Learn From Ikea's Big Mistake

Berkshire Hathaway's (NYSE: BRK-B  ) Warren Buffett, perhaps channeling Eleanor Roosevelt, has been quoted as saying: "You want to learn from experience, but you want to learn from other people's experience when you can."

This adage isn't as easy to act upon as it may seem.

My colleague Adam Wiederman has a great piece telling Fools about his losing position in Allied Irish Banks (NYSE: AIB  ) , and how to avoid his mistakes. You may be nursing a similar wound in your own portfolio, and thus identify with Adam's plight. Still, you don't literally feel his pain. Only personal losses cut that deep. So how likely are you to take his lesson to heart, without taking the hit yourself?

A stock's seductive story, combined with the enthusiasm of the crowd, can sometimes cloud the clearest of investing minds. Maybe it's futile, then, to tell these cautionary tales.

Well, I'm going to give it a shot anyway. This lesson's far less psychologically sticky than Adam's battle with confirmation bias. It's one you can easily apply, and should help you to avoid losing money. Sound good?

Not just a platitude, dude
You've surely heard that investing in emerging markets carries elevated risks. Of course, that's painting things with a pretty broad brush. For example, India is no China. But in general, there are serious pitfalls to contend with when you start looking at countries where governments are prone to topple, there's violence in the streets, or corruption is ingrained in the business culture.

Globetrotting Fool Bill Mann boiled it all down to this key issue back in 2006: "Investing in another country means that you need to have an understanding about what the people to whom you are entrusting your money think about people like you."

From Russia, without love
Russian businessmen have repeatedly shown that they don't think much of people like you. And by that, I don't just mean American investors.

Citing the "unpredictability of administrative processes" in Russia, Swedish retail behemoth Ikea has iced all its future Russian investments. The company's founder has spoken about being gouged on electricity prices there in supposed retaliation for an unwillingness to grease some palms. In a statement very reminiscent of that Bill Mann quote, Ikea's country director conveyed the feeling to an interviewer that "someone somewhere does not like us."

So it is that Ikea joins a very long list of Western businesses to catch that frigid feeling. Pan American Silver (Nasdaq: PAAS  ) learned this lesson back in 1999, when its Dukat project was "ambushed" (in the company's own words) by a local Russian firm. More recently, Big Oil has been the one getting roughed up by the Russian bear, from Royal Dutch Shell's getting shooed away from Sakhalin-2 to the ouster of Robert Dudley as head of BP's (NYSE: BP  ) joint venture in the country.

Despite this boorish behavior, the allure of Russia's resource wealth continues to draw in the likes of Kinross Gold (NYSE: KGC  ) and Total SA. I think they are making a mistake. Ikea certainly did, but recognized it quickly enough, and will now bring its meatballs and BEDDINGE futons to places where they will be better appreciated.

Meatballs to morals
For me, this is an experience that I don't need to suffer from firsthand. Russia is a big-time "avoid" in my book. That definitely rules out folks like Mechel OAO (NYSE: MTL  ) , and even makes me reluctant to consider something like ConocoPhillips (NYSE: COP  ) , with its 20% stake in Lukoil.

Yes, the country's stocks often look cheap, but as my colleague Ivan Martchev argued recently, they may always remain so.

Allied Irish Banks is a Global Gains recommendation. Berkshire Hathaway is both an Inside Value and a Stock Advisor selection. Total is an Income Investor pick. Rush in to any of our newsletters free for 30 days. Get it, rush in?

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of Allied Irish Banks and Berkshire Hathaway. It also has this delightful disclosure policy.


Read/Post Comments (32) | Recommend This Article (115)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 26, 2009, at 2:18 PM, biotechmgr wrote:

    Excellent piece.

  • Report this Comment On June 26, 2009, at 2:46 PM, starbucks4ever wrote:

    Unfortunately, I have to agree. PUTIN.OB can make you millions if you're lucky, but ultimately it always goes to zero.

