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VALUEVEST MANAGEMENT'S
MARK BAKAR AND JOHN BURBANK
(continued from preceding
page)
So we took another look. And when we did, we concluded for several reasons that the Korean currency - the won - was very likely to go into a free fall.
OlD: Can you give us your rationale in a nutshell?
Bakar: Sure. Thailand had started to crumble and devalued its currency. Then, that same phenomenon had begun to spread to Indonesia and other countries in Asia.
And if your economy's export driven, as Korea's is, and your neighbors devalue their currencies, then in order to stay competitive, you have to devalue yours, too.
OlD: To offset their "beggar thy neighbor" policy.
Bakar: Exactly. Meanwhile, the Korean currency was one of the few whose value was set by the government rather than being allowed to float. And we concluded that Korea was keeping its currency artificially high - which we confirmed when they finally disclosed their reserves and they turned out to be negligible because they'd used the rest to prop up their currency. So that was our rationale. And we disliked the currency's prospects so much that we decided to bite the bullet and take our lumps by cashing out of our position at KW20,000 per share.
OlD: Despite thinking it the "mother of all bargains".
Bakar: Exactly. That's the first and only time that I can recall that we've ever done anything like that. In fact, we usually view declines as opportunities to buy more. But, in hindsight, at least, we were very fortunate because if we hadn't sold, we'd be down another 65% or so today in U.S. dollar terms - most of it currency-based.
At that time, the won was selling at KW900 to the $1. And it's declined to about KW1,500. So we'd have been down about 40% based on the currency alone and down over 80% from our original cost in U.S. dollars.
And that reminds us of something we always try to keep in mind - that whenever you invest outside the U.S. you're making two bets, not one: 1) the bet on the stock, and (2) the bet on the currency. And if you get one of the two wrong, you'll lose money. But if you get both wrong, you can be down 80% in the blink of an eye.
OlD: No big deal. We can do that domestically.
Bakar: And that's exactly what's happened in Korea.
Since June 19th, the average Korean stock is down more than 79% in U.S. dollar terms.
Incidentally, earlier this year, Jean-Marie Eveillard of SoGen told you about Cheil Foods and its sizeable assets. This one can get you to those same assets even cheaper.
OlD: Although I imagine that Cheil Foods can get you to those assets cheaper than it did then, too.
Page 5 of 14
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