewing company. It's a consistent payer of dividends,
now yielding 5% (but 12% last year). Or Mobil Oil Ghana, selling
at two times earnings, and typically yielding from 15%-30%. Or Standard
Chartered Bank Ghana, which typically yields about 10%, and sells for three
to six times earnings. At time, shares of many firms are available for
anywhere from one (not a misprint) to three times last year's earnings. |
|
| I didn't check
out all these outfits, but they range from cheap to unbelievably cheap
by traditional measures, like P/E ratios and dividend yields. |
|
| But the real
value is almost always likely to be in their real estate holdings, as with
SCOA. Why are they so cheap? Lagging perceptions, which I explained earlier,
is the major reason. Very few foreigners visit the place (I needed four
photos, had to fill out a sheaf or papers, and get a bunch of shots to
make the trip) and, most of the locals don't understand stocks, and
thos who do have no sense of urgency. Most investment funds flow into the
government's debt, which is also traded on the exchange. |
|
|
| Stock prices
will go up radically as Ghana - already one of the most liberal countries
on the continent, and by far the freest in West Africa - liberalizes even
further. If I was of a mind to do so (but I have other fish to fry),
I'd take Ben-Jehuda's advice. He'd be as right today as he was back in
1970, even though the economic environment has changed totally since then.
Be advised. Whether this remains academic data, subject only to cocktail
party banter, or the basis for making a bundle is up to you. If you have
a son or grandson looking for opportunity, this type of thing can beat
an entrance level job - or getting an MBA. |
|
| As the
chart above of some leading issues shows, share prices in cedis have gone
basically nowhere for the last two years. Meanwhile, the cedi has lost
roughly half its value against the dollar. But the real assets of the companies,
and their earning power, have gone up in real terms as the economy has
liberalized. At some point, there will be a price explosion. |
|
