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Hey, Fools.

I hope you're ready to kick off the discussion of Investment Biker by Jim Rogers on Thursday, the second book in our ongoing Global Gains curriculum.

Member wpr101 jumpstarted the discussion a bit back on this thread (http://boards.fool.com/Message.asp?mid=27685092&sort=who...) on the concept of buying every half decent company in a country you believe in, but I wanted to start a formal thread for the book to encompass the entire discussion. This is that thread.

I have full notes on the book that I'll save for later, but I wanted to throw out a few topics to get us started and talk a little bit about why this book was chosen for the curriculum. Hopefully many of you had the chance to read and enjoy the book; let's get started:

Why it was chosen
Jim Rogers is a bit of a celebrity in the global investing space, and this is one of his best-know, best selling, and best books. It combines a few keen investing and cultural insights with a very entertaining story about his two-year motorcycle journey around the world. Many of the countries in the book have changed significantly since Rogers’s trip, but a few have not -- an interesting happening in its own right. But the purpose of this book was to give folks who may not have traveled everywhere a feeling for just how different the world is from region to region and from country to country. Further, Rogers provides a few good frameworks for how to think about investing in emerging markets. Finally, it’s an entertaining read that we hoped many of you enjoyed (leaving aside Rogers’s somewhat sketchy and far-too-frequent mentions of his attractive, much younger female travel companion).

Some things potentially worth discussing
We can talk about the various travel experiences and black market currency strategies as well, but in terms of investing ideas, these are a few that struck me as interesting…

1. The time to buy is when no one else is paying attention (so it’s cheap), and the time to sell is when you’re on the front page of the paper (after a catalysts has been realized).

This is sentiment-based approach, and I wonder if it limits your holding periods. I feel like emerging markets investing actually required very long holding periods to be successful, though given the wild volatility, one can certainly make money the other way.

2. Make broad bets on countries you believe in.

wpr101 talked about this in the thread linked above, but I feel like the ETF approach or the broad bets appraoch works better in very frontier economies (Cambodia?) than in countries with more developed markets (China, Brazil). When it comes to China, I think you want to exercise a lot of discretion in the stocks you choose to buy.

3. The best way to invest in China is through Chinese companies, not multinationals.

Rogers writes, "I’d be tempted to sell short almost any non-Chinese company with a massive investment in China, because the Chinese frame of reference won’t allow outsiders to make the big money…How, then, should a prudent Western investor play the Chinese economic explosion? If you want to get involved, you should get a Chinese company to do business for you in China."

Many advisors recommend that folks get China exposure through companies like YUM! Brands and GE because it lowers the risk profile of the China investment. But I agree with Rogers, you really want to own domestic Chinese companies. I'm sure people have thoughts on this.

Finally, I wonder how Rogers reconciles his loyalty to free markets with the recent financial trauma, which was exacerbated by financial giants who were left unchecked and took on exorbitant risk. Now, there were certainly some distortions in the marketplace that supported them as they took on those risks, but there’s no doubt they weren’t as rational and risk-averse as Rogers seems to think they are. In fact, the world is an interesting laboratory these days, with China, India, and Brazil all achieving healthy economic growth under regimes that offer different degrees of freedom and regulation.

Let's hear your thoughts!

Tim
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"Rogers writes, "I’d be tempted to sell short almost any non-Chinese company with a massive investment in China, because the Chinese frame of reference won’t allow outsiders to make the big money…How, then, should a prudent Western investor play the Chinese economic explosion? If you want to get involved, you should get a Chinese company to do business for you in China."

Bingo...The Chinese are sort of protectionist. Most multi-nationals are more likely to have their ideas stolen rather than make enormous profits. Also the business scene is so difficult in China that most companies will have to partner with a local Chinese firm and it will be the local Chinese firm that benefits more than the big foreign company.

There are a few Multinationals that will do well in China but a lot won't. Many seem to think that our big multinationals are just going to roll in and take over but I know in my heart that it is going to be a lot more difficult than that.

I had a American friend on ship that basically grew up in Hong Kong. He used to have mostly Chinese as friends and he hated playing with the Australians. He used to tell me that most Chinese may not show it to a Westerners face but privately there are a lot of Chinese people that have a serious beef about Western powers coming in and colonizing China in the past.