  • Report this Comment On June 26, 2009, at 5:02 PM, DallasYellowLab wrote:

    Great article, and unfortunately I don't think the situation will change for a long long time. Mozhet byt nekogda (maybe never!).

  • Report this Comment On June 26, 2009, at 5:24 PM, greenwave3 wrote:

    Agreed. Russia is a cesspool in which only the corrupt and corruptible do business. I have never considered Russia to be a full member of BRIC since their political policies allow only the government and its agents to make money.

  • Report this Comment On June 26, 2009, at 5:26 PM, jesse2159 wrote:

    This is a very good take on the Russian mentality concerning anyone else's money. They will steal it without a second thought regardless if you are a multinational company or a single investor. And that, is the very reason Russia will remain a third world country. Don't invest there. There are no laws protecting you and no agency that will help you. If shipping to anyone there, get the money first. Wait until the check clears, really clears, and your bank actually has the money. Unless you do, the check will eventually bounce and you can kiss your product goodbye. Ditto for Nigeria

  • Report this Comment On June 26, 2009, at 5:40 PM, TomBe103 wrote:

    So right and things never change. Had a good freind who's UK company went into JV for telecon services a few years back. All their capital, time, energy, & effort "stolen" right from under them. Even AFTER the "pay-offs" ! System stayed and converted to local ownership & they got 86'd from Mother Russia. Stay away !!

  • Report this Comment On June 26, 2009, at 6:09 PM, starbucks4ever wrote:

    "Mozhet byt nekogda (maybe never!)."

    When Putin is put in jail for corruption, maybe then.

  • Report this Comment On June 26, 2009, at 7:59 PM, SwiperFox wrote:

    Not to the point of your article, but...I doubled down on AIB at under $2 and have now recouped all my losses. It's not always the stock, but the timing.

  • Report this Comment On June 26, 2009, at 8:10 PM, IslandDave wrote:

    Adding my agreement to the others commenting. After 4.5 yrs here in Russia working for a western oil company, I've seen the corruption and not-so-subtle manipulations of its govt. many times. As an investor, it's simply too tough to identify what impact the future actions of govt. will have on a particular business here (always for the worse, from investor view). A huge margin of safety would be needed to balance that risk. I don't agree, though, with the impression some may have of Russian people, in general, as ready to steal you blind. My experience here has been that many do actually have integrity and deal with you fairly. It's a shame the govt. corruption and blatantly unfair actions against foreign companies overshadow that.

  • Report this Comment On June 27, 2009, at 1:02 AM, memoandstitch wrote:

    Similar things happen in the U.S. The U.S. government seized billions of assets from GM bondholders and Chrysler bondholders and gave them to either Fiat or the union (is this socialization?). Politics happen everywhere, not just Russia.

  • Report this Comment On June 27, 2009, at 1:14 AM, roamabit wrote:

    I believe we might be seeing a hint of progress.

    As long as corruption is "winked at, in Russia or closer to home, generations will learn the techniques and institutionalize corrupt practices.

    While nobody seemed to get tagged for the Enron debacle a few years ago, Mr. madoff might be a "pioneer" in discovering just how far one can go in corrupt practices before one suffers some unpleasant consequences.

    Widespread public outrage may have reached critical mass. Perhaps integrity does have a chance of coming back.

  • Report this Comment On June 27, 2009, at 1:35 AM, billcarr wrote:

    I don't see much mention of IKEA in this report so why is it the headline, and do IKEA really make meat balls?

  • Report this Comment On June 27, 2009, at 9:11 AM, Rehydrogenated wrote:

    Im surprised you didn't mention campbell's soup (CPB) who just began selling in Russia in a joint venture with Coke.

  • Report this Comment On June 27, 2009, at 9:12 AM, AnxiousBorrower wrote:

    BTW, where are you keeping Bill Mann these days?

  • Report this Comment On June 27, 2009, at 9:53 AM, masco61 wrote:

    So, what did this article have to do with IKEA'S BIG MISTAKE?

