Thursday, March 5, 2009

Beware of False Prophets

I would like to turn your attention to a truly great article by Michael Lewis titled Wall Street on the Tundra. It is a fascinating look at the peculiar country of Iceland and the recent collapse of its financial system from the perspective of an outsider. Here is the introduction:

Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjav√≠k, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.

I know almost nothing about Iceland but when I heard about the collapse my first thought was, "hey, I remember hearing a lot about investing in Icelandic bonds." I did a quick search through my emails and found articles from the email list that I subscribe to: Daily Wealth.

Daily Wealth is a free financial publication written by Dr. Steve Sjuggerud. From 2005 to 2007, Sjuggerud wrote many articles extolling the virtues of investing in Iceland and "safe" Icelandic government bonds in particular. Here is a small sampling of quotes from various issues...

When you add up the interest (4%) and the inflation payback (5%), these bonds [Icelandic Government Bonds\ will likely pay 9% total interest in 2006. Let me say that again… government-issued bonds from a AA-rated country are paying 9%.

It’s time to buy long-term inflation-indexed bonds in Iceland. You’ll get paid 9% in interest (4% interest, plus 5% inflation payback). But that 9% isn’t even what excites me…

What excites me is the capital gains potential, as long-term interest rates in Iceland return to earth from these record levels. As interest rates come down, the value of a bond goes up. The more long-term the bond, the higher the capital gain will be.
November 9, 2005

In fact, across my career I've been significantly responsible for about $100 million dollars in trading activity in this country [Iceland].

In all that time, I haven't had a problem. In short, I never worry about my money there. It's because I believe this country may be the safest country in the world in which to do business.

I think they’ve made a great move here… a high paying CD in the world’s safest country.
February 2, 2006

The downgrade sparked a sell-off in Icelandic assets. Iceland’s currency – the krona – fell 10% over the next two days. It was all a big surprise [Comment: This was your first hint that the "safest country in the world" might not be so safe].

Iceland still has the highest interest rates in the industrialized world. It has a top-notch credit rating [Comment: This is from the good old days when at least one person believed in the value of credit rating agencies.] and aggressive policymakers who aren’t afraid of cranking up interest rates. Interest rates in Iceland may even rise further from here, especially after Fitch’s warning and the krona’s fall last week.

Bottom line: the krona is still a very attractive currency for our bank deposits.
February 28, 2006

If we’re right, we’ll make a fortune. If we’re wrong… We’ll still make a heck of a lot of money, safely.

If you’re looking for a safe place to put money outside the dollar that still has significant upside, this bond is it.

In the last month, Iceland’s currency has been beaten up. Danske Bank, a Scandinavian bank, warned of a financial crisis in the country. After investigating, I’m not worried. Iceland’s fundamentals are sound. [Comment: How many times have you heard that last phrase - the fundamentals are sound - in the last year?]

Once the currency settles down, I really do believe certain Icelandic bonds will be the best bond plays in the world for the next eight years.

If you’re looking for a safe place to put money outside the dollar that still has significant upside, this bond is it.
March 27, 2006

For example, I don’t know how many trips I’ve made to Iceland in the last few years checking things out. It’s at least a half dozen. And I’ve met with the local brokerage firms and feel extremely comfortable that our money is absolutely fine there [Comment: If you have not done so already, please read the Michael Lewis article. You will find this particular quote quite funny after having read that article].
October 25, 2006

Iceland has one of the highest credit ratings on the planet. It's one of the world's safest places to live and do business, according to many surveys. Transparency International just ranked Iceland the least corrupt country in the world, out of 163 countries.

You won't find a safe government bond anywhere in the world paying you interest anywhere close to this... [Comment: And you won't find it in Iceland either!]
March 14, 2007 can see why it's really easy to bet on Iceland's currency.
May 10, 2007

When it comes to investments, Iceland offers the highest interest rates of any developed country. Is Iceland a developed country? Absolutely – income per person is in the $45,000 range. Is it a safe place to put your money? As safe as anywhere on the planet... The government here has no net debt (it can pay off its debts with its income), and Iceland is traditionally ranked the world's safest, least corrupt country.

You can earn outrageous rates of interest, and you really have no default risk in my opinion.

Iceland is traditionally expensive. But I've been here a handful of times now, and it's as expensive as it's ever been. So the currency could (and probably should) weaken. [Comment: I thought part of the bet was that the currency was going to strengthen?]
June 6, 2007

This is what Iceland looks like now:

The Iceland articles in Daily Wealth ceased in 2008. In the last year and a half, Daily Wealth has not mentioned Iceland in a single issue. Did Dr. Sjuggerud sell his positions? Did he recommend to his paid subscribers in True Wealth to sell their positions? I cannot answer these questions. All I know is that Dr. Sjuggerud was gung-ho on Iceland and Icelandic bonds for several years and then uttered not one peep about either one in his Daily Wealth newsletter as these markets imploded. If you held Icelandic currency through the crisis, you were most likely completely wiped out. If you were lucky you may have gotten off with a huge loss due to the collapse of the currency.

Fast forward to a few weeks ago. Dr. Sjuggerud is still taking credit for his "safe" and "easy" investment with high yields. In an article titled The Best, Safe Investment of 2009 Pays 19% Interest:

Three months ago, I said you should "take advantage of this no-risk trade right now." I hope you took my advice then... because you'd be up about 10%, including your 4% quarterly dividend payment. If you didn't listen, you're in luck, because the opportunity is still huge...

Thanks for the advice Dr. Sjuggerud, but I think I have seen this all before.

