What Is Adventure Capitalism?

Who is this Adventure Capitalist?
Hi, I’m Joe and I am an adventure capitalist. I used to work for Wall Street, now I work for the people of Africa. I’m also one of those guys that try my best (and very much fall short) to follow the example and teachings of Jesus. I’m no preacher, I’m no missionary, and I’m not much of an evangelist, I’m just a guy trying to do what I can as much as I can as fast as I can.

Let’s get one thing out in the open about me: there is a HUGE difference between working for Wall Street and working on Wall Street. I drive a seven year old Jeep that I also use for snow-plowing in the winter. I’m not independently wealthy (comparatively) and I certainly don’t have a CFA, CPA, MBA, or any other kind of certification. I quit my job as a technology stock analyst in August of 2007 and have been working on a single objective ever since: to connect conscientious investors in the US with life-transforming and profitable business opportunities in Africa and other frontier economies. I’ve got an amazing wife, Shelley, and together we chase after our two little kids around our little house we built ourselves on a little hill in a little town just outside Albany, New York. Over the past few months, I’ve investigated dozens of business opportunities in South Africa, Zambia, and Kenya—going to each place and working with entrepreneurs across a wide spectrum of creativity and caliber. More specifically on those trips in my next post, but I will say this—it is absolutely the most fun I’ve ever had in any job.

Adventure Capitalists know how to invest in the 1%.
Adventure Capitalism is not for the typical American “investor.” Adventure Capitalists (ACs) deal with opportunities your financial advisor will NEVER tell you about—in fact, your financial advisor is going to tell you to run away from Adventure Capitalism as fast as humanly possible, and with good reason. Here’s an example of Adventure Capitalism: a new fish farming business in Malawi wants to get started. They have two fish farming experts from South Africa to run it, the startup business will create 5 jobs right away, and the proceeds once investors are repaid will go to a trust fund to take care of the local village’s widows and orphans. They need $8,000 to start the farm and are offering 15% return in 12 months… their marketing hook: “we sell live fish at dead fish prices!” I’m not kidding, this is a real business, up and running and the first harvest was so promising, the business has asked if they could repay investors early.

Too small for you? Try this one: a smart AC I know moved his family to Nairobi and started a Kenya-based micro-lending business. In just a few years he and his two partners have grown it into a multi-million dollar business that has a 93% repayment rate and an annual return of 37%. The profits are used to grow the business, expanding fast into Tanzania and Uganda with additional proceeds used to invest in an impressive agri-business operation in Zambia which employs hundreds of people there. His loans are small and the interest rates are high by US standards, but he knows these loans are used for hospital bills, paying for school fees, other hardships, and he knows that the only other place these families could have turned to are the numerous loansharks in Nairobi that are highly predatory and have much uglier payment policies.

Adventure Capitalism is part of a larger investing trend called Socially Responsible Investments (SRIs), which make up just under 10% of professionally managed funds based on 2005 stats—small but growing fast, up about 400% since 1995, according to the Social Investment Forum. According to a recent Harper’s article on the subject, SRI’s break down a couple of ways; there are funds that invest only in companies that do good things; they look for positive companies. This kind of “positive screening” makes up the majority of SRIs. Then there are negative screen SRIs; funds that will invest in any company but screen out companies that are involved in “bad” things, such as tobacco or gambling. Negative screening makes up about the the other half of SRIs. And then there is that leftover 1%-- and this is where ACs play. The remaining 1% of SRI focuses on small business development, community development, microlending, inner-city business start ups, poverty-focused businesses, etc. This 1% is where Adventure Capitalists work everyday. The risks are high but the rewards are massive. Adventure Capitalists understand that great rewards come with great risks—and we’re not talking just about monetary rewards here, we’re talking about creating something that generates local wealth, that generates jobs and economies, that transforms lives! Adventure Capitalists aren’t out to just make money, rather they’re out to radically improve peoples lives. I haven’t met a 401(k) that can do that.

[Sidebar from the Harper’s article: Can you do well by doing good? Not by letting someone else make decisions for you. For example: $1,000 invested in the S+P 500 fifty years ago would have become $124,000 today. Screening out the “evil” tobacco company Philip Morris would have produced about 5% less returns. That same $1,000 invested solely in “evil” tobacco giant Philip Morris fifty years ago would have become $4.6 million today, but you didn’t want to know that.]

Are Adventure Capitalists Good-Hearted Idiots or Risk Junkies or Both?
The adage is right—there is a sucker born every minute, and it’s easy to think Adventure Capitalists are suckers soon to be parted with their money. The reality is, even in traditional venture capitalist (VC) firms in Silicon Valley, risk is mitigated but not avoided. Out of 10 “bets” that a VC firm might place in a year, they expect some outright failures, some businesses to struggle, a few to be profitable, and then one giant home run. Something like 3 failures, 3 struggles, 3 profitable, and 1 big giant home run— venture capitalists understand that it’s a numbers game and you have to play the game to win. By the way, it’s the same understanding that hall-of-fame home run hitters have; they often have some of the highest strike out ratios. Now, there’s nothing wrong with mutual funds or index funds or following your broker’s advice but let’s be clear; historically, mutual funds buy at highs and sell at lows and over the past 50+ years, the S+P Index has shown a little over 10% annual performance; in 50 years!! Let’s not call this investing. Let’s call them employer-subsidized savings accounts with the added benefit of being able to give you an ulcer.

