The Either/Or Investor: How to Succeed in Global Investing, One Decision at a Time

by Clark Winter Narrated by Stephen Hoye

Overview

People today are inundated with advice, opinions, and information about how to invest. The more data you accumulate, the thinking goes, the better decisions you'll make. In The Either/Or Investor, global investment strategist Clark Winter shows that the opposite is the case, introducing a revelatory way of thinking about the markets based on finding and assessing just enough of the right information and using your common sense.



According to Winter, investing comes down to making choices. All great investors employ an "either/or" filter for evaluating and simplifying the many investment opportunities available to them. The Either/Or Investor reveals how you can emulate this thought process while remaining realistic about your own goals and needs, and gives you the tools to choose among the options that modern investors face, such as:



-Fear versus greed: In an anxious post-9/11 world, discover when it's smart to make an aggressive financial move.



-Developed world versus developing world: Find out if you should stick with opportunities in the United States or risk those available in the emerging economies of China, Russia, India, Mexico, and Turkey.



-Anti-immigration versus migration of talent: Learn to evaluate the products that immigrants introduce to the rest of the world in order to assess the value in investing in American companies that cater to new immigrant groups.



-Too much information versus too little information: Use the Internet, newspapers, and TV to your advantage. (For example, get the pros and cons about China's growing economic power so you can become informed enough to act.)



-Rising interest rates versus falling interest rates: Understand how changing interest rates are a good barometer for how to spend your money.



Winter shows how anyone can learn to make sound decisions in a changing world by discerning trends early in an investment cycle, and then taking advantage of these trends or steering clear. Winter also explains how to choose a money manager and how to determine what the next investment opportunities might be.



Armed with Winter's methods, any investor can improve his or her own investment prowess. The Either/Or Investor is a way-both judicious and daring-for choosing a better future.

Editorial Reviews

Publishers Weekly

Winter, managing director at Goldman Sachs, delivers an admirably clear and encouraging guide to informed investing that is refreshingly free of jargon, theory or scare tactics intended to propel individual investors into his firm's advisers' waiting arms or related mutual funds. Winter also shies away from the standard introduction to broad concepts that leave readers ready for a pop quiz, but unclear as to how they will make any money. Instead, his direct approach hones in on the four cardinal rules to navigate through the "noise machine" that is the investment industry and to prevent investors from falling prey to "clever sales pitches or... hubris." He champions simple and pragmatic binary thinking ("the developed world versus the developing world," "Tokyo or Shanghai," "fad versus trend") to decide which investment possibilities to pursue. Even more usefully, he explains how investors have been making money recently and points readers in the direction he believes future profits will most likely be found. Novices and seasoned investors alike will find much to relish in this crash course in making sound investment choices. (Aug.)

Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

From the Publisher

"Novices and seasoned investors alike will find much to relish in this crash course in making sound investment choices." ---Publishers Weekly

Product Details

BN ID:	2940170718085
Publisher:	Tantor Audio
Publication date:	10/06/2008
Edition description:	Unabridged

Read an Excerpt

Chapter 1

The Developed World versus The Developing World

The developed world has people with money to spend. The developing world, meanwhile, has endless needs and a growing pool of savings. Which will be the better investment in the years ahead? The developed world has aging populations who will increasingly have to save for retirement and who will have to be parsimonious if they are going to have enough money to last their entire lives. Does that make them a bad investment? Not at all. Citizens of the developed world enjoy long life, and the willingness to spend money on health care treatments, leisure activities, and life experiences such as travel, hotels, and restaurants—all this makes for good investing in certain sectors. Just look at the cosmetic surgery market: at one time it was limited almost exclusively to older women. Women still account for most cosmetic procedures, but men are making up more of the total than they used to. In 2005, men underwent 13 percent of all procedures, according to the American Society for Aesthetic Plastic Surgery, up from 11.7 percent in 2002 and 9.7 percent in 1998. The total number of cosmetic procedures increased 18 percent in 2005, to 7.2 million. What’s more, increasingly those procedures are being done by for-profit surgicenters connected not to hospitals but rather to hotel and spa chains, where patients can recover at their leisure, in pleasant surroundings. According to a July 2006 article in the Los Angeles Times, various companies are preparing to build as many as fifteen thousand of these stand-alone centers in the United States and Canada over the next ten years.

Over in the developing world, medicine of a different kind is an equally good bet. Health care budgets in many nations are rising rapidly, and as countries pass out of the infectious-disease phase of health care, the budget is increasingly spent on the management of chronic illnesses, such as diabetes, hypertension, and heart disease, and on modern instrumentation, such as CT scanners and MRI devices. These are all made by a handful of U.S. and European firms, so as health care globalizes, opportunities for investors develop.

