This 56 page report is composed of excerpts from Gary Scott's World Reports dated from August 1999 to February 2000.
About Gary Scott
Ted Nicholas, one of America's best selling self publishers and foremost entrepreneur, wrote of Gary Scott, “Gary Enjoys a worldwide reputation. He is an entrepreneur, author and investment advisor extraoridinaire. While today it's commonplace, Gary was the first advisor 30 years ago who recommended international diversification for the small investor. At first, many thought he was crazy. Today, the establishment advisors are on the bandwagon. Gary's investment tips have probably helped more investors get rich than any advisor in the world!”
Gary began writing and speaking about international investing in 1968 when he moved from the U.S. to Hong Kong. Then he moved to London England and began a publishing business which included two monthly newsletters on international investing and numerous investment reports with readers exceeding 22,000 in 82 countries. He has written and self published 36 books, reports and courses on international investing and business.
Thousands have attended his International Investment & Business Courses which he conducts around the globe. He has conducted courses over the last 20 years throughout the U.S. as well as other international locations that include the Isle of Man, Vienna, Hungary, Switzerland, London, Belize, Hong Kong, Edinburgh, Brussels, Amsterdam, Paris, Singapore, Thailand, Manila, Jakarta, The Dominican Republic, Puerto Rico, The Bahamas, Vancouver, Toronto and in Ecuador.
He has appeared on numerous T.V. and radio shows and was heard weekly on the syndicated radio program, Market Rap, broadcast by WEVD New York City for many years. He was columnist for the New York based magazine, On Wall Street, one of the largest circulation magazines for U.S. stock brokers, The Global Guide, a newsletter published by one of Canada's top portfolio managers and Natural Awakenings, a magazine about alternate living. He has also appeared in the federal court system as an expert witness regarding international economics. Gary is former director of Agora Inc., contributing editor to International Living, and a founding governor of the Oxford Club.
Gary and his wife, Merri, after living in Naples Florida for many years, sold their home and publishing business so Gary could write his first novel “the 65th Octave. They now share at-home time between Rosaspamba (Place of Roses), their 800 acre plantation where they are helping develop an Incan monastery and Merrily farms their 250 acre farm located in the lost Province of North Carolina. Both Gary & Merri are experienced yogis who have studied philosophies of the ancients worldwide during their years of living abroad and Gary now dedicates his financial activities to promoting “Inspired Investing”, every person's personal path to peaceful, permanent wealth and increased fulfillment. Gary is a trustee of The Land of the Sun foundation, a publicly funded charity for reforestation and encouragement of resettlement by rural people who have migrated to become urban poor which is currently funding an Andean water system in Ecuador. Gary and Merri's children are international too. Their son attended University of Edinburgh, Scotland and Florida Gulf Coast University. One of four daughters worked with Gary and Merri in their business and traveled worldwide. Another completed school and university in Costa Rica, England and Valencia, Spain and is now an international tour director. Another daughter is at University in London England and another a Veterinarian practicing in Oregon State. Gary's first novel the 65Th Octave a spiritual economic adventure about 5 families trying to dominate the world appears in book stores this spring and is available now at Amazon.com. Gary's website is www.garyascott.com
Gary A. Scott Special Report
* 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.
* HOT REAL ESTATE BARGAINS NOW. Real estate prices in Ecuador were unbelievable. Now they are even lower. Learn how you can have your own dream house over looking the beach for $35,000 or less! Read page sixteen.
* Dream Solutions: Learn seven trends that can make you rich. See page twenty six.
* THE BEST MAJOR EQUITY MARKETS NOW. Equity markets are tenuous all over the world. Some bubbles are ready to burst. Investors must take care. Even when investing in the right areas there is risk. Look at the best value major markets for stability on page thirty three.
* PREPARE FOR TURMOIL. Emerging markets have increased risk but also enhances potential. Calculated risks will make sense for some. See which markets are best on page thirty five.
* Invest in the Imagination Era: Find the next Microsoft before it takes off. Page fourty.
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: firstname.lastname@example.org 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. His fees run as low as .50% which includes all trading you wish to do!
* 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.
* Feature #1: A strong balance sheet. This insures financial stability plus the ability to pay dividends.
* Feature #2: A rising dividend. Compounding dividends have a significant effect on profits and UK companies generally pay a higher dividend than their U.S. counterparts.
* Feature #3: Steady and dependable earnings growth. This is typically provided by utility stocks, food retailers or other such defensive stock.
* Feature #4: 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.
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 covered 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: email@example.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.
* Problem #1: 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.
* Problem #3: 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 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.
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.
Bizarre 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.
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.
Bargains in Ecuador A soft maritime breeze, cool thatch covered shade and swaying palms frame the views of the crystal clear sea. The ocean gently roars, a Pacific song, serenading our meal. The sun sets fiery orange in pure, golden skies.
“This is how you can live here in the land of the sun because Ecuador has it all,” I said to a group of International Living magazine readers who visited us in Ecuador. “Beauty, convenience, and incredible bargains. Now prices are even lower.”
The group believed me too since we were sitting at a restaurant where the Pacific stretched blue and serene from our cliff point into the horizon. Miles of empty beach lay in our view yet they had just inspected Mediterranean villas overlooking a sleepy fishing village and the sea with asking prices of only US$35,000.
This group was the first of two tours that visited with Merri and me in a whirlwind exploration across the equator.
Timing could not have been better. Ecuador is experiencing its worst economic crisis in 70 years. This has created a unique situation where one has access to every creature comfort available in the Western world and old world service at the same time . New cars (used cars cannot be imported into Ecuador to keep smog producers out), T.V., cell phones, computers, the most up to date Internet access and all modern conveniences are easily and readily available. Yet we can also have personal services no longer available in the U.S. or Europe except for the very, very multi-millionaire. With wages at 75 cents an hour and real estate costs low, every imaginable domestic service is just plain cheap.
In addition because there is very high unemployment, Ecuadorians value their jobs and treat their customers with respect. Personal services are inexpensive (maids cost about $75 a month), but they also do a good job! This ranges from friendly, loyal domestic service to speedy, accommodating bell hops in hotels and truly serving waiters in restaurants. Ecuadorians are friendly by nature and they work as professionals taking great pride in giving good and gracious service. No smart acting college students (“Hi, my name is Dave-I'll tell you my life history-if you tell me yours”) serve food here.
Let me share with you a specific example of how this converts in pleasant living and profit next page.
Here is an example of how dedicated Ecuadorians can be. Two North American friends (in their mid 80's) recently bought several hundred acres in Ecuador where they planned to live and farm. They stocked the land with enough cattle to make the farm self-sufficient and gave the staff enough money to get by for several months while they returned to the U.S. to obtain their Ecuadorian residence permits and wind up their U.S. affairs. One of the new cows they purchased was infected with a disease, which in their absence was passed onto their entire herd. The staff on the farm used all their money to have the cows healed and went without a penny for themselves (they lived off the land) for several months until the patrons returned. This is the type of stories about loyalty we hear down here again and again.
This work ethic and the land's great diversity are two of the most wonderful aspects of this country. For example if you travel from the Andean City of Quito to the coast you encounter the same bio-diversity you would see journeying from the Equator to the Arctic Circle. You'll meet mountain nomads in llama wool coats, jungle natives wearing few clothes and who dye their hair with red seeds. Yet you will also find sophisticated, western dressed, cell phone carrying business people who would not be out of place in a New York board room.
Thrills Too There is plenty to do on this coast as well. For example during our recent journey we took 30' boats and watched 120' humpback whales jump from blue, clear seas. (Only 20 feet from our small boat!) We visited colorful South American markets offering jewelry, hand woven-naturally dyed rugs, Panama hats (they are only made in Ecuador), wool ponchos, llama and alpaca sweaters, vicuna blankets, purses and coats, art, antiquities, clothes and much more, all at rock bottom prices.
Mostly we looked at real estate bargains galore. The depression here is compounded by high interest rates (75% to borrow sucres and 20% on dollar loans) so anyone with cash can almost name the price.
A group of International Living readers went to look at the real estate. There were over forty of them and taking 40 buyers to view a property is not the best way to drive prices down. Yet the brokers told the group they could expect to reduce the asking price by 40% to 50% if they were not in a hurry and offered cash.
They visited a wide range of properties representative of many types of bargains western investors might want.
One example was Villa Balsamaragua, which is a development of villas overlooking the sea. Built on a hilltop, the villas have a panorama of a fishing village-Crucita, the Pacific and miles of empty beach. These villas represent the idea of houses built in isolated parts of the Pacific where infrastructure and utilities are primitive and sparse.
This project is slightly unusual because the developer (who lived for in Seattle as an exchange student) has put in modern utilities. 24 lots (15 sold) have underground electricity, phone, water and paved roads. There are plans for 72 more lots plus a hotel and restaurant. The building of this infrastructure has increased prices a bit, but the villas still run as low as $35,000.
There are three free standing models (all Moroccan style) that the developer will build for owners of the land. The Oasis unit is about 1,300 square feet at a price of $35,000, Venturi at 1600 square feet at $38,000 and the Marrakesh at over 2,000 square feet for $50,000. These prices include the land. The asking price for lots alone run from $3,800 (about 2,700 square feet) to $5,200 (about 3,300 square feet).
Prices and size don't tell all the tale either because these villas are really charming! Start with a panoramic view of the magnificent Pacific. The land lays on a hill about 400' above sea level. Miles of empty beach stretch below. Crucita, a rustic fishing village, is spread along the beach. One International Living delegate I talked to said the village reminded her of Puerta Vallarta 40 years ago.
The white buildings with domes and arches contrasts spectacularly against the blue sea and green vegetation. All the villa designs are two story and take advantage of the views, incorporating large terraces both up and down stairs and with a roof garden. The living, dining and master bedrooms are designed to enjoy the maritime with terraces flowing out of the dining areas. There's a dining room inside, but what a view Al Fresco overlooking the sea.
These villas will appeal to those who want a simple, fairly remote (the nearest city of any size is 30 minutes away) natural life with an easy going pace.
Prices for everything are low. For example I picked up the menu from Restaurant Las Gaviotas, one of the ocean front eateries. Simple, half walled, with cement floors, plastic table cloths and no decor except the ocean view, the seafood is fresh from the fishermen every day. There is nothing fancy here, just lots of plain, fresh food. Here are a few of the prices on the menu. Fried Fish Dinner – US$1.27. Stuffed Shrimp dinner, $2.27. Lobster With Garlic – $4.54. Grilled chicken – $1.54. Breakfast of eggs, toast, juice, coffee or tea – $1.18. These are not skimpy rip-off packaged tourist meals either. This menu is for the locals and you can be sure they'll have rice, fried bananas or potatoes and beans and plenty of it as well. The most expensive item on the menu, the specialty of the house “Bandeja de Mariscos” is a seafood platter. I suspect most of us cannot eat it all, yet it costs only $6.36. Fresh squeezed juices like papaya, melon, etc. are 45 cents and a toasted cheese sandwich 36 cents.
The owner of the Villa Balsamaragua project admits he is in financial trouble and has reduced his prices by 50% to create cash flow. He has a loan payment he has not been able to meet. I talked to his banker who said the family is a well known reputable member in the community and they are not foreclosing. Buyers should however proceed with caution and be sure their land is freed from the loan before paying. I further suggest that anyone buying any property in Ecuador (especially if you are not staying for the closing process which can take weeks) use a real estate broker and attorney to make sure you get clear title and to assure the closing does not take months to complete. So many Ecuadorians are having financial difficulties, take extra precautions. Right now do not even trust the Ecuadorian banks!
