Podcast: Michael McGaughy

I spoke with Michael McGaughy, founder and CIO of Research Alpha, about what it means to invest where crisis, illiquidity, and institutional abandonment have driven valuations to generational lows. This was a timely chance to catch up on Michael’s thinking, how his portfolio has evolved, and what the last few years have taught him about investing through dislocation.

Michael explains that his process is built around three things: quality people, structures that align minority and majority shareholders, and crisis-level valuations. We discuss why he spends so much time studying ownership, families, and incentives, how that work began in Indonesia, and why he believes the same lens applies across much of the world outside the Anglo-Saxon markets. Along the way, he shares examples from Pakistan, including a Toyota dealership (Indus Motors) and Lucky Cement, that illustrate how much of investing ultimately comes down to capital allocation and stewardship rather than sector narratives alone.

We also explore the difference between foreign and local capital, why forced selling and ETF closures can create extraordinary opportunities, and how reforms in places like Nigeria can matter more than top-down commentators appreciate. The conversation closes with a candid reflection on Michael’s biggest lesson from recent years, namely the cost of selling too soon, and with a discussion of where he is currently finding value, including in Turkey.

As always, this conversation is for general discussion only, not investment advice.

This transcript has been lightly edited for clarity, grammar and punctuation.

Graham Rhodes: This is Graham Rhodes, and you are listening to the Longriver Podcast, where I sit down with fellow investors to talk about global business and investing as we see it from Asia.

My guest today is Michael McGaughy, Founder and CIO of Research Alpha. He launched the fund in 2017 to invest worldwide in frontier markets.

Michael and I first connected through his work on the people behind the companies that shape corporate Asia. That focus on owners, families, and incentives is as essential to his process as it is to mine at Longriver. When we recorded our first conversation back in 2022, I was struck by the way Michael invested through financial crises and other dislocations, and by the kinds of opportunities he was finding in places like Greece, Ukraine, and Uzbekistan.

We called that episode No One Left to Sell, which says just about everything you need to know about where Michael likes to fish. I wanted to invite him back for an update on what the last few years have taught him, how his portfolio has changed, and where he is spending his time today.

But before we go any further, a quick reminder: this conversation is for general information and discussion only. It does not constitute investment advice, a recommendation, or an offer or solicitation to buy or sell any security or fund. You should not rely on it when making investment decisions, and it may not be suitable for your circumstances.

With that, Michael, welcome back to the podcast.

Michael McGaughy: Hi Graham. Thanks so much for having me back on. I enjoyed our discussion a couple of years ago.

It is really great to have you back. Perhaps to level-set and give everyone some context, could you give us a brief introduction to Research Alpha and what you do?

Research Alpha was set up in 2017. We invest typically when and where there is a crisis or a big dislocation, such as a major FX move.

We look for three things, primarily. We look for companies that are controlled by quality people, structures where minority and majority investors’ interests are aligned, and businesses that are trading at generationally low valuations.

Those generationally low valuations are typically found in a crisis situation, like the Asian financial crisis of the late 1990s, or Sri Lanka three years ago in 2022.

You mentioned frontier markets. We are not strictly frontier. Typically, idiosyncratic crises occur in emerging markets. A lot of the time, developed markets move in parallel, and when one goes down, they all go down. There are also many more emerging and frontier markets. You have maybe 15 or 20 developed markets around the world, but our FactSet database tracks around 100 to 115 markets. So for every developed market, there are about three or four developing markets that we can tap into.

You mentioned that you look for the right people and also the right corporate structures. I found you through your blog, where you mapped out who was behind corporate Indonesia.

Tell us a little bit about that work and how you came to develop that tool in your research toolkit.

I have always been interested in who owns what, and what the connections are between key controlling shareholders and politicians, or between different business groups and the government.

It was just a way for me to make sense of the market I was looking at. The first stock market I looked at as a sell-side analyst was Indonesia. There were 24 listed companies, and only seven of them were available for foreign investors at the time.

So to make sense of things, I started writing down who owned what. There were also rumours, or people had told me that the daughter of this famous businessman, or this family, was married to the son of some other famous business family. I just thought it was interesting, so I started to map it out.

