53 | Michael McGaughy, Emerging Market Investing

Michael McGaughy is the Founder and Portfolio Manager of Research Alpha, a specialist fund which invests in the equity of unloved and out-of-favour quality companies in some of the world’s least expensive stock markets, like Uzbekistan, Argentina and Egypt. 

In this conversation, we cover how he started and got interested in emerging markets, what investing in emerging markets involves, and a little bit about Uzbekistan.

I hope you enjoy my conversation with Michael McGaughy.

Show Notes:

[00:00:31] – [First question] – How Michael first made his way to Asia
[00:03:46] – How Michael became an Analyst in Indonesia in 1989
[00:06:44] – Private Equity in China in the mid 90’s
[00:09:09] – Developing comfort in investing in emerging markets
[00:13:45] – The Three things Mike looks for in an investment
[00:16:19] – How quickly do emerging markets rebound?
[00:18:33] – Difference between financial crisises and political crisises
[00:20:33] – Dealing with foreigner restrictions in emerging markets
[00:21:47] – Mike’s process for determining who owns what in an emerging market
[00:24:40] – The investment opportunity in Uzbekistan
[00:30:13] – Most undervalued life experience?
[00:32:38] – How does Mike navigate emerging markets and the language barrier?
[00:33:57] – Influential books or people?
[00:35:13] – Future plans?

Connect with Michael:

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[00:00:31] Kalani Scarrott: Alright, my guest today is Michael McGaughy. Mike is the founder and portfolio manager of Research Alpha, a specialist fund, which invests in the equity of unloved and out of favour quality companies in some of the world’s least expensive stock markets like Uzbekistan, Argentina, Egypt and plenty more off the beaten path.

[00:00:51] So in this super fun and illuminating conversation, we cover how we got started and interested in emerging markets, what investing in emerging markets involves, and we speak a bit about Uzbekistan and the opportunity there. So extremely valuable, fun, and varied conversation for me today. I think there’s plenty to take away, so please enjoy my conversation with Michael McGaughy.

[00:01:12] So yeah, Michael, cheers a million for coming on today. A part I’d love to start with is a bit about your background, because for me, being young, it’s interesting. So you first came to Asia as an exchange student in Hong Kong in 1985, so what prompted that and yeah, how did it all start?

[00:01:27] Michael McGaughy: Well, I guess it goes back to just, you know, I, I was working actually wrapping presents one Christmas, holiday at a high-end shopping mall outside of Washington, DC.

[00:01:39] You know, we used to have great bookstores back then and huge magazine racks. This is before the internet, came in, obviously. And I happened to pick up the Economist and just started reading it and I was just, I dunno, so many lights went off in my head. I bought the magazine and I think I, kept reading the, just, it just got me interested in what was happening outside of America.

[00:01:58] I was in the university at the time, maybe a freshman. And in the US uh, we have typically a four-year, university, career, I guess, for lack of a better word. And, many people take their junior or their third year abroad. And most programs at that time were going to France or England someplace in Europe.

[00:02:17] But there are a few that went to Asia and one of the only ones that, went in, in from the Asian programs when the only ones that you did not need to have, a language background, was the program in Hong Kong. and, I noticed that the price was lower, lower than, even including their plane tickets back and forth, which were pretty expensive back then, relatively relative to people’s income.

[00:02:39] even the plane tickets back and forth from Hong Kong to DC were, and the tuition, we’d still save money, compared to the tuition I was paying at my, at. My parents were paying at the university. so it seemed all around a good deal. Uh, I’d never really been out the US at that point. it took a while to get the passport and things, and it was a, you know, it’s definitely a life-changing year.

[00:02:59] and for me, not just for me, but for other people on the program too, we still stay in Chucks with each other all the time.

[00:03:04] Kalani Scarrott: Oh, cool. And you continue to stay in Asia directly after that and start working?

[00:03:09] Michael McGaughy: No, no, I had to go back and finish up my university program. Uh, and then I got a job in New York for a couple of years after that and you know, I was spending so much time working for Chase Manhattan Bank, which is, I forget who’s, who’s part, who they’re part of now.

[00:03:26] but, I was spending so much time in Chinatown and all my buddies, who did stay in Hong Kong were doing pretty well, and I really missed the place. So I, I got a part-time job, saved up a thousand dollars, spent $400 on a plane ticket and arrived with $600 and started looking for work in Hong Kong In 1989,

[00:03:46] Kalani Scarrott: $600 and a dream, that’s all you need. That’s unreal. Because you eventually ended up as a sell side analyst in Indonesia in ‘89. So how did you make the transition from Hong Kong to Indonesia and just what was that period like? Like? Yeah, just talk me through it.