  • Report this Comment On June 27, 2009, at 1:47 PM, KatWoman50 wrote:

    If you read the whole article rather than browsing it you would find this paragraph.

    'Citing the "unpredictability of administrative processes" in Russia, Swedish retail behemoth Ikea has iced all its future Russian investments. The company's founder has spoken about being gouged on electricity prices there in supposed retaliation for an unwillingness to grease some palms. In a statement very reminiscent of that Bill Mann quote, Ikea's country director conveyed the feeling to an interviewer that "someone somewhere does not like us."'

    The point is that Russia is corrupt and investors are better off staying out of there unless they like games of Russian Roulette.

  • Report this Comment On June 27, 2009, at 1:55 PM, Zade wrote:

    I agree with memoandstitch. I have become very concerned about the workings of our government lately and how quick they are to abrogate contracts and change the rules or throw money around without putting rules in place to see where it goes, how it is spent. Our politicians talk about salary caps for Wall Street executives and clawbacks on their bonuses but plan to keep the campaign donations and lobbying money they received from these very same companies. Can we say HYPOCRISY with a CAPITAL H! Government is putting all the blame on Wall Street, the banking system and corporate America BUT government has been in bed for decades with these same entities and is just as responsible for this mess we are in .The media doesn't hold our politicians accountable for any of this mess either. If I work for a company that farms out a contract for bids and one of the companies bidding for the contract offers me money and I take and keep it, I have committed a criminal act (taken a bribe) and could go to jail for it. This would be true even if the company did not get the contract. When Congress does this, it is called lobbying except Congress is ABOVE the law (like Russia). I thought our democracy was set up by our founding fathers so NO ONE was ABOVE THE LAW - EVEN THOSE WHO MAKE THEM.

  • Report this Comment On June 27, 2009, at 6:11 PM, wing78 wrote:

    :) you make me laughing when you say don't invest in country, which has tons(!) of oil gas coil gold ore and etc.

    Corruption? Open the Hystory of USA in 1920-30

  • Report this Comment On June 27, 2009, at 7:55 PM, exseries7 wrote:

    wing 78, all the resources a country has are worthless to investors if company owners are imprisoned on false charges so the government can nationalize their assets. Unless Putin releases his corrupt iron grip on Russia, and abandons his Stalinist agendas, Russia will remain nothing but a joke in the international investment community. Ikea was right.

    Oh, and to all the Obama haters, find another forum to air your grievances; that is completely off-topic and unrelated to this story.

  • Report this Comment On June 28, 2009, at 1:34 PM, wing78 wrote:

    exseries7, oh I see you are lover of Khodorhovsky and hater of Putin,

    I don't want to talk about politics I want to talk about economy (but IMHO Hodorkovsky is thief and he should be in jail вор должен сидеть в тюрьме and Putin imho is a good leader and I wish to every country had such leader. More realistic view on Putin I saw in article of "Times")

    talking about economy, Every country can use nationalization (Fanny and Freddy),

    how many companies ,exept thief case of Khodorkovsky, were nationalizaded in Russia???

    IKEA was absolutely not right when didn't check the local market before opening trade line there

    SHELL is right (Sahalin3 and 4)

  • Report this Comment On June 28, 2009, at 2:53 PM, gebanks wrote:

    You don't need to look to foreign countries to find massive corruption, as we all know from recent experience. I don't think you can be too trusting anywhere.

  • Report this Comment On June 28, 2009, at 9:05 PM, exseries7 wrote:

    Wing 78, you may not want to talk about politics, but foreign investment requires an assessment of geopolitical as well as economic risk, and that is the focus if this article. Every prospectus will advise the investor to consider that before investing abroad.

    You may be right that Mikhail Hodorkovsky was a thief, and it also may be true that he was selectively arrested because he was funding political parties, becoming too powerful, and consequently a political threat to Putin. At the time of Mikhail's arrest, there was widespread outrage not only around the world, but also in Russia.

