World Reports, August-September, 1999


To print this copy of World Reports, use this version

This is a significant extract of Gary Scott's World Reports August-September, 1999 and is about 10 pages or so. You may wish to print it out! Remember, page numbers refers to the printed page!

  • CASH IN ON CHANGING NOW. Spotting trends can help us gain an edge in the new millenium. This is especially true now as emerging markets have greater risk and trends in some major equity markets offer better potential
  • Beware of Bank Fees and Mutual Funds. Page six.
  • MY MOST BIZARRE COMMENTS YET BEGIN ON PAGE TEN.

Leather clip-clops echo on cobblestone squares as bear-skinned soldiers stride by. Waterfront smells ride on a brisk ocean breeze. A bronzed temptress sits on rocks overlooking a choppy, windblown sea. What secrets are held in her mysterious eyes?

Copenhagen, Denmark, Midsummer's Eve. Spotting trends before the pack does is one of the easiest ways to make substantial profits. This thought was on my mind as Merri and I flew to Denmark where I spoke at Jyske Bank's international investment course.

We brought our daughters, Francesca and Eleanor, and took in the wonderful sights of the city, visiting the cobblestone square of Copenhagen's Amalienborg Palace with its bear-skin hatted soldiers guarding their Queen. We strolled up the waterfront to the statue of the Little Mermaid that bronzed temptress sitting on a rock in the sea. Over a week we went everywhere and let the city unfold like a string of pleasantly lustered pearls. Denmark is a enjoyable place to visit but I also spotted trends in its history and recent stock market conditions which suggest that Denmark is also a great place to invest.

I've been concerned for two years with the potential of volatility in stock markets. My feeling is that each month we move closer to a major shakeout. This concern has been increased this month when a reader I respect very much warned that his technical program has finally shifted into a sell position suggesting we may see some sharp and sustained drops in the U.S. market. This makes finding unusual trends in stable markets more important than ever before. This is why I like what I saw in Denmark.

Denmark's history and stability are deep. For centuries Danish Vikings were fierce marauders and Denmark's warmongering navy was among Europe's strongest. These warriors travelled afar and left their mark. However, this recent visit to Denmark gave me clues suggesting we should now invade the Danes, in their stock market at least.

Investors looking for good fundamentals in a stable market should review the Copenhagen stock market for several reasons, the first being that Denmark's equity market has crashed. The Copenhagen SE Index has fallen 13.2% over the past twelve months while most of its European partners were rising (Britain +11.9%, the Netherlands +9.1%, France +8.4, Spain +6.1%, Italy +8.9%, Sweden, +6.1). This fact alone gives Denmark's market a contrarian edge, but other fundamentals peaked my interest as well.

For example, Denmark is a member of the EU, but its currency, the kroner, is not in the EMU. This makes the kroner attractive, linked to the Euro, but not frozen in a currency agreement that could turn into a mess. Right now kroner interest rates and yields are a little higher than the Euro's (3 month 3.02% rates compared to the Euro's 2.65%, and 4.84% for ten year bonds versus 4.40%). This gives Danish shares room to rise if kroner interest rate drop to EMU levels.

Another good fundamental is Denmark's low 5.9% unemployment rate. This is compared to 11.9% in France and Germany's rate of 10.5%, Italy's 12% and Spain at a whopping 17.4%! I am also impressed with Denmark's 2.4% inflation and its federal budget running a surplus of 1% of Gross Domestic Product. Most Euro nations are still turning deficits (the average of the 11 EC countries is a deficit of 2.1% of GDP).

Denmark is small (just over 5 million population-about half the size of Maine), but I like that too. Small, stable countries have an advantage as the economic success in Singapore, Hong Kong and Switzerland can attest. And Denmark is about as stable as you can get having one of the world's oldest Parliaments that is so open anyone can visit at any time. Yet there are no security checks at the Parliament entrance which suggest the country has peace and low crime as well. In fact it has been said the only problem of the Danish Police is to act as if they have something to do!

Denmark has also invested heavily in electronic education so its kids and young workers are computer literate and well linked to the Internet open to the future of the modern world. Add all these little benefits up and the list becomes impressive.

One Danish share I particularly like is Jyske Bank. I have been working closely with this bank for many years. The more I see the more I like. Jyske is one of the country's leading financial institutions and specializes in the borrow low-deposit high technique. Most investment banks offer this service in one way or another, but Jyske offers a very organized approach to this investing strategy. Jyske's high degree of specialization in the field of lending to invest is unusual and I think this will continue to attract business.

The private banking division of the bank offers every services you can get from Swiss and other tax havens, but I believe Jyske and Denmark have several advantages. First though bank privacy in Denmark is not secret in the Swiss or Liechtenstein way, Denmark's confidentiality is enough for any non-European investor. Yet Copenhagen is not thought of as a tax haven. Having a Danish bank account won't raise the same suspicions as Swiss, Cayman or Bahamian, etc. Trends in bank privacy seem to be shifting adversely. Governments are cracking down on privacy. Banking centers offering complete secrecy are likely (along with their clients) to become increasingly targeted, even though they do nothing wrong. Danish type privacy will become a realistic alternative for honest investors who want a little privacy but don't want to become suspect of hiding wealth. This trend could help Jyske attract investors over the upcoming years.