But health care is just one part of the puzzle. For years, public infrastructure spending in developed nations stagnated, while most of the action was in the developing world. No longer. The infrastructure of much of the United States and Europe is aging and obsolete and needs to be replaced: roads, dams, bridges, tunnels, even whole cities. The money for these projects comes from municipal financing, which, because of a rising interest rate environment, will result in higher rates on municipal bonds, which are generally tax-free, or, increasingly, through private equity deals that transfer ownership of public property to investors and take them off the tax rolls, allowing politicians to hold the line on raising taxes. Either way, there is sure to be a windfall for the manufacturers of the equipment that reshapes and rebuilds the infrastructure. Some of those companies will be American, but the steel is likely to come from China, Brazil, Korea, South Africa, or Mexico. The cement will come from an Italian, French, or Mexican company—a decade ago they bought up most of their American competitors—and the technology will just as likely come from a German or Japanese firm as an American one.

So is it the developing world or the developed? The answer depends upon the opportunity. If you had to pick between, say, a 30-year airport expansion bond paying 5 percent offered by a U.S. entity such as the Port Authority of New York and New Jersey, or a 30-year Mexican municipal bond from the state of Quintana Roo with a coupon of 7 percent, the answer would appear to be a no-brainer. The Mexican bond pays a higher interest rate, and at the same time the Mexican peso continues to appreciate against the dollar, giving you the possibility of earning 8 percent or 9 percent. But wait. The Port Authority has been paying off bonds successfully since 1921 and has never missed a payment even though it has no power to tax and pay bondholders with the revenues it earns by managing bridges, tunnels, ports, and airports in and around New York and New Jersey. The Mexican state of Quintana Roo, on the other hand, has no prior history of municipal borrowing, and while Mexico is currently in the midst of an economic upsurge, there are no guarantees that that will continue. Indeed, the disputed 2006 national election will ensure bitterness despite the outcome and may prejudice investors against Mexico for some time to come. So the real question you have to decide is whether you are being adequately compensated for the risk you are taking whenever you make an investment.

There are bond-rating agencies that are supposed to help you answer that question, and you can go to your local public library and look up the Quintana Roo bond or get the rating from your broker or from the Internet. You can look at all three ratings—Fitch, Standard & Poor’s, and Moodys—in a matter of seconds, and generally you will find that most of the rating agencies are in accord with one another. But don’t be fooled. The agencies generally rate the risk for the bond only at the time of issue and depend upon the markets to reprice the bond thereafter, unless a significant piece of news forces them to rerate the bond. If, for example, Mexico’s government were to turn sharply leftward, the rating agencies, fearing repudiation, might lower the bond’s rating, even if Quintana Roo had remained scrupulous about making its interest payments.

Generally, you will notice that investors who commit to globalizing their portfolios are a cautious lot. Brazil’s economy is roaring ahead, to be sure, but even though Brazil’s Bovespa index has more than tripled over the past five years, Brazilian stocks still have low P/E ratios compared to U.S. stocks. In other words, they are undervalued by American standards, often by half or more, even though the companies are turning in double-digit growth rates. Why? It is because investors look at Brazil and see a long history of booms followed by significant declines. Fiscal discipline seems to take hold in Brazil for a few years and then vanish again like Brigadoon, not to reappear for another generation. Enough investors have been burned in the past by investing in Brazil that many remain skeptical about just how long the current honeymoon will last, and it is hard to fault them. Brazil’s current president, Luis Inácio da Silva, known as “Lula,” is a former leftist trade unionist who courageously took the step of adopting middle-of-the-road economic policies just at the time when China’s commodity-dependent economy was moving into high gear. The combination of sound fiscal management and booming exports has driven Brazil’s chronic inflation down to near normal levels, has added billions of dollars to the nation’s foreign exchange reserves, and has raised the living standards of Brazil’s growing urban population. But you have to ask yourself how much longer such a “virtuous cycle” can prevail.

That’s what assessing risk is all about. When you see a confluence of events, good or bad, you have to ask two questions. The first is “How long can this continue?” and the second is, to borrow from Cole Porter, “Is it the good turtle soup or merely the mock?” When you are seeking opportunity, you are attempting to make sense out of uncertainty, to make comprehensible the bits of information you have that don’t seem to fit into a pattern. In the intelligence business, there is a saying that before you can connect the dots, you have to know what a dot is. Not all information will fit into an investment thesis, and sometimes, no matter what you do, you won’t be able to make sense of what you are looking at.

