Trip to Africa enlightens

by Stephen Butler

My fact-finding trip to Africa began to bear fruit in Zimbabwe when Richard, my elephant driver through some lion-infested bush country, shared what it was like to live in a failed state.

A week later, in South Africa, I gained an appreciation for why the country currently enjoys the world's fastest growing percentage increase in foreign investment.

And finally, I heard a story that illustrated what has to be one of the purest expressions of what we term "contrarian investing."

In the failed state of Zimbabwe, my elephant named "Janet" strolled leisurely along while Richard explained that his father was now retired from a 30-year career in management at a major gold mine. His pension, which was to be a fixed amount of money per month, was now worthless because of the uncontrollable inflation that has gripped the country.

Each week, the stores now close for a day so that prices can be relabeled on food and merchandise. For all practical purposes, the local currency is now worthless. A restaurant menu lists meals in the local currency where the entres cost, say $1 million, but the largest bill in their currency is 100. The only alternative is to use foreign currencies.

The country finds itself in this mess because its once-revered president has now been in office for 27 years and, at 83, is showing signs of weak leadership if not psychological problems. We all know what that can mean. It doesn't take long for powerful opportunists to fill the void with criminal activity like they did here back in the Nixon era.

Today, Zimbabwe's government ministers have grabbed farms using their version of eminent domain, and instead of giving the land to small farmers, they have kept the large farms and just distributed them to government officials. The World Bank and foreign governments have cut off all aid to the country with the thought that this will force a change. Meanwhile, the people suffer with unemployment rates at 80 percent

This year is predicted to be the tipping point for Zimbabwe. Meanwhile, Richard's father supports himself in retirement with a herd of about nine cows. I found myself thinking about how tough the early 1980's were on retirees in this country when inflation raged at 18 percent or more for several years.

It's reassuring to see the Fed combating inflation as we speak, even if it curbs business growth and stock market performance. It was only 70 years ago when this country, in the middle of a depression, had an economy that was out of control. I have just witnessed what inflation at 5,000 percent can look like, and the view is not pleasant.

In spite of Africa's problems, the continent as a whole has the fastest growing attraction of western capital, according to the Economist magazine.

Investment firms like Kohlberg, Kravis and Roberts and various college endowment funds are searching there for some of the best values in the emerging markets investment category.

Emerging markets overall earned 23 percent per year over the past three years. In 2006 alone, the return was 25 percent. In spite of Africa's lingering challenges in the area of racial equality, many I talked with were optimistic. Racial issues distract from what ideally should be a total focus on growing businesses and making profits. However, business doesn't operate in a vacuum. It requires an integrated, well-educated society to thrive. A rising tide raises all the ships, and Africa's economic success depends on that rising tide.

Finally, we learned that land values in Zimbabwe have more than doubled since their absolute bottom just since January of this year. Foreign buyers from the U.S., Europe and other African nations are fueling the boom. Talk about "contrarian investing."

On the face of it, I can't think of anything crazier, but some of the greatest investment success stories have started like baby warthogs - something that only their mothers could love.

For more conventional expressions of contrarian investing, take a look at Fidelity's Contrarian Fund or consider an investment in Warren Buffet's Berkshire Hathaway "B" shares.

The contrasts in Africa offer first-hand experience of several extreme economic conditions - inflation in a failed state, value in emerging markets and contrarian investing. As for my safari experience, living in tents and confined to Land Rovers effectively puts us humans in a "zoo." The animals get to roam freely, and I wonder what they think of us.

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