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SCMP Reporter

Marc Faber

1970:Graduated with a doctorate in economics  from the University of Zurich.

1970:Worked for investment bank White Weld  in New York and Zurich.

1973:Moved to Hong Kong.

1978:Appointed managing director of Drexel  Burnham Lambert in Hong Kong.

1990:Started SAR-based Marc Faber Ltd with  role as adviser, fund manager and broker  dealer and publisher of Gloom Boom and  Doom Report.

IN A LONG AND EVENTFUL investing career Marc Faber has made some big hits and big misses. One he remembers was an American woman friend offering to sell him a seven-room apartment in Madison Avenue, New York.

Mr Faber, then a young recruit at United States investment bank White Weld, decided the US$50,000 asking price was a bit too much for his limited means. He has been kicking himself ever since as today the apartment would fetch up to US$10 million.

'Sometimes you miss big opportunities,' he said. Curiously, Mr Faber remembers thinking the woman who was selling up would not have much chance of success in a new career as a novelist. As the years passed he learned a second lesson - not to underestimate people. The woman was Danielle Steele.

Mr Faber, a former member of the Swiss national B skiing team and still a keen snowboarder, has done the slalom through good and bad times in 30 years as an investor. He has made big money in real estate in New Zealand and Thailand. He has lost money in opportunities that he scouted out across the globe and assessed with his keen eye for economic history.

He has been a consistent fan of gold as a hedge against a global economic disaster even though the metal has been in a bear market for two decades. He remains a regular buyer and has 7 per cent of his assets in gold but his position is under water by at least 6.66 per cent.

In hindsight he would have been as well off holding all his money in quality bonds and letting the compounding effect take hold, he said. By re-investing the bonds' annual yield to buy new bonds at the latest rates, the strategy would have worked well. In the 1970s and early '80s bond yields were rising and averaged 10 per cent, Mr Faber said. At annual returns of 6 per cent, an investment will double over 10 years thanks to compounding.

For investors wanting the safety of bonds today, quality corporate bonds looked a better bet than treasuries, said Mr Faber.

In the region, he chose issues by Singaporean banks DBS and OCBC in US dollars which yield slightly above 7 per cent.

'This is almost like a government guarantee,' said Mr Faber. 'I think it is okay for the average investor. The only time you get killed in bonds is in hyperinflation.'

Tying up money long-term in real estate to gain income from tenants was also a sound strategy for the average investor 'because they don't do anything more stupid with the money, like buying Internet stocks at 100 and they go down to one'.

Mr Faber, dubbed Dr Doom for some famous bearish calls, takes a dim view of the US Federal Reserve's efforts to reflate the ailing US economy. But he recommends investors take a neutral stance in their portfolios for the New Year as the world waits to see how the globe's biggest economy shapes up.

'In the absence of having a clear idea of how the world will look I would suggest that people be conservative,' he said.

'I would have a balanced portfolio, maybe 30 per cent cash and 30 per cent in high quality corporate bonds. Then some stocks. I would diversify say maybe 50 per cent of my money into the euro rather than the US dollar. I would put five to 10 per cent in gold.

'Then you are not going to do fantastically well because the one or other investment will not perform so well. But your risk is limited.'

As for stocks, Mr Faber - following his strong contrarian instincts - strongly favours Asia over the US and European markets because of lower valuations.

'Everybody is so bullish about the US and bearish about Asia. My view would be that you should do the opposite and invest in Asia, not in the US,' he said.

'In 1990 if you talked to portfolio managers worldwide all of them were bullish about Asia and bearish about the US because during this period, 1982 to 1990, the Asia markets had way outperformed the US.

'Now you have the opposite situation. The Asian markets have done so badly. They are down about 80 per cent in US dollar terms from the 1990 high. And the US is up five times from 1990 as well as the European markets.'

Besides cheap valuations, Asian stocks might benefit from the return of billions of dollars invested abroad by the region's rich families during the financial crisis.

Having once been seen as the world's best bet for strong growth, the region (excluding Japan and Australasia) is now considered an export play on US growth. Although it is responsible for 23 per cent of the world's gross domestic product, the region makes up only 3.39 per cent of the MSCI All Country World Free Index, only slightly more than Switzerland at 2.93 per cent.

The low weight in the index has meant tiny Asian holdings in most global fund managers' portfolios as they only marginally deviate from the benchmark.

'You have to really question how these fund managers can index because when you think of it logically how can the whole of Asia really be worth less than say General Electric or Microsoft in terms of market capitalisation,' said Mr Faber. 'It can only be worth much less because the markets are terribly out of favour and the others are overvalued.'

After being bullish and wrong for this year, the strategists at big investment banks are bullish once again in their outlooks for the US next year. It did not stack up, said Mr Faber.

Last year total earnings per share for companies in the Standard & Poor's 500 Index rose sharply to US$56 'because of a lot of accounting gimmicks and share buybacks'.

With the US in recession and suffering from over-investment, S&P company earnings could be as little as US$25 this year.

Take a look at the numbers for Goldman Sachs' strategist, said Mr Faber. 'Abby Cohen is carrying US$52 for the S&P next year,' he said. 'If the US$52 happens [then] by next year you have a strong economy. Then the long bond will yield over 7 per cent.

'Somewhere these strategists and their views don't add up very well. If the long bond yield goes up to 7 per cent, the mortgage rates will be 7.5, 8 or 9 per cent. Then what happens to the housing industry? It gets killed.'

With somewhat less aggressive expectations for earnings growth by S&P 500 companies, they look overpriced.

'Let's say they will recover to US$40. This would be very optimistic. This is an increase in profitability of close to 50 per cent,' said Mr Faber. 'The S&P, say for argument's sake, [is] at 1,200. If the earnings are US$40 then we are selling at 30 times earnings. Not cheap.'

After a career in investment banking, Mr Faber has run his own Hong Kong-based firm offering broking, fund management and advisory services.

But since last year he has scaled down Marc Faber Limited to concentrate more on his work advising top fund managers and on his newsletter 'The Gloom Boom and Doom Report'.

Though he still spends half his time travelling the world, he is now based in Chiang Mai, Thailand.

Looking back he particularly regrets being bearish on overvalued US stocks far too early. 'This is a big shadow in my career to have missed to a large extent the bull market in [US] equities in the '90s,' he said.

However, he did spot bull markets in Russia and Latin America. 'We had reports about Chile, Argentina, Peru and so forth. They went up 20 to 30 times between 1989 and 1994.

'When the Asia crisis happened people remembered my warnings about Asia and I was also fortunate to understand that the opening of China would be negative for Hong Kong.'

That has helped the Swiss who has spent most of his SAR career counting Morgan Stanley's star strategist Barton Biggs and Tiger hedge fund boss Julian Robertson among his close associates and to be 'reasonably friendly' with George Soros.

'Over time I'm the first one to admit that I have made as many bad calls and mistakes as good ones,' said Mr Faber. 'But somehow I was lucky in that people remembered more of the good ones than the bad ones.'



Swiss whiz Marc Faber takes a peek into his looking glass to see whether the new year will be filled with cheer or gloom for players