Twenty minutes north of these villas, an even more primitive village on the coast offers beach front lots with no infrastructure at very low prices. Much of the land was offered as low as 15 cents a square foot. One 10 acre property with a large beach front (and a hill offering high sea views) is for sale by a government ministry at the incredible asking price for under $50,000. There were several small 4,000 and 5,000 square foot beach front lots ranging from $2,500 to $4,000. One very special lot of almost a full acre covered in coconut palms had a large, totally private beach and a primitive house but an asking price of only $16,000. (This sold for $14,000.) This area will appeal to the Indiana Jones within us and offers bargains to those who really want to get away, don't mind sandy roads, like to spend time with the natives and aren't too upset when the electricity doesn't work for a few days.
For those looking for more infrastructure look in the city of Manta, a major sea port with over 350,000 population. This area is in the middle of Ecuador's coast and a new American military base is being built here. This base could stimulate the economy and create rental possibilities for investors. The city has a high degree of facilities. The five star Oro Verde Hotel is perhaps the finest on the coast. Every room is beautifully decorated with complete amenities and has a balcony with sea view. Stay there and you'll be serenaded by the waves lapping at the large sandy beach. The service and food are outstanding, yet prices by western standards are quite low (less then $85 per night). The steambaths there are a perfect way to end hard days of viewing real estate.
In Manta there are much more refined places (but with higher asking prices). One condo in a dramatic Mediterranean building hung out over the beach has a swimming pool with a beautiful sea view. A perfect place for a barbeque as the sun sinks below the horizon in bursts of pink, salmon and gold. The broad beach allows you to walk to Manta. This three bedroom, two and a half bath condo has excellent maritime panoramas and is accessed by a glass sea-view elevator. The asking price was $70,000 but the broker came down to $59,000 almost immediately when we inquired about a discount.
We looked at a one-bedroom studio just next to the Oro Verde in the center of town. This small apartment had a large, marble floor, glassed-in front porch with wrap-around ocean views. In rough decorative shape but with good fundamentals this is a fixer upper with a $15,000 asking price.
We also viewed luxury ocean-view apartments attached to the Oro Verde Hotel. These are brand new top of the line properties which come with access to all of the hotel amenities, swimming pool, complete gym, steam room and sauna. There are fully furnished, one bedroom, 2 bathroom suites of about 1,200 square feet. If these apartments were in Florida, they would be running many hundreds of thousands of dollars but here they have a $140,000 asking price. There are also magnificent high-view condos of near 3,000 square feet, three bedrooms, three and a half bathrooms, plus maid quarters, which would be in the million dollar range elsewhere, but here the asking price was $244,000.
When the broker and I showed our astonishment at what we felt were high prices, the sales manager immediately dropped 20% on the spot. The broker told me later it looked as if no apartments had been sold since they opened sales in June. He expected the price could be shaved at least another 20% to about $84,000 for the studios and $146,000 for the condos.
In Quito top quality property is available for those who want city life in perpetual mountain springtime weather. Prices are very low. Merri and I reviewed many properties including an attractive, modern four bedroom, three and a half bathroom house in Quito's most popular suburban valley. The house has a large porch with killer mountain views and a small creek at the back of the sizable, terraced yard. This house features an alarm system, modern kitchen with views, large dining room, tiled roof, post and beam construction and charming architectural details. The asking price was $69,000 but the owner dropped the price by $10,000 immediately.
We viewed numerous brand new condos, all with outstanding views, hardwood floors and lots of tile and marble. Prices ranged from $40,000 (asking) for an attractive one bedroom to $73,000 for a three bedroom unit with two and a half baths near the largest, most modern shopping mall-cinema-restaurant complex in town. These are asking prices only. Expect to buy them for less.
Finally for those who want to do something unique, we visited a group of architect-builders who showed us half a dozen charming models. They use a cement-straw building system to create incredible Spanish style designs. The architectural details are overwhelming, recessed lights in the walls, rounded breezeways, natural stone showers and fireplaces, lots of exposed wooden beams for warmth and strength and cozy step-down, chimineria areas where the family can all meet round the warm fire.
Their building charges (including designs) run less than $15 a square foot. I was so impressed I hired them myself to build a 2,000 square foot, three bedroom house with three step-down fireplace areas, Turkish bath and pool at our plantation on a spot we have that offers killer Andean views. “You are remote,” they said, “this might cost a little more than $30,000, but not much!”
The nice thing is they can build anywhere so they can serve those who won't be satisfied with anything but their own special design. You can find land at dirt cheap prices in an area that suits your tastes, then let this firm build.
Wherever you want to be city, forest or farm, in the mountains or on the sea. Even in the jungle. Ecuador has them all and right now you can have it at give away prices like you have never seen before. We might never see the prices again! Depressions generally don't last forever. If you are thinking about buying land abroad and are especially interested in Ecuador, this is the time to plan a visit.
Ecuador won't solve its problems overnight and I suspect that prices will remain low for many months ahead. Yet when the economy does recover, real estate prices will might never be this low again.
All the contacts below have acceptable levels of English except where noted.
Jorge Loor, Villa Balsamaragua, PO Box 220, Portoviejo, Manabi, Ecuador. Tel: 011-593-5-635-279. Fax: 011-593-5-635-633. Internet: firstname.lastname@example.org. George is developer of the project overlooking Crucita with villas at only $35,000. Beware of this developer's financial difficulties and don't pay any large deposits in advance. Be sure to use an attorney and real estate agent to work with you and protect your position.
Kjetil Haugan, Leonidas Plaza #353 y Roca, Quito, Ecuador. Tel: 011-593-2-504-977. Fax: 011-593-2-236-688. Email: email@example.com. Kjetil, is a Norwegian who has lived in Ecuador for the past five years. He is a real estate broker who helped us inspect many properties. He has exhaustive listings. He recently placed an ad to buy property expecting about 40 replies. He received over 400 calls! He can help buy property in the Andes or on the sea including at Villa Balsamaragua. He has been one of the most responsive contacts I have found in Ecuador.
Mrs. Pilar Endara and Cecilia Manciati, Calle 14, no. 1106 y Av. 11, Manta, Ecuador. Telephone: 011-593-9-872-148 or 593-5-623-603. Fax: 011-593-5-626-110. Two real estate brokers with extensive listings in Manta including the Mediterranean condo overlooking the sea. (Some English.)
Juan Baca, Hosteria San Mateo, Km. 75 Via Latacunga, Ecuador. Telephone: 011-593-3-719-471. Fax: 011-593-2-465-504. email: firstname.lastname@example.org
Sr. Baca is the owner of a charming hosteria about 40 miles south of Quito. He is looking for a partner to expand and offers a business opportunity with very interesting U.S. tax consequences.
Dr. Andres Cordova, Estudio Juridicio Cordova y Asociados, La Pradera 412 y San Salvador, PO Box 17-01-3170, Quito, Ecuador. Tel: 011-593-2-500-343 or 552-920 or 548-632. Fax: 011-593-2-524-225. Dr. Cordova is a well connected (his Grandfather was President of Ecuador) attorney who can help in the conveyance of land. He is handling several closings at Villa Balsamaragua on the coast and consequently offers a lowered price for closing on this project.
Fausto Acosta, Barro Viejo, Arquitectura en Tierra, Via a Cununyacu, 7ma Tranev, Tumbaco, Ecuador. Telephone: 011-593-2-374-258. These architects have charming designs at very low prices. (No English.)
Global Equity Market Weakness As I write this issue at the turn of the millennium the technical indicators for equity markets around the world have greatly slowed. The stock index velocities in September suggest rising markets in 33 of the 38 markets reviewed, but their upwards momentum has dramatically slowed. Only 12 of these markets now have a velocity of 1.10 or better.
This should come as no surprise. There are at least five good reasons for the slow down. In the short term, the numerical energy gained from the SE Asian rebound has waned. Though the momentum of the markets in Indonesia, Taiwan, South Korea, Singapore and Malaysia still lead the world, their upwards velocity is much more modest.
Second, at a deeper level, the first burst of the Internet stock bubble has taught investors (yet again) that there is no magical forever in the stock market. This lesson comes quite close on the heels of the bursting international stock bubble, when so many investors thought shares in emerging markets had some guarantee to always rise. The reality in both as in all emerging things is the same. A few shares will rise dramatically. Most will go bust. Treat emerging and Internet markets now just as you would penny stocks. Spread out your diversification, expect losses and hope to make up for them through the big winners.
Another reason for declining stock markets is rising interest rate velocities. Though short term rates are still falling in Europe, bond yields now have a strong rising velocity all over the world. The fear of a global economic slow-down created by higher interest rates will keep a dampening effect on markets. The higher interest rates for bonds will also siphon money out of equities into the higher paying debt.
Plus there is nervousness in currency markets. The continued record trade deficits have finally caught up with the greenback and the U.S. dollar is no longer so stable. The yen has a dramatically stronger velocity which suggests it will rise even more versus the greenback. In addition though European currencies still have falling velocities versus the buck, their weakness has reduced significantly. We have mentioned for some time that the single, main strength of the U.S. dollar has been its interest rate advantage over its European counterparts. As this advantage wanes, there are few reasons why the dollar should remain strong.
A dramatic shift in long term interest rate velocities has taken place. European interest rates are now rising much faster than in the U.S. If the pace continues, Euro bond yields will begin to catch dollar yields. If European investors decide to switch from the greenback back into Euros over the months ahead, this could create a further U.S. dollar fall. This would discourage currency sensitive investors from entering or staying in U.S. equities. Such a move will push the U.S. stock market and equities down.
These global economic factors suggest that the new millenium should bring positive changes, but that growth will not be in a straight upwards mode. Technology is great, but does not diminish the reality that markets rise and fall . Many believe the new millenium will see higher evaluations of financial markets. Don't be too sure. Watch markets with caution.
Look carefully for logical opportunities that will develop in our great future but always remember that historically most of the entrants in every new technology fail.
Recently I was enjoying breakfast at our local country restaurant and the owner proudly showed me a worthless (except for its antique value) share certificate from a local bank that went bust in 1932. This certificate reminded me of the huge number of railway companies that went bust. Those who invested in railroads, when this was the innovation of the era have ended up with Amtrak as their main legacy. Could Internet shares be this way too? Could new technology (such as autos, trucks and airplanes did to trains) we cannot even envision completely ruin current Internet companies in the future? When we are buying shares at sixty and even a hundred times earnings, we are buying only the pure prospect of future growth. Let's think about this!
So if markets begin to decline seriously, where do we go?
Investors should seek stability during times of market turmoil. We should look for places which offer good value and have fundamentals which will allow shares to grow.
For example, right now one such equity market worth looking at is Norway. It is currently listed as a good value market by Keppler Asset Management, indicating the market is selling at values well below its relative norm. This means that this market has one of these two important factors, good value .
The country's short term positive indicators are also supported by great wealth and stability. The country is so oil rich that it regularly has government financial surpluses. The Norwegian administrators have been pouring these surpluses into its infrastructure. The additional big benefit is that much of this government spending is on information technology. Norwegian youth are among the most computer literate in the world which also bodes well for the future of Norway. This means the country is also well positioned so it can grow in our information era.