[00:03:58] Michael McGaughy: Sure. Well, I was , it’s kinda a little roundabout story, but I was actually hired as a China analyst, in, I think it was March or April of 1989 which was just a few months before the famous day in Tiananmen Square.

[00:04:12] And, me and my boss, the head of the company. At that time I was working for a group called Crosby Securities, which, you know, us and CLSA used to, be the key independent research driven brokers, back then. we were due to actually take a plane flight to Beijing on June 4th. you know, which is the famous day, in the Tiananmen Square.

[00:04:34] and we were called back from the first time to ever use a cell phone. We were called back from and told, you know, don’t go to Beijing. There’s, you know, all your need meetings gonna be cancelled any. so I thought I’d be out of a job. You know, you don’t need to be a China analyst if there’s no stock markets and there’s no possibility of them opening up in the next few years.

[00:04:51] luckily, about a month after that, in July of 1989, Indonesia opened up their markets for foreign investment, their stock market for foreign investment. and, I was a new kid on the block. So they set me down to Jakarta to start looking around and start kicking the tires. . and so in July of 1989, I spent about a couple weeks down in Indonesian.

[00:05:13] Met with, it was we, only seven companies were allowed, were open for foreign investment. There were only about 24 stops at the time. Uh, but we met with all the 24, with all the seven companies and started writing reports about. Then.

[00:05:26] Kalani Scarrott: Wow. So how hard was the work back then, given it’s only seven companies?

[00:05:29] Like was it the Wild West? I don’t know. Yeah, just what was it a bit like then? Well, at

[00:05:33] Michael McGaughy: the time, you know, I ha I didn’t have much experience in the markets, so it was, you know, I just wanted to keep my job so I could pay my rent and get outta the cubicle where I was staying in Hong Kong, you know, I was living pretty hand, hand to mouth back then.

[00:05:46] so it was a tremendously good at learning experience for me. you know, I didn’t really know much about the markets. back then, I barely knew what stock was, to be honest with you. but, I kept my job and learned a little bit here and there. you know, I didn’t really have much to compare it to.

[00:06:00] So, and because I spent so much time, you know, we spent all, it was, it was, it wasn’t hard work, but it was very different work than what we’re doing now. A lot of the work was more collecting information and taking that information and putting it into a spreadsheet or writing it up. you know, listening to rumors, following up on those things.

[00:06:18] you had a much more. Very good financial press back then. I remember the, you know, I became friends. He’s still a French to this day with, the, the head of the Jakarta bureau at Wall Street Journal. and he had some really, really good insights, into what was going on back then, things, so I got really lucky in terms of the contacts that I made in my first couple years from the business.

[00:06:39] maybe that’s part and parcel being when the first, you know, analyst in the market. And yeah. If

[00:06:44] Kalani Scarrott: we fast forward a few years, I saw you spent a couple of years in the mid-nineties co-managing, a China private equity fund listed on the London Stock Exchange. So I recently read Tim Clissold’s, Mr. China, and I’m unsure if you’ve read it, but it’s just a co of a story about trying to set up and invest in businesses in China.

[00:07:01] I’m just wondering what are your memories of that period? And is it as well hold as the book paints it? Like what do you remember from then? Yeah.

[00:07:07] Michael McGaughy: That’s a great book. I’m really glad you read it. You know, when I read that book it came out, I think three or four years after I left China.

[00:07:15] I, I literally had nightmares because it was so close to what I experienced, but just on a different level. but you know, I took over, a private equity fund that, the person started the fund or with the firm. He wanted to do something different, or he wanted to do his, his own private equity.

[00:07:33] So I had to rebuild the team in Beijing as well as take over his investments or the investments that previous team made. and we found a few holes in them. And so I spent an awful lot of time, and this is what kind of reminds me of the book, is that one of the firms that we had invested in, it was a water heater factory and western province.

[00:07:53] They basically just, management just took the money and invested it in something else. so I spent most of my time in Beijing trying to figure out the problem first and then trying to recover about 5 million that the previous team had invested in the company. And management basically just embezzled.

[00:08:09] So we got the money back. but you know, you’re just back to square one and it took an awful, awful lot of time to do. and meanwhile, other businesses are kind of suffering it. Planning just wasn’t ready for private equity back then. and, you know, it was very, very different. I think it was about five or six years after I left that sign.

[00:08:28] As I seen the sign, s i a.com went public. by the, it’s a VIE structure that was worked out. and that, that structure wasn’t available to us at that time. but yeah, that book is very, very accurate.