Jyske's banking services, though comprehensive and totally global, are inexpensive. American investors can get more investments and investment services in Copenhagen than at many Swiss banks. For example, just before the trip to Copenhagen I bought Eurobonds in Switzerland from Credit Suisse. The cost was 3/4%. Had I made the trip to Copenhagen first, I would have known that Jyske's fees are only 1/4%. I would have saved a bundle on my bond purchase. Guess where I'll buy my bonds next!

Nothing is Perfect

Denmark may be a good place to look right now, but not everything is bright. The people work hard and are well organized. This should keep costs down, yet Copenhagen is one of the most expensive cities in Europe. Danes are efficient and have one of the highest incomes per capita in the world (US$38,000), but they also enjoy seven weeks of vacation each year. With public holidays and weekends, the workers of Denmark take almost half the year off! This and an extensive social system and high government debt creates a social cost which is reflected in high prices almost everywhere. These high costs dull the Danish competitive edge. Despite these problems, Denmark now has a positive trade balance and current account of about $2.5 billion in the past year.

Contacts

  • Larry Grossman, Sovereign Asset Management, 2706 Alt 19, Suite 114, Palm Harbor, Florida 34683. Tel: 800-983-1779, 727-784-4841. Fax: 1-727- 784-6181. Email: lcgrossman@earthlink.net Larry works with discount broker Fidelity specializing in overseas shares & IRAs abroad, provides information about how to invest IRAs and pension plans in Danish shares.
  • Den Danske Bank, Holmeus Kanal 2-12, 1092 Copenhagen K. Denmark. Tel: 011-45-33-44-00-00. Fax: 011-45-39-18-58-73. Den Danske is Denmark's largest bank.
  • Teddy Christiansen, Jyske Bank, PO Box 133, DK-1780, Copenhagen V. Denmark, Europe. Telephone: 011-45-33-78-7800. Fax: 011-45-33-78-7633. EMail: Teddy@Jyskebank.DK. Here are Danish shares which Jyske recommends:
                   
Company Industry Company Industry
Novo Nordisk Medical Danisco Food
Ratin Service Cheminova Chemical
DSV Transport GN Store Nord Tele Comm
Funki Environment Inwear Clothes

UK

Merri and I were barely back from Copenhagen when we had to crawl back aboard Delta and fly to England. Our daughter, Francesca, graduated from the University of Birmingham (joint honors in Spanish and Politics). This was an occasion we did not want to miss.

We flew over for just the day. On the flight I wondered what trends I could see in such a short trip. Having lived in England for over a decade, I knew what to look for. The UK is a magnificent country but is trapped in its history. Too many old boys are still trying to hang onto the glory days of the Victorian era where the role model strolled into work about ten, had tea, hurumphed a bet, left for a long, boozy lunch, showed up about three (for more tea) and left early. A good friend of mine, a British Lord with an aristocratic background that dates back centuries but also half American, summed it up perfectly, "we are expected to always have money but never to be seen earning or caring about it."

The nation has ossified in its glorious past, where Britannia ruled and a stiff upper lip always won the war. So while the UK struggled to modernize an out-of-date capital base and work methods, the Germans and Japanese whose cities were obliterated in WWII rebuilt and rocketed ahead.

I could never have guessed what positive images I would gain in such a short time. I was dramatically impressed with Birmingham's economic transformation. This is no longer a dingy textile and foundry based town, mired in economic depression based on industry (and industrial practices) of the Victorian era. I was very aware of the importance of a region keeping up with the times, because on the flight over I waded through the book, "Power or Pure Economics," a translation of the Austrian economist Joseph Schumpeter and Japanese economist Yasuma Takata (edited by Japanese economist Michio Morishima). I don't recomend this book at $75 unless you are an insomniac looking for a sure fire way to sleep. Reading the efforts of a Japanese economist to translate German and Japanese economic publications into English is a sure fire way to overtax the brain. However Schumpeter's economic logic managed to flow through this mess.

Schumpeter's message is clear. Humanity has moved through five eras of innovation (Steam Powered – Internal Combustion Powered – Chemical/ Plastics Powered – Air/ Electronics powered and now Information Powered) since the first Industrial Revolution. Each era made society more efficient and each new found method of productivity changed the way we eat, work, sleep, live, practice religion and politics, gather our families, spend, etc.

The Midlands hung onto the Victorian-Steam Powered Industrial Era for far too long. This caused their economies to lag. No more. Birmingham is now bursting with activity. You can feel it, the streets busy, the restaurants full, activity everywhere.

Yet the real signal that this area had shifted from stuffy, out-of-date English attitudes was at the graduation itself. The ceremony was traditional, held in ancient stained glass hall with magnificent pipe organ, professors marching in led by a mace holder, all dressed in gowns and robes of antiquity.

This was immensely impressive but it was the commercial aspect of the event that impressed me most. Everyone had something to sell, photographers, the local newspaper (every graduate's name was in the paper), even a tee-shirt maker had a graduating class shirt! The sales system was incredibly organized, credit cards taken, everything processed quickly, etc. This was a money taking machine of the ilk of Disney.

