Rise and Fall?

Can investors prosper from hope?

Yesterday the Journal ran a story about Eike Batista, a Brazilian whose meteoric rise and fall seems to mirror the financial fortune of his home country. Starting in 2006, he took five startups public in five years, creating a commodities empire from scratch. His financial backers included the bond firm PIMCO, the mining firm Anglo-American, and the Ontario Teachers Pension Fund. At one point Mr. Batista’s wealth was calculated as greater than $30 billion, and he was considered one of the 10 richest people on the planet.

Then it all came crashing down. His flagship oil exploration firm OGX sank one dry hole too many, and his lenders stepped back. Because of cross holdings and additional leverage, the whole edifice came crashing down. Now investors who have lost anywhere from 40 to 96 percent are trying to see what can be salvaged.

Batista’s story is a cautionary tale about the dangers of emerging markets. They’ve always had something of a boom-and-bust character. When oil-giant Petrobras announced a huge find, it seemed that Brazil was off to the races. Betting on a charismatic entrepreneur seemed a sound way to profit from the boom phase.

But salesmanship and sloppy accounting are no substitute for engineering and production. Announcing a find is not the same as delivering oil. And believing in a dream isn’t enough to make it happen.

Douglas R. Tengdin, CFA

Chief Investment Officer

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