You must understand the Chinese are a proud people. At one point in time they were about the most advanced society on this earth. They have a serious beef about being turned into second class citizens within their own countries by both Japan and the Taipans from the Western Powers in the earlier part of the last century.

So people that think that Western Corporations are going to go in and re-colonize China are going to be in for a rude awakening. It is going to be tougher to gain a foothold there than most assume.



Starrob
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The time to buy is when no one else is paying attention (so it’s cheap), and the time to sell is when you’re on the front page of the paper (after a catalysts has been realized).

This is a similar cliche to "buy low and sell high". A good example is AAPL. It has been on the front page right since the stock was trading at $40. Today at $130, it is mostly likely still an excellent investment. To me, it is all about identifying a good business case and then guesstimating if the price is right based on future valuation. Investing does not have to be any more complicated than this.

Make broad bets on countries you believe in.

One can succeed with a low risk with the approach provided:

a) The bet is really broad (100+ companies).
b) The country has 8%+ average annual growth potential over the next 2 decades.

Of course one can make more money than the aimless broad bets if there is a good choice available like it is with China and unlike India.

Anurag
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Unfortunately I haven't keep up with the reading as much as I'd like... got a bunch of books going at once.

One thing I noticed is he mentioned he looks for countries with non-statist or pro free markets. I agree with this. However, there was some passage I was reading where he basically implied most U.S. investments were bad ideas as the U.S. is on the decline... but didn't really elaborate. It seemed more like a mismashing of ideas than some sort of strategy to follow from that segment.
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he basically implied most U.S. investments were bad ideas as the U.S. is on the decline...

You're right that Rogers does not have a lot of nice things to say about the US. Of course, this book was written 20 years ago and we're still holding on, so take it with a grain of salt. But many of the problems he identified back then are only worse today. For example...

p.96: “The market will do the same to the United States [as it did to Zaire] if we don’t shape up, if we keep running a budget deficit and borrowing our heads off…Someday the world markets will refuse to buy more U.S. dollars and bonds. Can you blame them? Would you buy overpriced bonds and currencies?”

p.122: “In all of my years of investing, there’s one rule I’ve prized beyond every other: Always bet against central banks and with the real world…When a central bank is defending something…the smart investor always goes the other way.”

His support for free markets is, I think, generally summed up in this line:

“Is it likely a bureaucrat earning a secure seventy-five thousand dollars a year will make better judgment of what will work economically than an entrepreneur about to risk his own money, reputation, and opportunity?”

I think the two can hang together because of his belief that the US free market system is generally becoming more statis with more spending and more government control. Of course, there's an interesting argument to be made about the origins of the current US crisis.

But boiled down, I think he's pushing everyone to have non dollar exposure, and I think that's very good advice (as we've discussed in the past).

Tim
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Hi Tim – my compliments on your championing the 'educate' in our Foolish motto. Have you considered highlighting this as a unique value add in your GG marketing /blog?

“The best way to invest in China is through Chinese companies, not multinationals”

That certainly is the best way to capture the initial takeoff of a nascent economy. But it isn't necessarily the best/ only way to capture both long term profitability and sustainability. Inevitably, globalisation comes into play, and powerful MNCs take over the most profitable mass segments, driving local brands/ companies into less profitable corners, buying them out, or squishing them.

No matter what the category, if it has space for a powerful, global brand equity, it has MNC written all over it. Many a retail chain has learnt this lesson from Wal*Mart. In country after country, across generations, youngsters want the brands they see on TV/ movies/ online - i-Pod, BMW, L'Oreal, Tag Heuer, etc. And it's no different in corporate purchasing of products from 3M, Sony, Cisco, GE ...

That is not to belittle the tremendous potential in essentially local businesses like China Mobile, Tsingtao, or Baidu. Such context-sensitive franchises should be able to build a sustainable competitive advantage, though not necessarily as purely Chinese companies.

As for Rogers' assertion that the “Chinese frame of reference won’t allow outsiders to make the big money”, a 2006 Shanghai AmCham survey of US MNCs found that 65% of them had profit levels equal to or better than that in other countries, with some enjoying >26% operating margins. Gross margins may be lower, but volumes are much higher - which is what market penetration is all about anyway.