I was especially sensitive to this because this year three of our children graduated from university, (Francesca, plus our daughter Cinda as a Veterinarian in Oregon and our son Jake at Gulf Coast University in Florida). So we could easily compare how the Americans were selling versus the Brits. We Yankees did not have anything so well organized. "My gosh," I thought, the British have become more American at hustling for a buck than the Americans themselves. This shift is taking place at a level where it counts most, in the universities!

Britain also has some good short term economic fundamentals. Like Denmark, it is part of the European Union and also like Denmark its currency is not part of the European Monetary Union so the government has more room to maneuver fiscal policy than the EMU nations.

In addition the number of major investment projects by overseas companies into Britian have skyrocketed. The emerging market crisis last year should have reduced the number of such investments by Asian countries. Yet Britain had a record 652 projects from foreign companies during 1998-1999. This is a rise of 5% over the previous year. Investments from Asia and Europe into the U.K. held up and investments from North America were especially strong.

Britain is also gaining more knowledge-based investments. Software is the leading sector, followed by electronics, automotive components, chemicals and information technology services for the Internet. Part of this success is because America's huge leadership in software technology has created a dominance of the English language in software.

Britain's unemployment at 6.2% is lower than in Europe and its stock market has been running behind the U.S., (up 4.8% in US$ terms compared vs. 8.4% for the S&P 500). This mean there's a little more steam in London shares. Price-to-earnings and yields are more attractive.

One area of potential danger is the parity of the British pound. Sterling has remained strong but at a higher interest rate than in Europe. With inflation also running ahead of Europe (2.3% projected versus 1.5% for the Euro 11) there is temptation to devalue the pound before the UK enters EMU. Overall, what I saw leads me to believe that the the trend for the UK will be good.

Options

One way to invest in UK companies and boost profits is with traded options. My friend and banker, Juan Corkish of Anglo-Irish Bank-Isle of Man, has been specializing in this approach and first put me onto the idea.

Covered option writing is an attractive strategy that converts capital gains potential into current income while reducing risk. An investor buys a share and then sells an option to buy the same share to another investor. The original investor receives a premium (income) for granting the option, but unless and until the option is exercised that original investor enjoys the privileges of dividends and voting rights. Usually the original investor sells "out of money" options, which means that the option he gives is an option to buy the share at a higher than current market value price. This means if the option is exercised the original investor makes a capital gain as well as the income received from writing the option. There is no risk in the writing of the option itself since the writer already owns the share.

There is an active UK traded options market which of Blue Chip UK stocks. Investors can hedge their forex risk, eliminating parity loss of sterling versus their local currency. Anglo Irish's strategy is to write options on companies with most, if not all, the following features.

 

  1. Feature: A strong balance sheet. This insures financial stability plus the ability to pay dividends.
  2. Feature: A rising dividend. Compounding dividends have a significant effect on profits and UK companies generally pay a higher dividend than their U.S. counterparts.
  3. Feature: Steady and dependable earnings growth. This is typically provided by utility stocks, food retailers or other such defensive stock.
  4. Feature: Companies out of favor. Anglo-Irish Isle of Man looks for shares that are ideally near the bottom of their trading range in terms of chart features, but which have solid fundamentals.

There are downsides to this strategy. If the stock rises unexpectedly, the option will be exercised and you must sell your stock. Also the value of the stock you buy may fall.

Anglo-Irish uses tactics to reduce much of these two risks. First they look for options that are at least 10% out of money which means the share must rise at least 10% before the share must be sold. You pick up at least a 10% gain plus dividends and the premium income from selling the options. You receive the premium when you sell the option so you have this revenue stream to reduce risk and for reinvestment.

The premium earned also reduces loss if the value of the share you hold drops. The bank can often take quick profits by buying the option back at a much lower price, and then selling a new option at a lower price. If an investor adds a systematic buying strategy (buy half now and half later, etc.), a great deal of risk is reduced.

Below is an example of how Anglo-Irish eliminated loss in the shares of Marks & Spencer (a major British retailer) by buying down and by writing and trading short dated options. The shares plummeted from 420 to 366 pence in three months. However, in this example there was no capital loss, as earnings compensated for the share price drop.

In this example the bank bought shares over three months at an average price of 412. Here is how losses were eliminated.

 

     Transaction                                            Earned   
Nov. 9th two options-Jan 20-420-sold at 27.5 pence GBP 537.79
Dec. 3rd two options-bought back at 11 pence - 228.38

Dec.12th four options-Apr 21-420-sold at 28 pence GBP 1,095.35
Jan. 1st four options-bought back at 7 pence - 295.46

Feb. 1st two options-Apr 21-390-sold at 22 pence GBP 423.76
Feb. 1st two options-Apr 21-390-sold at 17 pence 324.73 Total earnings over three months: GBP 1,857.79

The original investment was 16,511.75 pounds. The option profits of 1,857.79 pounds reduced the cost to 14,653.96 pounds and dropped the average price per share to 366 pence, exactly their listed price at the end of three months. This is a perfect example of how writing covered options reduces risk even when the original shares purchased fall.