[00:08:40] Kalani Scarrott: Yeah. No, I just love the stories and same thing, I was just like, surely this can’t be real.

[00:08:44] But yeah, you read all everyone else’s stories, and, it seems to, yeah. You connect all the dots and it really was that crazy.

[00:08:50] Michael McGaughy: Yeah. There actually, and there’s another book that predates that by, I dunno, maybe five or 10 years called Barefooted the Board. . and it’s about, it was written by a Westerner, I dunno where it’s from, but he, he talks about, working in a company in mainland China, in Guangdong province, very, very early on after their after China’s opening.

[00:09:09] Kalani Scarrott: Okay. I’ll definitely get onto that. Awesome. And to fast forward again to the work you’re doing today. So for Research Alpha, and given it’s not a strictly emerging or Frontier Markets fund, You’ve mentioned those markets tend to have more idiosyncratic financial and currency processes, and it’s your background to look at emerging and frontier markets.

[00:09:27] So you’re quite comfortable in that space. But how do you actually develop this comfort? Is it nature, is it nurture? How have you become comfortable?

[00:09:36] Michael McGaughy: I guess probably just experience, the latter. I’ve been following Indonesia off and on ever since I was an analyst there, late eighties and the early nineties.

[00:09:45] And, it’s really interesting and I, it’s, it’s, it’s fantastic to see what’s happened there because you’ve seen such a small thing become a big part of the economy and the openness and the transparency, the, the stock market. I think there’s a spinoff effect from that on the, on the rest of the country.

[00:10:03] and vice versa. That also helps with valuations and more companies listed and you knows, it is basically a very virtuous cycle. Uh, and it’s really great to see that happen over the last many years. and part of that process was going through the age of financial crisis and, you know, between 1997 and kind of really.

[00:10:21] A lot of those countries, a lot of Southeast Asian countries didn’t really come outta the crisis until 2001 or so. but when I went back and looked at, how those companies did after the crisis, you just had phenomenal returns. if you had invested during the crisis. so, you know, in my present, you know, I had our, our data provider on a back test for me or just gimme some information.

[00:10:44] All the hundred baggers around the world in the last, you know, ev for their life of their database, which is about 30, 35 years. And in Indonesia, I think you had like 8% of the companies that were listed at the time. I think there were about 400 companies listed at the time, and I think about 35% or 35, 35 of them became a hundred baggers.

[00:11:06]  according to this database, that’s 8% chance. Of getting a hundred bagger. and then, you know, some of the companies I looked at, one of the favorite companies, the companies that had really good, corporate governance and good shareholders and good structures, good structure. I’m thinking here of Astra International, you know, it was really blue chip company.

[00:11:26] Everybody liked it. great history. there became a 200 bagger over between what, 1998, I think when it hit this bottom. When I looked at the numbers in, I think 2016, 2017, and that’s not including dividend or dividends reinvested. so that’s a company everybody knew about, blue Chip Company, one of the most liquid companies in the market.

[00:11:48] And, That’s, you know, that’s, that’s all you you know, all you really need over the last, what, 25 years is to find one of those and stick with it and be smart enough to stick with it. so that’s kind of, and there’s another one of their subsidiaries, United tractor that was a thousand backer, over the same time period.

[00:12:03] Again, not including dividends or being reinvested. so just phenomenal returns. and a high probability of finding, something like. So when you look at that data and, you know, reading a lot of the behavioural finance stuff that I’ve read, you kind of put all that together and you say, you know, you basically, you’re, you’re, I think you’re taking a lot less risk than investing in say, a Sri Lanka now than you were say, buying tech companies a year ago or two years ago.

[00:12:30] Or buying, you know, we bought Turkey in 2018 when everybody was buying. , and that that actually turned out to be a little bit of a safer. Uh, I think I’ll have to go back to the numbers, but that’s the kind of stuff I’m looking at. You know, you, you buy when there’s all the negative news in the price, but the underlying asset is still, still high quality.

[00:12:49] No. It basically gives you a chance to buy a high quality asset as a, at a, at a Roth bottom price. and to me, if you have holding power, and no matter where that asset is, I think you can do pretty well over

[00:13:02] Kalani Scarrott: time. Yeah. So if I’m allowed to probe here, given that emerging markets are extremely volatile, things change quickly, people scare easily, how do you actually find and attract the right investors where they’ll stay the course with you and your strategy then?

[00:13:15] Michael McGaughy: Well, that’s, that’s the hard part. And to be honest with you, I’m not doing a great job. Oh. All the, all my current, I only have, four outside investors. I’m, I’m an investor in the fund. And all the people who are invested are ex-colleagues who have known for about 25 years or so. I need to go out and you know, our expense rate ratio is quite high and as we raise more money or as our funds become larger, that’ll come down a bit.