If you want to read Daily Wealth and follow the advice of Dr. Sjuggerud, be my guest. He certainly has some valid investment advice and has not been wrong about everything. Just don't be surprised when one of his "safe" investment ideas collapses and you never hear him acknowledge it again. If he had one or two notes about Iceland over the years that would be one thing. In this case, however, he pumped the $&%^ out of Iceland for many years. Is it too much to ask for maybe one article about the total miss? I guess so. With that kind of intellectual honesty at play, you are better off avoiding such investment advice.

Beware of false prophets.


Bill Jerdee said...

Thanks for the great post. I suspect similar examples could be found for most of the other newsletter writers out there. If these guys are able to consistently generate such huge profits, then why are they so frantically hawking their publications? My guess: they need to eat, and can't do it off their own cooking!

SoYouThinkYouCanInvest said...

Thanks Bill. You are right to be skeptical about newsletter writers for the reason you mention. I am probably less skeptical about free newsletters/blogs than I am for the paid publications. If a person publishes without trying to sell something, they are more likely to be motivated to write simply because they enjoy the subject and are interested in what others have to say.

rdoring said...

Since March 2009 I have been testing about 20 paid newsletters with investment advice.
About half of them have proven to be outright liars, bragging with investment success that just did not happen during the time I was a subscriber (always between 9 and 12 months).
Unfortunately out of the first 10 newsletters that I started to subscribe to between March and June 2009 ALL except two asked their subscribers to be very cautious. The buy limits were so low that they never materialized.
Five months later when these stocks had substantially gone up the authors claimed success of 100% and more.
Only "Profit Taker" remained honest for 8 months and generated more than 50% of profit, then suddenly did not send any newsletters any more.
Only the German edition of "Oxford Club" continually advised on gold and silver mines that performed very well. (Unfortunately I did not dare to invest in mines for the first 4 months of my subscription.)
I cancelled seven of those first newsletters and am testing another set of 10 newsletters now.
Up to now only "Mining Speculator" and "Sound Profits" are standing out and doing very well while the German "Oxford Club" is still leading the pack.
Within these 15 months of active investing my overall performance is about +70%, never investing more than 700$US in any one stock. Not bad!
My best investments are
Fortuna Silver (+308%, Oxford Club),
Rio Alto Mining (+248%, Oxford Club),
Silver Wheaton (+216%, several),
Gold Resource Corp (+246%, Value Investor),
Akamai Technologies (+193%, Motley Fool),
AXT Inc (+386%, Profit Taker),
Keryx (+326%, Profit Taker),
and 8 stocks over +100% (Oxford Club)
and 4 more over +100% (divers);
I still own all these stocks.
My best investment ever was Brett Resources (+555%, Oxford Club) which I sold at +310% (chicken!!).
My worst investments are
Matech (-85%, OTC Reporter),
Crowflight Minerals (-62%, Oxford Club),
Hawthorne Gold Corp (-45%, Oxford Club),
U.S. Geothermal (-36%, Money Map),
Kong Zhong (-51%, Taipan),
Xinyuan Real Estate (-41%, Lombardi),
China Fire & Security (-48%, Lombardi),
Capstone Turbine (-50%, Lombardi),
China Agritech (-48%, Lombardi),
China BAK Battery (-46%, Lombardi),
Senesco (-42%, Michael Berry),
Yucheng Technologies (-57%, Lombardi Small Caps),
China Green (-50%,,
Yayi International (-48%,,
Subaye (-40%,,
Evergreen Energy (-72%, David Roy),
Valeant Pharmceutical (-41%, Strategic Advantage).
For the subscriptions I paid about 3000$US per year.
An email referring heavily to Dr. Steve Sjuggerud is now advertising the German Newsletter "Wahrer Wohlstand" (True Wealth) by the German Investor Verlag.
Now I know better and will not subscribe!
Thanks to this blog!

Anonymous said...

Not true - in the August 2008 True Wealth issue he clearly stated to "Sell your Icelandic bonds now."

Here is the exact text:

Investment Symbol Ref. Date Ref. Price Recent Price Total Return Status

Iceland Bonds HFF 150644 9/16/05 $166.00 $117.00 -2% Sell

Looking ahead, the dollar has been rallying... Is it the real deal? Or is it just a bear-market rally? We can't know for sure. But I don't want to hang around any longer in our Icelandic bonds to find out.

This month, I recommend you sell your Icelandic bonds. No we haven't hit a trailing stop. But as of next month, we will have held these bonds three years with no return.

In addition to trailing stops, I like to use what I call a "time stop." That way, you don't hold an asset that's done nothing for you... you don't spend forever "in purgatory." If the investment hasn't started to do what I expected within three years, I probably got it wrong – so it's time to get out.

We've only done this once before in True Wealth... with an incredible company called Cresud. We used a "time stop" and sold after three years with a small, 17% gain.

If the market didn't understand the value I saw – if the stock did nothing for three years – then I figured maybe I got it wrong. And it turns out, selling was the right thing to do. Today, two years after we sold, shares of Cresud are lower than when I originally recommended it.

I really liked Cresud... and I really liked our Icelandic bonds. It makes so much sense... Iceland is the world's safest country. And the central bank is holding short-term interest rates at an astounding 15.5%. So the currency should rise versus other currencies. But it hasn't.

We bought inflation-indexed bonds, which are currently paying 16% interest (4% interest, plus inflation is running at 12%). You'd think someone would find that attractive. But the bonds haven't made us money in the three years we've owned them.

Maybe I got this one wrong. It's time to move on... particularly with the U.S. dollar showing some strength. Sell your Icelandic bonds now.

Anonymous said...

The comment posted on Jun 30, 2011 rebutting the whole point of this article demands a response from the article's author. Author, please respond! Is that comment correct or not?