Listed below are some of the shares Anglo-Irish Isle of Man has recently been writing options and the profits or losses realized.

 

                               Positions closed               Share              Profit              Time held
Asda 12.2% 22 weeks
Allied Domecq 1.63% 7 weeks
Barclays 4.38% 8 weeks
Bass 6.74% 9 weeks
Ladbrokes 13.60% 14 weeks
Shell 3.40% 7 weeks
Marks & Spencer 4.01% 21 weeks Position Still Open Share Option Profit Time Held
Boots Oct 850 -5.11% 10 weeks
Brit Aerospace Aug 460 -1.10% 13 weeks
Cadburys Aug 850 2.60% 7 weeks
CGU July 950 3.40% 7 weeks
Glaxo Aug 1800 10.12% 5 weeks
Invensys Aug 300 6.40% 3 weeks
Hilton Aug 260 6.00% 6 weeks
Lloyds Sept 390 13.30% 4 weeks
M&S Sept 390 3.90% 3 weeks
Safeway July 260 -.06% 7 weeks
Smithkline July 850 5.25% 10 weeks
Tompkins Sept 240 0.63% 12 weeks

Contacts

Investors who feel in sync with the British trends can receive more information from the contacts below.

Juan Corkish, Anglo Irish Bank, 69 Athol Street, Douglas, Isle of Man, 1MI 1JE, Isle of Man. Tel: 011-44-1624-611-590. Fax: 011-44-1624-625-497. This branch specializes in managing private portfolios of $100,000 and over for private incvestors and in writing bcovered options in UK shares.

Barrie Martin, NCL Investments, 9-12 Basinghall Street, London EC2V 5NS, England. Tel: 011-44-171-600-2801. Fax: 011-44-171-726-6201. NCL are stockbrokers on the London International Stock Exchange and can provide full details about such shares.

Ronald Buchanan, Lorne House Trust Limited, Lorne House, Castletown, Isle of Man, Britain. 1M9-1AZ. Tel: 011-44-1624-823579. Fax: 011-44-1624-822952. Email: general@lorne-house.com. Internet: www.lorne-house.com. Lorne House is a small personal investment management firm I have known for years. They offer portfolio management services and can develop portfolios of British shares for their clients. I will be focusing more on personal portfolio managers (rather than mutual funds) in upcoming issues of WR for reasons explained below.

Beware of Bank Fees & Mutual Funds

I mentioned earlier how the charges of Jyske Bank are very competitive for buying bonds. A recent bond purchase cost me an extra US$5,000 in bank fees because I did not bother to follow my own advice, which is to always check your bank fees before acting. Charges among banks varies enormously and are highly negotiable.

Being very aware of bank fees after being gouged by Credit Suisse I did some checking on another transaction I was about to make which included buying about US$175,000 dollars with Euros and placing the dollars on deposit for six months. The difference in the amount of money in my account after six months between the two banks I compared was $1,680! (Jyske Bank had the best forex and deposit rate in the comparison.) When I explained to the other bankers the difference, they met Jyske's rate.

Here is the point. If you have US$100,000 or more invested and especially if you are shifting funds within your account, keep watching what your bankers charge. This little extra effort can save or add thousands of dollars a year! This is especially true when dealing with mutual funds.

Mutual Funds

Last issue I pointed out that only 21 out of the 310 U.S. mutual funds in business ten years ago gained more than the Dow over the past decade. I also mentioned I was selling most of my funds. This I have done and now hold only one mutual fund in my portfolio. The poor past performance is only one reason why I have decided not to hold so many funds. Here are several current problems with mutual funds.

 

  1. Problem: Fundamentals suggest that fund managers will continue to underperform related bellwether stock market indices. This is partly because fund managers have to keep a portion of assets in cash to make redemptions. Also as the world moves forward at a faster and faster pace, it is harder for fund managers to rely on rules of the past to manage funds. Third, it is harder for fund managers, especially with large funds to be as flexible and to act as quickly as individual investors.

    We are moving into an era where small, flexible and fast is beautiful. These characteristics are the opposite to features offered by funds.

    Mutual funds were originated to help small investors gain the economies of scale that large investors enjoyed. This is a Victorian concept whose time is almost past. Today's information technology has spelled the beginning of the end of mutual funds. As access to economic, share and financial information becomes more easily available, the needs for the economies of scale are irrelevant.

    Finally the costs of running and selling a mutual fund further reduce the profits you receive.

  2. New vehicles and services now compete more efficiently with mutual funds. A major competitor is the fairly new Webs. Webs are shares traded on the New York Stock Exchange that mirror stock market indices. For example, if you want to invest in the US, you can buy the Dow Web which moves according to the value of the Dow.

    If you wanted to invest in Germany, you could buy the German Web which moves in tandem with the DAX index. Webs are the equivalent of tracker funds but cost less.

    In addition to this, technology now allows personalized portfolio managers (such as the banks and managers I have mentioned above) to profitably offer personal portfolio management for smaller portfolios at ever lower costs. The benefit of personal portfolios is they can match your particular wants, needs and desires. A personalized portfolio can be more geared to match your financial circumstances than a mutual fund.

