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Author: TMFCogitarius Big gold star, 5000 posts Old School Fool Home Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5162  
Subject: Possible criteria for culling GG holdings Date: 5/11/2012 2:11 AM
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Now that we know what's not on Nathan's watchlist, some of us may need some criteria for culling the rest of our GG holdings. Of course we'll soon get a full review from GG on all current recs, but I see it as their last serving of fish.

If I still can't figure out for myself what to hold and what to fold, maybe I shouldn't be here to start with.

So I thought I'd share my shortlist to seek your inputs and, hopefully, help kick start your own thought processes.

The key challenges common to US-based global equity investing are:
1. Unfamiliar country (culture, economics, laws, business environment)
2. Unfamiliar management (due to language/ culture/ access differences)
3. Indeterminate moat (driven by 1&2, due to difficulty in relating to how critical/ desirable the product/service is in that market, and what its competitive dynamics are locally)

1. Unfamiliar Country:
With every pick, GG gave us a Country Risk rating:
“A general risk measure for equities domiciled in a particular country. The elements considered include relative level of development of the country, its debt structure, its political environment, existence of systemic corruption, or anything that would potentially affect an investment.”

I'm taking it beyond that and asking myself how familiar I am, personally, with the market in which the company does most of its business – relative to, say, the US.

Chile, for instance, is one I'm least familiar with, never having visited or engaged with it, nor having read / heard as much about it as I need to feel comfortable. OTOH, it's known to be business friendly and fiscally responsible, unlike some of its dodgier neighbours :)

Net, if my lack of familiarity with Chile puts PVD at the bottom of my GG holdings, I may have to walk away from it.

2. Unfamiliar Management:
Regardless of how well the stock has done so far, I need to assess how far I trust management, not just on corporate governance, which GG defines as “Our proprietary analysis of the company's corporate governance practices, this encompasses how well the company treats its outside shareholder.”

I dumped UEPS many moons back despite my firm belief in the future of mobile services, because (a) South Africa seemed to have merely exchanged one set of corrupt rulers for another, and (b) I simply stopped buying into management's optimism on getting back into shape. This was a business call on management realism, not on its governance, which, unfortunately, has also come under scrutiny now.

3. Indeterminate Moat:
Moat, or sustainable competitive advantage, is what separates high quality, long term business models from the rest. If prudent investing is buying (and holding) great businesses at reasonable prices, then each of us has to make our own call on the moats of our holdings.

As I wrote earlier, “Sterlite has negligible control over its business outcomes, which are almost entirely driven by the global demand/ price for zinc.” Which makes it a no-moat business after having lost its ability to get projects approved and efficiently executed. Plus untrustworthy management: “as minority investors, we have no choice but to trust management's ability to protect our investment. SLT's Agarwal has shown us exactly how much he cares for that with his bungled restructuring attempt.”

Unfamiliar financial reporting
Of course, on top of all this, there's the challenge of dealing with unfamiliar and inconvenient financial reporting – using non-GAAP standards, in foreign languages, requiring Fx translation, not always quarterly, etc.

Unfortunately, that goes with the territory. While many GG picks do offer English versions, the rest of the hassles will remain for any non-US listed company. Chances are, if you're truly convinced of the value of global investing, you'll find ways to work with this handicap, because the rewards could well justify it.

What do you think?
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GG Home Fool
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