    There is no connection between the U.S. injecting money into a failing U.S financial institution to prevent further economic collapse. Unlike the seizure of Yukos, nobody went to jail.

    As for Putin, you can take the man out of the KGB, but you cannot take the KGB out of the man. So now Russia's wealth is in the hands of Putin's friends: Timchenko. Yakunin, Kovalchuk, and Chemezov.

    And Mikhail? He would have been eligible for early release, but jail guards and an accomplice alleged that he broke a jail rule. So Putin wants to ensure his rival stays in jail and thus ensure Putin's own reign as Russia's new czar.

    You say, "Every country could use nationalization." I doubt that the oil companies seized by Chavez would agree since they still have not been paid for their stolen assets.

  • Report this Comment On June 29, 2009, at 2:47 AM, dgmennie wrote:

    Retirement money should never be invrested in assets outside the US and denominated in foreign currencies. Recent history provides ample lessons. For example, in the 1970s, US investors were told by the (then) vogue investment newsletters to buy into Mexico for the great interest rates. Soon afterward Mexico DEVALUED the peso. All this from a friendly government right on our doorstep.

    Right now the US investor is being sold a boatload of beans from those gurus who want you to buy into "emerging nation" economies (think China, India, Russia, and others). These are places you neither (1) understand or (2) have any influence over. Tyrants, despots, and political instability are to be avoided like the plague.

    Despite the US economic downturn of the past 1-2 years, far worse awaits those who gamble their life savings overseas. More clocks are about to be cleaned. Don't let yours be one of them.

    Even if you are already 80 years old, you WILL live to regret such investments.

  • Report this Comment On June 29, 2009, at 8:30 AM, afamiii wrote:

    Afamiii writing from Nigeria.

    Much hysteria about investing overseas. Ask me for a safe investment and I will give you Bernie Madoff's jail cell number.

    Anyone who has 100% of his or her assets in one country (or even on one continent) is taking on more risk than they should particularly if they are looking at a 50 year investing lifetime.

    The right advice is to diversify, but to understand the geopolitical risk of the countries who assets you are investing in (including your own) and where risk is high, demand an outsized return to compensate.

    For those investing in the USA, it would be madness to believe that over the next five years, the combination of financial shock, rising government debt, high oil prices, GDP weakness and balance of payments deficit will not result in a decline in dollar purchasing power and a resulting reduction in the real value of most dollar denominated assets. www.smartinvestorafrica.com

  • Report this Comment On June 29, 2009, at 8:41 AM, lemoneater wrote:

    Interesting article, IKEA's leaving is Russia's loss. The question is how does a country, or a state, or a county, or a town get rid of a tradition of corruption and move forward? Corruption wins out in the short term by constantly changing the rules, but it is a losing strategy because nobody wants to play with Russia in spite of their amazing natural resources and skilled workforce. Unfortunately changing leadership doesn't seem to improve the situation much for them. There appears to be a disconnect between the lives of ordinary people and elected officials there and starting to be here also. Statesmen are scarce everywhere.

    I just went to IKEA in Charlotte, NC for the first time ever. Very comfortable, stylish, furniture at great prices--we came home with two chairs and threw out our old love seat that hardly anyone ever sat on. The foot traffic in IKEA was very good. Yes, you can eat meatballs there and the ligonberry juice is delicious.

  • Report this Comment On June 29, 2009, at 9:14 AM, Zade wrote:

    Afamiii - good post.

  • Report this Comment On June 29, 2009, at 9:57 AM, XMFSmashy wrote:

    Thanks so much for the thoughtful comments, everyone.

    TS

  • Report this Comment On June 29, 2009, at 12:26 PM, dgmennie wrote:

    To afamiii: Nigeria is a hotbed of Internet corruption and con games conducted on a worldwide scale. While Bernie Madoff is a high-profile US swindler, he has not escaped justice. Who among the guilty in Nigeria is being put away for good? Looks to me like the government and police over there are probably getting a nice piece of whatever the scam artists rake in. Civilization, let alone the most rudimentary of business ethics, has yet to emerge in Nigeria.

