Amazingly, I found that this anomaly wasn’t restricted to MNPZ. Nearly every company in Russia had preferred shares and most of them traded at a huge discount to the ordinary shares. These things were a potential gold mine.
I intended to leave Sandy alone until after the election, but this situation was too compelling. These preferred shares were trading at a 95 percent discount to the ordinary shares, and the ordinary shares were trading between a 90 and 99 percent discount to the shares of comparable Western companies. Whatever Sandy’s concerns about Zyuganov, valuation anomalies like these were too rare to ignore. You’re lucky if you find something at a 30 percent discount, maybe even a 50 percent discount, but to find something this cheap was unheard of. I had to tell Sandy about them right away.
When I told him the numbers, he immediately perked up and started grilling me for more information. We finished the conversation and I could practically hear the wheels turning in his head about how he was going to justify this investment to Safra.
Two days later, the Levada polling agency[10] published Yeltsin’s latest approval ratings. They had jumped from 14 to 22 percent. About three minutes after this announcement hit the wires, my phone rang. «Bill», Sandy said excitedly, «have you seen the polls?»
«Yes. Amazing, isn’t it?»
«Listen, Bill, I think we should start buying some of those preferred shares. I’m wiring two million for tomorrow».
I told Clive and Svetlana the good news and we high-fived each other. I even walked over to Alexei, who hadn’t learned about high-fiving in his previous job in the Moscow Traffic Police. I awkwardly grabbed his arm, raised it in the air, and slapped his hand. He gave me a polite, toothy smile. Clearly he enjoyed being a part of this strange American ritual.
We were now in business, and by the end of the next day the fund had invested all of this new money in Russian preferred shares.
Over the next three weeks Yeltsin’s approval ratings jumped from 22 to 28 percent. For the first time since his campaign began, people started to factor in a real possibility that Yeltsin would win. New buyers entered the stock market, pushing my fund up 15 percent.
Unlike other decisions in life, with investing you know if you’re right or wrong, based on the market price. There is no ambiguity. That Sandy could see a $300,000 profit on his first $2 million gave him more confidence than any words or analysis. He called me that Saturday afternoon on my mobile phone to let me know he was wiring an additional $3 million into the fund for Monday morning.
With the probability of an apocalypse now fading, and the market starting to rise in reaction, other investors didn’t want to miss out, and more and more started to enter this small, illiquid stock market at once. Panic buying ensued. The week after Safra put in his additional $3 million, the fund was up a further 21 percent. Since we’d started investing a few weeks before, the fund was up a total of 40 percent, which in the world of hedge fund investing would have been an amazing year — only we had made it in three weeks!
The following Monday, Sandy wired an additional $5 million without even telling me.
In the midst of this excitement, I had a wedding to attend — my own. Sabrina and I were going to be married on May 26, 1996, only three weeks before the Russian presidential election. I rushed back to London on the Wednesday before the ceremony to prepare.
We’d invited 250 guests from all over the world, and when Sabrina and I stood on the bimah of the Marble Arch Synagogue and she vowed to love and cherish me as long as we might live, I was moved. The words felt as real as any I’d ever heard. As I made my vows, I stared through tears at my beautiful, vulnerable wife. After the ceremony we had a raucous party with an Israeli band, which started off by playing «Hava Nagila». We were lifted into the air on chairs and then danced all night. It was an amazing wedding with friends and family, and it felt as if all the planets had lined up for both of us.
I’d promised Sabrina a honeymoon, but I could do it only after the election, and I flew back to Moscow the following Monday exhausted but happy. When I got to the office, Clive told me that we had another $5 million in the account from Safra. Over the next two weeks, two more tranches of $5 million arrived. By the second week of June, only a week before the presidential election, Safra had invested the entire $25 million he had committed, and the Hermitage Fund was up 65 percent from inception.
The first round of the Russian presidential elections took place on June 16. Clive, Svetlana, Alexei, and I got to the office at 6:00 a.m. to track the results from Russia’s Far East, which was seven hours ahead of Moscow. The results were good for Yeltsin. In Sakhalin, he had 29.9 percent versus 26.9 percent for Zyuganov. The results moved west, and in Krasnoyarsk, Yeltsin got 34 percent. Finally, results came in from Moscow, where he won 61.7 percent of the votes. In all, Yeltsin had beaten Zyuganov 35.3 percent to 32 percent, the rest of the votes going to other marginal candidates. He had won, but since the Russian constitution requires a candidate to get 51 percent of the vote, there would be a second round on July 3.
Over the next two weeks, anyone with a vested interest in getting Yeltsin reelected went all in. I was a bit worried that the race would be too close to call, but I needn’t have been. By midday on July 3 it was clear that Yeltsin would retain the presidency. When the final votes were tallied, he had beaten Zyuganov by nearly 14 percentage points.
The markets went wild, and the fund was up 125 percent since we launched. That was it. I was well and truly in business.
11. Sidanco
Late on a Friday afternoon in August 1996, I learned of another intriguing investment idea. It was a sizzling-hot day. The only sounds in our office were the gentle whir of the computers, the hum of our air conditioner, and the intermittent buzzing of a large horsefly. The city outside lay unnaturally still. On summer Fridays, all of Moscow’s citizens poured into their countryside cabins, called dachas. That afternoon, it felt as if we were the only people left in the city.
As my small team was about to leave for the weekend, the phone rang. «Hermitage, zdravstvuite», Svetlana said, sounding bored. She swiveled in her chair and cupped her hand over the receiver. «Bill, it’s Yuri».
«Yuri? Put him through».
I picked up the phone and he whispered, «Hey, Bill. I’ve got a four percent block of Sidanco. You interested?»
«What’s that?»
«It’s a big oil company in western Siberia that no one’s heard of».
«Who controls it?»
«A group headed by Potanin». Everyone knew who Vladimir Potanin was: a tough-looking Russian billionaire oligarch with a pockmarked face, who was also a deputy prime minister of Russia.
«How much do they want for the four percent?»
«Thirty-six point six million». Although my fund was growing, it couldn’t buy a block that big no matter how attractive it was. However, if the stock was interesting, the fund could buy part of the block. I remained silent as I thought about it.
«If it’s not interesting, don’t worry», Yuri said.
«No, no, Yuri, it may very well be. I’d like to do some homework».
«No problem».
«How long do I have?»
«I don’t know. I can probably keep it quiet for a week before the seller starts pressing, but it’s not as if there are many people out there looking for second-tier stocks».
I hung up with Yuri and my little team and I left the office for the weekend. But as I went home that day I had that tingling, greedy tension in my gut, similar to when I saw my $2,000 Polish investment multiply by nearly ten times, or when I’d first unearthed the Russian voucher scheme. I knew Yuri wouldn’t shop the deal to someone behind my back, but I also knew that a truly good opportunity wouldn’t last very long.