A Front-Row Seat to China’s Boom

WEALTHY: Your money … their ideas

HEALTHY: How the health care crisis affects car prices

WISE: Charles de Gaulle on China


Give me a hunk of that pie! (Michael Masterson)

Fun facts about China (Michael Masterson)

Add the word “solicitous” to your vocabulary

Cherry-Picking Ideas From the Pros

By Andrew Gordon

I’m no big fan of mutual funds. (The vast majority of them have done worse than their benchmark index during the last five years, according to Standard & Poor’s.) But to get new ideas about possible investments, it’s worth studying the few that consistently perform much better than their indexes.

To find these top performers, go to Morningstar’s fund screener. Use the pull-down menus to choose “domestic stocks” for fund group … “at least five years” for manager’s tenure … and “less than $200 million” for total assets. Check the 5-star box in the “Ratings and Risk” category. Then click “show results” to get a list of funds.

You’ll be tempted to select those funds with the biggest year-to-date returns. Don’t. It’s only June. And with funds, even one-year and three-year returns don’t mean much. Instead, click on the funds with the smallest total assets – for example, Manor Growth, which has $3 million in assets.

To see the companies a fund has invested in, click on “portfolio” and then “top 25 holdings.” Manor Growth, for instance, has only 34 stocks. In other words, it’s a fund with fairly concentrated holdings. (And the more concentrated the holdings, the more important each stock is to the fund.)

You can see that Manor Growth’s top 25 holdings are very stable … that their biggest category is utilities … and that they like to hold big growth companies. This indicates that Manor Growth’s managers haven’t panicked because of the market dip and that they evidently see energy and consumer goods as good sectors to be in. (Morningstar will even allow you to check out which energy and consumer goods companies are Manor Growth’s favorites.)

Do this for a few other “concentrated” funds, and you’ll begin to get a feel for how the more successful professionals are approaching the market. But don’t blindly follow the investment strategies being used by any one fund, no matter how successful it is. Your conclusions on what to invest in should always be your own. It’s your money, after all.

[Ed. Note: Andrew Gordon, ETR’s financial expert, is the editor of our new investment service, Income Advantage. Each month, Andrew uncovers dividend paying companies that combine a high level of safety with generous yields.]

“China is a big country, inhabited by many Chinese.”

– Charles de Gaulle

Notes From Asia: A Front-Row Seat to China’s Boom

By Michael Masterson

Arriving in Beijing, we are amazed. First, by the cleanliness of the airport. And then by the efficiency of the passport and immigration personnel. Stepping into the arrival zone, K and I are greeted by two valets from our hotel who welcome us in English, take our bags, and escort us to a waiting van. The driver gives us bottles of water and cold towels to refresh ourselves. We sit back and learn something about China:

Its population, at 1.3 billion, has more than doubled since 1950.

There are 100 cities in China with populations of 1 million or more.

Its land mass is the third-largest in the world (after Russia and Canada).

Looking out the van window, we remark on the good condition of the road and how pretty everything is. Potted flowers line the median. Along the roadsides, poplar trees. “Why doesn’t anyone talk about how clean this city is?” we want to know. We imagine how disappointed a Beijing tourist in New York or Miami might be.

Our hotel is large and modern and, again, immaculate. The service – we are not surprised to discover – is superb, from the doormen who rush to grab our bags, to the greeters who welcome us as we step through the revolving doors, to the smiling receptionists, solicitous concierges, capable operators, et al. Everyone is courteous, smart, and efficient. Nothing is ignored or neglected.

Only in Asia can you enjoy service this good. It’s undoubtedly a result of the unusual combination of a highly cultivated – yet largely poor – population. It will be interesting to see if, as China becomes wealthier, its service declines.

We take a walk in the afternoon and are once again amazed – this time by the size and modernity of the city. This is not at all what we expected: dirt roads … drab, Communist-era buildings … gloomy people … etc. We had heard stories about how big and impressive Shanghai is, with its towering buildings of steel and glass – but we had heard nothing much about Beijing.

These days, there are four million cars circulating through Beijing, our guide tells us. Just five years ago, there were only a few hundred thousand. Everywhere we look, new buildings are going up and every good-sized parcel of land is being prepared for some future construction. In preparation for the 2008 Olympics, all the beautiful wooden palaces and pagodas are being restored. And bustling workers are everywhere – repairing roofs, trimming hedges, relining sewers, fixing streetlights, repainting woodwork, and sweeping the pavement.

You can’t help but have the thought everyone seems to have when they come to China: This country is booming.

To me, it feels like good news. The bigger and stronger their economy gets, the more opportunity there will be for everyone, including Americans. But many people have a very different reaction to China’s growth – including two of my most-valued colleagues, BP and EP.

“We’d better get on the ball,” BP told me. “At this rate, they’ll be way ahead of us in no time. They are already making everything we buy. And now, with all this building, they are going to be using up all the oil and gas.”

“China’s growth has hit us in the construction industry,” EP, a real estate developer in South Florida, said. “They are buying up all the cement and steel they can get their hands on, and it’s sent our costs skyrocketing.”

Only six percent of China’s population is middle-class, our guide tells us. Still, that’s 90 million people. If that population triples in the next 10 years (which is probably a conservative estimate), that means the country’s consumer economy in 2015 will be as big as the U.S. economy is today.

