International Investing Made EZ 2001, Lesson 2



Lesson Two Session One

Learn about the power of currency moves.

International Investing Made EZ 2001

Lesson Two – First Session

This is Colonial breakfast in the tropics, outdoor dining under ancient ceiling fans that turn lazy arcs and coax a gentle breeze. Shafts of morning sun, crisp white linen and traveler palms sway in soft harmony with rackles, katydids and the gentle clinking of silverware.

Singapore 1971. The Raffles Hotel at an outdoor restaurant just next the long bar (home of the Singapore Sling). There is something comfortable in the old fashioned pots of thick cut marmalade and slightly burnt toast that stand in racks of sterling silver. This elegant setting and quiet service was an easy part of an ancient tradition offered to so many generations past. All seemed well.

All that was about to change as the morning newspaper, The Straits Times, proclaimed “U.S. dollar devalues!” That comfortable modern era had just come to an end.

Those many years ago as an American travelling only with dollars this was disaster. From centuries past, history had seemingly supported America’s financial well being. Britain’s colonial days had led to the emergence of America, the world wars, modern technology, Yankee know how, puritan work ethic and unbounded natural resources had all worked to form the greatest economy mankind has ever known.

That history had created a world economy vastly dominated by the USA, and this domination made the US dollar the bastion of global currencies and the reserve currency of the world, (as it still is today). Yet during the 20 years after the war times had changed. Japan and Germany were no longer bombed-out shells with no economies. Yet the greenback remained the reserve currency. This has distorted currencies enormously.

Lesson one explained how one key to making extra profits in global investing is by spotting distortions. At the age of 21, by luck, I arrived May 1968 in Hong Kong to invest and do business globally. This, by chance, was during the beginning stages of a very major economical and technological shift that is still having an impact on our economy 35 years later. This shift was creating many distortions.

These distortions would create a new era where economic success would be spread far more globally.

Few understood this back then. Almost everyone then (including me) felt economically secure just having U.S. dollars and U.S. investments. The dollar’s rate had been fixed by the Bretton Woods Agreement after WWII. The treaty fixed the rate of every currency to the U.S. dollar and everywhere, the U.S. dollar was known. It was respected, strong and worth the same amount everyday. In many cases it was considered better than local currencies and was much in demand, though often illegal for locals to hold.

Suddenly on that day in 1971, far from home, dollars would not be accepted because no one knew what they were worth. I did not know how to pay for breakfast! My serene tropical meal had been mightily disturbed because the US dollar was suddenly and without warning worthless for a while. Then they became worth less than they had been before! That change altered the way people thought about money forever and affected world currency markets to this very day.

During those years abroad many practical lessons on money came, but few as dramatically felt as that lesson about currencies that morning. The fears were worse than the reality but the lesson has never been forgotten, “Never rely on any one currency, banking system or government to protect your wealth”!

Today, after many years of once again enjoying US dollar strength, conditions are eerily similar to what they were in the early 70s. The dollar is the bastion of global currencies and is the reserve currency. Many countries are now dollarizing (pegging their currency at a fixed rate or using the dollar as their currency). The U.S. economy is slowing and Wall Street has crashed after a huge record setting bull era. Interest rates on the dollar are low and inflation is beginning to rise. There is an energy crisis. Most of these things happened in the early 70s as well!

History never repeats exactly but there are enough similarities that we should sit up and look and see what risks and opportunities these conditions create.

One opportunity in the 70s was the rise in gold, the yen and European currencies. Today the Euro is quite weak versus the dollar, yet offers a higher interest rate. This may create several opportunities. One of these opportunities may relate to the value of Euro to the dollar and the Czech Republic to the Euro.

This introduction leads us to lesson one where we saw an indication of an apparent distortion in the Czech Republic evidenced by the car (Skoda) which was manufactured there being rated one of the most liked by owners, even ahead of Porsche and Mercedes Benz.

So how does one go about investigating such a distortion and taking action? Let share some ways on how to approach this.

First let’s look to trusted sources of international investment information such as the Economist Magazine’s web site www.Economist.com. When the Czech Republic is entered, a search here shows 238 relevant articles.

The first article dated June 21, 2001 turns up some good data. Entitled. “A Slavic Sun King”. Here are excerpts from this article:

“Vaclav Fischer has created something that is still rare in Central Europe: a trusted brand.

It should come as no surprise that Skoda cars and Budweiser Budvar beer are the most recognized brand names in the Czech Republic. Just behind them, however, is a company that few non-Czechs will have heard of: Fischer. That is a strangely lofty situation for a mere travel agency. But then Czechs consider the company’s founder and sole owner, 47-year-old Vaclav Fischer, to be their most successful entrepreneur. He is certainly a rare tycoon for the former communist world: squeaky-clean, soft-spoken, politically independent and more interested in serving than gouging his customers.

