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How I Learned Diversifying Overseas Was Key To Success

09 Nov
How I Learned Diversifying Overseas Was Key To Success

How Argentina's Currency Crash Supercharged My Life

My first real overseas living experience was in Argentina in 1994.

The drilling company I was working for had already sent me on two overseas assignments by that time, in Chad and western Kazakhstan.

However, those had been short stints (six weeks apiece), and in each case I had been based in a camp where everything was provided for. I took my meals in the cafeteria, and maids cleaned for me and did my laundry. We could leave camp if we wanted, but there wasn’t much to see or do anywhere around, so I had no authentic experience of the place.

Then, in 1994, the drilling firm sent me to Argentina.

I remember that my initial reaction when arriving at the international airport in Buenos Aires for the first time was that this wasn’t the Third World. The airport was busy but organized and orderly.

The drive to the domestic airport to connect to my in-country flight to northern Salta Province, where I was being posted, took me through a metropolitan area that I later learned holds a third of the country’s population. But, again, this wasn’t Third World Africa. The people were well dressed, the men in suits, going about their business.

At first, I figured that the prosperity I was seeing was being generated from this country’s vast natural resources. This was before the internet, and I didn’t know I was going to Argentina until the day I left Kazakhstan, so I had had no time to study up on the country in advance of my arrival. I showed up and began trying to size up the situation as I experienced it.

After a couple of weeks, the local economics became clearer.

Yes, Argentina was doing well… but not so the typical Argentine on the street. They were struggling to make ends meet.

Stores didn’t indicate sales prices on items but payment terms. Want to buy a shirt? You could make eight payments of US$10. A television… that was 20 payments of US$15…

Store owners were confused when I asked what the price would be if I paid in full. I was supplying a new office and camp for the drilling company. I had a lot of shopping to do, both immediately and ongoing. Paying over time would have been a nuisance.

Plus I figured we should be able to get a nice discount by paying in full… and indeed we did.

With the discount, prices were more reasonable—not cheap but OK.

Then someone told me about shopping in Bolivia. The border was only an hour from the town in Salta where my operation was based, and prices in Bolivia were a fraction of prices in Argentina for, in many cases, the exact same products.

So my assistant and I started traveling to Bolivia to do our shopping.

That got me thinking…

Why was Bolivia so much cheaper than Argentina?

Locals would tell me stories about when the reverse had been true. They could remember, they said, when Bolivians came across the border to shop in Argentina, where prices were much lower.

What had changed?

The currency.

Argentina pegged its currency to the U.S. dollar in April 1990, eventually changing their currency from the austral to the peso and using a 1-to-1 peg between the Argentine peso and the U.S. dollar.

Pesos or dollars… the average Argentine on the street didn’t know the difference and didn’t care.

However, the more sophisticated Argentines… the business people and the old-money families… they did understand the difference… and they wanted U.S. dollars.

In fact, they were accumulating them and hoarding them… in bank accounts outside the country.

They knew that the situation created by the artificial currency peg was unsustainable, so they were squirreling away everything they could and storing it outside the Argentine economy.

Prices for everything in Argentina rose and rose until, eventually, the country’s manufacturing sector vanished. It became too expensive to produce anything in the country. Cheaper to import goods.

I left the drilling company after six months in Argentina, and it wasn’t until eight years later that the economics of what I had lived through during those six months in 1994 became much clearer to me.

In December 2001, Argentina removed the peg between its peso and the U.S. dollar. The government converted all bank accounts from dollars to pesos… as well as all debt… in one fell swoop overnight.

People with savings in banks woke up one morning to find that their account values had been decimated.

Meantime, farmers with mortgages on their properties got big breaks as the peso fell in the wake of the decoupling. In 2002, the exchange rate dropped from 1-to-1, where it’d been with the peg, to as low as 4-to-1.

Banks closed and real estate prices collapsed. It was a time to be buying property. Unfortunately, I wasn’t able to get on a plane until October. Prices bottomed out in July, but I did still manage to find some amazing deals in October. Friends and I bought three downtown Buenos Aires apartments over the next six months.

What surprised me during my property scouting trips and then during the time I spent in the country over the next two years, while the local economy was trying to stabilize itself, was that most of the Argentine businessmen I met with didn’t seem concerned. They weren’t struggling financially. In fact, they were doing quite well.

Putting the pieces together, things began to make sense…

The businessmen and professionals I was speaking with were the ones who had been accumulating physical dollars and keeping as much of their wealth as possible outside the country. They could see the writing on the wall and had taken steps to prepare for the collapse they knew was inevitable.

Argentina’s economic history is filled with dramatic ups and disastrous downs. Over generations of experience, Argentines, I realized, had learned to diversify their wealth outside their own country. It was simple self-preservation.

That revelation in 2002 about the wisdom of keeping the bulk of your money outside your home country made a big impression on me. By this time, I’d already begun working to diversify my life and my investment portfolio, but watching this lesson play out in real life in Argentina compelled me to work harder and faster.

I wanted to be like the Argentine businessmen who were able to come through unfazed from what amounted to total economic collapse in their country… not like the average Argentine on the street struggling to pay his rent or buy groceries for his family because his life savings had literally disappeared overnight.

And, thanks to those Argentine businessmen, I understood in a real way the secret to making sure my family and I would be OK no matter what happened in the economy or markets of our home country… or of any other country for that matter.

For these Argentines, diversification is not a theoretical exercise. It’s the key to survival.

Take whatever you’ve got and insulate it… in an overseas bank account… in overseas property…

Keep what you’ve got tangible and accessible… but keep it at a distance.

Lief Simon