Why is Adventure Capitalism like Old School Investing?
I’ve been studying adventure capitalism for the past few years and there isn’t a single model or methodology that works for every market or situation. However, I did find one commonality—adventure capitalists do a lot of due diligence, a lot of investigating, they do a lot of boots-on-the-ground research, and this is where Adventure Capitalism can give true investors an incredible edge because AC’s do real world research to find great opportunities. They do the research themselves: they focus on being early, and they focus on the people involved in the investment. They want to know about benefits beyond the monetary. This is old school. Today, much of modern Western investing has devolved into accepting analysts’ opinions as a market reality unto themselves. ACs know true investing is about discovering reality for yourself.

A Dangerous Axe to Follow: Most stocks today have what we call “the axe”— one analyst whose report or opinion will have massive influence over the investment community on that company/stock. Occasionally (ok, pretty rarely), I was “the axe” on a stock, and I have to tell you, it’s a pretty cool position to be in. So Western investors are usually at the mercy of “the axe.” Even if they don’t know who the axe is, other analysts and brokers do and their research is usually based/biased on what the axe is thinking. That’s called book reporting, people, not independent research. Let me give an example: a software company called SAP AG, out of Germany, had some 40+ analysts writing reports on them each fiscal quarter, trying to predict what the quarterly revenue and profit number would be. One guy at JP Morgan was scary accurate predicting quarterly revenues—I mean, often within a single percentage point, quarter after quarter after quarter. Most of the other analysts weren’t trying to predict SAP’s results, they were trying to predict JP Morgan’s prediction! JP Morgan was the axe on that stock and if that analyst was getting more cautious, it didn’t matter if the company made its numbers or beat expectations—the investment community trusted JP Morgan’s predictions and the stock price would decline. Great news if you have access to JP Morgan’s research every morning. Bad news if you don’t. And don’t think you can sign up with JP Morgan and get the report. You can’t. Another axe on another major software company was a one-man outfit I knew working out of his garage in San Mateo. He was scary accurate and the typical investor would have never heard of him but he alone determined the direction of that stock each quarter.

Axe Free Zones: AC’s follow a different path (an off the beaten path path)—they go where there aren’t analysts, where the playing field is level and the one that does the most work and is most creative and listens the most and is interesting in making a difference will be in a great position. There isn’t an axe on Malawi fish farming, trust me. It takes a lot of research, a lot due diligence, and AC’s have to be able get over there, look at the project, get muddy, and get the job done—and that’s why AC’s are old school investors. They would prefer to invest where it can make a difference and in the process, transform lives. This is Frontier stuff. This is change the world stuff!

Prediction and Humor Stuff
Every few posts I’ll try to prognosticate something useful for the investing world, and/or support previous prognostications. I’ll make one promise: I’ll be wrong in some of these and right in some of these. I know, pretty safe promise to make, huh? One warning: I tend to be early in my predictions, usually by six to eight months. My last two big calls were earlier this year—one was that AKAM and content distribution companies were about to run into a buzzsaw of declining prices and steeply rising expenses as peer-to-peer networks were changing the fundamental business model. The other prediction was that gold was going to make run (it recently hit a 28 year high). Of course, I also thought the fed wasn’t going to cut rates last month, so that was a recent miss.

So what’s my prognostication for this post? Gold has more room to grow. I think investors will soon turn towards liquid vehicles as the volatility of traditional markets increases. I’m not a zealot believer in a massive stock correction coming (although Greenspan put the recession bet at 50-50, up from a 30% chance a few months ago). However, I think the volatility will drive institutions towards liquidity vehicles like gold—and the trigger I’m watching for will be additional collapses in the hedge fund industry. I don’t like how much cash has been pumped into the system lately by the central banks (CBs) to bail out the subprime mess— a mess largely due to the explosion in hedge funds. Given the central banks’ focus on curbing inflation, I’m betting the CBs are going to bring that cash back into reserves over time. They’ll attempt do this through market forces, and one of the forces they’re going to leverage will be reducing the influence of the unregulated and in my opinion reckless hedge fund industry—probably by pressuring large institutional firms to put “controls” in place in working with the hedgies. There will soon be a lot of frustrated dentists and plastic surgeons out there that dumped money into these wealthy-only investment clubs. The resulting volatility and contraction of cash will drive funds/people towards liquidity and that means gold and other liquidity vehicles. That will likely drive the price up even more—levels over $800/oz aren’t out of the question, and I think there’s more room after that but I'd pause after $800 and reevaluate.

Humor: Man and God are debating (as Man is wont to do), and Man asked God, “Lord, what is a million years to you?” The Lord answers, “A million years is but a second to me.” Man asks, “Lord, what is a million dollars to you?” The Lord answers, “A million dollars is but a penny to me.” Man smiles guilefully and says, “Very well Lord, may I have a penny?” The Lord says, “Sure, just a second.”

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