That was before Google. One of the tricks I use is to take two or three words and type them together into Google and see what comes up, and then take another two or three related to the same subject, and then begin trying various combinations. What happens is fascinating. Let’s take Lula, economic reform, and China, put them into the Google window, and hit the search button. As early as February 2003, right after Lula took office, evidence began to turn up on the Web that he was going to attempt to move Brazil down the path of economic reform at the same time that he was going to court China. By October of that year, the two nations had already signed the first of a series of trade agreements. Since China’s economy was growing fiercely and Lula was not about to do anything stupid with Brazil’s economy, there were already enough signals emerging that Brazil might be a good bet. But back in 1994, long before Lula’s arrival, the U.S. Department of Commerce conducted a study that identified Brazil as a “big emerging market,” a nation that, if it could get its economic and fiscal house in order, had the potential to become a major trading partner with the United States. In other words, the signs that the Brazilian economy was, as Soros put it, “a waterfall you could put your bucket under” began to emerge more than a decade ago. The most opportunistic investors might have jumped in and invested then and been burned by a major currency crisis in 1998 and 1999, which was caused, ironically, by too much foreign investment (in the year before Brazil’s monetary meltdown, foreign currency inflows, chasing inflation-fueled interest rates, jumped 140 percent). Naturally, global investors who had been burned in the currency crisis were intensely skeptical that Brazil would get its economic house in order when Lula took over in 2002, especially since he had run on a fairly left-wing platform, which always gives capitalist investors in the West the heebie-jeebies, so little capital flowed back in as the Brazilian economy began to recover. But a handful of smart investors spotted a strong opportunity here, a waterfall, and placed their buckets appropriately. All through 2003, 2004, and 2005, you could have made handsome returns by investing in Brazil, until the Bovespa took a break in late June 2006. As it turned out, Brazil was the real turtle soup.

Which brings us back to the first question: how long can this continue? Ask yourself this question: what has changed since the Brazilian economy took off? Inflation is down, not up. Interest rates continue to drop. The nation’s foreign exchange reserves, now at $57 billion, appear to signal a healthy economy. Brazil has paid off its $15 billion debt to the International Monetary Fund, and commodity prices remain strong. Coffee is up so much that Starbucks has had to raise its prices. Brazil’s investment in sugar cane for ethanol has put a floor under formerly sagging sugar prices, and it is now the largest meat producer in the world. That’s the upside of Brazil. The downside is that Lula’s government has been plagued by charges of corruption, which led to the resignation of his finance minister. Party discipline is breaking down, as Brazil’s poor, who have not benefited nearly as much from economic reform as promised, are growing restive. Worst of all, there is simply too much foreign portfolio investment, at least $100 billion, almost twice as much as a year earlier. Whenever there’s too much money on one side of an investment and not enough on the other, there is a stronger than even chance that the investment’s value will fall. It is a simple illustration of supply and demand. Too many sellers will emerge at the first sign of trouble, and not nearly enough buyers.

What is true for developing nations such as Brazil is equally true for developed nations like the United States. For a long time, Americans watched interest rate changes by the Federal Reserve and bet on the general direction of stocks and bonds from there. When interest rates began to rise, stocks generally would fall, and vice versa. But the U.S. economy has become more interwoven with the global economy, so it is harder to discern the circumstances that will combine to push or pull the equity markets. That has caused investors to be flooded with information, which leads to overload, which can lead to indecision. How do you cope with too much information? Make yourself a balance sheet that contains four categories: politics, economics, the environment, and exogenous factors.

Politics

Political factors, for instance, might include the willingness of an administration to rein in spending. The current Bush administration has shown no such discipline, and in fact, because Republicans dominated both the executive branch and Congress for most of the past few years, there was no counterforce to keep them from passing whatever tax-cutting or deficit-enlarging legislation they wanted. If Democrats had been in power, the situation would have been exactly the same. Now that a counterbalance between the White House and Congress has been restored, the tendency by the party in power to run amok to the detriment of taxpayers and consumers may be dampened.

Other political factors include how the party in control of the White House exercises power. Are they imperious, or are they relatively open? Again, this is not a Republican versus Democrat issue. Each side has behaved badly when it had the reins of power, and it is discouraging to investors whenever that happens. Both sides have attempted at one time or another to force the Fed to make decisions about interest rates motivated by politics, which is always to the detriment of investor decision making.

Economics

Is GDP growing at a good clip? Are corporate profits rising or falling? What about job creation, consumer debt levels, and consumer savings? How is the housing market doing? All these are economic influences on your decision making. So, too, are trade balances, foreign exchange reserves, the money supply, and the cost of energy.

The Environment

By environmental factors, I don’t mean the physical environment literally, although that can come into play if a natural disaster causes a lot of destruction. Aside from the property losses, such disasters can suck resources from one part of the country to another and create imbalances that can stress the economy. That’s why GDP dropped half a point after Hurricane Katrina. But other “environmental” factors are the quantitative versus qualitative data and the mood of the nation. Consumer confidence is an environmental measure, not an economic one, because it is an attempt to measure the zeitgeist of the country, not the true state of economic well-being. Presidential popularity is another environmental factor. When it is low, as it has been for the last couple of years, ordinary people are uncertain about how well their nation will be led when crisis erupts. And as we know, when people are uncertain, they don’t invest.

Videos