As I kept doing that and going down the rabbit hole of who owns what, what their reputation is like, who they are related to, and which politicians they work with, you start to see the structure of the overall market as well as the structure of a particular business group.

When you do that research, you begin to think: these people have the scope to take money away from minority shareholders, or from the listed company, and put it into a company that they own 100% of rather than 55% or 60% of. I have noticed that over time it does not always happen, but if there is an incentive, it will probably be used at some point. There is a big incentive to take money from a company where you only own 40% or 50% and move it into a company that you own outright.

Right. And if you pioneered that kind of work in Asia, and it has been so valuable, have you found it useful outside Asia too?

Very much so. In fact, as far as I can see, outside the Anglo-Saxon markets, meaning the US, Australia, and the UK, most markets around the world have some kind of family business structure.

It is almost as if every market has anywhere from five to 20 or 30 business families. They own a big percentage of the market’s capitalisation, and they will have anywhere from one to 20 companies listed on the stock market, as well as many other companies that are not listed.

Then you have a handful of subsidiaries of multinational corporations. Nestlé, for instance, has several listings around the world. You also have a lot of SOEs, state-owned enterprises, with listed subsidiaries. Then you have a handful of independent companies that are not part of larger business groups.

That same kind of structure tends to repeat itself, though in different proportions depending on the market.

Right. So in a way, do you look at your position as a minority shareholder as fundamental to your margin of safety?

Very much so. If a business owner is taking out 5% or 10% of top-line revenue, or pumping in costs that should not be there, it may not seem like a lot. But over time it really adds up.

You may not notice adverse transfer pricing of profits or revenues outside the listed company in any given year. It could just be a few percentage points, or one big event. But that one big event, or that slow transfer of cash away from the company, really adds up over the long term.

Agreed. So Research Alpha is now in its eighth year, and it has been four years since we last spoke. I loved reading through your letters, not only for the updates on where you are investing, but also for the lessons you are sharing with your investors.

Has anything changed, or is there anything new or different that you look for when considering new markets to invest in?

That has been pretty standard. We have mostly been lucky with that so far.

We have had some good opportunities. In fact, we have missed several opportunities in the almost eight years since we started the fund. One worry I have going forward is that 2025 was such a great year. I think you had more stock markets around the world rise, or go to new all-time highs, than ever before.

So from a macro or top-down standpoint, and from a long-term valuation standpoint, whether you are looking at the CAPE ratio, the dividend-yield equivalent of the CAPE ratio, or the EV/EBITDA equivalent, it is harder to find value now than at any point since I started the fund.

That is interesting. And speaking of that, your portfolio does look quite different today from what it did four years ago. Why don’t you tell us about some of the changes, and where you found value over the last couple of years?

Sure. About two years ago, we took a position in Pakistan.

It was an ongoing crisis situation. You had very bad floods a couple of years before we took our position, the government response was not very good, and there were political problems. So I was watching the market go down pretty steadily for a couple of years.

It got to the point where I think it was trading at about five times CAPE. The rule of thumb is that once it gets down to around five times CAPE, as long as the currency remains fully convertible, it is a good time to buy. Pakistan hit that point, and the charts were looking good.

A lot of times I look for four things when I take a country position. First, are the other fundamentals good? Are there enough stocks to make it worthwhile? Are there enough good companies and enough quality companies to look at?

Second is valuation. We just talked about the rule of thumb around five times CAPE and the currency being liquid.

Third, is the market out of favour? Would it be contrarian to go in there? What is the narrative like? If the narrative is positive, that is probably not a good sign, because the market would already reflect it. But if the narrative is very negative, and you start to see smart money going in and nibbling, that is a good sign. Maybe insider buying starts to pick up even though the narrative is still very bad.

And lastly, technicals. What do the charts look like? I take really long-term charts and look at the market index and individual stocks on a gold basis. A lot of times you might have a double bottom on a gold basis where you would not have that on a US dollar basis or a local-currency basis.

Sorry, what is the logic of using a gold basis to measure these prices?

Theoretically, I keep reading that gold is the global inflation hedge.

Yeah.

So that kind of measures global inflation. They say that an ounce of gold is worth a good man’s suit in London, on Savile Row, I think it is called. I am sorry, I do not know London well, but I think it is Savile Row.

