Global Treasure Hunting

The Daily Reckoning PRESENTS: There are good mid-size and small companies tucked away in places other than the United States. Stateside investors ignoring these other opportunities are like wine drinkers who don’t want to try imported wines. Chris Mayer explores…


I just finished two new books about investing. One, written by a capable analyst, tackled global investing directly. The other, penned by a famed money manager, did so only indirectly. But the message behind both books was simply this – investors need to look abroad.

We’ll start with the indirect first. Christopher Browne of Tweedy, Browne fame just published a book called The Little Book of Value Investing. In it, he lays out some basic thoughts and ideas on how the aspiring investor may add to his financial breadbasket.

The book is in the Graham and Dodd tradition – espousing simple verities about the virtues of buying cheap stocks. It’s like a little country store. But instead of polished apples and sweet corn, the shelves hold bags of polished wisdom and sweet dollops of moneymaking advice.

But what struck me, buried among the homespun maxims, was his emphasis on global investing.

Browne gleefully tells readers of his exploits kicking around in faraway markets. Like an eager traveler returning from his first look at the pyramids of Egypt or gazing up at the Incan ruins of Machu Picchu, Browne talks about the glories of picking up cheap stocks in Japan, South Korea and Switzerland.

In the late 1990s, free-spirited investors could find Japanese homebuilders, media companies and textile mills selling for less than the cash on their books. In 2003, Browne uncovered a Swiss conglomerate loaded with valuable assets – real estate, a sheet metal business, a sporting goods division and more. The stock traded for only one-half of an understated book value. In two years, the stock doubled. He writes about Dae Han Flour Mills of South Korea, which he picked up for one-third of book value.

This is merely a small sample of Browne’s profit-laden travelogue. A globe-trotting treasure hunter, Browne spends considerable ink on the rationale behind global investing, understanding foreign accounting, what to make of foreign currencies and more.

But for all the convoluted reasons others often offer up for investing in foreign stocks, Browne offers one that’s crystal clear: “If you expand your horizons to all the developed countries of the world,” he writes, “you can double your chances of finding cheap stocks.”

To dispel any fears of putting one’s hard-earned dough in some flighty company glued together with matchsticks, Browne offers another basic, yet compelling, observation.

When you rank the top 20 companies in the world by sales, you find 12 of them maintain headquarters in Europe or Asia. “The world’s largest oil company is based in the United Kingdom [BP],” Browne writes. “And three of the five largest auto manufacturers are found in Germany and Japan.”

What holds true at the top also holds true in the middle and at the bottom. There are good mid-size and small companies tucked away in places other than the United States. Stateside investors ignoring these other opportunities are like wine drinkers who don’t want to try imported wines. They have restricted their choices unnecessarily – and they don’t know what they are missing.

Browne is a man who follows his own recipes. Today, his firm, Tweedy, Browne, is finding bargains overseas. Of the $14 billion in assets it manages, about 70% of the pile is in international stocks. And about a third of that is in small companies with market caps of $5 billion or less. Among his current favorites spots are South Korea, Japan and Mexico.

The second book tackles global investing directly. Finding the Hot Spots is the title of David Riedel’s new book. A former Salomon Smith Barney farmhand, Riedel now heads up his own independent research firm.

Riedel opens his book with several myth-slaying pages. To the charge that investing overseas is too risky, Riedel turns the microscope on U.S. markets. “Remember Enron and WorldCom?” Corporate mischief and thievery pepper American companies as well.

Investors also have a way of looking down at foreign firms because they believe the information they are getting is not reliable. Again, Riedel points out that unreliability is not unique to overseas markets. It’s not as if we are talking about malaria or polio. In my personal experience, the disclosures can sometimes be even more thorough overseas than at home. Foreign firms know they have an extra hurdle to clear.

Further, let’s not forget the basic idea of investing is to make some money. Riedel writes, “Nobody would tell ever tell you that you should not buy stocks from the beacon of American business like IBM, Coca-Cola, Disney, Time Warner, Blockbuster, Microsoft or Sears.” Yet a three-year investment in about half of these examples would have left investors with less money than they started with.