  3. Problem: Mutual funds can lack liquidity. Major stock markets all over the world are at a plateau after a huge rise over the past fifteen years. Prudent investors cannot ignore the chances of a major sell off. We learned during the October dip of 1987 that in major market downturns mutual funds can be very hard to sell or liquidate.

    Even in good times getting your money from a mutual fund can be an onerous task. This fact was brought home to me when I recently liquidated my mutual funds. Some of the proceeds reached my account within a week. Most took over three weeks and one fund took nearly eight weeks to get into my account! If you have money invested in a mutual fund which you may need urgently at some time, check with the fund managers (or with the banker or broker where the funds are held) to see how fast you can liquidate and get access to the proceeds.

When do mutual funds make sense? The main reason to have a mutual fund today is because, despite their short falls and costs, most fund managers still do better than when we invest ourselves. I am not suggesting that we jump out of funds and invest into stocks and bonds directly. Professional management is a valuable benefit. If an alternative such as a Web or personalized portfolio does not make sense, then funds can still be a better option than investing direct. This is especially true if you invest in markets you don't know or if you have only a small amount to invest.

Right now I am holding shares in a Japanese Warrant Fund. Japanese shares have been doing well and there is reason to believe they will do better. The country has been in a ten year recession, yet the Japanese are thrifty, clever, hard working people. Their problems won't last forever.

Japanese shares have had reverse synchronicity to the U.S. for more than a decade, so investing in this market gives some added protection from a U.S. slump. In October 1987 when the U.S. market dove, Japanese shares rose.

Japanese warrants give about three times leverage and can rise explosively if the Japanese market continues to move strongly. Yet I know nothing about these warrants. I only want to invest a small amount so I'm using a fund despite its high cost and other weaknesses. If I wanted to just invest in the Japanese market in general, I would choose the Japanese Web traded in New York instead of a fund.

Micro Trends

The expansion of the global market has increased opportunity for not only huge multinational corporations but for tiny service oriented businesses as well (partly because more and more people become frustrated with impersonal service from the huge multinational corporations). This is especially true in the financial service sector. This is why I've just personally invested into an IPO of Citizens Bancshares of Southwest Florida, Inc., which is setting up a new personal bank (Citizens National Bank of Southwest Florida in Naples, Florida). I've watched Naples become one of the wealthiest and most booming cities in the U.S. Again and again small banks have started, grown and sold out to much larger banks. Each time, the small bank is taken over, the personal service falls and currently I feel there is a void. As more wealthy people pour into Naples, the more the need for this type of service. For further details: Joe Cox, 3411 Tamiami Trail North, Suite 200, Naples, Fl 34103. Tel: 941-643-4646. Fax: 941-263-0703.

Benefit of the Turtle

The June-July issue of WR ended with a thought provided by London stockbroker, Barrie Martin of NCL Investments. Barrie pointed out that the longer period of time an investment is held, the narrower the gap between high risk and low risk investments.

This leads me to address a mental error many investors make when thinking about the potential for a major global bear stock market. Many investors make the mistake of saying, I'll just hold the shares forever. Eventually they will come back. Don't depend on this "I'll hold them forever" attitude.

Investors who buy and hold shares forever may actually be better off with certificates of deposit or bonds. Shares are the best bet for quick and medium term profits, but their attractiveness drops over the long haul. This idea can have a profound impact on your investments.

To understand why, let's compare two investment portfolios, one a high volatility share portfolio, the other a very safe interest bearing portfolio of CDs and bonds.

The high volatility portfolio has the potential over three or five years to rise rapidly. Your bonds and CDs can't do that. But the high volatility shares could also drop dramatically as well. The longer you hold the shares, the better the chance they will fall. Since avoiding loss is really important to long term growth, the longer you hold a volatile portfolio, the greater the risks of a major reduction in its value. To get real value from high volatility investing you must buy and cut losses or take profits continually. Such activity demands great attention and creates high trading costs.

On the other hand a very safe investment in Treasury bonds or in CDs or savings accounts has a much lower potential for growth, but almost no risk of loss and costs far less (in time and money) to buy, sell and manage.

In a five or ten year time frame, there is no way that a safe investment has the potential to earn as much as the riskier portfolio.

However in a 20 or 30 year time frame, because of compound interest and because the portfolio never drops, historically the safe portfolio will do just about as well as the riskier portfolio. This is the economic equivalent to story of the hare and the rabbit.

The Cost of Loss

We can understand this better by looking at two shares, one rises 7% per annum for three years in a row. The other rises 15% for two years and then drops 15%. Which portfolio would you rather have?

The steady portfolio returns 22.9% over the three years. The 15% portfolio returns just 12.42%! Such are the benefits of never losing even on a three year basis.

Factor in Time

This knowledge can be most helpful in structuring a total portfolio plan because it shows us that we should factor in the value of time. The longer the time we have for our money to work, the greater the risk we are taking with speculative investments. This reality is exactly the opposite of what we hear from most financial theory. Traditional theory is that if you have long enough time to let the market rise you won't get caught in unexpected losses. Traditional theory is the longer the time, the safer it is to invest in shares.