[00:13:39] And that’s one thing I’m keen to do going forward is to raise more money.

[00:13:45] Kalani Scarrott: And do you wanna talk a little bit about what you look for investments? So what do you look in a market before entering? You’ve mentioned the sort of three-legged approach. Do you wanna explain that?

[00:13:52] Michael McGaughy: Sure. So the three-legged approach of the trifecta I call, is looking at the company selection is basically people structure and value.

[00:14:00] You know, I can, if I, if I had any macro overlay, . It’s very simple. Uh, it’s just, you know, is that country in a crisis? Is there a possibility that the country will come outta that crisis and will be able to realize our investments? And if those, if we hit those two metrics, then I start looking at the, at the, at the country or the stock market.

[00:14:21] and then in terms of picking stocks, you know, you kind of hit the nail on the head there. The three things that I look at, I look at people structure and value. so I’m really looking for companies that are controlled and managed by quality. People have a good reputation. they’ve done the right thing for minority shareholders and also the structure of their, business holdings, not just the listed company, but their other unlisted entities.

[00:14:45] that structure, Is pretty simple and, and where it’s all focused. so that the, the incentives for the majority of the controlling shareholder are the same incentives for the minority shareholder. You have an aligned incentives between the two because a lot of times in, particularly non-Anglo act and markets, you, there’s very many ways where the major shareholder of the company, the controlling shareholder, can extract cash from the listed.

[00:15:09] To the detriment of company. Company. so that’s the structure side of it. that’s kind of the people, the structure are kind of my quality, metrics or overlays. And then the third part is this valuation. And I use a lot of, long-term valuation metrics. Uh, and this kind of goes back to, Benjamin Graham, you know, I forget which one it’s security analysis or the intelligent investor, but he would talk about averaging out earnings over 10 years so that you, take out the business cycle.

[00:15:37] And then Robert Silver came in with, the Cape ratio, which does the same thing, but you, not deflate, but you adjust those earnings by inflation. and so I look at that, when I look for valuation, both at the market level and at the company level. And typically, you know, if you go into the markets like Turkey in 2018 or Greece in 2012, everything’s cheap.

[00:15:59] you don’t really have to spend too much time on the valuation. And in fact, that’s where I’ve screwed up. I’m spending too much time on the valuation looking for something that’s at, I don’t know, two times Cape instead of something at six times Cape. And, in a, in a market drawdown like that, almost everything, everything’s cheap typically, and it’s a good time to just stick to quality.

[00:16:19] Kalani Scarrott: Yeah. Okay, because one point I want to draw about that is, how often on valuation and with crisis’s, how often or how quickly do emerging markets rebound? Have you found, like, so how time critical is it to notice, evaluate, and then map out all these web of structures that Yeah. Is often common in emerging markets.

[00:16:37] Like how time critical is the work sometimes, like you spend a few years doing nothing and then everything hits all at once. yeah, just talk me through.

[00:16:43] Michael McGaughy: Uh, it, it really varies. so there was a great, there’s one or two pages in, there’s a great book called, this Time is Different. and it maps out the history of mostly fixed income, I think it was bond markets.

[00:16:55] And they kind of mapped out financial crisis, but there’s one or two pages in there about equity markets and they know that e equity markets tend to rebound quickly. I think within, it’s within six to nine months. You know, the property market tends to rebound in three, I think it’s three to five years.

[00:17:12] I could be wrong on this. and that, that, that kind of coincides with the general economy rebounding. in my own personal experience, it’s, it’s really varied. So, you know, I’ve basically been running the strategy for about 10 years, first with my own money. and then about five and a half years now with the fund, I started.

[00:17:30] And, what really got me interested first is Greece and Greece rebounded really quickly. you know, hit the bottom in, I think it was June, beginning of June, 2012. And then by the end of the year, the stocks had done really well. They recovered a lot. And the same thing happened in Argentina.

[00:17:47] where, you know, I went there in. Just before Covid, I think it was October, November, 2019. And the stocks had rebounded pretty quickly after that. now other markets like, Turkey kind of have what they call a double dip. Where I went there in 2018, the market went up and then they went down again.

[00:18:06] Uh, and now it’s, you know, last year it did really well. so we’ll see. We’ll see. But it, it’s, it’s, it’s, it’s really hard to make a generalization. I tend to be a little bit too trigger happy, at least recently I was in Sri Lanka in, in June and we we’re down about 20% now in Sri Lanka. but I think longer term Will, will do well.

[00:18:27] I just got too in, too early in. I was too excited about the situation there. Okay.

