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Hey, Fools.

I hope some of you are still following along with our international investing learning curriculum. If not, at least it's still been fun for me to reread a bunch of books that have been very influential at times during my career. Up this month is Mark Mobius's Passport to Profits, which you can think of as an updated version or modern version of Templeton's Global Investing: The Templeton Way. Mobius, as you may know, was chosen to succeed Templeton as head of his international funds and has been quite successful.

Why it was chosen
Passport to Profits, more than any other book, will give you the playbook we used to build GG from the beginning and it best details the methodology we use to find international, and mostly emerging market stocks, each and every month. What you'll notice immediately in the book -- and is the thread that ties it all together -- is that Mobius is a relentless traveler, using not just company meetings, but down time in countries around the world, to get to know people and places. He then uses these observations relentlessly when making investment decisions.

I think we're a bit more numbers based than Mobius is (and we certainly don't travel as much), but the Mobius travel MO is something we've adopted here at GG. Further, the book provides some great tips -- though you'll find most of them in Templeton -- about investing in emerging markets.

Ideas worth remembering
Mobius peppers rules throughout the book that are the general takeaways from the specific investment anecdotes he goes through in Estonia, Russia, 1997 Asia, and Brazil. I've picked out the lessons I thought were most valuable, but I recommend folks read the book to get the context in which Mobius learned them.

#1 Apply the FELT principle to any market you're thinking about investing in. (FELT means that the market is Fair, Efficient, Liquid, and Transparent).

I don't think this is the best acronym because Mobius is going into markets we might not exactly think of as efficient or transparent (ex. we probably wouldn't call China transparent today, but Mobius and many others are there). But what he's getting at is an idea he brings up at the end of the book which is namely that if you're going to put money in anywhere, it better be pretty easy to get it out. And that's good advice.

#2 Your best protection is diversification

We obviously preach this a lot on these boards (and I don't think people really take me seriously when stocks are going up), but it's a critical point when it comes to volatile emerging markets. Mobius reveals that his funds have regional limits, country limits, and specific company limits to make sure they're never so overweight they can get burned. The reason I think this is important is because investing in foreign markets is inherently risky and you need to take risk to make money. If you go overweight in one region, one country, or one company and get burned, it will make you gunshy about taking risk the next time...and you may miss out on something like YONG when that opportunity presents itself. (Imagine, for example, if you'd only owned AOB the last few years. You might never invest in another Chinese stock.)

#3 Look at a map

Maps are tremendously useful tools. First, they reveal right off the bat that the US is a very small part of the world, which is a crucial worldview to have if you plan to be a global investor. Second, only maps can reveal what Mobius calls "gateway countries." These are trading nations or smaller nations that stand to benefit from growth of a regional giant like Brazil or China. These small countries are often undervalued relative to their larger peer, but represent a similar opportunity due to their georgraphy.

#4 Getting lied to can be just as valuable as getting the truth.

I love this one because it means no meeting is not worthwhile. You'll learn just as much when you're being lied to vis a vis making a sound decision than if you get everything straight. The key is being trained and knowing the numbers well enough to know when/if you're being lied to.

#5 Management matters; walk away if you get even a whiff of impropriety

This one sounds easy enough, but I often wonder how it hangs with Mobius frequent observation that if you buy cheap stocks, you will one distressed companies and/or bad companies. After all, stocks get cheap for a reason and the perception that management is rotten is one of those common reasons. So, I think I'd modify this -- and I think Mobius would agree -- that you walk into situations where you get a whiff of impropriety, but walk out quickly when the preponderance of evidence indicates that management is not working in your favor. (Note, too, that his funds are big enough to fight management team. Us individual investors should pay special heed to this advice since we can be easily ignored.)

#6 The less developed the economy, the more basic you should be

In frontier economies you're looking at nothing other than utilities, financials, and telecoms.

#7 Try to buy when others are fearful, but you can find bargains in a boom

We're all well aware of this first bit of advice, but Mobius says that if you want to get into a booming economy, look for second-tier companies that may be struggling, but have significant growth potential if they get their business right (remember to be protected in diversification).

#8 Things change a lot around the world. Be flexible, always be learning, and make sure you can get out if you need to.

One final note
There's a whole chapter in this book devoted to how corrupt Russia is. This book was written 12 years ago. Russia continues to be in bad shape. There's a lesson there about never predicting that the zebra will change its stripes despite the fact that things do change a lot and fast around the world. Our investments live in between those two facts.

Tim
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This certainly looks interesting, I have been trying to figure out how to reconcile the things Tim posts on Russia with smart investors like Mobius who are bullish on Russia (as in he has $2B invested in Russia)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a8mn...

Also, it seems like the folks at Hermitage would say that Russia doesn't qualify for the "F" in FELT

"#6 The less developed the economy, the more basic you should be"

Reminds me of the line from the Jim Rogers book where when a country satisfies his basic criteria he buys the biggest bank, the biggest brewery, and so on.

-Gunnar
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Hey Tim,

I just ordered the book from the local library, and should have it shortly.

I love the GG curriculum, keep the rec's coming!

Brian
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Management matters; walk away if you get even a whiff of impropriety


This advice works best before buying into the stock. But if this is discovered later, exiting should still be done but in a planned manner rather than a kneejerk reaction. I remember SA selling SAY at $1.00. Now it is at $6.60. Its founders are in jail. The company has been taken over by others. It is selling way too cheap. I still haven't sold it. This time it is AOB.

Anurag
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I found the book to be a highly engaging first person account of how Mobius acquired his reputation as a hard nosed emerging markets investor. With a wealth of real life examples, he shows us what due diligence really means in emerging markets, where reliable information on local companies and policies is usually very hard to get.

His 'Mobius Rules' – all 84 of them - crisply summarize a key lesson learned from the company or market he just described. While invaluable as quick recaps, they do tend to get repetitive after a point.

His description of some key elements of the 90s Asian meltdown is one of the best I've come across. Which is why it's disappointing that someone with his collection of visas had little or nothing to say about the potential of either China or India. In that sense, it's largely a rearview mirror drive through the last hurrah of emerging markets of the time.

Yet he was the one to describe Africa as the 'Final Frontier'. It still is, and his closing remarks on the brutally exploited continent ring even truer today: "We see Africa as one of the greatest untapped pockets of potential on earth"!
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