>From a technical point of view this market also has a strong rising velocity. The Oslo Stock Exchange Index recently ended on a 13 month high at 2183 points up from the low in 1999 of 1652. The 1.89 average yield of the Norwegian market is favorable compared to Wall Street (1.57 at time of comparison) and the Norwegian average p/e ratio at 17.4 was twice as low than the S&P (39.49) when I made the comparison. Figures can be updated in the Financial Times Global Equity Markets.
Norway has the benefit of not being in the European Union. This gives the Norwegian government greater flexibility in its monetary policy and as a rich country, it is not dragged down subsidizing the weak EU members.
Small is also often beautiful. We can see this when we look at the success that has taken place in other small countries such as Switzerland, Singapore and Hong Kong.
The Oslo Stock Market is small with only 111 listed shares. Many are small shipping companies, etc. Here are some shares which I feel are worth further investigation at this time.
Aker RGI ASA, Oslo Stock Code: Akera.
This is one of Norway's largest industrial groups with over 25,000 employees. The company is in a unique position that the owner billionaire, Kjell Inge Rokke, has made a $383 million bid to buy up enough shares to delist the company. This firm had such a huge jump in earnings in 1999 that its p/e ratio has dropped to a tiny 3.11. The sentiment is that the bid will prevail, but currently an association of shareholders has rejected the bid along with the country's national insurance fund. Investors who buy these shares might cash in if Mr. Rokke fails in his current bid and has to offer more.
Sandsvaer Spare Bank, Oslo Stock Code: SANG. This is tiny bank (only 56 employees) and has enjoyed steady earnings growth from $45 per share in 1994 to $60 in 1999 with a very low (3.5) p/e ratio.
Merkantildata ASA, Oslo Stock Code: Mero.
This smaller data company (3,067 employees) provides computer system integrated services, distributes hardware and software products in Scandinavia. This firm is the largest IT supplier of infrastructure, data communication and application in Norway and Sweden. The p/e ratio of 20.58 is low compared to U.S. IT shares.
Tandberg Data ASA. Oslo Stock Code: TADO.
This smaller firm (586 employees) is the largest manufacturer of info technology and designs. The company markets peripheral equipment for presentation, integration and storage of data, sound and pictures. The firm is considered a pioneer in development of user-friendly computer terminals.
Inspired Investing-More PIEC This year I have written often about the incredible financial power of having your own business in this era. This advice is based on the principles outlined by Austrian economist, Joseph Schumpeter, on how innovation creates industrial revolutions that alter the way we live, work and earn and keep money. We reviewed five great economic eras that began in the late 1700s:
ERA #1: 1785-1845-fueled by water power-60 years. Textiles and iron works were the backbone of growth industries.
ERA #2: 1845-1900-fueled by steam-55 years. Railways and steel provided the main growth in this era.
ERA #3: 1900-1950-fueled by the internal engine-50 years. Electricity and chemicals provided the major growth.
ERA #4: 1950-1990-fueled by electronics-40 years. Petrochemicals and aviation were the innovations which became mainstream in this period.
ERA #5: 1990-current-fueled by digital networks- 30 years+ ? Software and new media create the growth elements in this era.
The innovation that has led us to this current era allows us to increase our wealth and fulfillment in life at the same time by developing a Primary Income Earning Capacity, (PIEC). PIECS allow us to make money and feel better by looking within to find ways of turning our passions into wealth.
All of this innovation means we are in a continual state of turmoil and change. We have to work harder and look deeper to keep up, but the world is open to anyone who wishes to have riches beyond belief. The wealthiest billionaires of today were unknown just a decade or two ago. They have made incredible wealth in industries that have only existed for a few years.
This innovation empowers the individual! Today we have faster and faster computers, the Internet, the information access. All this allows you, me, anyone to be incredibly efficient, anywhere in the world! All this allows us to identify and reach markets very easily.
Everything is about to change yet again! The billionaires of today are likely to be the has beens of tomorrow and this is happening sooner than anyone can imagine. Never before has an old boys' network been overturned so fast. The railway and oil magnates of the first and second era dominated the world's wealth for centuries. Electronics, car and airline multimillionaires lasted perhaps 50 years. The Internet and communications wealth will be overshadowed in as little as a decade.
Add this all up. Change. Access to markets and information. Ability to plan, organize and sell. Anyone can take advantage of these opportunities and use them in small or large ways.
The beautiful thing is we can take advantage of this era to make money and avoid great dangers at the same time!
Opportunity Equals Danger Avoiding the danger is important because each era of change not only brings new benefits but brings new dangers as well.
Today, speed of light information technology creates a huge threat to our wealth.
Not keeping up today is a big risk. Innovation builds new ways of life and in the process is destructive to the old. Traditionally accepted ways of working, investing and saving are not working as well as they did if at all. The Internet is making many, many businesses obsolete.
For example, take my business of publishing. The old ways of just printing a monthly newsletter no longer makes sense. Too much data is too readily available over the Internet. The timing of a monthly publication becomes too slow. There is still a market for newsletters to be sure, but enough of the market has gone or is going electronic that the printed newsletter market is a diminishing one.
Remember whatever you do, try not to have a business that grabs an ever increasing share of an ever diminishing market. (Think about the remaining buggy-whip manufacturer, if you don't understand what this means). Jack Welsh, the president of General Electric (a well managed organization that grew out of Era #3 summed this up when he explained the following: When the internal rate of change in a business is slower than the outside rate of change, the end of the business is in sight.
The answer of course is to embrace the change and let your business evolve. This is true whether your business is one that you personally manage or is one in which your participation is as an investor.
Back to newsletters: the Internet makes it possible for my business to reach more potential clients more easily. Email makes it possible for me to send out data at a fraction the cost. New digital book technology makes low print-run books capable of being marketed through book stores. The era of bookstores with tens of thousands of books has to be a diminishing market. Soon bookstores will have computers with millions of books stored digitally. You'll be able to walk in, select a book and have it printed (looking just like books you buy now) in less than a minute.
We have to embrace technology and keep up with the trends . But in such a rapidly changing world, how do we know and keep up with what the new trends will be? Follow Your Heart
I continue to hammer away on the idea of following your passions because I have been so lucky doing so. Over the years I always seem to be in exactly the right place at the right time, again and again. Without ever recognizing what I was doing I was stumbling through the process of keeping up without giving it any thought. I have always accomplished this by following areas that interested me personally. This allowed me to take advantage of what I call the Golden Rule of Simplicity which is to do what we love by learning to market from the heart. This puts us in touch with millions of others just like us! If we get in touch with our hearts, we are looking into the hearts of an entire market who feel and desire as we do. This is so simple yet it allows us to have the most finely tuned market research in existence.
Dream Solution I recently discovered a line of thought that can help us better focus or define how to use the rule of simplicity. I was speaking at a conference with the head of a think tank in Denmark, who gave a speech entitled the “Dream Society-How to Spot Upcoming Trends”. This gentlemen gave seven points that will affect markets in the current era.
* Trend #1: The rate of change will increase. This is self evident.
* Trend #2: The rate of private consumption will grow. From 1884 to 1995 private consumption just about doubled, but increased 25% in the past ten years. This means that the amount of money spent per person will continue to grow. This also means that the amount of discretionary income per person is growing. This also means by the way that society will have to continue to embrace technology. The only way to increase private consumption is through the generation of more output with less input. In other words, productivity has to grow before private consumption can grow. Improved productivity is normally gained through the use of new technology.
There is a second part to this second trend. Though private consumption will grow, less material goods will be purchased.
The growing trend is for the purchase of immaterial goods, such as sports, entertainment, health, communication and spirituality .
He pointed out Maslow's Need Hierarchy which is:
Physical Security Social Needs Acknowledgement Self-Realization
In western society we now pretty much take the perfection of physical and security needs for granted. If we buy a new car. we expect it to run and to run pretty much perfectly. This is true of most consumer products, so we don't choose one car over another for that material quality. We instead buy cars which fill social needs (for example, a mini van for our large family) or for acknowledgement such as an expensive sports car which has very little utility or a large sports utility vehicle with more utility than most of us need.
The key to understanding these facts is that the higher people move up the hierarchy, the more they will pay for the satisfaction of their needs. Pound for pound, a Chevy Caprice is a lot more car for the dollar than a top line Porsche (the owner of the Porsche has to risk life and driver's license to even use the performance feature). It is the implied power, the acknowledgement that the Porsche owner is paying all the extra thousands for.
* Trend #3: There will be more automation. In the process of automation, mankind works through another type of hierarchy to supplement muscles first, brains second and feelings third. This fits Maslov's Law of Needs explaining why tractors and forklifts were invented long before computers.
This knowledge can help us see why the future for mood altering equipment, machines and drugs will grow. As automation takes over all of the physical jobs we have to do, then we'll start looking for ways to automate our emotions as well. This speaks well for the entertainment industry and explains why people get so caught up in sports for example.
Here humanity throws in another interesting twist because the more we perfect automation in an area, the more retro we become. Once we perfected central heating there was an explosion in demand for fireplaces. This explains why, in the United States which has perfected its road systems and has such large urban areas that almost no one needs to venture into the country, the fastest growing segment in the auto industry is the four wheel drive sports-utility vehicle.
* Trend #4: Age, sex and wealth are becoming increasingly irrelevant. Society is going through a great convergence which explains the end of segregation and the advancement of basic human rights. This is why U.S. armies (or NATO's armies acting at America's bequest) are now allowed to invade so many places. It has always been politically okay to invade the space of another nation if it is in the name of a “good cause”. The end of discrimination is causing the description of “good causes” to dramatically narrow. This also dramatically alters markets. Look at the ads for the vitamins called Centrum Silver which show a mature couple in some form of physical activity. The slogan of the manufacturer is “It's a good time to be silver”. Look at how adults buy items that used to be for the kids, such as bicycles. The subject of bicycles leads us to the next trend:
* Trend #5: There will be a shift of attitude from our brain to heart. Once mankind has taken care of its basic physical needs, it will revolt against the tyranny of reason. Function (such as the well running car) is taken for granted. Now there is a market for stories not products. One example, Mr. Paladin used was that in his home country of Denmark the highest point of land in the country was not over a few hundred feet. Yet guess what the best selling bicycles in the country are? Mountain bikes, of course. Look at the strong markets: for belonging, love, togetherness, identity, adventure, anchored values, conviction and caring, not products. Housing was another example he used. More and more people demand having huge family style dining rooms while eating out grows enormously. This fact has very much to do with the next trend.
* Trend #6: Families will turn more and more of their responsibilities to the market place. Cooking and eating out were one of the first signs of this trend. Then came the giving up of entertainment (how often do you stay home and play games with the kids). Look at the growth in businesses for child upbringing and care of the elderly. See how our health and financial care are become given over, more and more, to the insurance companies, HMOs and other such businesses. Even the emotions of our kids, (including the huge growth in sales of prescription drugs) are being serviced by business now. Parents are more likely than ever before to call in a party entertainer for the birthday of the kids. Weddings are more and more organized by wedding planners than ever before. Where we live up here on the farm in the mountains when someone passes, their loved ones go out to the family cemetery, dig the grave and bury their own. This used to happen all over the country. When was the last time you attended such a funeral? Now all of these ceremonies are dealt with by business.
* Trend #7: The growth in markets will be for stories, not products. One example given was for selling eggs. He explained how the typical, not tuned in farmer can sell an egg for 10 cents in Denmark. The product has become commoditized. This is an important clue. You do not want to be in a market where the product becomes commoditized. The only way to compete in such markets is through lowering price. This usually requires a reduction of profits or a huge infusion of cash.