[00:18:33] Kalani Scarrott: To continue on crisises as well. So you’ve mentioned on Graham Rhodes’s Longriver podcast who’s a good mate and a previous guest that you love to invest in financial crises but tend to avoid political crises.

[00:18:44] But how often in emerging markets are those two crises linked in?

[00:18:50] Michael McGaughy: Okay. Well, first, a big shout out to Graham. that was the first one of a podcast I’ve done, and, he introduced, we found each other through him. So thanks a lot to Graham.

[00:19:00] In a financial crisis. Know what’s gonna happen in a way, or you, you. know what you should happen? uh, usually it’s a lot of financial crisis, and I’m thinking back here to Indonesia, is that over the three years they were in a pretty crisis situation. You had a lot of reforms taking place. and that led to the rebound and Indonesia becoming what it is today and probably, you know, even more, even better in the future.

[00:19:25] And so that’s you, you like to see that. And even if there aren’t that many reforms, as long as the company, the country stays pretty open allows businessmen to do what they want, what they do best, and I think a good business, can do well in just about any environment, whether it be a democratic environment or a or authoritarian political environment.

[00:19:47]  as long as there’s stability and they can get access to the goods and materials that they need, businesses tend to do. . but when businesses tend not to do well, it’s when you have a, you know, kinda a geopolitical situation like we have in Ukraine, that’s just fairly unpredictable. or, you know, Venezuelan market did really well last year, and I’ve been getting questions about why I wasn’t there, but.

[00:20:09] Firstly, I don’t know if I can do it. I’m an American citizen. so I don’t think I’m kinda the weakest link in the funds. So I don’t think we can invest there simply because of that. and also I just didn’t really, it doesn’t seem like things are gonna change much. maybe I’m, I could be wrong there, but, yeah, I tend to avoid a pure political situation. But a financial led crisis, like we’re in, in Sri Lanka right now is, is, is, is attracted. ,

[00:20:33] Kalani Scarrott: you mentioned restrictions there with Venezuela. So one thing I do wanna know is, when investing in emerging markets, how often do you find there’s restrictions on foreigners owning, investing companies like the valuations of potential, maybe there, but it might truly be uninvestible.

[00:20:47] So how do you navigate these mine fields, especially as a one-man band?

[00:20:51] Michael McGaughy: I guess a lot of the experience and having seen it before, big one isn’t so much investing money in the country, it’s getting money back out. particularly getting us dollars back out. So that’s, that I’m pretty sensitive on. so, you know, you do things like go with a bigger broker that may have more clout with the foreign exchange control authorities.

[00:21:11] you know, a lot of markets, there’s ways to get in now through what they call the blue chip swap rate, which is buying and selling the similar asset the local versus the foreign market. so in Argentina we get all our money in and out through the boot chip swap. And what’s interesting in Argentina is that that Blue Chips cooperate, was declared legal by the Aine Supreme Court, I think about 20 years ago.

[00:21:34] and, so there’s, there’s ways to do, but that’s, that’s the biggest concern is the currency. so one thing I do follow on the macro side is what the government might be doing to impose currency controls on, on foreigners.

[00:21:47] Kalani Scarrott: So if I could talk about the structure side of your investment process, you’ve written that one of the first things when looking at a new market is just to determine who owns what.

[00:21:58] what’s that whole process look like? Where do you even start and how long does it all take?

[00:22:03] Michael McGaughy: Uh, sure. So, yeah. Yeah. It’s, so I, one thing I’d like to do is when I was an analyst, I used to write these, what, what I call the group reports, where you’re looking at the market. Uh, the first thing you do with that is exactly what you said, where you map out the owner of each or the controlling owner of each company.

[00:22:21] or yeah, you map out the ownership of each company that’s listed on the stock market and tech typically start go by market cap. and what you find is a lot of the ownership of the bigger companies. , in each market, they tend to go back to any one of maybe five to 10 different families. so, you know, you in, in Which I can give you some examples here.

[00:22:44] Some of the names escape me. but like, you know what, like in, in, like in Sri Lanka, for example, the Perrera families, one of the bigger o owners of, of uh, companies there, you have the John Keels groups, which, you know, you have the list of John Keels companies, and then they have I think, five subsidiaries that are also listed.

[00:23:02] You know, in Indonesia way a long time ago, one of the biggest business groups was c r Mass. and they had quite a few companies listed on the stock market. Astra had several companies listed on the stock market. and so that’s the first thing I do, and it’s a way to really organize a new market for me so I can figure out kind who owns what.