So if you think of that as the global long-term inflation hedge, then theoretically it should take out a lot of the political problems, or maybe incorporate the political problems that have shown up in the currency over time.

Okay. So you identified Pakistan as a market, and I am just going to take a little segue here. Everybody is talking about AI these days, but you still spend a lot of time doing on-the-ground research and visiting people, don’t you? Do you still get a lot of value from that?

I do. There is so much going on. It gets back to what we were talking about before, macro versus focusing on the companies themselves. You can read all you want, but a lot of the news just does not make it into the newspapers.

The way an entrepreneur or business leader looks at his or her company, how they are adjusting capital allocation, and what they are spending their time on, that is really interesting for somebody who does not have in-depth industry knowledge.

I can hold my own talking about consumer goods, industrial products, or financial products, but I have never really worked in any of those industries beyond my investments. So I do not really know what goes on day to day.

I am relying on that person to manage the business on my behalf, and it really helps. It is also just really fun to talk to those people and find out what they are thinking and how they see the world.

Yeah. And in your letters, you have given a few specific examples of that, which I found really interesting.

Tell us about the Toyota dealership. Or tell us how you realised that Lucky Cement was more of a capital allocation story than anything to do with the specific industry.

Oh yeah. Thanks for bringing that up. The Toyota story is fantastic.

We happened to be doing channel checks with one of the sell-side guys in Pakistan. We went to a Toyota dealership, and when they saw me, the brother of the dealership’s CEO came out and started talking to us. Then the owner came back, invited us into the back office for tea, and we just started chatting about the business.

He explained that they were the biggest Toyota dealership in Lahore. Toyota itself had a large market share within Pakistan. Both brothers had been educated in California, then came back to Pakistan and were expanding the dealership. They told us why they had chosen a certain location to expand into, and why they had chosen that particular time to expand.

That gives you a lot more confidence in a stock that has been beaten down. At that point, and I think even now, cars, especially ICE cars, internal-combustion-engine cars, were out of favour. The auto sector was down, Pakistan was down, so it was kind of a double or triple negative. Nobody liked the country, nobody liked the sector, and the stock itself was out of favour too because a lot more competition had been coming into the market.

So it was really, really beaten down. But at the same time, you had somebody who was involved in the business day to day putting in a significant amount of money. I think it cost about a million dollars, or I could be wrong, maybe half a million dollars, to open up a new Toyota dealership in Pakistan, buy all the inventory, build the buildings, and buy the land. That is a lot of money in Pakistan.

So they were still expanding and putting their money where their mouth was.

So that gave us more confidence. I think we already had our position there, and I think we increased it a little more after that.

Right. And how about Lucky Cement? Tell us about that one.

I remember being an analyst in Pakistan in the early 1990s, one of the first analysts to go into the market, again before it was even on Bloomberg. I remember seeing Lucky Cement. It was always like a one- or two-million-dollar company in terms of market cap. Lucky Cement, Murree Brewery, which is the alcohol producer there, the brewer, they were all tiny, one- or two-million-dollar market-cap companies.

So I was never allowed to write about it as a sell-side analyst because you just could not make much money if the stock did not trade and you were not generating commissions. It was all commission-based back then.

I took a break from Pakistan while I was doing other things, for almost 30 years, I think, maybe 20 or 25. When I went back to look at it, lo and behold, Lucky Cement was one of the largest-cap companies in the market. Just wow. A massive amount of return.

I had an hour with the CEO, the guy who really turned it around, and I asked him, “How did this happen?” He took me through it step by step, and he did not do anything flashy. He just did things before they needed to be done. He did things because they were right.

He did not react to the market. He preceded it, if that makes any sense.

He just ran a solid business. By being prepared and moving on to the next phase, expanding when things were cheap, and not overpaying for things, you realise this guy is probably really good at allocating capital.

In addition to the cement business, he got the franchise for Kia Motors in Pakistan. He went into power transmission and power generation. He also bought the biggest fertilizer company there, Engro Fertilizers. He also has Lucky Core Industries, which is part of the Lucky joint venture with Korea.

So basically, he has been expanding his business in the right way. Nothing fantastic, nothing earth-shattering, just being very proactive and very smart.