Then he went on to explain how some smart farmers had caught on and started offering free range eggs. Now they were not selling eggs. They were selling a story of health. This is still just an egg but now it can sell for twenty cents!
But the really smart farmers have taken it a step further. They allow families to come to the farm, enjoy the fresh outdoors and work as a family collecting the free range eggs. Still the same egg but the story is different, health, togetherness, anchored values. These eggs sell for thirty cents! The Power of the Heart
The egg example was inspiring to me because I was wondering why we had just set up a flock of Cornish hens (for the eggs) high in the Andes mountains where Merri and I had purchased a plantation to conduct seminars. What kind of seminars? Those aimed at wealth, as always before, but in different ways. Early Wealth is a new course I'll be conducting for kids (togetherness), Inspired Investing to use spirituality to enhance wealth (identity). We'll do some Andean hiking and gold panning courses (adventure), some courses on the impact of health on wealth (better health). We had already taken the steps that Mr. Palladin suggested.
But I had not figured out these facts and that this was where markets were growing. I simply felt what was interesting to me and proceeded to let my business evolve in that direction. This is the power behind the Golden Rule of Simplicity.
But how do we get in touch with ourselves to use this enormously powerful law?
Understanding and being able to follow our intuition can be enormously difficult, but an anonymous 14th century Samurai warrior gives us a clue how to do this. This Warrior's Creed explains what to do better than I could, so I;d like to share it here with you.
A WARRIOR'S CREED I have no parents: I make the heavens and earth my parents. I have no home: I make awareness my home. I have no life or death: I make the tides of breathing my life and death. I have no divine power: I make honesty my divine power. I have no means: I make understanding my means. I have no magic secrets: I make character my magic secret. I have no body: I make endurance my body. I have no eyes: I make the flash of lightning my eyes. I have no ears: I make sensibility my ears. I have no limbs: I make promptness my limbs. I have no strategy: I make unshadowed by thought my strategy. I have no designs: I make seizing opportunity by the forelock my design. I have no miracles: I make right action my miracles. I have no principles: I make adaptability to all circumstances my principles. I have no tactics: I make emptiness and fullness my tactics. I have no talents: I make readiness my talent. I have no friends: I make my mind my friend. I have no enemy: I make carelessness my enemy. I have no armor: I make benevolence and righteousness my armor. I have no castle: I make immovable mind my castle. I have no sword: I make absence of self my sword.
Whether we are investors or business people, we are commercial warriors. Despite industrial eras, technology, innovation and all the miracles of our modern world, the true nature of life, commerce and business has not altered one bit. Run your business or invest with this wisdom and you will not be able to fail.
Multicurrency Sandwich For quite some time now there has been little opportunity for good multicurrency sandwiches. This is about to change as the yen now races strongly upwards versus the Japanese yen.
As Japan's economy finally begins to improve, there is a growing interest by U.S. businesses and investors for investing in Japan. For them to do so, they must buy Japanese yen. The increased demand for yen increases, the value of the yen. Should the U.S. market slip and Japanese investors flee from Wall Street, the yen could rise even further.
I have been following the yen dollar parity for over thirty years. When I first arrived in Tokyo, it took over 400 yen to buy a dollar. Since then the dollar has fallen steadily. Plotted on a long term chart, the yen should be about where it is now, around 110 yen per dollar.
If it falls further, it will again start to make sense to borrow yen and convert the loan to invest in greenbacks. Right now you can borrow yen for less than 3% and invest them in U.S. dollar CDS for around 5%.
If you borrow four times your loan, your profits look like this on a USD$50,000 investment placed in a CD.
Amount Investment Interest Earned Amount Earned $50,000 US dollar CD 5% $2,500 $200,000 US dollar loan 5% $10,000 $200,000 Japanese yen loan 3% -$ 6,000 Total return $ 6,500 Your annual interest on the $50,000 invested is 13%.
This is a marginal position at this time. Should the yen fall below 100 yen per dollar, start to call your international private bank manager about making such loans.
Of course, there are risks! The yen has risen as far as 79 per dollar in the past. Should it rise that high again, you would suffer substantial losses. Also beware of investing your yen loans in bonds at this time. If the dollar weakens much further, the Fed may cause U.S. interest rates to rise to strengthen the dollar. This won't help unless the U.S. stock market has already crashed. An interest rise will weaken the U.S. stock market and cause foreign investors to leave. This will weaken the dollar and counteract the benefit of the rise, unless those foreign investors decide to shift their dollars from equities to U.S. interest bearing investments.
U.S. dollar bonds are also at risk from the interest rise. You might make money on the currency and interest rate spread, but lose it on the bonds. The situation to watch is where you can make a decent spread (three percent or more) on the yen/dollar on current or short term type accounts. With a four times loan, this allows you to double your current rate of return for taking the forex risk.
High Risk Can high risk investments still pay off? The simple fact is that investing when markets are really down is still one of the best ways to make money (either in business or investing). The top performing offshore funds over the last year show how true this is. After the SE Asia crisis, this region once again became a top performer.
Fund 12 Month Performance RSAIFS/Lippo Indonesian Growth +502.72% Lippo Indonesian Growth +449.19% Korea Open Fund +308.77% Malacca Fund (Cayman) inc. +276.30% BBL Invest indonesia +273.76% Fidelity Funds Indonesia +262.35% The Yellow Sea Investment Co. +252.69% Paribas EM Indonesia +249.13% Dresdner RCM ASF New Tiger korea +248.87% Singapore Sesdaq Ltd. +240.07%
Does this mean that SE Asia is now the best high risk place to invest? No ! Over a year ago, I recommended this region especially South Korea as a a place of high risk but also incredible upside potential. Now SE Asia is still high risk but much of the growth potential is gone.
The SE Asian region is now a neutrally rated value region by Keppler Asset Management and Korea is nearly in the sell rated value range. There could be a consolidation in SE Asia especially with the turmoil in East Timor.
The emerging market buy candidates (according to Keppler) are mostly in Latin America (Brazil, Colombia, Venezuela) and Eastern Europe (Czech Republic, Russia, Slovakia) plus China and Sri Lanka. These are the high risk areas that offer the bigger potential now. Brazil, (because of the size and enormous potential of the market) and Slovakia-Czech Republic (because they are oversold due to knee-jerk reactions to problems in Russia which really don't affect these two markets).
I have been positive about SE Asia for more than a year but now suggest you take profits (if you bought a year ago you should have enjoyed substantial gains!)
I also suggest moving away from emerging markets as potential problems in these areas are much greater than in the industrialized world.
I suggest you consider Europe as a better high risk bet instead. Japan still makes sense as a market to hold but balance this Asia investment in the risk portion of your portfolio with increased equity holdings in the Euro.
The Euro and Europe's economy have a good chance of benefiting from the U.S. dollar weakness now. European funds also make more sense as they have lagged behind over the last year dropping 2% in average while funds which invested in the U.S averaged up 20.2% and SE Asia funds have averaged up 52%. Contacts
Listed below are major European funds. Bank of Bermuda European Fund, 6 Front Street, Hamilton, HM11, Bermuda. Tel: 1-441-299-5600. Fax: 1-441-299-6518.
Invesco GT Europe and European Small Company Funds. PO Box 366, Town Mills, Rue Du Pre, St. Peter Port, Guernsey GY1 4NE, Channel Islands, Britain. Tel: 011-44-1481-722746. Fax: 011-44-1481-722679. email:Guernsey@gtplc.com Internet: invescogtoffshore.com.
Mercury ST European A Fund, 12-13 Hill Street, Douglas, Isle of Man IM1 1EF. Britain. Tel: 011-44-1624-671128. Fax: 011-44-1624-662850.
I have listed these fund managers because they are good ones, however, don't forget my thoughts from the last issue about the high toll mutual fund fees take. Instead you might consider buying some shares direct.
Two markets to consider are Austria and Germany who, along with Norway are top value markets in Europe. If you want high potential profit, look for information technology shares in the German market that might have low prices because the depressed sentiments in the market have masked hot investor sentiment for Internet and IT shares.
I have not found any listed companies in the Austrian market that are IT or Internet related, but here are three companies that have extra reason to investigate now. The Austrian market is so thinly traded that it has explosive upwards potential, especially if Eastern Europe enjoys any positive news. These three companies are large, well established and have enjoyed steady earnings growth despite Europe's economic woes.
BWT AG. This company was established in the early 90s when its management bought Mondseer Armaturenfabrik Ges.m.b.H.. I like this firm because it is a leading European firm in water treatment technology, a market that is bound to grow. BWT means “Best Water Technology” and the firm develops and offers customized solutions for the treatment of domestic, industrial and commercial water supplies and for swimming pool water treatment plants. Additionally, the company produces and sells air purification systems and sanitary fittings. BWT water treatment plants operate with chlorine, ozone or UV-disinfectants and a diversified range of single bed, mixed bed and osmosis filters, able to provide nano, micro and ultrafiltration, deironization, demanganisation, denitrification, decarbonisation and deacidification. Shares are selling at a P/E Ratio of 19.90 at the time of this writing.
EVN. EVN is a leading Austrian utility which supplies electricity and natural gas to Vienna and its surrounding areas and currently sells at a P/E Ratio of 16.53. I like this share because it is a steady, well established firm with excellent earning growth. This is a solid holding for times of turmoil, but could sell for much higher prices if Austria's market catches fire again.
OMV Aktiengesellschaft. This firm is one of Austria's largest industrial enterprises, which operates in three main segments: energy, chemicals and plastics. I like the potential of this company because in the energy sector OMV extracts oil and natural gas in Austria, Libya and Britain. The shares are selling at a p/e ratio of 20.32 and if the U.S. drops its sanctions with Libya and free trade opens there, OMV could benefit.
New books and the Beach Watch for the launch of my first novel, “The 65th Octave”. You can look it up through Amazon.com or Barnes & Noble.com now and will be in bookstores next spring. This book is a good fast paced read and contains some deep understanding about wealth.
Gin clear waters spread over white powder sands. Mangrove and palm edge the shimmering sea. We loll in slow waves, warm reflected sun and watch flamingos stand like anorexia statues splendid in ruffled pink. Purple monster iguanas, a bizarre presence juxtaposed from the past, skitter near the surf reminding us that the future never stands still even in a paradise like this.
Sonesta Hotel Aruba. This is a desert isle with 83,000 residents (and many more tourists) living tidily, in happiness and harmony at the edge of South America and surrounded by the Caribbean Sea. Crime is low, one feels safe, the locals are friendly (though not particularly well-informed or reliable about what is happening on the island).
This is a beautiful place if you like dry on land, but hot, tropically humid in the air. This island is clean, neat, tidy. The Dutch (Aruba was a colony and is still politically connected with the Netherlands) have added this fastidious touch.
Merri and I visited Aruba so I could speak at my last seminar this millenium. While on the trip we took a couple of hours to visit a small island which has swimming, tennis, sports etc. We swam in the clean waters, lazed in the sun and strolled along the soft sands through the vegetation to watch the exotic wildlife such as frigates, iguanas and flamingos.
In all Aruba would seem a perfect place. The island has political stability, a good economy of agriculture (aloe vera mainly), tourism, (from the U.S., Europe and cruise ships), plus a strong financial sector. Everything seems to be here. The shops are incredibly sophisticated and offer world class shopping (jewelry, fashion, etc.) in air conditioned malls with goods from all over the globe. There is excellent weather, good tasting desalinated water and a low stress, easy going way of life.