[00:23:19] And so like in Sri Lanka, I think there’s about 300, 400 enlisted companies there. and. If you break that down by who owns what you really come up with, I think I’m up to about five or six really big owners of stocks that are major port, you know, the Hayes groups, the Metals Corp group, John Keels, which I mentioned before.

[00:23:38] And then you have others, other bigger business groups and smaller business groups. . and so, you know, I think Haley’s has maybe 10 or 15 listed companies there, and you start talking to people, you know, do you like this group or you don’t like it? And if you do like it, then that gives you a lot of options to look at.

[00:23:55] If you don’t like it, then you can just wipe those 10 or 15, companies off your list of, of things to look at. So it kind of becomes a process of elimination and it’s a way to quickly get up that I use to quickly get up to speed on a new market. Like, like Sri Lanka, or actually I should say I’ve been to Sri Lanka a long, long time ago.

[00:24:13] and looked at companies there, but say in Greece where it was a very new market, I used the same methodology that I used in other parts of the world and met first mapping companies to the controlling shareholder and then figuring out which controlling shareholders I like and which I don’t like, or which are good for minority shareholders and which are maybe not so.

[00:24:32] Minority shareholders. and then you invest or look at more deeply into the companies that, of the ones that are controlled by good controlling shareholders.

[00:24:40] Kalani Scarrott: One location I would like to ask a couple questions about is Uzbekistan. So you mentioned in 2017 that the stock market there was just dead. It was hard to find brokers hard to open an account, yet the country had plenty of what you call triple six s, so a PE lesson.

[00:24:54] Priced a book of less than 0.6 and a dividend yield over 6%. So, which seems kind of unfathomable in mature markets, but could you talk about how you first came across Uzbekistan and what interests you there?

[00:25:05] Michael McGaughy: Uh, sure. Kinda again, another shaggy dog story, I guess. I had been to well, Kazakhstan came up on my every.

[00:25:12] Every month or so, I’ll do a valuation screen of the whole world. and I think Kazakhstan came up on my screen as being amongst the cheapest mark stock markets in the world. and so I went there, yeah, started poking around. And, this is probably about 2014, about the same time the Rubo crashed in 2014.

[00:25:32] The other currencies in the, in the ex-Soviet Union crashed also, including the Kasak. And so I went. To Kazakhstan in 2014 or maybe 2015, started looking around and when I was there I noticed a lot of Uzbeks in management and middle management positions tons of Uzbek restaurants and you know, that that was surprising.

[00:25:55] So asking around why this was so, the response was that s Pakistan is really the center of Central Asia. you know, the best universities are there. really smart people come from there. and so I set. Just kind of looking at back stand ever since then, kinda stayed in the back of my mind.  so when there, there are political changes that I read about in 2016 when Islam Kara passed away.

[00:26:19] He had been there for 20, 25 odd years after the Soviet Union. And, you kept hearing every now and then you for the next year, you’d see what the odd article about us Uzbekistan changing. . and then what really got me on the plane was that in 2017, I think it was September, I saw an article, a couple, quite a few articles about how the Uzbek saw was devalued by 50%.

[00:26:42]  so, you know, currency gets devalued by 50% overnight. That’s literally a 50% discount on all the assets there for us dollar investor. at least on paper. and that turned out to be the case. but the, the stock market was, so that’s kind of led me Tostan. and then when I went there and started.

[00:27:02] I still remember the time people were telling me. One of the government officials, were telling, was telling me about the reforms that they’ve instituted over the last couple of years. particularly since the new president came to power and they were just draw, jaw dropping. you know, I just couldn’t believe the, the pace of reform and, and, you know, I’d already seen time to reform in the last 30 years and the pace of reform and what these guys were trying to do, it was just, it’s been very fast and very ambitious.

[00:27:31] Kalani Scarrott: Yeah. And for the market of Uzbekistan, so reading your post inside corporate as Pakistan, it’s like legitimately mind-blowing. So I highly recommend everyone to read it. But maybe for listeners to understand the market a little bit better, could you just describe the makeup of those big market and the actual investible market there?

[00:27:48] Like because the statistics there just honestly had me breathless like it’s insanity. So could you explain a little bit about that?

[00:27:54] Michael McGaughy: Sure. It’s just really, how would you say it’s just really small. I forget the actual numbers. you know, we have, I think the biggest company there has some that we have is a market cap of about 160 million.

[00:28:04] and that’s been a five bagger for us. so, you know, had to market cap in maybe 20 million before 20, 30 million before. and you know, we’ve, we bought in and we were getting dividends. There’s been great growth in the company. Uh, we reinvest our dividends, so we’ve done really well there. And they’re going through a privatization program now, and it’s really frustrating because, you see these assets that are being sold and they’re being sold at a really, really low price.