  • Report this Comment On June 30, 2009, at 7:16 PM, wing78 wrote:

    exseries7

    ...foreign investment requires an assessment of geopolitical...

    :) really? how many americanes companies were worked with IRAQ before the war? and why some israiles companies are working with palestinians?

    because money is talking

    ...there was widespread outrage not only around the world,

    widespread outrage of thief? thief should be in jail and some other olligarhes should be there but many of them agreed to give back/to support weak places/institutions of Russia

    ...There is no connection between the U.S. injecting money into a failing

    my friend, it's cold nationalization :) and the only differnce between them that in first case it was because nazionalisation because of disorder and in second was bancruptcy in consequence of thief

    ...you cannot take the KGB out of the man

    Why to take kgb out of the man? By my opinion kgb is one of the most professional organization in the world and people are working there not the worst part of russian people

    thx for conversation,unfortunately i have no free time to continue this, it looks you are a good man but I think you look on the world in black and white colors, the world has many many colors.

    as to article, I think it's ridiculous article! Ok I agree to open business or take part of it in such country like Rissia it's not easy.

    But to write stay away of stocks of country with tons(!) of oil gas coil gold ore and etc.

    it's not competently or just manipulation.

  • Report this Comment On July 04, 2009, at 1:08 AM, Mandragoran75 wrote:

    "Oh, and to all the Obama haters, find another forum to air your grievances; that is completely off-topic and unrelated to this story."

    Investing is not about love or hatred, just trying to guess the probability of making money and surviving. From what I read in the newspapers, it does appear that Russia is full of corruption and not anywhere near safe for business. I don't live there, so I can't even vote for anyone in their government - the only way to be safe is to stay out. I do live in the USA, and I most assuredly did not vote for any of the Democrats who are running DC today. This is my home, and if we let it turn into a cesspool of corruption, where can we run to, that will be safer? We have laws for bankruptcy, covering secured and unsecured creditors, and it appears that our President has ignored the law as thoroughly as any dictator - the auto company arrangements are designed to empower the labor unions that campaigned for Democrats, even though those unions have made the difference between profit and loss and created the bankruptcy of Chrysler and GM. Anyone who hopes to have one country where the rule of law provides a little protection (predictability) for business should be paying attention to the cancer growing in our government and trying to turn it around - especially those of us who live here and share some responsibility for what our government does.

  • Report this Comment On July 06, 2009, at 4:36 PM, drborst wrote:

    I find it particularly interesting that the Russian and possibly Nigerian commentators are quick point out that the common mis-deads we (mostly Americans) attribute to them are (corruption and nationalization) also happen right here in the US. I think this misses the point.

    Investing in Russia is difficult partly because they resent the fact that some rich foreigner gets richer off the labor of Russian people. Its almost like a zero sum game where the investor is suposed to make the investee rich by giving them money. When in fact what is supposed to happen with an investment is wealth is created allowing both parties to be richer as a result.

    The second missing point about Russian investment is that while the Russians have significant natural resources. it is nothing compared to the creativity of its people. I read a quote from an Intel software manager in Russian Life reciently that sums it up. (I'll paraphrase) 'When have have a problem that requires manpower, we send it to India, when we have a hard problem, we do it in the US, when we have an impossible problem, we sent it to the Russians'

    It was clearly true 8 years ago during my last visit, that the Russians have lived without easy access to cheap junk for long enough they they can fix just about anything, they have one of the most over-educated populations in the world, they have loads of resources, and they offer a bad climate for your physical and investment health.

    I want to have some money (but not much) there for the day when the climate changes, because the potential gains are crazy, even if my short term losses are almost garanteed at the moment... (Think China 35 years ago).

  • Report this Comment On July 12, 2009, at 9:59 PM, jm7700229 wrote:

    I do get a kick out of people who equate Russia's official corruption with American finance and political horsetrading. I presume they have put their life's savings in Russia, Iran and Venezuela.

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