I just wanted to touch on another thing that you have mentioned in your letters, which is the difference between foreign capital and local capital.

Can you elaborate on that for us? Why does this matter in your process, and what kind of signals do the buying and selling patterns of foreign capital and local capital tell you?

In the old days, in most stock markets around the world that made a distinction between who was investing, they would publish what foreign investors were buying and selling, both at the market level and the stock level, and what local investors, retail investors, and mutual funds were buying and selling. They would provide market statistics like that. In the past, foreigners used to be a big part of the stock markets, I think...

In Indonesia, foreigners may once have accounted for more than 50% of trading, especially when the stock market had not really caught on with the local population.

I think Sri Lanka only recently passed the point where 5% of the population had access to brokerage accounts through the central clearing system. What is significant about that is, first, that you kind of have liftoff. These markets do not need foreign capital. Companies do not need foreign capital to raise money on the stock market, and I think that is significant.

Second, local investors will probably do a better job of discovering things and keeping track of their companies than foreigners will. And locals tend to be stickier. A Sri Lankan investor will probably want returns in rupees so he can pay off a house loan or send his kids to a local college. He is not as concerned about FX volatility as a foreign investor might be.

Most foreigners look at frontier and emerging markets as trading markets. They think you do not want to be there for the long term. Whereas I think that is going to change. You are going to have long-term success stories like Lucky Cement, which we talked about. That has been a hundred-bagger. Even Murree Brewery, at one point, was a hundred-bagger before it fell 80%.

So you do have some very good long-term success stories in these markets. It may not be true at the index level, but at the company level, you do have some very strong long-term outcomes.

Yeah, I think that is really important, actually. The role that good role models can play is understated in promoting better and more sustainable wealth creation. And I think you should look for role models at the company level, the investor level, and the LP level too, to see that alignment of interest, really.

Oh, definitely. Yeah. And it is always good when you have a stock that, even though it may be in nosebleed territory, gets a lot of people excited about what is happening in the market.

Yeah. But the reverse of that, which you have written about too, is institutional abandonment, which I guess is when foreigners just say, “This is too hard,” and they get out. That has been a great source of opportunities for you, has it not? Tell us about that.

Well, I guess there is groupthink in that. When foreigners get out, and there are a lot of foreigners in a market, once they start to leave, they often do not have anybody to sell to.

Another thing you have happening is this huge concentration of capital among Western fund managers. I think some of these guys are up to a trillion dollars in assets under management, maybe even more. There is just no way they are going to be looking at a place like Sri Lanka.

When I went to Sri Lanka in 2022, there was only one stock above a billion US dollars in market cap. That is perfect for a guy like me, because I like looking at small caps and out-of-the-way places. But a trillion-dollar fund could buy every stock in the market, and even if it all went up 100%, it still might not move the needle for them.

And then you have things like forced selling when index weights change or country-specific ETFs close down.

Oh yeah, exactly. In fact, you took the words out of my mouth. I love it when I read about an ETF closing down, or a big international bank exiting a country, because those typically call the bottom of the market.

The Nigeria ETF in the US was closed, I think, about two or two and a half years ago, and it was almost to the day, or at least to the month or quarter, that it signalled the lowest point in the Nigerian market in the last 20 or 30 years.

Wow.

It has been up ever since then.

Well, that is a good transition into Nigeria, which is also an important part of your portfolio. Why do you not tell us about the background to those investments there, what you see, and what is going on?

Nigeria was one of the first places where we put money to work. Actually, our return there has not been great, because we started investing there in the summer of 2017, so that is almost eight years ago. We are finally doing well now.

But we have held stocks and kept adding over the years, first because they were very inexpensive, and second because you have had a lot of reforms, particularly in the last three years since President Tinubu came to power.

Everybody tends to focus on reform stories in a top-down way, which I do not do a lot of. But if I spend time on the macro side, one thing I really like to see is reform and policy change, and how that can help listed companies and the broader economy.

Nigeria is looking really interesting. Everybody talks about the reforms in Argentina, and you can find a lot on Twitter about them. But what Tinubu and his party have done in Nigeria has been just as significant, maybe even more so, over the last three years.

For instance, within the first couple of weeks of his inauguration, he freed energy prices. Nigeria used to subsidise oil to a very large degree. He allowed private generation of electricity, and he also unified, or freed, the exchange rate.