[00:28:29] You know, people just aren’t looking there still. you know, there are, there are a few companies like, you know, our, we have a company in, in Turkey the Turkish bottler of Coca-Cola. They recently bought the, their Uzbek, the Uzbek Coca-Cola bottler. and they tweak that a little bit and now it’s, it’s growing by 40% per year.

[00:28:49] I. I think it’s one of the fastest, it’s certainly the fastest growing, subsidy area of their business, but I think it’s probably one of the fastest growing markets for Coca-Cola in the world right now. in fact, you know, I was just in Uzbekistan in November and I didn’t see many Coke, much Coke in the stores, and I was asking about that.

[00:29:11] There’s so much demand for it. They can’t keep up with it. So it’s only the high end restaurants and the high end supermarkets that, that have access to Coca-Cola. so it’s f it worked out so well, you know, knocked on wood, in Hezbe. But we’re still really, really at the early days.

[00:29:27] and I’d, I’d love to have some more m and a people go up there and to take a look around cause the assets are just so cheap. and, you know, it’s a safe place. The currency’s pretty stable. They’re really making a good push to increase electricity supply. I think 65% of their foreign reserves is backed by gold.

[00:29:49] And if they want more foreign currency, they just gotta mine more gold. Cause they have so much of it. I mean, I’m, I’m making a, it’s a lot more complicated than that, but, there’s a lot going for the place and I don’t think a lot of people, it’s getting a little bit more pressed now, but it’s just so the asset prices and the, the economy is so small compared to the rest of the world.

[00:30:08] It’s not showing up on many people’s radars right now.

[00:30:13] Kalani Scarrott: Yeah. Easy.  so yeah, my closing round, I really enjoy asking, especially for you with a lot of life experience. I’m very keen to hear your story. So what do you think is the most undervalued life experience that university aged students don’t give weight to?

[00:30:25] So what do you think is an underrated skill or an experience that they think you think they should have or even something you wish you had younger on?

[00:30:32] Michael McGaughy: yeah, you know, just, just kind of doing what you’re doing. Just going out and, starting to do something. You know, you learn. a lot by doing rather than, you know, you have to study things and, and things, but just going out and taking more risks.

[00:30:44] So to give you an example of, you know, you asked me things that I wish I had done before. One thing I didn’t do was invest my money in the markets, say during the Asian financial crisis. and that is a huge mistake. so I think just kind of going out, especially when you’re young, take more risks and do what you do.  just try different things. travel more, travel to places. Maybe your friends don’t go to or don’t make the papers every day, but you, you find interesting yourself

[00:31:13] Kalani Scarrott: because that’s what I love about you and your investment style too. You, you literally get on the plane, go to these places.

[00:31:17] You’re not just investing from the office in Hong Kong. You, you’re going there seeing, chatting with local vendors. It’s awesome to see. And yeah. I’m so jealous.

[00:31:25] Michael McGaughy: but that’s a big part of the job. I love doing it. it, it’s definitely a labour of love. you know, it’s just so much, you know, like, you know, I was just kind of getting depressed about this Pakistan because, some of the companies that I know, they’re kind of doing the wrong thing.

[00:31:37] I think some of the privatization is not being handled properly. Uh, but then once you go there and see the changes over the last three years, You know, my opinion went changed about 180 degrees. cause there’s so much energy now in ta, the cash can half, three and a half years ago you know, for instance, they’re facing up, they’re facing a little bit of a power crisis around Christmas time.

[00:31:58] And one reason is because power consumption, I think it’s gone up. Often forget how much 50% of the last four years in, in, in w Pakistan. One reason for that is just plain marketing. you know, cash can is much brighter. Now in terms of, you know, I’m gonna, you know, I’m, I’m writing my, my quarterly newsletter right now and one title I’m gonna have for is a Bright Lights Big City.

[00:32:24] because it’s really come alive a lot more businesses. Lot more marketing. it’s really, really exciting to see what’s happened. Uh, in US Pakistan in the last, what, five years since I’ve been going there and investing there.

[00:32:38] Kalani Scarrott: And just curious, I’m just curious to know when you go to these places, and we’ll maybe use us Pakistan as an example, do you have a local fixer, a friend, an ex-colleague that shows you around and can navigate the local language? How do you even get over that hurdle?

[00:32:49] Michael McGaughy: it depends on the market. So, you know, in Uzbekistan, it was all me going out and finding somebody who, you know, talking to the, the local brokers, because you do need a local broker to transact. and then once I found a couple that I liked, I opened accounts with them.

