Dear Diary,
We’ve come to China to check on our investments. Not that we have many. But the fewer you have, the more each one is important to you.
Of all the world’s major stock markets, only two are reasonably priced. China is one. Russia is the other. We are long-term bullish on both.
It is raining here in Beijing. Outside, the roads are clogged with slowly moving traffic. The scene appears normal for a big city. It could be New York, London or Paris. What is remarkable about the view from our window is that it came about so fast. Never before have so many people moved so quickly into the modern world.
Paris looked much like it does today after Baron Haussmann completed his makeover of the city in the 1850s and 1860s.
The London skyline has changed significantly over the last few decades – with the addition of many new landmarks, such as the London Eye, The Gherkin and The Shard. But the basics of the city were put together over hundreds of years and remain relatively unchanged.
New York, too, was largely completed 60 years ago.
But modern Beijing is brand new. A few years ago, it barely existed. In 1979, when former Chinese leader Deng Xiaoping announced that henceforth it was okay to make money, there were few decent roads… few decent cars… and few decent bars in Beijing. Now, they are all over the place.
A New Beach of Hope?
And now China – not the US – offers a beacon of hope… and a model for development to the rest of the world. At least, that is the premise of Stefan Halper’s new book, The Beijing Consensus.
The former White House staffer says China’s system of state capitalism is more appealing than America’s market-driven version:
Twenty years ago […] globalization was driven by American capitalism and its two founding ideas – that markets, not governments, drive progress, and that democracy is the optimal way to organize society. […] Today, in the world beyond the West, these certainties are eroding.
Come to China, and you will be impressed, as we are, with the material progress made over the last 30 years. But this progress was not made because of the genius of China’s central planners; it was made in spite of them.China’s success is widely misunderstood. Then again, so is American capitalism.
What does it take to produce prosperity?
Property rights – you have to believe that you can control and enjoy what you produce. Stable money – you have to be able to count on the medium of exchange. Freedom of action – you have to be able to go on with your business without too much state intrusion.
Communist China provided those minimal conditions. Its businessmen, entrepreneurs and hustlers went to work. The planners continued to plan. But their plans interfered far less with the economy than they had under Mao.
Meanwhile in the US, the planners… regulators… controllers… meddlers… and zombies – all those who prevent real prosperity – grew bolder and more numerous.
California to Guangdong
Washington now pays out a quarter of all personal income in the US – either in salaries or benefits. That’s up from 21% in 2000.
Every penny of that money results from a political deal of some sort, not a free-market transaction.
The US is a “democracy.” But democracy has little to do with material success.
Businesspeople and investors are indifferent to the form of government. What they care about are the criteria we mentioned above – their ability to hold on to their property, the integrity of their money and their freedom to do business without too much interference.
As China’s state capitalism reduced the role of government in the economy, Democrats and Republicans in the US wrote new laws and new regulations.
It was soon faster, easier and cheaper to set up a factory in Guangdong Province than it was in California. And once in business, the Californian found his taxes higher than the Chinese… and his regulatory costs far higher still.
Today, both the US and China have versions of “state capitalism.” But capitalism works best when the state keeps its proper place. When it tries to dominate and control the economy, the cronies take over.
Then costs rise… growth slows… the rich get richer… and everything goes to hell. That is the real reason American capitalism no longer looks so appealing.
Regards,
Bill
There’s No Such Thing
as a Bad Investment
You may be surprised by Bill’s bullishness on China and Russia.
After all, there’s plenty not to like about both countries and their economies. And most investors would rather stick to what they know and invest in their home markets.
But one of the principles we follow at Bonner & Partners is that there’s no such thing as a good or bad investment. Instead, every investment can be good or bad depending on the price you pay for it.
Put another way, investment success doesn’t come from “buying good things.” It comes from “buying things well.”
This is no different from everyday life. For instance, if I asked you if you wanted to buy my old set of golf clubs, you wouldn’t know the answer unless I told you what price I was willing to sell them for.
The same goes for investing in stocks, bonds and other financial assets: Fairness of price is paramount.
Another principle we follow is that markets are cyclical. Over a long enough time horizon very few things move in a straight line. Asset prices rise, and then fall. Bear markets give way to bull markets, which give way to bear markets again. Economies grow. Then they decline.
So, although there is a long list of challenges facing both China and Russia, (1) these two countries’ stock markets are selling at a big discount compared to the rest of the world and to their own historic averages, and (2) although both markets are out of fashion right now, there will come a time when investors start to pay attention again and pile in.
Seen through this lens, a preference for relatively cheap and out-of-fashion Chinese and Russian stocks over relatively expensive and in vogue US stocks makes perfect sense.
After all, on a trailing P/E of 6.9, each dollar of reported 12-month earnings in China will cost you $6.90. And on a trailing P/E of 5.6, each dollar of reported 12-month earnings in Russia will cost you $5.60.
Compare that to the US. On a trailing P/E of 20 for the MSCI USA Index, each dollar of reported 12-month earnings in the US will cost you $20.
Of course, the US stock market is rising. The Chinese and Russian markets are on less firm footing. This makes it easier for an investor to buy US stocks over Chinese or Russian stocks… because he has the comfort of doing so alongside the crowd.
This reminds us of something legendary resource investor Rick Rule said at a private meeting of Bonner & Partners Family Office members:
Investing is the only business I know that when things go on sale, people run out of the store.
Providing you’ve got plenty of patience… and have the guts to go against the crowd… we advise you to do the same.When the “On Sale” sign goes up, we’d rather pick up bargains while we can.
It’s the surest path to long-term investment success.