So you had a series of massive reforms that were long overdue, and that has really helped the Nigerian economy. It is one of those short-term-pain, long-term-gain situations. But we are starting to see that help the Nigerian economy now.

So when Peter Lynch and Warren Buffett said that spending, what was it, an hour on macro was a waste of an hour, I think they had the privilege of saying that from their position investing in the United States. But for someone like you investing in Nigeria, you have written about the tax episode there, which came out of left field, and I imagine you have been through at least one currency crisis in the seven years since you invested. How do you factor that in when you are thinking about your investments?

On currency, I tend to think about valuations mostly in US dollars over time. I am asking whether they are cheap, and whether there is a good possibility that profits will recover to where they were before in US dollar terms. A lot of times the answer is yes, simply because energy is such a big part of an economy, and that tends to be priced in US dollars.

Second, technology is priced in US dollars too. That may not be as large on a spending basis, but in terms of what people actually use and need every day, it is becoming increasingly important.

A lot of people in Argentina, for example, were looking at the economy from the standpoint of the peso. But the peso is really just a transactional currency. It is not really used for savings, for large purchases, or for pricing. That is even more true now than it was a few years ago. Even at the height of their crisis, everybody was buying property quoted in US dollars, or using the peso equivalent of the US dollar based on some formula. The transaction might have been in pesos, but the pricing was all in US dollars. So it is very much a US-dollar economy.

That tends to happen over time, and I think that is what people miss. If the economy is basically a US-dollar economy and it is going to adjust to oil prices and technology costs, then the economy is going to change at some point. That is what makes getting in at a devaluation, or staying invested through a devaluation if the stocks are cheap, profitable, or at least doable.

Yeah. And one of your largest investments in Nigeria is a consumer goods company. Does that have the ability to pass on inflation?

Increasingly so, yes. It depends on the product. Their biggest product is a very low-priced kind of meat roll that you can buy on the streets in Nigeria, and they can largely pass on most of those costs. But there can be a time delay before they do.

Okay. And just stepping back a little bit, how do you think about portfolio construction and the right weights to have when you have ideas and conviction?

We have 45 core positions in the portfolio, or 46 now. We are getting out of one and moving into another. We are in seven countries, and that breaks down to about six or seven stocks in each country. So we are fairly concentrated at the country level, but not at the fund level.

I tend to equal-weight things, depending on how much cash we have when we are investing initially.

One reason our Nigerian position is so big is that it has been cheap for so long. Since I started the fund and started investing there in 2017, the CAPE ratio has almost always been attractive. It was one of the cheapest markets in the world up until recently, really until the last 18 months or so, because the stock market has gone up so much.

Policy has also been getting better, so I have been putting more money in there. And as the currency came down, I kept putting more money in over time. But within the market itself, I try to keep equal weights in terms of the money I put into each company.

That comes from a really good book, Thinking, Fast and Slow by Daniel Kahneman. He makes the point that there is a fallacy in trying to predict too much. I came away from reading that book thinking that, at the end of the day, I cannot predict the future. So I just equal-weight everything, and that has worked out pretty well.

A lot of the time, the companies I love most do not do that well, but the companies I feel more iffy about tend to do better.

Over the last four years, one of the major dislocations in the global economy has been in China, with the collapse of the real estate market there and all the pressure that created. But you did not invest in any Chinese stocks. Why was that?

On a country basis, I have been looking at the property sector in China, and it certainly looks attractive on a CAPE basis. China itself looks attractive on a country basis. But it never got to crisis levels.

I think it got down to maybe below 10 times CAPE at one point, but it never got down to the three times CAPE we had in Argentina in 2019, or the five or six times CAPE we had in Sri Lanka in 2022, or the six or seven times CAPE that Nigeria was trading at until the last 18 months.

So it never got to the kind of crisis level that would have made me pull the trigger. It is kind of like Indonesia right now. It is very cheap and it looks really attractive. As someone who used to be an analyst there, I think it is probably a good time to buy. But it is just not at the crisis levels that I like.

Why don’t you tell us, in your own words, what you think has changed the most, or what you have learned, over the last few years?

