Crisis Investing

Christian DeHaemer

Updated December 16, 2009

It’s one of my favorite investment stories.

It was told to me by the now famous prognosticator, businessman, and future congressman, Peter Schiff — at the Hotel Del in San Diego, back in 1999.

Not only was it instructive on how to make a legitimate fortune, but it forever changed my investing philosophy.

You see, it was 1998 and the dot-com bubble was just ramping up. The NASDAQ had doubled that year and was about to go up 300% by the time it found a pin in the first few months of 2000.

At the time, I was recommending companies like Oracle, Sun, and Qualcom — and those recommendations were up between 600% and 1000%. I had an entire portfolio of these overvalued, over-hyped, new-age stocks. And they were going up 10% a day.

It was a surreal experience. CNBC was on at every bar and restaurant. Fashion models were giving stock recommendations and sales of Ferraris in Silicon Valley were off the hook.

Everyone knew the end was coming but nobody knew when, exactly…

And when you were staring at Amazon going up 10% a day, you didn’t want to leave the party too soon. The downside was that many party-goers showed up late and never left.

Asian Contagion

While the Internet boom was still all the rage, many emerging markets at the time suffered what was called the “Asian Contagion” — a debt and currency crisis.

This crisis was fueled by fast money from the larger economies. Emerging markets took on too much debt denominated in U.S. dollars, British pounds, and German deutschmarks.

As the dollar increased in value against local currencies, the debt payments went up, and the countries could no longer pay. A whole host of nations — South Korea, Indonesia, Thailand, Malaysia, South Africa, Russia, Brazil — could no longer keep up with their payments. They had to default or face the IMF’s strict recovery policies.

Default

The poster child for this international event was Indonesia. Indonesia was run by the dictator Suharto, who had been in power for decades. His party came to power in a brutal revolution which killed more than 300,000 people in the early sixties.

In 1998, Indonesia had to pay more than half their export earnings to service their debt, which stood at 140% of GDP. Furthermore, the principle payment on their debt was going to increase from $2 billion in 1999… to $5 billion in 2000… to $9 billion in 2001.

In short, it wasn’t going to happen.

For years, Indonesia billed itself as an Asian Tiger and did all the things that countries do at the top of a bubble, like building the tall buildings and starting a car company before hitting the tipping point. (As an aside, 140% of debt to GDP seems to be the trigger point in these scenarios.)

Wall Street and London knew Indonesia would have to restructure or default. The situation was unsustainable. Traders started selling the rupiah, the local currency. The rupiah fell from 300, to 3000… to 10,000… to the dollar… before you couldn’t get a bid at all.

Threat of Civil War

The price of everything went through the roof. Students and workers flooded into the streets as they could no longer afford rice, cooking oil, or fuel. Suharto responded with troops and tanks. Violence ensued. Cars were burning in the streets for weeks.

The Bottom Fell Out of the Jakarta Stock Exchange

At this point, a California lawyer gave Peter Schiff a call. He wanted to fly to Indonesia and start buying companies. And that he did.

He packed up his bags and his limited knowledge of life on the ground, and started investing in Indonesia companies, and a lot of small caps at that.

He was among the buyers of last resort. While tanks sat on the tarmac at the airport, these people were talking to CEOs. It was the epitome of buying fear — real “blood in the streets” stuff. And it worked just like they talk about.

By the time I heard the story six months later, the California lawyer had sold and was now fat, happy, and rich. (He was fat to begin with.)

Telecom

In the fall of 1998, I recommended Indonesian Telecome (NYSE: TLK), an undervalued blue-chip close to the bottom. This recommendation tripled in about a year and I took profits.

But what I should have done was follow the California lawyer. I should have scraped together all the money I could find and bought a plane ticket. Because you never really know when the top of a momentum- or liquity-driven market bubble will pop.

But you can know — or come pretty close to knowing — when fear is at its highest, when blood is running in the streets… and it’s time to buy.

And truth be told, I’ve been buying fear ever since. I would encourage you to do the same. It is the only time-tested way for the retail investor to profit from stocks. And it is why I created Crisis and Opportunity.

It is also the reason I got on a plane when I heard about the “blood in the streets” deals in Mongolia. Keep and eye out for my research report. It will be in your inbox in the next few weeks.

Happy Holidays to you and yours,

Christian DeHaemer

Editor, Wealth Daily

P.S. If you’re currently a member of one of our many advisories, tomorrow I’ll show you how you could instantly collect more than $10,753. Meantime, my office mate Luke Burgess has recommended one bargain of a silver stock. And, as Luke explained to me, this company just announced an 86% increase in silver production. But that’s nothing compared to what they have planned. Here’s the full report.

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