But the most interesting aspect of Riedel’s book is the numerous profiles of foreign firms. Many of these are companies you’ve never heard of before. And they trade on U.S. exchanges. Riedel discusses China Yuchai, for example, which makes diesel fuel engines. Another interesting China play is Bodisen Biotech. Despite its name, Bodisen is simply a producer of fertilizer in China. This one looks interesting. As I write, the stock is about $9 and trades for only 12 times trailing earnings. The company has no debt and nearly a dollar a share in cash. Riedel’s book gives plenty of interesting ideas like these.

Another good reason to invest abroad is to give you some exposure to a currency other than the frail and waning dollar. Riedel uses Brazil as an example of the good things that can happen when you get a rising market and a good currency. Last year, Brazil’s market rose about 30%. However, the Brazilian real also rose against the dollar by about 14%. So all told, U.S.-based investors in Brazilian stocks turned a 30% market gain into a 50% gain in dollar terms.

Not that you will always get that extra wind behind your back. But it shows you an unappreciated force in global investing.

In summary, plenty of options lay before investors these days. Consider the opening up of Eastern Europe or the booming economies of Asia. Or look at the brightening prospects in parts of Africa. Or easily overlooked South America. Both Browne and Riedel remind us of the potential in these markets. They nudge us on to take a look beyond the fringe of trees on the horizon and explore other lands under the big open sky.


Chris Mayer
for The Daily Reckoning
November 15, 2006

Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Daily Article series to here in The Daily Reckoning. He is the editor of Mayer’s Special Situations and Capital and Crisis – formerly the Fleet Street Letter.

“To hear some Democrats tell it,” begins a feature article in USA Today, “the United States is engaged in a costly, ill-advised foreign adventure that is long overdue for a change of course.

“Not the war in Iraq. Globalization.”

According to USA Today, the election has turned globalization into a political issue. There are those who are agin’ it…and those who are fer it.

For the record, here at The Daily Reckoning, we are neither fer it nor agin’ it. What we like is free trade, simply because we don’t like anyone telling us what to do. But someone always seems to want to tell us what to do…often the same people who are selling us ‘globalization.’

Globalization has been around for centuries. It comes in fits and starts, as trade routes are opened and closed. Even in pre-historic periods, people traded widely. Archeologists find beads, art, and implements often found thousands of miles from where they were made.

Later, the great empires established free trade zones in their conquered territories…often improving the quality of life – even for those of whom they’ve beaten. Empires knock down trading barriers and establish order and safety, in which people can do their business.

There’s nothing new to this.

But there’s a catch. If an empire allows lower-cost or more dynamic competitors into its trading bloc, it had better have something else up its sleeve.

Globalization has been a big benefit to Americans, says the Peterson Institute. It adds $1 trillion to the economy each year…about $10,000 per household.

The big gains come from reduced costs, say the Institute’s experts. Asia can produce things cheaper than we can. These savings are largely passed along – by low-margin retailers such as Wal-Mart – to U.S. consumers. Wal-Mart’s everyday low prices have surely helped middle and lower class Americans increase their standards of living, even while their real incomes were steady or falling.

One of the reasons those incomes were not rising – and we are talking about a long period since the 1970s – was globalization. It was very hard for working stiffs in the United States to make more money, when working stiffs in Asia were willing to do the same stiff work for a fraction of the price.

Jacob Hacker argues that the pain inflicted on the middle and lower classes by globalized competition is getting sharper. He claims that when a family loses a job today it tends to lose a bigger portion of its income than it did in the 1970s.

“The typical family that stumbled [in the ’70s],” explains the USA Today report, “lost 27% of its annual income. But over the last decade as globalization moved into high gear, the income loss averaged around 40%. For a family in 2004 earning the median income of $43,200, that would mean a crippling decline of $17,280.”

Why is that? We’re only guessing…but we suppose it is because there are fewer well-paid jobs in manufacturing, so that the person who loses his job in that sector has to look elsewhere – often to clerking at Wal-Mart or flipping burgers. We suppose, too, that that is why the rich are getting richer…while everybody else is struggling. The rich get their money from capital investments and specialized careers. The poor and middle class – even white-collar workers – get their money from wages, which have to face international labor competition.