[00:33:03] and then, then it kind of helped me with a lot of different things, generally. But I, I try to arrange my own meetings now. So I was in Istanbul in in September, cause we have a big position in Turkey and I arranged all my own meetings there and I prefer to do that. to be honest with you, for a couple reasons.

[00:33:19] Number one, you know, we’re a direct, I, I like to be an investor in the company and it’s nice, it’s good not to have a broker. there’s some really good brokers out there, really good analysts. but at the same time, it’s kind of nice to do my own work. And a lot of times, the brokers, they tend to have more of a short term view, than I have and tend to look things much more trading oriented, simply because that is how they make a lot of their money or transaction oriented.

[00:33:45] Uh, and they also look at, a lot of times they’ll just stick to the bigger cap companies that are already big where it’s kind of. I wanna look at the companies that are gonna be big in the. You know, skating to the puck rather than where the puck is

[00:33:57] Kalani Scarrott: now. And another general question, have there been any books or people that have been influential in shaping you or your worldview?

[00:34:03] Michael McGaughy: Oh, sure. Yeah. There’s a great book on the rise of Capital by a Japanese author. Uh, I forgot his name, but it’s, that’s probably the, one of the better books. It been very influential to me. It’s very data now. What he did was he outlined, all the big business groups in Indonesia and talked, how they, they fit together.

[00:34:22] the other one is, I think it’s just the rise of capital by, Richard, oh, I forget his name. Also an Australian guy actually. he’s based, and he looked at the rise of how companies and groups raised capital in Indonesia, way back when, back in Thailand in 1960s to 1970s.

[00:34:38] And those are really fantastic books. and they kind of introduce you to the, at least they did, to me, to the business group concept and how they, you know, the crony capitalism, and how things really work. Yeah. And there’s also, you know, we talked, sorry about, we talked about it before the model, which just came out by Richard Lawrence and the guys that overlook, it’s very good.

[00:34:57] I thought. And of course, you know, the Ben Graham books are fantastic. there’s another guy named James Montier who writes about behavioural finance. I think he wrote the Guide to Behavioural Finance, and I thought that was really interest. No shortage of books to read.

[00:35:10] Kalani Scarrott: I know that is true. And for you, what’s your plan going forward now? So you mentioned going out, maybe raising capital. What areas are you curious about? Or yeah, just what’s the plan?

[00:35:20] Michael McGaughy: Yeah, I mean, I love what I’m doing. My goal is to keep doing it and, you know, hopefully improve on some of the mistakes I’ve made and to learn more about, the investment process. and then, you know, I do like, I do want to raise more capital going forward, particularly to lower expense ratio, but also, you know, I really do believe that this is the best way to invest and nobody seems to be doing it. you know, during a financial crisis, all you see is a risk, but three or four years later, all you looking back, you just say, why wasn’t I doing that before? the same feeling I have about investing in say, Indonesia or Southeast Asia 1998 or during the financial crisis. so I really do think it’s just a good way to invest. It’s not for everybody. You know, there’s a lot of headline risk. you know, I’m sure my investors are looking at some of the markets that I’m investing in and just cringing because you.

[00:36:13] You know, even though Turkey had one of the best perform, Turkey and Argentina were some of the best performing markets last year, you still see their economies. Every article you read about their economy is just really, really like, why would anybody wanna put their money there still? and so you need the right type of mentality.

[00:36:32] I think. And, you know, I wanna make somebody, you know, meet my job as a manager is to make sure that I have the right people or the investors in the fund so that we don’t have people withdrawing their capital, and make perhaps hurting performance and withdrawing their capital for a long time.

[00:36:50] Basically you wanna make sure that people understand what they’re getting into. Yeah.

[00:36:54] Kalani Scarrott: Michael, thank you so much for coming on today. really appreciate it. Anything you wanna plug or where can people find you?

[00:36:58] Michael McGaughy: Oh, sure. So I’ve kind of unusual spelling in my last name, so it’s pretty easy to find me on social media.

[00:37:03] So I, I post or, or repost a lot of things on Twitter. I like to post things that a lot of, I don’t see other people looking at. and then I also have a blog that I don’t write to very much anymore. that’s just on the Google platform. and I don’t post much on that cause just since starting the fund, it’s been busy writing the quarterly newsletter doing all that. And then I’m also on LinkedIn.

[00:37:29] Kalani Scarrott: Perfect. I’ll include links to all in the descriptions. But yeah. Michael, thank you so much. I’ve learned a ton. It’s been extremely valuable for me, and I think for listeners too.

[00:37:36] Michael McGaughy: Hey Kalani, thanks so much for having me on, and we really appreciate your interest.