No wonder the US is so eager to claw back those billions in overseas profits – the bulk is sitting in China!

Thankfully, Rogers covers all bases by concluding that companies who invest there for the long term “will get rich, of course, because the market is so huge”. That, I suspect, is how most MNCs became top dog in market after market, worldwide :-)
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That, I suspect, is how most MNCs became top dog in market after market, worldwide

I think your point is broadly accurate, but I do think it's a bit more cloudy/shady/complex in China specifically. When we were in country last year we were told by a few people to watch where MNCs won contracts in China. They would be pretty high profile, focused on the big cities such as Shanghai and Beijing, and be for monetary sums that were nothing to sneeze at (GE and the "green" Olympics stuff, for example).

But if you looked at who was winning contracts in the west, where the real money is being spent (the stimulus, for example), it's domestic Chinese companies. That's because while China wants to do enough to keep the MNCs happy and their dollars flowing into the country, China wants to support its domestic industries so it can emerge as a global business leader. So they are giving very big money to Han Chinese in somewhat low profile ways.

I thought of that observation when I read this passage from Rogers because it's certainly true that while you seen enormous amounts of Western logos on the coast, they're much rarer in central and western China. But we can talk more about the Chinese character when we get to China Road. And that will be an interesting discussion.

Tim
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<< But if you looked at who was winning contracts in the west, where the real money is being spent (the stimulus, for example), it's domestic Chinese companies. That's because while China wants to do enough to keep the MNCs happy and their dollars flowing into the country, China wants to support its domestic industries so it can emerge as a global business leader. So they are giving very big money to Han Chinese in somewhat low profile ways. >>

While emerging as a global business leader might be a nice outcome, Beijing is more concerned about maintaining the status quo. In order to do that, they have been building a wealthy class of non-government officials. This group of newly wealthy entrepreneurs have gained much and have much more to gain from the current system and so will support the party's efforts to maintain centralized control.

This is why investing alongside the government in China is such an important step for success. Guanxi is an important cultural aspect that is good to understand, especially for foreigners looking to do business in China, but for individual investors, guanxi is less important than government connections and implicit/explicit government support. The line can be, and is intentionally, blurred, but I think it is important to understand the underlying current in order to form an accurate investment thesis.

As usual, this is just my cynical take on the situation and I am open to other interpretations.
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Beijing is more concerned about maintaining the status quo.

I would actually quibble with that. I think Beijing is most interested in preserving Beijing. Thus, they're very open to change (see recent economic reforms) as long as that change quells unrest and serves to keep them in power.

It has to end somewhere, though, because ultimately what will paradoxically "keep them in power" will be competitive elections.

But if you view Chinese government policy through the lens of self-preservation, my own opionion is that it makes a lot more sense.

Tim
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what will paradoxically "keep them in power" will be competitive elections

I realize the following question calls for wild speculation, particularly since it isn't easy to discern the level of (muted) dissent across China, though I have not seen it discussed (and I have never been to China and don't know it well enough to begin to speculate).

My question is: What do you think is the likelihood that China's leaders would retain power if the country moved to free and fair elections? And I would even be satisfied with speculation if we were to adopt the assumption that China's economy continues to flourish and grow leading up to such elections.

Though I am responding to Tim's statement, I'd welcome anyone's thoughts here.
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Tim: "I thought of that observation when I read this passage from Rogers because it's certainly true that while you seen enormous amounts of Western logos on the coast, they're much rarer in central and western China."

As in any emerging market, that's primarily a function of commercial media access. Once commercial TV blankets a region, the big spenders ramp up distribution and merchandising and blitz the airwaves to trample all over the local brands.

'When an elephant enters its kingdom, even the lion gets out of its way'

I wish I had a dollar for every country /marketing manager that's tried - in vain - to argue "it's different" in his/her market. :-)
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I am only about a third of the way through Jimmy's book, but I'd sum up my observations as follows:

1.) you have to be courageous enough to look where no one else is looking

and/or

2.) you have to look at what others are looking at, but able to see something else

This is more Charlie Munger like than Buffet like. Buffet adheres to a tight circle of competence, Munger likes to know a "little about a lot" and believes education across a diverse and liberal arts curriculum makes numbers one and two possible, much like Rogers interest in history.

NW
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