A Fantastic Investment Story

Red Notice is the incredible story of Bill Browder’s bold journey from young American investor to the largest foreign investor in Russia. This success made him a personal enemy of Russia’s most dangerous oligarchs and public officials. The details are unbelievable and the lessons valuable. The first half of the book focuses on how Bill’s intuition and curiosity led him to a 10,000% return via a large scale public equity investment strategy. The second half traces the murder of his business partner by corrupt Russian officials and the legislation that followed.

Intuition and curiosity

Bill had a hunch early on that Eastern Europe in the 1980s was a vast untapped opportunity for investors. For all of the obvious reasons you might expect, no one was paying attention to that area of the world at that time. Most Eastern European countries were corrupt, opaque, obscure and often dangerous and violent. Still, the region was ripe with investment opportunities and Bill barely had to scratch the surface to find them. Bill’s story is probably the best evidence against the Efficient Market Hypothesis.

A quick detour into efficient markets

The Efficient Market Hypothesis basically states that all relevant publicly available information is spread to all investors so quickly that you can’t use it to profit as an investor. This has been a topic of fierce debate for decades. The reality is sometimes this hypothesis is true, and sometimes it’s definitely false.

So what makes a market efficient?

• Many buyers and sellers: More investors means more inquiring minds and more transactions that will be published. You can see what people are willing to pay and why.
• Coverage: Small companies are not in the news as often and fewer sell-side analysts write research about them. Wall Street analysts don’t cover every single investment. On the opposite side of the spectrum, Amazon employs more PR reps than the Washington Post has reporters (and both are owned by Jeff Bezos).
• Available data: Zillow provides extensive data for real estate investors. Lots of relevant data available from many sources (banks, independent journalists, public records, etc.) makes it easier for more investors to develop a confident, informed opinion. In 2020 and beyond I expect independent research published by independent bloggers to make a significant contribution to available investment data.
• Ease of access: The major stock markets make it extremely easy to quickly buy and sell, and learn about publicly traded companies. In contrast, buying and selling houses or private businesses requires specialized knowledge and considerable due diligence.

For many US stocks, all four of the above are often true. This makes investing in US stocks incredibly competitive and therefore challenging to outperform the market. This is a main reason why US equity hedge funds have not performed all that well. The returns are no longer within their control as the competition has increased exponentially and markets have become more efficient.

Inefficiency means opportunity

The less these factors are present, the easier it is to find truly great investment opportunities. For example, real estate has many buyers and sellers but transactions are cumbersome and crucial data like zoning and permits can be difficult to navigate for a layman. Private companies are complicated to buy and important data is closely guarded. Even public small cap US companies have weak coverage and limited data.

When you find an inefficient market, information becomes extremely valuable and the investment returns can be within your control. In Bill’s case, there was no efficiency in the Russian market of the 1980s. There were few buyers and sellers, no coverage, very little reliable data, and buying and selling typically took a lot of legwork. In other words it was a gold mine for someone like Bill whose intuition, sense of adventure and boldness allowed him to find untapped, mispriced opportunities.

Gazprom

One of Bill’s most successful investments was in Gazprom, Russia’s largest oil company. Everyone knew that the Russian oligarchs were stealing from Gazprom. As a result, major international investors all but ignored the company. The stock traded at about 1% of its theoretical value as it was assumed that oligarchs were skimming off 99% of the assets.

After months of interviewing Russian locals who were close to Gazprom, Bill found that the executives had stolen just 7% of the company, leaving 93% intact but trading at roughly 1% of the true market value. The locals were happy to share everything they knew since they were upset about the effect of corruption on their community and quality of life. Bill purchased the shares and one year later BP entered a partnership with Gazprom which brought international standards for transparency with it. The stock went up 100x, 10,000%, over the following two years.

The opportunities that Bill found lasted about 10 years. After that the Russian economy and currency collapsed almost entirely. He admits that when things seemed “perfect” he should have sold. He weathered the bad times and made it out okay after a lot of investment pain. This reminds us that inefficient markets never last forever. It pays to be early and to take your money off the table when things seem a little too perfect. Especially when your investments consist of a handful of heavily concentrated single company positions – as was the case with Bill.

I recommend Bill Browder’s Red Notice to people with all types of interests. The human rights, geopolitical, investment and biographical details are accessible and interesting to just about anyone. It’s a fascinating read.