So naturally, the Democrats are breathing heavily on the globalization issue. They pretend to represent the working stiffs. And now they’re going to pretend that the masses can keep on enjoying those ‘everyday low prices’ without yielding to wage pressure from Asia. They’re going to call for ‘fair trade,’ not free trade…and try to clamp a ball and chain on the legs of our competitors. Of course, Asia won’t let itself be hobbled with U.S. style work-rules, social security, health care, lawyers, safety and environmental regulations. Still, there may be trouble coming…and the stiffs may still be stiffed.

More news:


James Boric, reporting from Charm City…

“…I cringed when he uttered those words. Warren Buffett, John Templeton and every other billionaire investor alive today would be appalled! But this priest is like 99% of all investors in America…”

For the rest of this story, see today’s issue of The Sleuth


And more views:

*** Here’s a contradiction in terms: a fiscally responsible Democrat.

It seems impossible, but it looks like that’s what we have gotten in Senator Harry Reid of Nevada, the newly-elected Senate Majority Leader.

Friend and DR reader Jon Carnes received this letter from the Senator:

“Thank you for contacting me regarding fiscal responsibility and tax reform. I appreciate hearing from you, and I noted your suggestion to read the book Empire of Debt.

“I agree with you that our debt is extremely troubling, and I am disturbed that some in Washington seem to regard the debt as a mere inconvenience rather than the actual threat it represents. Over the last four years, the country has experienced the worst fiscal reversal in history, which is not a temporary deficit due to the economic slowdown or the costs on the war on terrorism. Instead, the $5.6 trillion 10-year surplus the President inherited is now a deficit of $2.8 trillion, creating a total fiscal reversal of almost $8.4 trillion. That amounts to over $25,000 of debt for every man, woman, and child in the United States and threatens to leave our children and grandchildren in debt for a generation.

“This massive debt will have a serious and damaging effect on our economy…”

*** Some friends introduced us to their new baby – a little girl only three weeks old. We examined her. Cute little smile…alert, wondering eyes…dark hair…and miniature fingers and toes. How does it work, we meant to ask. We have six children; you’d think we’d know. But we were unprepared for this. Did she need batteries?

Somewhere in that little head there must be a complete set of plans…to construct a fully-grown-up woman…with all her delightful curves and contradictions…capable of confounding her husband with arguments that never seem to join his.

Does she already know she is supposed to love silk underwear…and diamond rings…and houseplants…and Smallbone kitchens with granite countertops?

Where do they store all those details?

“What a miracle,” exclaimed the mother. “I mean…that this intricate, exquisite little creature comes out of my body. I can still hardly believe it. ”

“She has my smile,” said the father.

“Well, actually, she looks like her grandfather…your father.”

Men and women get together too casually these days. A woman marries a man with a big nose…and she curses her whole line – for generations; the big nose will be there forever. She may marry a man with no money and hope he gets lucky. But what can she do about his crooked legs…his strange gait…his funny little head? And what if the man is stupid? These are defects that can’t be wiped away by the stock market or the housing bubble.

Is there any more profound act of partnership than mixing your family’s genes with those of someone else?

In the old West…and still today in other parts of the world…a family would think long and hard about whom they married off to whom. When a young man brought a bride into the family…he didn’t just bring in a woman. She brought with her parents, brothers and sisters, cousins and other future in-laws. These connections – along with the genes she brought – would attach to the family for decades into the future.

In the novels of the 19th century for example, you often found women who practically could not be married off, because there was illness or dishonor in her family. When the prospective bridegroom’s family discovered the stain on his intended’s escutcheon, the whole deal was scotched. Even if the poor girl’s aunt had died of tuberculosis or her uncle had run off with a chambermaid, it was enough to dim her chances of making a good match. Who wanted people like that in the family?

But those days are gone. Young people have to find their own marriage partners. And if the union doesn’t work out…well, there’s always the divorce court.

The Daily Reckoning