On the surface everything seems perfect. One could be lulled into thinking that this country is a perfect place to plunck down a little money. This why in this issue I want to share with you how Aruba is a good example of the type of place and economy where one could lose everything they investment there now. Aruba offers the epitome of today's economic order, but we are on the threshold of social and economic change that can turn our entire way of life, investing and economic order upside down. I explain why, how and what to do about this next page.
How would you like to have invested in Microsoft when it began? Even better how would you like to invest in the next Microsoft when it begins? If the past is any indication of the future, the next business leader in the next big economic wave will be even larger. I outlined how to spot the leading companies of the future at the last seminar of this millenium and want to review these ideas here with you. Traditional successes such as Aruba's tourist industry could fall by the wayside because people will demand more than just sun, sand, sea and shopping. This island may or may not change with the times but the point is smart investors will see beyond the veil of apparent affluence and success. We will review what to look for in the future but first let's look at the present, the equity and currency markets which look fundamentally and technically best.
We will review fundamentals as well as technical factors in this analysis because investors who rely just on momentum today are at extreme risk. We have moved to the top of a bubble and there is no common sense guide to shares today. People are pushing up prices of companies (such as Amazon.com) that have never made a profit. In any other industry if a new business moved in and swiped at a chunk of the market share by dropping prices and selling at a loss, we would say this was crazy. But the .com bubble has blinded many investors to the reality of the risks. The Internet will become a big part of our future. I believe this and am going virtual myself. For example you can receive this newsletter and courses free from this month forward at my web site Gary-Scott.com.
But we do not know how the Internet will work out. We do not know who the winners will be. The very essence of the net means that most of the initial players won't be able to last. The net is perfect for a business like mine which offers only proprietary information, but it can be awful for firms (such as Amazon.com) who have nothing unique to sell.
Watch the Superbowl this year and you will see many .coms spending millions per minute just trying to get noticed. Throwing money around this way is not a good formula for success. Some .com winners there will be no doubt, but investing in them today is really high risk stuff so be sure to counterbalance your portfolio with some investments where the fundamentals make more sense.
Best Value Markets
Let's start with major markets because I feel that emerging markets have an extra fundamental risk around Y2k. They will be hardest hit. The fact that the U.S. is allowing its diplomatic staff to return to the U.S. from places like Russia is a sign that the government expects the worst!
To determine which markets offer the best potential let's look at the markets that have the best value, the best velocity, the highest yielding currency (which should help the currency stay strong) and the currency which has the highest upwards velocity.
The best value major equity markets based on relative price earnings, price-to-cash flow and yields currently are:
#1: Austria, #2: Australia, #3: Germany, #4: Hong Kong, #5: Norway.
The major market indices with the best 39 week moving averages are:
MARKET UPWARDS VELOCITY Sweden 1.17 France 1.12 Denmark 1.10 Japan 1.09 Germany 1.08
Choosing strong markets which are denominated in strong currencies is important. For example if you invested in the U.S. market instead of the Japanese market in the last year, the Dow shares would have had to appreciate over 40% before your investment broke even in yen terms. The yen has risen from 142 yen per dollar to 101 yen per dollar almost 40%! The major market currencies with the best real return (ninety day interest rate less inflation rate) are:
CURRENCY REAL RETURN Swedish kroner 3.36% Australian dollar 3.30% British pound 3.30% Austrian schilling 3.01% U.S. dollar 3.30%
The major currencies which currently have the highest upwards velocity (the lower the velocity, the faster the currency is rising versus the greenback) are as follows:
CURRENCY VELOCITY Japanese yen .91 Canadian dollar .98 British pound .99 German mark 1.01 French franc 1.01
In addition let's look at the major markets with the fastest falling interest rate velocity. A currency with falling interest rates will help stimulate the rise in shares of that market. CURRENCY INTEREST RATE VELOCITY British pound .89 Japanese yen .94 U.S. dollar 1.02 Denmark 1.03 Germany 1.04
If we put all these together, here are the markets which appear most often on these lists: #1: Germany #2: Japan #3: Britain #4: Australia #5: Austria #6: Sweden
This analysis suggests that the above markets will offer the best overall opportunities now.
Best Emerging Markets Before we look at the best emerging markets I would like to share with you a letter I recently sent to my nephew. He is a really hard working, very successful executive for an incredibly successful medium sized firm owned 100% by one man who has built the company from scratch.
The owner is getting on in years and is about to sell shares to the employees before going public. My nephew wrote asking how he could go about borrowing as much as was possible because the company made an annual return of 26% and you could bank on a return of 22%. Here is my reply.
“As a businessman I can't advise on whether the shares of your company are a good deal or not without a really deep analysis. Even then I don't know enough about this type of business to make a really good assessment. What you have written sounds good. Few people know a firm as well as its employees so your strong endorsement and confidence are very good signs.
“However I also know every business has surprises in store during these times that even its employees don't see.
“Though I can't say much as an investment advisor, as your uncle I can tell you that the big question here is one of philosophy. This is a question every investor must answer for himself and then stick with the answer. Philosophically this is a tough question and the correct answer can only be found within your heart.
“On one hand I do not believe in borrowing more than you can really afford to lose to invest. I have seen too many investors make really bad mistakes by being over taxed. There is too little leeway for error. You mentioned your business can bank on 22%, but we are in a time of enormous change. One can never totally count on such returns and you could see a slow down or difficult years of business.
“When you carry a burden of debt, you lose your ability to stick through tough times. The need to service debt throws all types of long term logic out the door. This nation is riding a wave of boom that has lasted for 25 years. Your position reminds me of mine at age 24. I was working for a company that was growing by leaps and bounds. The company had grown from eight employees when I started to 2000 people in just three years and was going public. I had a stock option to buy 50,000 shares at a dollar a share and the shares were going public at $20 per share.
“I borrowed and borrowed to buy all I could. This was a mutual fund company that had been riding on a similar Wall Street boom (the stock market had risen continuously from 1949 to 1969). The same year I bought those shares the U.S. stock market crashed and stayed depressed for 15 years. The company I owned shares in went bankrupt and I was left penniless, deeply in debt and had to start all over again. It took me more than a decade to recover. This is not a pretty sight.
“I point this out to show that you could lose everything by borrowing too much, plus you could be stuck with the responsibility of owing investors money as well.
“This is the good reason why your firm will only lend you what you can afford to pay from your income. Your boss sounds like a wise man and it may pay to heed this discipline he has set up with good cause.
“However on the other hand many investors who are really wealthy today became so by at some stage taking a very big, calculated risk. You are in a pretty good position to calculate the risk. My concern is that you become aware that a risk does exist. Risk always exists because we live in an unknown world. Tomorrow your boss might die or some major new law could turn your business upside down, a new competitor could rise, etc. I do not say this to discourage you but only to help you realistically examine the questions. If you accept there is risk, then you can examine the degree of risk and how much you are willing to take.
“Sit down and calculate how much you want to borrow. Then look at what would happen to your finances if you borrowed this money and your company did not make a profit for a year. How much would you lose? How would you make the payments? How would this affect your family, your job, your son, your life, etc.? How long would it take you to repay the debt? Then calculate how much extra profit you might make with the borrowed money assuming that private investors will charge you considerably more than a bank. Then ask yourself if the extra profit is worth the worry and the risk.”
Having shared these thoughts, let's look at the emerging markets now. If Y2K problems don't hamper these economies, they could explode upwards in the new millenium. Getting into these markets now however does offer considerable risk. And there is no way to anticipate these risks.
The emerging markets with the best value based on relative price earnings, price-to-cash flow and yield are:
#1: Brazil, #2: China, #3: Colombia, #4: Czech Republic, #5: Venezuela
The emerging markets with the current fastest rising velocities are:
MARKET VELOCITY Turkey 1.38 Greece 1.28 Africa Gold 1.20 Brazil 1.16 Argentina 1.16
The emerging market currencies with the best real return currently are: CURRENCY REAL RETURN Brazil 12 % Indonesia 11 % Poland 11 % Argentina 9.2% Colombia 9.0%
Let's take into account that the statistics from emerging countries have proved to be far less reliable than those from major markets (which certainly are not perfect either). The emerging markets most likely to succeed today are: Brazil Argentina Colombia South African Gold
Manage Risk I have been a risk taking investor for many years and have learned that once in awhile fingers get burned. From this I've learned ways to hedge my bets. A look at the disasters I have recently experienced in Ecuador may help you manage risks better.
When I first arrived in Ecuador, I saw that the country had started to boom in 1995 along with the rest of Latin America. Then a war with Peru and various other problems devastated the economy. I felt the country was fundamentally sound and would pull through its problems so bought shares in the cement company and two of the largest banks (Pacifico and Previsora), plus put money on deposit (in US dollars paying 10% in the most profitable bank in the country (Progresso).
I was right. The market did boom and in the next 18 months prices almost doubled. At this stage I sold (and recommended that readers do the same) half my shares and pulled the money out of the country. This is one of my risk management systems…always pull back capital once profits are doubled in high risk deals. From that point on, whatever happens I have only my profits at risk. The downside to this system is that it dramatically reduces profits on the really big winners. Less conservative risk takers will let their capital and profits roll. Others will even increase their positions (something I rarely do).
In the case of Ecuador my risk management really paid off. Everything that could go wrong did. First, the country made such a disastrous choice in electing their President they had to impeach him and the temporary President was also bad. Finally they voted in a really good man to run the country but were hit by a series of natural disasters. El Nino and La Nina flooded the country for two years, ruined roads, washed away bridges and destroyed crops. An earthquake rocked the coast and trade was hurt by the European banana (Ecuador's biggest crop) war and the shrimp crop (Ecuador's second biggest export) was infected with white spot. Banks started to collapse.
Then two of the country's volcanos (which had not erupted in almost 600 years) started erupting and have covered the capital of Quito with ash, shut the airport down and again created all types of havoc in general. The fourth largest city (Ambato) has been evacuated and one of the largest spas (Banos) has been shut down.
My deposit (with Progresso) was frozen for a year, then the bank went bust and was taken over by the government. This led to a series of other bank collapses and now both the shares of Pacifico and Previsora have plummeted to almost nothing. The government also defaulted on its Brady Bond obligations which is going to squeeze the country even more. In short all the investments are now worth almost nothing or are frozen and are worth only as much as the government's guarantee. So the profits I made have been given back. With my risk management system at least my capital is still at work.
On top of all this the country now faces Y2K and it has had little time or resources to prepare for this. I am far from discouraged and believe these incredible problems there create considerable opportunity especially in Ecuadorian real estate. There will be bargains of the century over the next year and I plan to take at least one group down to look at real estate in 2000. Watch my website Gary-Scott.com for details.
Microsoft of the Future Having talked of the negative sides of risk, let's look at the biggest risk we all have to face every single day, looking into the future! Let's answer the questions we asked earlier in this report…how would you like to have invested in Microsoft when it began? Even better how would you like to invest in the next Microsoft of the future at its beginnings?
If the past is any indication of the future, the next business leader in the next big economic wave will be even larger than Microsoft has become.
One great path to enormous financial success is to spot the major waves of technology the world will use and invest in companies related to that technology before they become mainstream institutions that operate as prime movers of a new wave of technology.
