Yes, Colombia!

Colombo Stock Exchange Index

One of the reasons I spend a lot of time in New Zealand, whilst having grown up in South Africa, apart from the breathtaking beauty and unbelievable lifestyle, is that South Africa completely blows New Zealand away when it comes to crime (pun intended).

Crime clogs the economic pipelines of South Africa like the fat in Jonah Hill’s arteries, and yet commerce still takes place there. Humans are incredibly adaptive. That said, the leverage that comes with a reduction in crime is truly astounding.

Crime at its worst is called war, and when wars cease the concurrent economic growth is typically very attractive. We’ve visited countries coming out of long-standing wars where the rate of growth has subsequently surged.

Last year we hosted a Seraph event in Sri Lanka, a country that fairly recently came out of a brutal 25-year-long civil war. We put together a comprehensive report on the country which you can read here.

Colombo Stock Exchange Index

Sri Lanka is not the only example, though… Mongolia, a country I spoke about recently, and that we’ve written about extensively for several years, experienced rapid growth on the back of some major commodity finds, which has been reflected in the publicly listed stocks on the MSE.

Mongolia Stock Exchange Index

Colombia is another country on our radar. It has an awesome reputation! Unfortunately, it’s generally a reputation for murder, kidnapping, and general mayhem.

Pablo Escobar, now deceased, whose arteries incidentally likely resembled that of Jonah’s, managed to turn Medellin into a battlefield that no sane person would have willingly spent time in.

We like opportunities where the zeitgeist doesn’t reflect the underlying fundamentals. This is typically where value is to be found!

Colombia Stock Exchange Chart

I’ve been asked, “how safe is Colombia?”

Well, let’s look at some of the facts:

As I said earlier, I grew up in South Africa, a country most don’t think twice about visiting either for business purposes or vacations. I’m 19 times more likely to be assaulted in South Africa than in Colombia. In fact, if you live in Washington DC or Chicago you’re currently enjoying a higher murder rate than that the average Colombian!

Now I’m not particularly interested in living in either South Africa or Washington DC… or Chicago for that matter, too damn cold. What I’m more interested in, though, is not a place to live, but rather the trend in motion, and where to place my investment capital for superior returns.

It is for this reason that we are basing a trusted team member of our organisation in Medellin for several months. Flying in to any country for a week or two will typically just land you in trouble. You’ll likely know enough to be a danger to yourself, having had insufficient time to sort the wheat from the chaff and get a decent lay of the land.

By placing a colleague in the thick of it we’re more likely to get the real scoop over time. We’re excited to see what he finds, though we suspect real estate is likely to feature fairly highly on the list.

This “strategic” placement of personnel into Medellin will also get us a leg up whilst planning our next Seraph Meet Up, which we will hold in Medellin in mid-August (with a side trip to Havana, Cuba… but that’s another post!)

Below are 3 facts that you may not have known regarding Colombia:

  1. Colombia is estimated to be the second largest economy in South America, right behind Brazil;
  2. Colombia has a vibrant banking system, which surpasses many of its regional peers, and is is fast becoming the predominant banking jurisdiction in South America;
  3. Colombia has struck free trade agreements with United States, South Korea, Canada, Switzerland, Norway, Iceland, Lichtenstein, the EU, Mexico, Chile, Guatemala, Honduras and El Salvador.

With our colleague on the ground we’re certainly going to be writing a whole lot more about this fascinating place, so stay tuned!

- Chris

“I’m a decent man who exports flowers.” – Pablo Escobar

This is NOT Fair!

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Looking back on my own childhood I reckon raising kids must have been a piece of cake. Parents let their kids wander off to the nearest state school where justice was swift and harsh. Caning was all the rage and I certainly got my fair share. It was all pretty fair. You screw up, you get caned. Easy enough to understand.

Parents seeking a “better education” for their spawn looked outside of state schools. In private schools they found this wonderful thing called boarding schools where you don’t even have to raise your own kids. The process was simple. Look around for the boarding school furthest from home, ship Johnny off with some simple advice, “try not to get sodomized too much and see you in the holidays.”

School was for the most part pretty fair, unless you were being sodomized.

The concept of fairness is ingrained in human nature. I still recall my sister lining up glasses on the table with juice in them. Fizzy juice was a luxury in our house growing up, used only on special occasions and meted out with military precision. No way were you going to get less than your sibling. The juice in each cup had to be EXACT!

IMG_3209
One slight inch higher on one cup meant a re-balancing and re-pouring was required. This could easily take 20 minutes! I remember measuring with a ruler.

Ah, fairness…

This doesn’t go away as an adult. In fact, it gets stronger. Now I get mad when I see unfair situations and one example can be found in financing start-ups.

Stacking notes

A purely hypothetical entrepreneur comes to you with a deal. It is a standard convertible note which, for the purposes of this example, is a $500,000 convertible note with a 20% discount and a $5M cap. You sign up for the deal but then the company realises that they have way more interest from investors than they had thought and they further realise that they need more money than originally thought. “No problem,” they say, “we’ll just put more money on this cap and raise it to a $8M cap”. Six months later they raise another tranche of capital on the same note but now at a $10M cap.

WHOAH!

Just wait one second…

Investors paying attention will realise that they’ve just been hugely diluted. What investors now own is a blend of those raises as they’re all attached to that one note. When the note converts everyone who thought they were buying at a $5M cap suddenly realise that their percentage ownership of the company is far less than originally calculated. The hell with that. That’s not fair!

Anti-dilution

Investors should ensure that this doesn’t take place. One way of doing so is to have the company sign a side note ensuring anti-dilution and pro rata rights in subsequent rounds of financing.

If you’ve risked your capital in an early stage venture then you certainly should be awarded this. I personally want the ability to follow on into the company until I no longer wish to do so. I’d like to keep my percentage ownership for as long as I can do so. Pro rata rights are an option, not a futures contract. You’re not forced to follow on but you have the right to should you so choose. I want that ability.

I was recently asked what to do in a situation such as the stacked note situation mentioned above. If you’ve invested and you see this taking place and you don’t have a side note in place then ask for your money back. If the entrepreneur is prepared to do this to his early investors then you don’t want to be doing business with him or her. Fools don’t deserve your investment!

You can’t keep sipping juice out of the glass and saying it’s the same thing. That isn’t fair!

- Chris

“I looked up fairness in the dictionary and it was not there.” – William Giraldi

Mongolia – Is This Guy for Real?

Mongolia has a kind of raw seething grittiness to it. It is like a brand spanking new 8 liter V-10 engine with the chassis in place but the rest of the machine is a mishmash of bolted on parts, the seats come from an abandoned Lada, the interior is decorated with sun damaged vinyl from […]

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Faith in Chaos

I’ve been absent for a few weeks and for that I make no apology. The recently concluded New Zealand meet up for members of Seraph over the last few weeks left me with little time for luxuries such as sitting down to jot out some thoughts to you. Hopefully, when I do get something out […]

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Is This How It All Begins to Unravel?

My daughter found a sick baby bird in our garage a few weeks ago. We took it in and began nursing it back to life. My daughter, a gentle little soul who believes that our home should be turned into an animal shelter for every imaginable creature whether it needs help or not, was interested […]

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Is US Dollar Carry Trade a Menopause in the Currency Markets?

I had taken my then life savings earned from a job pushing shopping trolleys at the supermarket, and sent them overseas with a friend. I was 16 years of age and my life aspiration was to travel the world. I’d figured out that to do so I’d be needing (strong) foreign currency. My friend banked […]

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