Almost every Bohemian town square is emblazoned with the blue-and-white livery of a Fischer travel agency. Inside, uniformed staff offer glossy brochures promising breaks to Acapulco, or at least Ibiza…nothing special in the West, but a welcome consumer revolution for sun-starved Slavs raised on communist travel monopolies. Fischer hopes for sales of $200m this year. It accounts for about half the 500,000 package holidays sold in the Czech Republic each year; in Western Europe, the biggest tour operators seldom have more than a 20% market share. Fischer’s elegant office in central Prague, which overlooks the opera house that staged the premiere of “Don Giovanni”, is a far cry from the cubby-hole that he rented when he first returned. What drove his success, say observers, was a willingness to invest in quality for a long-term return. A Fischer holiday is still beyond the pocket of ordinary Czechs. The average package goes for $500, well above the average monthly salary. All the same, Mr. Fischer bullishly believes that the Czech market will quadruple to 2m packages by 2005.

Mr. Fischer is eager that the Czech Republic should join the European Union, which it hopes to do in 2004. He reckons his low operating costs and central location (though what former Soviet satellite does not claim to be at the heart of Europe these days?) will give him an edge to push back into the crowded EU market, especially in neighboring Germany and Austria. Membership will also do away with regulations that prevent his charter airline business from hauling passengers around within the EU.” This article now gives us the names of three businesses to investigate in the Czech Republic, Skoda, Budvar Beer and Fischer Tours.

Another article in the first fifty quoted on The Economist search engine turned up an article about TV Nova a successful Czech TV station, so now we have four companies to research.

At “askjeeves” Prague Stock Exchange brings us to the Czech Capital markets which gives updated listings of all the shares listed in the Prague Exchange. No Skoda, No Budvra, no Fischer or Nova TV though the names of many of the listed companies are meaningless at this time.

Next we’ll try banking contacts by contacting eClub advisors Swiss banker, Andi Kaegi, akaegi@bpcs.ch, Teddy Christainsen at Jyske Bank in Denmark, TEDDY@JYSKEBANK.DK, Richard Radcliffe at Anglo Irish Bank Isle of Man, RichardRadcliffe@ANGLOIRISHBANK.ie, Michaela Andre at Anglo Irish Bank Vienna, mavie@angloirishbank.at, Barrie Martin at London brokers NCL Finance, b.martin@nclinvestments.co.uk, U.S. advisor Larry Grossman siamsite@gte.ne and Toronto based international money manager, Ian Dalrymple at iand@nigel.com

I will share their replies in the next lesson.

In the meantime there are more fundamentals to be gained from a search of the Prague Post www.praguepost.cz, and www.ceebiz.com an internet newsletter about Hungary, Poland and the Czech Republic provide more background information.

This is a low labor country, about to join the European Union and we can see that at least four companies appear to be successful and perhaps have a great future. Yet is there somewhere else we should look?

Yes! Let’s look at the currency of the country, the country’s overall economic growth and political stability. Beyond these factors we should look at the fundamental of all equity markets now, the fundamentals and technical aspects of the Prague Exchange, plus the needs and desires of society.

These desires are fairly predictable having been classified many years ago in Maslow’s Hierarchy of Needs. This hierarchy of needs are the physical, security, social, acknowledgement and self-realization needs. A starving, cold person does not care how fancy his clothes are, how much his car impresses friends, etc. He just wants food. He will ignore brand names, insignias and not worry too much in the neighborhood he is in. Once these physical needs are met he then turns to security, to assure that he can keep his home, stay warm, etc. Only when he feels safe and has spare time does he start to think more about family, friends and being social. Eventually he’ll want to impress these friends. He’ll want to be important. Once this is achieved he’ll have to prove to himself he is as good as his friends think he is.

The World Bank considers a country with an average income of $11,000 of purchasing power per capita to be a high income country (the US average is $27,000 and Europe’s $21,000). The 25 countries in this category have a total population of about 800 million and it is these places where the main markets for more service and less stuff will grow.

So let’s look at the Czech Republic and see where its populations stands. Then we can look at any company there and see if it is serving the locals or richer (or poorer) markets. Does the product fit the needs of the market. Is there room for growth?

We need to also look at the balance sheets of any companies we might be interested in (how much profit, debt assets, etc.) An examination of market fundamentals also counts, ie. the price-to-earnings ratio, and price to cash flow, market value in relationship to assets, etc. We need to determine whether there are good values for the shares at this particular time.

Finally we need to assess the management of any business we are interested in.

Then we should ask if the stock market is the best place to invest, for us. There may be good investments in the Czech Republic but they may or may not fit our own particular wants, need and desires (see our course on Inspired Investing and Quantum Wealth for more about this).

With these thoughts in mind and because this is a interactive course, let’s hear your ideas about the Czech Republic after you have used the research information provided in Lesson One and Two and your own resources and experiences.

This course is a collective and your input can make it more accurate, richer and stronger for all. Your replies will also help determine Chapter Three. By the way, Prague is one of the most beautiful cities in the world to visit (but watch out for the pick pockets). Remember to always make your investing activities fun! Maybe a trip to Prague is in the cards! If so and you buy shares the expense may be tax deductible!

Until next message, good global investing!

Gary

 


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