In the first industrial wave the best investments ( before technologies became mainstream) were in cotton mills, foundries and railways. The second wave winners were automobile manufacturing firms such as Ford. Next came communications (telephones). The fourth wave favored airplane companies (Boeing for example) and the fifth wave was computer dominated first in hardware (IBM) and then software (Microsoft). But the key has always been to invest before the technology or the companies become accepted norms. Investing in fifth wave technology or companies (such as .coms) today may be a way to maintain the value of your money but this is not the way to make really huge capital returns.
It has been said this is how Warren Buffet developed his great success. He caught a wave of corporate globalization made available by the third, fourth and fifth wave technologies (phone, plane and computer) and invested in established U.S. companies as they shifted from being American companies (with markets of about 300 million people) to being global firms (with markets of billions of people).
My best luck in investing was founded on the same principle. In 1968 I had the great fortune of having a job in Hong Kong which required me to travel the world. During these adventures I discovered dozens of ripe new markets existing outside the U.S. before most investors caught on to this fact. For the last thirty years I have mostly devoted my time helping readers discover which markets would unfold next and how to invest in them.
Today most investors are aware that life exists beyond Wall Street. There is still huge potential investing abroad, but the idea has become part of the mainstream. The big question now is what's going to be big next? What factor will drive the sixth industrial wave ?
One factor behind Merri's and my success in spotting trends has been listening to our inner stirrings. This has helped us see what others will do in the future because our backgrounds are very similar to the baby boomer segment of the population (the richest market on earth). We had normal baby boomer parents, educations, work experience, etc. But our backgrounds had a fateful twist. We were typical until our teens. But then, by fate and circumstance, we diverted from the mainstream. I moved to Hong Kong and lived in Asia and Europe for nearly twenty years. Merri moved to Germany for advanced lingual studies, worked in Europe and then developed a business where she worked for years in Central America.
When we moved back to the U.S., we had the American baby boomer grounding but because of our formative years abroad saw things in a slightly different way. We could see (feel would perhaps be a better word) how the world might change as societies all over the world would merge. Much of society's growth has come because nations all over the globe have been learning from each other as each has become more global. Our insights have been slightly ahead of the pack because we were global early on. Our combination of U.S. and overseas experience helped us see the future differently than most! This has been valuable. Great fortunes are rarely made from making safe, time proven bets. The key to making huge increases in wealth through capital gains comes from correctly betting one's money on what differences our future will bring.
Because the future is never guaranteed and because it unfolds in wonderfully strange and unexpected ways Merri and I have learned to (and learned how to) follow our hearts. Often we even follow our feelings when our minds don't see why. This has been especially true over the past several years. We have watched ourselves and often wondered, why? Many of our actions, on the surface, even to us, seemed strange. Take for example the apparently illogical behaviors exhibited.
#1: I wanted to write a novel after nearly thirty years of successfully writing non fiction. (My first novel “The 65th Octave” hits book stores early next year and can be pre-ordered at barnesandnoble.com or amazon.com). This desire came at a time when my economic reports were bringing in millions of dollar a year. Shifting from a well known, market to a totally unknown, notoriously difficult area made no financial sense at all.
But we have learned to follow our hearts even when things we feel don't make apparent sense. I took the cut in profits and wrote the novel.
#2: When our International Business and Investment Courses were at an all time peak we wanted to stop. This seemed expensive as well. But we did make the shift.
#3: The city where we lived (Naples, Florida) finally perfected itself. When Merri and I began living there, the place offered little except the beach. The location was inconvenient, our nearest airport was in Miami (two hours away). There were no good theaters, no Walmart, Kmart, no Office Depot, Home Depot, no good shopping, no decent arts or culture, no health food stores, or even a decent book store, etc. We could not even get decent bread or coffee (important to us at that time as we had moved from London where we had everything-especially good coffee and bread)! Finally the city grew up so that everything, anyone could want was available at great prices. When Naples was finally listed as one of the ten best cities in which to live by Money Magazine we felt compelled to leave !
#4: After more than a decade of work to make our historical seventeen room house an architectural delight with a perfectly designed and incredibly lush gardens, we moved to a one bedroom, one bathroom, North Carolina farmhouse (and have been deliriously happy here) on 200 + acres and even smaller accommodations (an open hut) on an 800+ acre Ecuadorian plantation neither of which can ever be totally kept up. These are wild and wooly places compared to the civilization in which we have lived.
#5: After spending most of our adult life in cities and having access to the state of the art communications we felt almost compelled to live in nature. We moved into two areas so remote that one is called the “Lost Province”. These areas are so isolated they have no garbage service, no T.V., cell phones won't work here in North Carolina and the phone lines aren't very good. There are no phones or even electricity at the Ecuador site. The nearest store is almost a half hour away and we don't have paved roads in either place. Both are an hour and a half to the nearest airport.
Why these incredible desires to make such substantial, seemingly illogical changes? We have waited, watched and asked ourselves, what's up ? We have enjoyed the moves, loved the peace, quiet and nature, but kept wondering what deeper force was driving us. There was some force driving us we couldn't quite understand or put into words.
Last issue of World Reports I noted how the process of piecing this puzzle together has helped while I was speaking at a conference in Copenhagen. One of the speakers was Johan Palladan of the Copenhagen Institute for Future Studies, a think tank that operates from Denmark.
Mr. Palladan's speech verbalized what we have been feeling and helped us understand why our actions make total financial sense.
The logic formulated from what I heard can help all of us understand what the future might bring so we can direct our investments into areas that may become the next big Microsoft-like winners.
Mr. Palladan revealed seven trends that will affect markets in the economic era ahead. These trends are:
* Trend #1: The rate of economic change will increase. * Trend #2: The rate of private consumption will grow. * Trend #3: There will be more automation. * Trend #4: Age, sex and wealth are becoming increasingly irrelevant. * Trend #5: There will be a shift of attitude from our brain to heart. * Trend #6: Families will turn more and more of their responsibilities to the market place. * Trend #7: The growth in markets will be for stories, not products.
Mr. Palladan also recommended a book written by the president (Rolf Jensen) of the Copenhagen Institute entitled the “Dream Society” (published by McGraw Hill). After reading this book, we can see why the moves Merri and I have made are almost perfect from an investment point of view. The book outlines a very believable scenario and shows how by following our hearts we've simply done what a huge market is starting to feel like doing as well. The ideas in this book verbalized what we have felt and can help us see the types of businesses that will succeed in the society ahead.
The writer is clear. These ideas are to make us think and add our own experiences to see the upcoming dimensions. However, the future is never guaranteed so what follows should be filtered by what you also feel and know. The Coming Sixth Wave-The Imagination Era
The nature of our upcoming economy and social structure will be as different as the Information Era was from the Industrial Era. In the last issue of World Reports, I outlined how each era has been highly affected by human nature and the way we react, as individuals and society as a whole. This human reactionary path was described by Abraham Maslow in his “Needs Hierarchy ” which states that humans move through six steps in life if given a chance to progress.
The first step in Maslow's “Needs Hierarchy” is to take care of one's physical needs, the second is to gain security. After these two levels the third step is to focus on social needs before progressing to the fourth step of acknowledgement and finally to self realization. Maslow years later stated that there is perhaps a sixth step he called idealization or the need to find a purpose beyond oneself.
Let's put this into day-to-day economic terms. A person first makes sure he or she has food, clothing and shelter. If these needs are not fulfilled, not much else matters. Someone who is cold and hungry rarely thinks too much about how they look or about the social impact of their process of getting food. Enough hunger and cold will lead people to take great physical risks to be fed and warmed.
But once the belly is full, the body warm and the larder filled, one begins to think about how to protect that food and how to stay warm. When secure and comfortable that the physical needs are and will remain satisfied we start to think about how we look, how we get along with others and how we fit into our society and family. We want to fit in! At least for awhile.
Then we want to excel, to be acknowledged, in our society or family, as being special, being good, being more than just acceptable.
When we reach a point where we have convinced others we are special and unique, we become driven to convince ourselves of this fact. We look for acknowledgement.
Finally, if we prove ourselves to ourselves, we reach a sixth level of having needs that goes beyond ourselves.
Our upcoming society will be dramatically affected by this hierarchy of nature and four other important facts. First the fact that parts of the world (industrialized society) have seen a six times increase in wealth in just one century. Today the average American is 40 times richer than ancient mankind, an amazing increase. Second most of the incredibly rich westerners are still not satisfied. Third most of the world hasn't enjoyed this increase in wealth. Fourth most of the world, rich and poor can See the discrepancies in wealth between the rich and poor.
These facts lead to two ways of making wealth in the millenium ahead.
The first alternative is to spot new innovations and trends in rich countries and invest in them ahead of the pack. This is what Bill Gates and his cronies did in the fifth (Information) era.
The second alternative is to look at less developed nations and see from experiences gained in industrialized countries to understand what level of needs the developing populations have. This will help you see what the citizens of these poorer nations will buy next. As America and other rich countries discard old successes for even greater ones, other less developed nations will buy the older successes.
Imagination In western society we now pretty much take the perfection of physical and security needs for granted. If we buy a new car, we expect it to run pretty much perfectly. This is true of most consumer products. Fewer and fewer consumers choose one car over another for the material qualities of getting us back and forth to work. We assume the car will take care of our physical needs. Instead we buy cars which we imagine fill more of our hierarchic needs. We might buy a car to enhance our social needs (for example, a mini van may be purchased to fill the love need related to our family). Many cars are purchased to enhance acknowledgement. An expensive sports car such as a Porsche has very little utility, but establishes the fact that one is special. Such a car turns heads.
Often the car will fill multiple rolls. The luxury version of a large four wheel drive sports utility vehicle (the most popular selling vehicle today) may provide the owner with a feeling of security, may fit family needs (running the kids to ball games and classes, etc.), suggest wealth and status and emote that the owner has a rugged outdoor lifestyle.
This is the Imagination Era because the reality is that all of these additional factors (which may cost a bomb) may never be used. Few people dare push the pedal to the metal in their souped up Porsche or Bentley Turbo. Not for long at least. Nature has a way of eliminating people from th e gene pool that drive highways at 140+ MPH. Many owners of SUVs never turn on the four wheel drive. (Car manufacturers acknowledge this fact by now making two wheel drive SUV models.) In many instances some features contradict themselves. Fancy, light colored easy-to-stain, leather seating isn't compatible with the implied ability to navigate dirty woods, haul muddy dogs, etc. which an SUV offers.
I've watched myself go through all these phases. As a youth I had a car with four-on-the floor transmission, overhead cam engine and stripes down the side of the car. After getting into business I had many of the expensive status cars, Mercedes, BMW, Bentley, Rolls Royce. Then with five kids and a grandma I shifted to mini-vans though the whole family were not often all together in the car. I drove all that extra space because I imagined that having this vehicle was good for the family. Then I threw in a fancy two person sports car, with superb road handling capacity and wondered every time I drove it what I was doing with such a car on Florida's straight, never-curving roads.
A Huge Rising Market Understanding the hierarchy is important because the higher people move up the hierarchy, the more they pay for the satisfaction of their needs. Pound for pound, a Chevy Caprice is a lot more car for the dollar than a top line Porsche (The owner of the Porsche gets just two cramped seats and risks life, limb and driver's license to use the performance.) The Porsche owner is paying for something he imagines he will get beyond a car. Speed, power, friends, romance, whatever. He is paying for some type of story.
