Disclaimer: the main purpose of this note is to help myself distill and internalize the information from the investment books, mags and websites I read. If you feel it’s informative, I’d be very glad. But please do not take it as your investment guide. People have different personalities, what appears very right to me, might be totally wrong to you. Please do your own research for your investment.
- Ellen’s FA study note 0: travel towards a wonderful world on trains
- Ellen’s FA study note 1: institutional investors and individual investors
Long-term (5 years to 10 years) investment principle No. 1: Find a good emerging market. Find a fast-growing industry in this good emerging market. Find a company with wide economic moat in this industry. You take care of the business, capital will take care of itself.
When established economies such as Germany is in a good economic cycle, people would happily say “This year’s GDP growth is 3%, how fabulous!” Companies such as Volkswagen would celebrate hard if their profit-attributable-to-shareholders grow at a rate of 15% annually. In emerging economies such as China, when things go really bad (such as this year, a variety of natural disasters attacked one after another), the GDP growth still exceeds 10%. Companies such as China Mobil, China Life have the growth of profit-attributable-to-shareholders at 30+%. You see the difference yourself.
From year 1977 to 1997, the Heng Seng index of Hong Kong grew 31.2x, averagely at 21.5% per year. Now the similar golden 20-years is happening in China mainland. Basically you cannot afford not to invest in any emerging market. Deutsche Bank knows it. You should know it too. They are aggressively expanding their business in China. You cannot build your own “Deutsche Bank Tower” in Beijing, but you can buy and hold H and/or B shares of Chinese enterprises in Germany.
People talk about political risk. But the “political risk” does not only exist in emerging economies. Look at the recent subprime credit crisis in USA and look at the high tax rates in Europe. You do not shield yourself from political risks by avoiding emerging markets.
High volatility, yes. But in the long run (let’s say, in a time interval from 5 to 30 years), the stock price reflects the quality of the company truthfully. In short term, anything could happen. There are so many super institutional investors nowadays, many of them are able to buy any company in the world. If they happen to have the same idea at the same time, they could largely affect a stock’s price. Do not get too nervous for the daily market price (but always remember to closely monitor the businesses you own). Capture the major uptrend, not the small ones.
Emerging markets will not be “emerging” forever. Sooner or later they would be emerged and the growth will slow down. So you cannot wait until everything is perfectly stabilized and matured in the now-emerging markets. Get in now and enjoy the fast growth. In the coming study notes, we will have a look at the principle of when to get in and when to get out with some concrete examples.