This theory is true but misses the bigger picture. It is safer to invest in shares if you have a long time, yes, but your returns are not as likely to be as high or stable as if you had invested a in a safer interest bearing account. The more time you have, the less reason to take any risk.

We should layer our investments, making our greatest risk investments for the short term and making our longest term investments in safer vehicles.

Hot, But Maybe Not

For the short term should we continue to hold stocks? A first glance at equity performance now suggests that the emerging market bust is over. Emerging market indices are skyrocketing everywhere. Thirteen emerging markets have risen dramatically and have rising technical factors. The Indonesian stock index has a record high technical velocity. Emerging market currencies look strong as well.

But these short term velocities do not tell the entire tale. Much of the growth is just a rebound from the dramatic falls of last year. There are three scary fundamentals we must not ignore. First, there is a huge overhang of emerging market bad debt. Emerging market banks are in a crunch and credit will not flow easily. This will hold back emerging market growth.

Second, emerging markets face Y2K and are not as prepared as major markets. Many emerging market firms have been lucky just to survive much less fix their millenium computer problems.

Even worse, shifting into the information age is vital for every economy (the U.S. has proven this by racing ahead of the rest of the world). The poor educational standards in many emerging markets means they have not moved strongly into the electronic age. This will further slow their growth in the years ahead.

I am still a long term emerging market optimist. The world has too much invested in the global economy to allow emerging industrialization to fail. But growth will not be straight up. Emerging markets will have ups and downs, so when considering the speculative portion of your portfolio look at some contrarian major markets, such as the UK or Denmark as well.

Gary's most bizarre comments ever…

Over the past several years of World Reports we have been studying deeper economic concepts such as Inspired Investing, Quantum Wealth and Investing in Chaos. If you have had any problems believing or making use of these concepts, I strongly urge you to read in the Money section of the July 15 issue of USA Today an article entitled "Beyond the PC: Atomic QC". This article is about the new line of computers that will over take the PC in two or three decades from now. What you will read there is so bizarre, if I just wrote it here, without the support of this article, you might think I have totally flipped.

I am not adverse to being accused of having strange thoughts. That's what you pay me for. I also don't mind being on the leading edge even though it is sometimes sharp. I was ridiculed, cursed and dismissed by the establishment for many years in the 70s when I had the audacity to suggest we should be investing beyond the USA. In those days many traditional investment advisors called me unpatriotic. The last thirty years have proven that it is the very heart of the American spirit to invest globally. These investments have not only helped our nation but the entire world.

Recently a marketing manager refused to work on my reports because in the manager's words my ideas were in conflict with the teachings of Jesus Christ. So despite the fact that my meditation room is adorned with pictures of Jesus Christ and I pray twice everyday without fail, I guess I've now also been called a heretic as well as unpatriotic.

But that's the beauty of this free world. We can respect the opinions of others but have our own! I have enough experience to know I have to follow my mind and heart in what I share with you. I have also learned that all too often today's blasphemy turns out ot be tomorrow's gospel. However it's nice, once in awhile, to be backed up by the establishment such as in this USA Today article.

The article states Atomic Quantum computers (QC) will probably take the world into the next era of information technology. The QC works in Qubits of processing power and has a different type of logic (which works on the principles of quantum mechanics) that makes their speed immense. For example a forty qubit (IBM labs have already created up to three qubit computers) processor would have all the power of today's super computers, but would be enormously faster. A Quantum computer would be a billion times faster than a Pentium III PC. According to the article, a current super computer trying to find one number in a database of all the world's phone books would take one month. A quantum computer would take 27 minutes!

Labs around the world are pushing this science hard. IBM, Hewlett- Packard, Bell Labs, UC Berkeley are just a few U.S. concerns that have invested heavily in this technology. Because these computers will be able to break any type of code or encryption, the CIA, Pentagon etc. are both very nervous yet interested all at the same time. The government has set up a well-funded quantum computer lab at the Los Alamos National Laboratory.

The point? What I am about to write is not science fiction nor airy- fairy stuff. Billions are already being invested by some of the largest companies and governments in the world.

Yet all this investing is in something you may not be able to understand or even worse can't even believe. According to the article, Charles Bennett, IBM's best known quantum computer scientist says, "It takes a great deal of courage to accept these things. If you do, you have to believe in a lot of other strange things."

MIT's Neil Gershenfeld, who with IBM's Issac Chuang built the most successful Quantum computer to date, says, "Nature knows how to compute. We just don't know how to ask the right questions."

Here is how the computer works. All atoms have a spin of up or down, so scientists can use these spins in the same way that transistors are currently used in today's computers to represent a 0 or 1.

So far so good, but here is where the quantum factors come in that are the source of the amazing power of these computers. Atoms can have both an up or down spin at the same time until they are measured. The act of measuring forces the atom to choose between up or down. In essence what these scientists are saying is it's not the atom that has the spin, but the act of observation! In other words, these computers do not depend on matter but on motion.

