Ah, to be back in South America.  Long-time Trading Deck readers might recall that I spend a fair bit of time in Peru (see “Going Long Two Beaten Down Euro Stocks”).  When you marry a Peruvian, you don’t really have a choice.

Not that I’m complaining.  I can say in all seriousness that I’ve never had a bad meal in Peru.  Not in more than five years of regularly visiting.  (If you haven’t had lomo saltado or proper Peruvian ceviche, then you haven’t lived.)  And as the father of a young toddler, I can happily say that I’ve never had to change a diaper there either.  A Peruvian man can live happily aloof of such responsibilities.  Such a shame I had to return to Dallas…

I was recently in Lima with the wife and kid to root for my father in law, Lucho Vasquez, in the Concurso Nacional, the once-per-year national championship for Peruvian paso horses (see “Paijan and the Legendary Peruvian Paso Horse”).

The Vasquez family have a long history of success as breeders, and last year Lucho won the prize for Champion of Champion stallion (LV Jardinero, the horse on the left in the photo below).  Alas, 2012 would not be a repeat.  The best stallion this year belonged to long-time breeder Alfredo Elias Vargas.  Oh well.  Can’t win ‘em all.

(Anyone interested in viewing the past years’ champions (and who can read Spanish) can visit http://www.ancpcpp.org.pe/inicio.html, click on “Identidad” and then on “Campeones.”)

One might legitimately wonder what Peruvian horses have to do with investing.  My answer would be “everything.” 

During rough economic times, there are two basic ways to run a successful business.  You can go the Walmart (NYSE:$WMT) or Amazon (Nasdaq: $AMZN) route of providing basic goods and services that people need regardless of the state of the economy. Or, you sell a specialized niche product to a dedicated core of consumers that is not sensitive to price. With a niche product like high-end Peruvian Pasos, you have a base of aficionados so fanatically dedicated to the breed that nothing short of death or incapacitation will cause demand to fall much.  Sure, at the margin, there will be the occasional aficionado who has to cut back his operation due to business setbacks elsewhere.  But for the best horses, demand simply doesn’t fall.

I’m not recommending that readers run out and buy a Peruvian horse (unless, of course, horseback riding is a passion of yours).   A breeding operation can be a fantastic investment.  But making it so requires years of experience and massive initial capital outlays for land, labor, feed, and—most importantly—high-quality breeding stock. For the vast majority of breeders, Peruvian horses are a luxury expense.   Afición isn’t cheap.

Instead I want to draw broader investment conclusions from recent developments in the world of Peruvian horses.

The first is the internationalization of the breed.  Every time I come to a horse show I see new faces and hear stories about a new breeder from a new country looking to enter the fray.  The breed’s popularity has expanded beyond its homeland to cover virtually all of Spanish-speaking South America and Central America.  It’s also gaining popularity in Europe, and it even has a small foothold in India.  (Ironically, the breed is struggling in the United States, which used to be one of the stronger markets.  There are now only a handful of internationally-competitive American breeders and a pronounced dearth of young breeders to carry the torch.)

While I am not aware of much in the way of Asian interest, I’m sure it’s coming.  Chinese companies are active all over South America, and it is just a matter of time before a Chinese investor decides to “go native” and buy a ranch.

This fits into my investment theme of luxury goods as both a play on the rise of emerging markets and on the rise of the global nouveau riche (see “Profiting from the Art Boom”).  While the middle class continue to suffer with impaired home equity and stagnant real wages, the world’s wealthy are doing just fine.  The crisis in Europe notwithstanding, corporate profits are at all-time highs.

It also makes a case for alternative investments with little correlation to global stock markets and relatively little exposure to the bends and twists of the global economy.   In a global bust, a champion horse will hold its value better than most financial assets.  This was certainly the case during the 2008-2009 meltdown.  Based solely on the prices paid for top-quality horses, one might not have noticed there was a crisis at all.

Of course, it helps that horses are rarely purchased with debt and that hedge funds have thus far ignored them.  The day I see a solicitation for a hedge fund or ETF that buys Peruvian horses, I’ll probably cry a little.  Just wait…that day will come.

If you take away one lesson from this article, it should be this:  If you want stability, buy assets that are not held by others with excessive debt or that have been “financialized” with ETF issues.

The financialization of commodities and other previously-uncorrelated assets has caused correlations to shoot upward in recent years and has been a major contributor to the upswing in volatility we’ve had to endure (see “The Myth of Commodities Investment”).  Everything is correlated to the stock market now because everything is traded on the same exchanges by the same people with the same borrowed money.  Diversification is dead.

As for your capital that is invested in traded financial assets, use their inherent volatility to your advantage.  Buy investments that no one else seems to want.  As an example, with Spain’s stock market near its 2009 lows, many Spanish blue chips are trading at prices we may never see again in our lifetimes.

My favorite?  Telecom giant Telefonica (NYSE: $TEF).  Roughly half its revenues come from the high-growth markets of South America, and it pays a dividend that could be cut in half and still be one of the highest-yielding stocks in Europe.

This article first appeared on Market Watch

Disclosures: TEF and WMT are held by Sizemore Capital clients.  TEF is held by the Covestor Sizemore Investment Letter Model

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