It is the implied power, the acknowledgement, the images the buyer gets that costs the extra thousands of dollars. The owner may well get this acknowledgement too because of what others imagine. As the Information Era improved productivity, it created huge markets of wealthier consumers. These consumers have moved up the hierarchy and spend ever increasing amounts on ever less tangible goods.
Today, for example, a durable watch which keeps accurate time costs about ten bucks. Any price beyond is the cost of imagination. A diamond crusted, solid gold Rolex does not keep better time than a basic Timex. But one could well imagine it does. The owner imagines that the watch speaks of wealth, prosperity and success. The story of the watch sets its price. In the Imagination Era the story will become more important than any other feature.
Thoughts on Imagination Era Here are some thoughts on the Imagination Era that can help us get a head start on selecting areas that will be the wave of the future. As you read these ideas, remember that we can be pretty sure that none of them will be totally correct. Economic forecasting and social trends are like forecasting weather. The future cannot be clearly foreseen. There are too many variables. For example there is a real chance that society will see teleportation in the next few decades (I shared statements from the U.S. Government, IBM and Hewlett Packard about the scientific evidence of this in the last issue of World Report). Imagine how this will change travel! Automobiles may cease to exist. Yet even before teleportation shifts from the science fiction to the industrial realm, a series of tapes I heard suggest it could be obsolete! These tapes were certainly way out but contained interesting information and some deep wisdom existed whatever the source. One taped question asked about sightings of UFOs. The reply given was food for thought. “Anyone who really has the capacity to visit us from such far places certainly does not need space craft. They would only use such physical objects to step down their presence so they could communicate with us.”
This made me think about the type of breakthroughs we could make in our mental capacities. We could expand our minds to such an extent (by the time innovation brings us teleportation) that we won't need Scotty to beam us up. We won't need space ships. We will not need a physical presence to visit other life forces and places. We may learn how to be so in touch with our minds and bodies (which are after all an integral part of the universe) that we do not need to use our five senses to understand a distant object, event or place. We will simply be able to accurately imagine it with as vivid (or more) imput as we now gain from the eyes, ears, nose, skin and tongue.
Maybe. I stretched my imagination in these last two paragraphs, and this is the point. The human mind is currently not capable of accurately imagining anything at a distance in time or space. The laws of quantum mechanics suggest we never will either. These laws suggest that the act of imagining actually alters, forms and shapes that are being imagined!
But humanity can get better at this! And we are working hard to do so. This is why I have coined this next wave as the Imagination Era. This is also why these thoughts below cannot be totally correct. The act of my writing and your reading alters what the future will be! So please read the thoughts below as a stimulus to use with the rich tapestry of your experience so you can feel how the future may be.
* Imagination Era Thought #1: The information era is ready to peak. We can still make money in Microsoft and the .coms. But the really easy big billions have now been made in the Information Era. The first industrial wave water-textiles-iron, lasted sixty years (1785-1845). The second wave steam-rail-steel, lasted 55 years (1845-1900). The third wave electricity- chemicals-internal combustion engine, lasted 50 years (1900-1950), the fourth wave petrochemicals-electronics-aviation, only 40 years 1950-1990) and the fifth wave which we are now in, digital networks-software-new media, is after a decade already near or nearing its peak. Each wave has been shorter and sharper. Each series of innovations has saturated the market faster than in the previous wave. If this wave has thirty years of life, it is already through its infancy and well into maturity.
* Imagination Era Thought #2: We can see the Imagination Era every day.
Eras do not start and stop in a day. We still have textiles and foundries, railroads, airplanes, etc. New airlines and car manufacturers still begin. The sixth wave is already beginning to form. Chances are it will rise even faster and sharper than all those in the past.
* Imagination Era Thought #3: Whatever can be automated will.
* Imagination Era Thought #4: Excellence and value will be taken for granted. In the industrialized world (remember investing in emerging nations will be different) the main mode of production will be automated assembly lines turning out low cost, highly usable, dependable products. Innovations in production will take place very quickly within an industry. Whenever someone comes up with a new, better idea for a product, all competitors will upgrade to match the innovation very quickly. The value of patents and proprietary design will fall dramatically (if there are any patents left at all). There will be very little difference in utilitarian value from one competing product to the next. For example, it is understood today that most cars will run without trouble for 40,000, 80,000, even 120,000 miles. Almost any watch you buy will keep accurate, dependable time. Buy a radio or TV and you expect it to work immediately, easily and to keep working without much fuss.
* Imagination Era Thought #5: The story will reign king! People will buy products based on the story behind the product. For example consumers won't buy the cheapest, best time keeping watch. They will buy a story behind non functional features which they imagine represents values relative to their lives. Those who imagine themselves rugged individualists will buy tough, bulky, shock proof, watches that are water resistant to 300 feet depths, even though they never plan to dive. (Swiss Army watches, for example.) Those who imagine themselves to be active sports types might choose a Rolex Yachtsman, etc.
Car buyers won't choose value and technological superiority. They will choose a car that has a story which represents the life style they imagine. Consumers will buy on a far more emotional basis than before and the emotions will be based on their imagination, hence the name Imagination Era.
The brand will become the story. We can see this clearly by studying the history of Marlboro country. In the 1950s the tobacco firm, Phillip Morris, was an obscure British company with a pitifully small share of the American tobacco market. RJ Reynolds was king and the leading cigarette was Winston. Marlboro was a cigarette targeted for women smokers with the slogan “Mild as May” and was going nowhere. Then under new management this all changed. The new managers created a new image for the cigarette, the rugged image of the Marlboro Man. This image along with the bold red and white, crush proof box helped Phillip Morris become the world's leading cigarette manufacturer and pushed Marlboro into the top selling cigarette in the world. This happened despite the fact that RJ Reynolds revamped Winston so the two cigarettes were literally identical in chemical composition (with the same additive additives, etc.). Where Winston could not compete was in the story, the spirit of the Marlboro Man was successfully placed in people's imagination. Today this story is more than smoke! Marlboro country has become a brand that sells clothes, trips and many types of consumer products beyond tobacco.
While on our recent trip to Aruba as we walked through a tourist shopping mall, I came across a Caterpillar shop that sells boots and clothing. Here is another brand where the story has gone beyond the original product (crawler tractors and earth moving equipment). In the Imagination Era the brand story will become more important than the product itself. Take Disney as an example. They've used the brand story to move from cartoons to movies to theme parks to an entire development of houses with a certain implied lifestyle. Disney's story is one of family values and this has appealed to millions of consumers in a multitude of ways.
* Imagination Era Thought #6: Values will be as or even more important than the economic value.. Consumers will base their buying decisions on private internal values that will grow in importance. We can see this trend already developing. For example many businesses have already learned it is good business to now give part of their profits to some type of charity.
Some businesses have become their values, such as the ice cream company, Ben & Jerry. Such companies form a new corporate culture each expressing their values through the way they do business. Such firms express a set of values which states how the firm's convictions differ from the norm. Consumers who imagine these convictions are good will buy from these firms because they feel this firm has the ecologically correct or wholesome values that match how they (the consumer) feels.
In the Imagination Era consumers will perceive these values to be of increasing importance and will increasingly follow their feelings even when their imaginings may be wrong. In the early stages of this era this may lead businesses to profess convictions that are not really felt simply to attract customers. This will be a big mistake (as I believe Bill Clinton, the Democratic Party and especially Al Gore may be about to discover). Consumers have too much access to too much information to be fooled for long.
This is why Perrier suffered greatly when it was discovered there was pollution in their process of adding carbonation to the drink. The story behind Perrier was French, fresh and naturally bubbly straight from the spring. The pollution was not the problem. The awareness that the water was not naturally carbonated destroyed the myth of its bubbly freshness and sparkle. Consumers were not buying water or even taste from Perrier. They bought the image of fresh French, naturally bubbly, mineral water.
This is also why the recent negatives the Disney empire has received (over management battles, golden parachutes and less than wholesome movies produced by Disney subsidiaries) could be great disasters to the Disney world. These events may be perceived as something less than clean, wholesome and good for the family and kids. If consumers imagine Disney as something less than a company that promotes family values, the luster of their products could be irrevocably tarnished.
The point is imagination is everything. The products, management and work force of a firm may or may not be as the public perceives. Disney may be a wholesome firm or may be a money grubbing, totally ruthless organization. Perrier may be pure or may come from cesspools. The Marlboro Man may be a rugged individualism or a complete pansy. But what affects consumers is the public image.
As investors we want to choose companies that have images that reflect true values because in this day and age the public is well informed and enlightened. Information is too readily available and this trend of transparency will grow. Bill Clinton learned this the hard way. There have been many married presidents who, it has been suggested, had an extramarital involvement while in office (Roosevelt, Eisenhower, Kennedy etc.), but those were days when information could be more easily contained.
Today we also suffer a crisis of values. The image of many local community, government, religious and business leaders has been tarnished. Most consumers are cynical. Yet they also desperately want someone or something in which to believe. They are looking hard at not just what every business says but what it does. They will stick (even if it costs more and is less convenient) with businesses that act by principles they preach.
Employees are in this same position too. Recently when we were in the Charlotte airport to visit two bankers who had flown in to consult with me, I was approached by an employee from US Airways. She belonged to a group named “Chaos” and the message she handed me read:
“Chaos could be coming to US Airways. More than 1000 days have passed since US Airways flight attendants began to struggle for a new contract. We made sacrifices for the airlines in bad times. Now that US Airways is making billions we want our fair share. US Airways Chairman Stephen Wolf and CEO Rakesh Gangwal made a combined $70 million last year. And they gave other top executives 500% bonuses. But management is asking flight attendants to make more sacrifices.”
Here is a clear example of how important the values of a business are both for the customer and the employees of a firm. If the business needs sacrifices, the trimming will have to start at the top. In this example US Air's management story of a need to cut back was not validated by their actions. Therefore the employees were not buying.
The Imagination Era will be highlighted by savage competition. We are seeing this starting to take place already. Internet companies are putting great stress on other types of retail businesses and distributors. Then these same Internet firms are competing intensely among themselves. Take for example Amazon.com which recently moved into the retail toy business. They are hot on the tail of Toys.com and Toys R Us. When Toys.com recently came up with a new way to gift wrap toys more easily so toy consumers can get their Christmas toys delivered already wrapped, Amazon.com immediately jumped on the wrapping bandwagon as well.
Several .com companies have or are developing software so that before you buy a product from one Internet firm you can first check prices from competing firms.
Soon, consumers will be so informed that no one will be able to compete on price and value. Only stories will sell and successful companies will need successful stories that last. It will become increasingly difficult for businesses (as it has for politicians) to use duplicity in the market place. (If you don't agree ask Newt Gingrich who led the attack on President Clinton's sexual affairs and ended up losing his job over his own similar foibles.) Values will become more valuable than value in the Imagination Era!
Big Markets What does knowing all this mean? If we think through how consumers will react, we can start to see markets that will grow. If we understand which markets will expand then we can look for companies that are providing products and services in these areas. Here are eight markets that Rolf Jensen believes will prosper which he outlined in the “Dream Society”.
Market for Adventure Recently the Wall Street Journal featured a front page article about the Replica of Captain Cook's ship “Endeavor”. The article told how people are paying big bucks to board the ship and live in circumstances so harsh that in days of old, sailors sometimes had to be press ganged (kidnapped) to serve. Yet men and women now sign up (and pay) to sleep in coed swaying hammocks hung so closely together they slam into each other like meat hanging in a locker. Some of the events include climbing up 120 feet on rope ladders in heaving seas and having sea sickness (the converted barge has little beam so wallows heavily in turbulent seas). The paying guests are overworked, get little sleep, are continually drenched in icy seas, are usually cold and at times actually at physical risk.