Remember I am simply passing on what USA Today says IBM, Hewlett Packard, the U.S. Government and others are spending billions on right now. But Quantum weirdness does not end here. The article continues by saying that qubits don't do calculations in linear form like current computers. They instead do all possible calculations at the same time, straddling all possible answers until the act of measuring the qubits forces them to settle on an answer.

Weirder still? According to the article, the Quantum computer holds an infinite number of right answers for an infinite number of universes (remember I am not writing this, the USA Today article and the computers already exist). The computer just gives you the right answer for the universe you happen to be in at the time. To believe in Quantum computers (which our government and private industry is spending billions on) we have to believe in parallel universes.

Even Weirder! Quantum computers gain even more power because of a process called entanglement. When two atoms are observed by the same force, they become entangled and remain so even though they may be light years apart. Their spins are in all positions at once, but the instant one entangled atom is observed its spin goes one way. At that same instant, the spin of the other particle locks in the opposite direction (even though they are light years apart). This is essential to the increased speed of Quantum computers. Today's computers are limited to the speed which an electron can pass through a wire (the speed of light). With entanglement, a quantum computer's speed can blow by today's computers because the shift in spin even over light years is instantaneous! In addition because of entanglement according to USA Today, there are ways to do Star Trek type teleportation.

Remember I am not writing these words. According to USA Today, Stan Williams of Hewlett-Packard says, "The potential is so huge and it would be so disruptive it could completely change the way at least some computing is done."

Enough of USA today. I hope that by reading what I have written here and by reading the USA Today article (if you still have any doubts) you will wake up to two facts.

First, realize that about the time we finally have our computers and programs down pat and have adjusted to life on the Internet, all will totally change in ways we can't even yet comprehend. So much for getting ready for the Internet era.

This is exactly what Joseph Schumpeter (the Austrian economist I mentioned last issue and earlier in this report) has said. Humanity moves through eras of innovation. Each era makes mankind more productive because the new technology created by the innovation and the way it is used totally disrupts previous technology.

The internal combustion engine, car and truck wiped out the railways. The airlines changed the trucking business. The Internet is changing the entire essence of the airlines. Imagine what Quantum computers will do to the Internet if we can instantly teleport through them? Very personal chat rooms? Each era is for less time than the last.

Really Inspired Investing

With these thoughts in mind, let's look at some basic concepts of Inspired Investing. One concept is that affluence does not come from external events, but from linking worldly affairs with the economic miracles we all possess within. This allows us to turn the process of ordinary daily living into an exciting, enormously profitable event as we learn to match our inner resources to external economic events.

Creating permanent, self-fulfilling wealth from the ordinary is a concept that evolved for me writing all the courses and articles and working with my readers. But the personal tragedy of losing a friend thirty-five years ago taught me even more. His name was Jim. We were seventeen, ready to graduate. Our lives were open books. Nothing but excitement and good things were ahead. Or so it had seemed. Jim's Mom and Dad helped him have a car, shiny and fast, beyond Jim's experience and skill. Our graduation ceremony was greatly diminished by his loss.

This sad story taught me an inescapable Inspired Investing fact. The faster we go, the better we must be. Success in anything requires inner growth to keep up within the increasing speed and power of external events. The bigger a tree, the deeper its roots. The more howling a hurricane, the more quiet the eye of its storm.

Yet as our modern pace accelerates, the world seems to ignore this fact more and more. External events have created dramatic opportunities everywhere. For example, when I moved to Hong Kong three decades ago, most investors did not know a Hong Kong stock exchange existed. Today the Heng Seng Index is quoted in all types of local daily papers, (even USA Today), along with dozens of stock markets. The investment industry has increased our choice of places to invest exponentially every year! Yet does the financial industry focus on the inner aspects of wealth?

The speed of opportunity has quickened. Just decades ago, a computer that processed a million bits of information cost a million bucks. Today the same computer cost $20 and can process hundreds of years of past information and forecast weeks, months even years, into the future in seconds. With the Quantum computer, who knows what we'll be able to do!

Access to data is accelerating, as is our ability to act. The Internet allows us to tap markets, stocks, bonds, currencies, commodities, even real estate, in real time, 24 hours a day. We can buy or sell, day or night, almost anything with turn-around times measured in seconds. How can we learn to cope with the detrimental parts of our personality, such as greed and fear, when we are in such an incredibly rapid motion? We are so bombarded with global news, information, facts, figures. How can we figure out how much to use and which fits into our lives? Where can we learn to enhance inner strengths to make sure our wealth remains steady and helps us feel good? How can we gain sufficient wisdom to use this enormous power given to us?

Several years ago, I wrote a report comparing tactics of some of the most successful investment managers around the world. To my surprise all of them used varied and differing tactics. Some managers never left their offices and relied entirely on numbers. Others would never invest in a company unless they had met the management and visited the plant, etc.

A deeper analysis revealed that, despite these surface differences, all successful managers thought for themselves (rather than followed the market) and continually searched for value and believed in what they did. They all had three external activities which they combined with two inner strengths. The external activities were searching for value, developing contrarian thought and spotting innovative positions.

These three external investment activities of being a contrarian, searching for value and recognizing the importance of innovation are all linked in a way to understanding current and future value. For example, since most markets are usually overbought or oversold, a contrarian by nature is looking at markets that will tend to offer better value. Studying the nature of countries and how they have adapted to innovation helps understand which countries will become more competitive and thus have markets offering better value.