What I have learned, or at least what one hopes to learn, is from mistakes. And the biggest mistake I have made is selling too soon.

That has happened a couple of times.

To give one example, we had a company in Turkey that we put money into in the summer of 2018, when that market was in crisis. The stock doubled over the next 18 months going into the COVID period. I could see that the charts were looking bad, so we sold.

The stock then went down, I think, 30% or 40% very quickly during the first stage of COVID, in January, February, and March 2020. I patted myself on the back, thinking I had done really well and read the charts correctly. But after it hit bottom, it went up another ten times.

So I patted myself on the back for getting out of a two-bagger, but I missed the 20-bagger.

Another example is a company in Argentina, Vista Energy, which is still one of our biggest holdings. I sold a third of it about five years ago when it looked like it was hitting a double top.

Again, the chart pattern worked in the short term. I think it fell another 20% or 30% in the next three or four months. But then it ended up going up another five times. So it is still one of our bigger positions, but it is not nearly as big as it should be. And I see that front and centre every day when I walk into the office.

And so what have you changed about your process in response to those lessons?

I am just more chill, I guess.

I knew this going in. In the past I had done fund-of-funds work, and almost all the managers I spoke to said their best analysts, or their best managers, were the ones who just followed the companies. They did not really spend much time on macro.

But it is really hard to avoid hearing about the macro situation, particularly now. We are recording this a few weeks into the Iran-US-Israeli war, and it is really hard to disengage from that.

So I have been focusing more and more on the companies themselves. In situations like this, I will do things that are probably partly psychological for me, such as spending more time calling the companies and asking, “How are you doing? How are you handling the situation? Are you seeing it yet in your business?”

That helps because, as investors, we are an equity fund. We are investing in companies. We are not investing in bonds, sovereigns, oil prices, or commodities. So I am spending more time focusing on what we are actually invested in.

And another thing that you have written about, about structures and people, is that cheap valuations have sometimes seduced you despite the risks in the people and the structure. Where has that happened, and what is your takeaway from that?

Oh, that one still happens. I still get seduced by cheap valuations, but I am getting better at it.

Basically, the trifecta for me is good people, a solid structure that aligns interests, and a generational valuation. Once I go outside one of those, things usually do not work as well. And I still make that mistake sometimes. Usually, those stocks do not perform as well as the ones where I have that full trifecta.

A big part of it is psychological. I am a cheap guy, right? I will go down to the hotel and skip the 7-Eleven across the street to walk to the supermarket because the candy bar might be 20 cents cheaper there.

We are cut from the same cloth!

Even though, if you think about the time value of money, it does not make any sense at all to walk the extra 50 metres to do that. I guess it is just a bad habit I have, and I tend to do that with stocks as well.

Thank you. That is a good point at which to begin to wrap up. So perhaps the natural place to end the conversation is simply to ask: where are you spending time now?

At the end of 2025, we started to increase our positions in Turkey. We had a little more cash come into the fund, and Turkey was the only market, besides Iran and Russia, that was below 10 times CAPE.

We cannot invest in either Russia or Iran. I am a US citizen, and we have other US citizens in the fund. And frankly, it is a little bit dicey. I like financial crises. Geopolitical situations, I would rather stay away from.

So Turkey was very cheap. The companies are, in my opinion, very well run. You have a young population and a long runway. Interest rates seem to be coming down. Politics is always going to be a problem, but as I keep writing and tweeting, Turkey is a value investor’s best friend, because the political shenanigans there tend to send stocks to very low levels, or send inflation very high and the currency very low.

So we have been able to pick up cheap Turkish stocks every couple of years. It always seems like there is another good time to buy them.

That is interesting. Well, Michael, you always like to say online, “Be safe out there.” So perhaps we can wish everyone, or warn everyone, to be safe out there.

And if anyone would like to get in touch with you, what is the best way to contact you?

You can follow me on Twitter or DM me there. My last name is spelled M-C-G-A-U-G-H-Y. My first name is Michael. It is a fairly unusual spelling of a last name, so it should be pretty easy to find me.

I am also on LinkedIn, same name, of course. Those would probably be the best ways to reach me.

Thank you, Michael, for the conversation. I really appreciate it.

Well, thanks for having me on. I really appreciate the letters you send out and the podcast you do.