“I was seldom able to see an opportunity until it had ceased to be one.” – Mark Twain
Freakin’ Russia. It was one thing after another the morning we flew into Sheremetyevo Airport. We had barely stretched our legs when a burly airport cop tackled my colleague, Mike, for taking a picture of the baggage carousel.
Then we hopped into a taxi – and were soon praying for our lives as our driver repeatedly swerved into the middle lane to get ahead of the slow-moving traffic. Trouble was, cars going in the opposite direction were also using the middle lane for passing, and our driver refused to get out of the way. Every two minutes, we were seconds away from a head-on crash. Finally, much to our relief, we arrived at our hotel.
But relief turned to dismay as the bellboy turned on the lights in the tiny vestibule… then the bathroom lights… and the lights on the two bedside tables. I could barely see a thing. Jeesh! This fleabag hotel was sadly the best we could find in Moscow.
I started to curse in Russian, but stopped when I eyed the bellboy waiting for his tip in the semi-darkness. I slipped him a fiver and he disappeared – no doubt alerting the babushka they had stationed on every floor (to keep track of our comings and goings) that I was settling in.
I was disappointed, but not surprised. I had stayed in a dozen hotels in Russia. They were all like that. This was a few years ago, but from what I’ve heard the situation in Moscow has barely improved. But one thing has changed. The same dingy hotels are charging a lot more now.
It’s different in Asia. Take Singapore. They have about two dozen five-star hotels, another two dozen four-stars, and one amazing six-star. The service is efficient and friendly. And they take the hotel business in this sparkling city-state very seriously. So much so that a bitter debate broke out a couple of years ago over room rates.
The five-stars in Singapore were charging about 20 percent less than the five-stars in Europe, and they weren’t sure why. Occupancy was robust, and Singapore also has first-class restaurants and shopping. The business community didn’t want Singapore to be a magnet for bargain hunters. It was an expensive city. People spent a lot and the hotel and shop owners cleaned up. They wanted to keep it that way.
When I was running an international business, I was a frequent customer of this sector. I’ve stayed at about 15 of Jakarta’s three dozen five-stars, at about 10 of Singapore’s two dozen, and at a half-dozen of Shanghai’s two dozen hotels. That includes the amazing Grand Hyatt Shanghai in Pudong, which occupies the 53rd to 87th floors of the Jin Mao Tower – one of the tallest buildings in the world.
Now I’m naturally curious about what makes businesses tick. So every time I stay at one of these hotels, I ask about their occupancy and break-even rates (and why they’re charging me so much). Except for a 6-12 month period beginning in 1998 when economic crises rolled over one Asian country after another (China, with its closed monetary system, was the notable exception) and caused occupancy rates to plunge into the teens, these hotels have enjoyed occupancy rates way above their break-even levels. Even in Singapore, the debate was more about respect and image and implications for the long-term future and less about losing money.
So let’s go back to the land of vodka and caviar. Russia has had its ups and downs economically, but it’s also a country where privatization has unlocked untold wealth and has helped the stock market reach dizzying heights. There’s no going back now to the old command economy. Russia is an economic power in the making, and Moscow is its epicenter.
So this is what we know about Moscow. Its hotel scene is disgraceful. The city is the political and financial center of the country. And Russia’s no-longer-red star is soaring.
My brother – who works for a major hedge fund – was there recently checking out investment opportunities. I told him the biggest opportunity may be where he rests his head. And, sure enough, when he returned he told me they’re going to be making big investments in hotel development.
Hedge funds may be into derivative investing in a big way, but they’re not above employing the most basic investing rule of them all: Invest in shortages.
The world is plagued with shortages. From Harley-Davidsons to Wiis to wheat and water, shortages are all around us. And they have one thing in common: They make great investments.
The best shortages are the ones that are going to get worse before they get better – like hotels in Moscow. You can’t build hotels overnight… or mines… or oil fields. When supply in these sectors falls behind rising demand, it takes a while for supply to catch up. (That’s why I prefer these sectors to, say, wheat, where you can make a leap in supply in a single growing season.)
It’s easier to invest in some shortages than others. Investing in the shortage of classy hotels in Moscow is challenging. If you have a million, you could invest in a hedge fund like my brother’s. But if you don’t, here’s another way to do it.
Invest in Templeton Russia and East European Fund (TRF), a closed-end mutual fund. It recently acquired Open Investments, a Moscow-based real estate development and management company that specializes in large projects, including hotels. Admittedly, that’s just a small fraction of TRF’s overall portfolio, although two out of three of its biggest sectors are metals & mining and energy. Clearly, this is a fund that believes in the advantages of investing in shortages. And it doesn’t hurt that its dividend yield is 18.5 percent.
Apart from decent hotels in Russia, other big shortages are copper, nickel, uranium, water, and oil & gas (prompting a surge in the alternative-energy sector)… plus affordable cars in some of the biggest and fastest-growing markets in the world. I’m a big believer in investing in shortages – and, as a result, the recommendations I’ve been making to my subscribers have been paying off in a big way.
Strong companies in weak sectors can break your heart and strip you of your savings. The best thing about shortages? Even mediocre companies with a penchant for keeping costs down can make big bucks off them. And all you have to do is look for sectors where structural shortages are in play.[Ed. Note: ETR’s Investment Director, Andrew Gordon, is the editor of INCOME, a monthly financial advisory service that uncovers income-generating stocks that promise safety (first and foremost), along with much-higher-than-average profit potential.]