There are dozens of books authored by some of the greatest investors in the world (such as Warren Buffet and George Soros) with thousands of pages on how to develop these value related, external skills.

But if millions of these books have been read, why aren't the readers all rich? Perhaps the books failed to show how to develop the two inner aspects of genuine confidence and enthusiasm which all long term successful managers have.

The way to develop genuine confidence is to understand the enormous power we already have within. We are made of atoms and we are natural living beings. Remember the words of MIT's Neil Gershenfeld who with IBM's Issac Chuang built the most successful Quantum computer to date, says, "Nature knows how to compute. We just don't know how to ask the right questions." Inspired Investing is learning how to look within to ask the right questions about how each of us as individuals should invest.

Success is natural

Incredible success is natural and should not be something unusual nor special. We all possess the ability to gain extraordinary abundance through the process of our ordinary living each and every day. Wise ones have been telling us this fact almost since society began.

The 14th century Kasmiri poetess Lala tells us this wonderful truth in a hauntingly beautiful poem:

"Dance with nothing on but air. Sing wearing nothing but the sky. Look out on the glowing day. What clothes could be so beautiful? What clothes could be so sacred?"

We do not have to do something special or different to become rich. The pure beauty in living our regular, daily activities can bring us unimaginable wealth. In fact my studies of truly successful people have found that the real success of extraordinary investors and business people lay in their ordinariness. They profit even as they walk out onto a street and spot a new item in a store, or order some new type of meal in a restaurant. Their success comes from within, a deep, intuitive spark. "Here is something people will want or here is a business that can grow," they will say. They feel the reason why there will be success because they are in touch with that which is ordinary within! Then they apply their measures, numbers, etc. to integrate their external disciplines with the internal strengths they possess.

Quantum wealth comes from learning how to tap the quantum knowledge which is within us all and applying this wisdom to the financial knowledge that we already possess.

Be what you are. Just be it better and clearer! Look at the process more. There are millions just like you who buy, sell. These are your markets, unique and better for you than any others. Understanding yourself is understanding an entire world. Knowing and really feeling this fact is the source of genuine confidence.

Huge institutions spend billions in market research to have confidence that their marketing strategies and products are right. Yet the best market research in the world is yours free when you simply look within.

The second inner strength of enthusiasm is a natural gift from the universe. All you have to do to receive it is to invest in being what you are. Do what you love! If you have passion for the outdoors, don't invest in things that require all your time in an office. If you love oceans, invest in the sea. Don't buy land in a desert. Do what you feel good about and your investments will become larger than just the bottom line. This is the way to ask the questions. Nature has given us pain and pleasure to be our 1 and 0 as we compute what we want to do.

Balance and combining the inner with that which lays outside are the keys. Inspired Investors are not lazy nor do they receive without giving first. They do not ignore the physical matters which living on this earth in our human form require. The accounting, the calculations, the diversification and such all have their place in the continuing process of remaining rich. But Inspired Investors also understand that their greatest wealth is readily available. Then they achieve a balance of the outer and inner realms.

Not long ago a group of elderly ladies formed the Beardstown Ladies Investment Club. They met on a part time basis and used simple, common, everyday ideas (such as I like chocolate-let's invest in Hershey's) to buy investments that dramatically outperformed most portfolios managed by skilled, dedicated full time investment managers. This underscores how the ordinary events in our evolving world are filled with economic miracles.

Combine the miracles and talents that lay within you. By all means study how to be a better investor or business person each and every day. Use the benefits of modern technology. Create a common sense approach to searching for good value in investments. Develop external disciplines. Don't spend more than you have. Work. Save. Invest. Hire professionals to help you study the markets. Even study economics and finance if you wish.

But match each of these external steps by also looking within. You are unique. You are a fountain of wealth…get to know yourself better. Tap the incredible power, knowledge and experience you already have. Your wealth not only will grow, but will become better, an everlasting flood of abundance that makes your ordinary journey through life an extraordinary process you'll never want to end.

Merri and I travel shortly to Ecuador where we will lead two Ecuador real estate tours organized by International Living Magazine. We'll be looking at real estate for sale there at unbelievable prices. For details call 1-800-926-6575, email tours@gate.net. September 17 we travel again to Ecuador for a special equinoctial celebration at our plantation RosasPamba with our frined Don Alberto Taxco, one of the best know Andean Yatchaks and healers. We will stay in an Incan village where Don Alberto has his healing center. This special event is sponsored by Grand Vista Tours. For details call Martha Hunter at 336-384-1122. Grand Vista will be conducting similar tours most months. On September 22, we fly from Ecuador to Venice and Vienna where I will be the key note speaker at Anglo-Irish Bank's investment seminar. There will be a host of other speakers. Then Nov. 11-14 I will speak at the last Anglo-Irish seminar of the year in Aruba. For details: 1-800-364-0620, email: seminar@flight to quality.com. I hope to spend time with you at one or more or all of these meetings. Until then, good investing and good living!

Gary Scott


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