Croatia, in my opinion, is one of the most beautiful countries in the world, and the drive down here has been spectacular. From Budapest, the drive to Croatia took me south along highway M7, which arcs gently across Hungary’s rolling hills and hot springs.
But what brings me here is not the beauty of the drive, nor the sun-seeking Europeans on vacation… I came to town to visit a friend of mine who has one of the finest investment minds I know.
Gianni Kovacevic is Croatian by descent and spends a lot of time down here. He’s an international man, a great guy, and an incredibly shrewd investor, so when he calls me with a recommendation, I listen. So do a loyal following of Swiss bankers and fund managers that have made money with him in the past.
By nature, I don’t really like stocks. The larger an organization grows, the more bureaucratic, top-heavy, and inefficient it normally becomes. Corporate executives can be like politicians and sometimes struggle to understand the realities that exist beyond their own cubicles.
One wrong move… and poof, shareholder value eroded. Too many wrong moves and the company goes under. Frankly I trust myself and the people around me to run deals more than most professional managers who have cut their teeth on TPS report cover sheets.
That’s why as a general rule, I only buy companies that are trading for less than tangible asset value, or are in an industry with such enormous growth potential that they could be run by a team of well-trained monkeys. This is how I cover my downside risk.
When Gianni recommends a company to me, it’s because he has identified these critical characteristics in addition to a winning management team. I’m always confident that my investment will go forth and multiply.
And it has.
One of Gianni’s most recent recommendations to me was Quadra Mining, a cash-rich copper and gold miner that generated a quick 400% return on my capital in just a couple of months. I have asked him to write an occasional short essay for this audience with his latest ideas, and he has agreed to do so.
Tonight, though, over a fresh seafood dinner in Zagreb, our discussion focused on Croatia. We were joined by a local Croat who is an ex-Special Forces commando turned successful entrepreneur.
I have been to Croatia several times, but with an accomplished local right in front of me, I took the opportunity to probed with a series of questions about his country.
The most interesting thing that I learned is how extensive the gray economy is in Croatia; most locals, particularly those who operate tourist related businesses on the seaside, do not pay taxes, at least not on their full incomes.
On average, a Croatian can expect to make roughly $3,000 per month, putting their per-capita wealth on par with that of the United States or developed Western European nation.
This is not, as people expect, a poor country. I would gauge the standard of living in Croatia to be much higher than in neighboring Italy, which also boasts a beautiful coastline but appears slightly dilapidated.
English prevalence is strong in Croatia, and economic freedom is high– you can start a business in a couple of hours, all online, and the capital gains tax is zero… EU citizens, particularly those from Slovenia, open trading accounts in Croatia to avoid paying taxes.
Since the beginning of the downturn, the country has not suffered dramatically; the gray economy has kept the locals financially insulated while the government struggles to balance its budget amid declining tax revenue.
Earlier this month, for example, the Croatian prime minister unexpectedly resigned in the middle of his term, citing ‘new beginnings,’ and fueling speculation that the economy may be in the same trouble as other Eastern European nations.
It’s budget deficit notwithstanding, Croatia is no Latvia or Ukraine. There is great promise in the country’s economy and natural resources, and I am hoping that the market will irrationally punish the Croatian Kuna, which I would look at as a buy opportunity.
It’s almost 1am here (long dinner tonight) so I need to push this out the door. More tomorrow.