Why would that be a threat to us? It means more stuff we can sell them – assuming, of course, that we have something useful to sell in 2015.

I go back to thinking about how I think about business. When I hear that one of my competitors is having a booming year, I am happy. That seems like an opportunity for my business to boom next year or the year thereafter. The more business the competition does, I figure, the more they will spend on marketing. And the more they spend on marketing, the greater the number of people we will have in our mutual marketplace.

If the marketplace gets bigger, so, too, does my opportunity. If my competitor is currently doing a better job than I am in developing that market, good for him. I’m confident enough in my own abilities to believe that, sooner or later (probably sooner), I’ll figure out why he’s doing so well and use that understanding to create products, projects, and promotions that will fuel my growth.

It may be that the essential difference between liking and fearing China’s growth rests in a different view of the nature of the market. If, on the one hand, you think of the market you are in as a fixed thing – a pie of a certain fixed size – then the size of your competitor’s slice directly affects the size of your own. If, on the other hand, you believe that the market is infinitively expandable – that the size of the pie can get larger ad infinitum – then you would welcome any and all growth, because it would mean more opportunity for you.

I suppose there are fixed markets in the business world in which it might make sense to run a business with a mine-versus-yours mentality. But most of the industries I’ve been in – from bars and restaurants to publishing to real estate – expanded and contracted over the years depending on how much marketing was being directed at them.

I consider it to be an advantage to see the world of opportunity as I do, because it allows you to put all your energy and enthusiasm into marketing and product development. When you view the business world as a fixed-pie, you end up spending too much of your time spying on and worrying about the competition.

Today’s Action Plan

Instead of worrying about how your competitors are going to “beat” you, look to them as a source of opportunities. Ask yourself, “What are my competitors doing that’s working? What can I do to profit from their growth?”

You might find that your competitor is taking advantage of a side of your business that isn’t getting the attention it deserves. And that’s a cause for celebration, not fear.

The Quotable Mr. Franklin: On Enemies …

“Enemies do man more good than harm. They point out to us our faults; they put us upon our guard; and help us to live more correctly. The best men have always had their share of envy and malice of the foolish and wicked, and a man has therefore some reason to be ashamed of himself when he meets with none of it. My good friend Rev. Whitefield once said, When I am on the road and see boys in a field pelting a tree, though I am too far off to know what tree it is, I conclude it has fruit on it.”

(Source: The Compleated Autobiography, by Benjamin Franklin, compiled and edited by Mark Skousen)

General Motors: Latest Victim of the “Economy of Disease”

By Jon Herring

A few days ago, Early to Rise sent you a message from Dr. Mark Hyman, M.D. In that e-mail, Dr. Hyman wrote:

“We are facing a national crisis, and it’s one that the government, food, and pharmaceutical industries seem to want to ignore. The reality is that this is the WORST crisis in the history of our nation. We are facing an epidemic of obesity and related diseases that, if not solved, will bankrupt our society.”

You might have read that and thought that Dr. Hyman is an alarmist. Surely the health care crisis will not “bankrupt our society,” will it? Actually, it is already happening.

Consider General Motors …

Last year, health care expenses for employees and retirees added $1,525 to the cost of every vehicle the company produced. In fact, GM now spends more for Blue Cross than it pays to any steel or rubber producer. And while the company has a market value of $14 billion, it has more than $64 billion worth of unfunded healthcare obligations.

There’s not much you can do to change the “economy of disease.” But you do have control over your own health. If proper nutrition and daily exercise are a part of your routine, you are doing your part.

It’s Good to Know: About China

By Michael Masterson

English is the most widely spoken foreign language in China. Millions of Chinese study English, beginning in primary school. Universities offer several specialized programs, including Tourism English and Business English.

The official policy in China is one child per family. This policy, meant to reverse the population explosion that the Communists created, has succeeded in reversing population growth. But the longstanding Chinese cultural preference for boy babies has resulted in some reprehensible practices, such as gender-based abortions and baby selling.

The Chinese invented the art of working with lacquer about 2,500 years ago, during the feudal Zhou dynasty. Lacquer is used to decorate boxes, fans, plates, musical instruments, furniture, and the pillars of temples and palaces.

China is the world’s longest-running civilization. During the Xia dynasty, 4,000 years ago, the Chinese were using a written language and had mastered making silk.

Among the many firsts the Chinese can claim are the production of cast iron in the 4th century BC (1,800 years before Europe discovered it), paper in the 1st century (1,000 years before Europe), block printing in the 9th century (500 years before Europe), and mechanical clocks (powered by the water-wheel) in the 8th century. Other firsts include suspension bridges, the foot stirrup (which revolutionized cavalry warfare), and (the two every Westerner knows) gunpowder and rockets.

Word to the Wise: Solicitous

Someone who is “solicitous” (suh-LIS-ih-tus) expresses extreme care or concern. The word is derived from the Latin for “to move, to stir.”

Example (as I used it today): “The service – we are not surprised to discover – is superb, from the doormen who rush to grab our bags, to the greeters who welcome us as we step through the revolving doors, to the smiling receptionists, solicitous concierges, capable operators, et al.”


Copyright ETR, LLC, 2006