Yet this adventure tour is sold out because as the Captain points out, “We give the guests controlled excitement and risk.” It has also been pointed out that a best selling maritime adventure writer who has written several romantic books on the high seas has caused huge numbers of consumers to imagine that this is a romantic story.
Adventure markets range from professional sports to hot air ballooning to mountain climbing to diving off bridges and radio towers. The market extends far beyond these actual acts. The story is what taps the imagination of the consumer! Note that the first successful around the world balloon journey was sponsored by the watch manufacturer 'Breitling'. This firm knows that many watch buyers are buying adventure when they buy their watch.
When people buy Nike shoes endorsed by an exciting athlete, they aren't buying canvas, plastic and rubber. They are buying a story of adventure. Sports offer the essence of adventure intense competition, the ecstasy of success, the pain of defeat, the high stakes that separate the winners from the also-rans.
Even sports stars are becoming story brands (Michael Jordan, etc.) more than ever before. One can expect to see Michael Jordan shoes, clothes, etc. Henry Ford understood the adventure market's impact on the car business when he said, “We race on Sunday and sell on Monday”. Today the Camel Trophy Cup is an adventure, an enormously grueling race which sells cigarettes, and much more (watches, shoes, bags and clothes).
Consumers do not even have to take risks to gain these adventures. Increasingly consumers will gravitate to sanitized (without risk) adventure. Cruise lines are becoming overbuilt and will become more competitive. The winners may become the lines which create theme boats where the guests live an era or event. There may be “Roaring Thirties Cruises”, “French Connection Boats” and “Western Pioneer Cruises”. There may be “Titanic” and “Lusitania Cruises”, etc. I would not be surprised to see a liner converted into battleships that act out battles. The guests will dress, act and live the adventure while on board.
As the Imagination Era advances, it is possible that computers will become increasingly powerful automating our emotions as they bring us sanitized adventure. We can already see this trend developing by observing some of the best selling computer games simulate Big Game Hunting. With this game, virtual hunters can take trips all over the world and hunt many types of game. These games allow the enjoyment of adventure, the out of doors and the rush that has been instilled in our genes by thousands of generations of hunter-gatherer ancestors. We can hunt, track and kill. Yet we never have to step in the woods. We don't have to get into shape. We don't have to haul the heavy game out of the woods, figure out what to do with all the meat nor face the blood. We don't have to put up with the rain, the cold, the leaky tent, the fatigue and the inconveniences. These also allow conservation and ecological advances taking place here. Whenever we want, wherever, night or day we can let the adventure begin!
Listen how the advertising copy reads in Cabela's catalogue for the computer CD Rom game “Big Game Hunter”.
“From the dense forests of the Alaska Highlands to lush Georgia woodlands, this game takes the virtual hunter where they have never gone before.” Big Hunter II offers an African safari and its expansion pack the high, rugged terrain of Colorado, Alberta and the all new Kentucky region.
Imagine. If you have $19.99 and a computer the adventure can begin, just about anywhere in the world! Such is human nature, to strive and have balance in our lives. Genetically we have been programmed for 100,000 years for high risk living. The more civilization eliminates risk, the greater our desire will be to take or imagine it through adventure.
Togetherness Another key motivator in the Imagination Era is emotional fulfillment. Many wealthy consumers have learned that just acquiring stuff is not enough. More and more things don't satisfy much or for long. At some point our material excesses turn into junk, worthless burdens that cost us to store, clean and insure. Successful sixth wave companies will learn to attach symbols of love and togetherness to their products and services. There will be a growing business in ties that bond people together.
Coffee houses and similar places of gathering will continue to boom. Clubs will grow. Restaurants which offer a place for people to be together will thrive.
The “Dream Society” suggests that Cafes Philos, (there are about 50 in France now) clubs or cafes where a philosopher raises a question to create a discussion for all present to join, will boom around the world. This market is not just about being together, but is about being united by a common story. The root of this market is the 100,000 years of selective processing of human genetics which have favored those who belonged to packs or tribes.
Training Dogs & Making Big Bucks Merri and I recently learned a valuable lesson about this genetic power. We have lived our entire lives together without having a pet, even though we love animals (I grew up the son of a zookeeper and we always had pets ranging from dogs and cats to bears, lions and tigers). Merri grew up with so many horses and dogs and cared so well for them that her mother (whom we used to call Ma) always said if there was such a thing as reincarnation she wanted to come back as Merri's dog!
Yet with our busy travel schedule, we have not felt we could give an animal the attention it deserved. So when we moved to our farms, the habit stuck. Then one day when we were in North Carolina at our Merrily Farms a whisp appeared as I was hoeing in our pumpkin patch. She was a puppy hound, about six months, all floppy eared, white black and tan, (pure mixed breed). She was dishelved, pitifully thin, matted hair, shivering in the cool mountain air. Her right hip was broken. Someone had beaten and dumped her, leaving her in a mess, near death. Yet she sat there, quietly watching and patiently waiting as if she didn't have a care in the world. It seemed this was exactly where she was supposed to be. It was. Some spark touched my heart as I worked in that soft earth. I had to stop and haul her back to the farm house.
The last thing we thought we needed was a dog, especially a sick one, but the pup was there and needed our help. She had arrived on the first anniversary of the passing of Merri's mother. And Merri's mom had a broken right hip and ulcers (the poor puppy's stomach was so ruined she could barely eat for weeks).
Now we're not sure about reincarnation, but we saw the coincidences and I named the puppy, Ma. We took her in and she was so sick in the first weeks, each night as we settled her down in front of a roaring fire, we didn't expect to see her in the morning. But Ma's tough (just as her namesake) and she pulled through. We knew she had made it when one morning she actually woke us up and wanted to eat!
But once we pulled her through her physical suffering, we now had a bigger job. Poor Ma had obviously been abused (mostly by a large man with a beard-when a man of this description used to appear she would shriek, and cower in fear or run for her life). She needed enormous love and care to overcome her fears and rid her of the avoidance she no longer needed. She needed help. She had to be trained. We started a search for a dog trainer when felicity stepped in. To our surprise here in the middle of nowhere, just ten minutes from the farm, is a kennel owned by the well known dog trainer, John Quey. John had decided, like ourselves, to have a farm (Little Horse Creek Farm) in the “Lost Province”.
You may have seen or read the “Horse Whisperer”. John is the Dog Whisperer and the day we started Ma's training I knew this course was about much more than just training dogs. John also teaches martial arts and admittedly does not train dogs. He trains and enlightens the dog owners teaching them how to use body language to speak to the dog.
“A dog's brain, his makeup, his hundreds of thousands of years of genetics have never prepared him to use voice commands,” John explained. “Yet the dog's entire being is geared up to understand your body language. Dogs sense even the most minute physical nuances you project. Dogs are pack animals. The entire history of dogs has created an animal today which has the best chance of survival if it can communicate with a pack. Your dog is part of your family and you must become the leader of the pack. Let's learn how to communicate through your body language with the dog.”
Within six weeks Ma could sit, lie down, come on command and stay. She has learned so well, even if her favorite food or toy is put nearby she will not break from her position until given the command. Yet to give her these commands I don't have to say a word. Words now work but I can communicate with her entirely through body language. This seems a near miracle as hounds are notoriously hard to train especially when they begin training so late in life. Ma is so proud and feels much better about herself. She no longer cowers or is afraid. We have the beauty of a dog that obeys and we can protect her more easily if she runs into risk. And she feels so good about herself and her role in the pack.
There was no miracle though. I have simply learned how to communicate as a dog does (which I can do now) rather than try to get the dog to communicate like a human being (which she cannot do).
Imagine my surprise when shortly after these training sessions I learned how scientists claim that 80 percent of the human brain capacity is used to process visual (body rather than oral language) impressions.
This is the moment I understood why the togetherness market has such huge potential during the upcoming imagination wave. This also helped me understand why despite video conferencing, computer training and radically improved telecommunications that meetings, conferences, business schools, places where people meet, etc. are growing at a rapid rate.
People prefer (we can even say they need or are compelled) to meet face to face! Evolution has honed the most likely human to succeed into a tribal person. We have deep seated, genetically supported needs to physically spend time with the tribe!
The more proponents of technology try to cram videos, telephones, computer screens and such down our throats as the ultimate means of communication, the more we will want to get together!
This favors businesses such as theme parks (family togetherness), shopping malls (theme parks based around shopping) and educational systems where people actually get together,
Friendship The market for friendship has to grow because technology has made society so much more mobile. I for example have lost nearly every single really good friend from school. I haven't seen or talked to Larry, Art, Tommy or Jerry for thirty years. I imagine they still live in Portland, Oregon, but maybe not. They might all have become travellers like myself. Out of a six pack of school buddies, Steve is the only one with whom I keep in touch.
A couple of weeks ago I visited the local car mechanic (Jay Dee's his name) with my next door neighbor Jim to have some work done on my beat up 1986 Suzuki Samari Jeep. This is the perfect farm car but often needs work (I had actually mended the problem up with a tin can but finally it had to go to the shop). Jay Dee's garage is in a barn by his house and local people sort of collect around that barn to shoot the breeze, spit a little tobacco and talk over old times. “Remember Johnny Blevins and that time he threw you in the creek, Jay Dee,” Jim might say. “Well darn that must a been fifty years ago.” I love being with these wonderful mountain people and their easy going, friendly ways. They have such deep roots and ties so they are comfortable and at ease with their friends. They know who they are, where they are and who their friends are because they have been with them their entire lives. These people aren't hanging around Jay Dee just to get their cars fixed. They are enjoying a ritual of friendship that has united them since they were kids. I love this! My friendships are scattered and far flung all over the world. I sometimes don't get to see my friends for years!
A huge segment (much of the wealthiest) of the population no longer lives where they were brought up and have lost touch with their roots. The more technology removes us from our origins, the more the market for togetherness and friendship grows.
Friendship is an extension of togetherness and can develop around many themes. For the mountain folk of North Carolina or anyone who remains rooted in their birthplace the theme is mostly “down home”. These friendships are tight and if you have ever heard the phrase “You ain't from around here are ya, boy,” you have experienced the reverse side of this type of friendship. The implication is that with these long term, locally based friendships, the only way to be a friend is to have been there for years.
Part of the years I lived in Gloucestershire, England were spent in a tiny village named Chalford. I regularly visited a local pub there, “The Mechanics Arms”. Though I was a newcomer to the area I was accepted as an old timer because of family ties. One man in his sixties, who visited the pub every night however wasn't quite part of the crowd. Many of the locals talked about him as the new man in town. I was surprised later to learn he had lived in Chalford for nearly thirty years! The locals would always view him as less trustworthy because he had not been born and raised there. Childhood experiences were the basis of their deepest friendships.
Many of us will never have this type of long term familiarity friendship. We have moved around too much. This creates markets for many types of new friendships. Networking is a form of business friendship. The theme of the friendship is scratch my back and perhaps I can scratch yours or we will both be better off scratching each others' backs. Such friendships can be local, state or country wide or as mine span the globe. They can be very informal or very formal.
The market for formal friendships has already exploded. Incredible growth of support groups such as AA are a sign of the momentum in the friendship market. Such groups offer a format for formal friendships and range from disease support groups to abused support groups. Each offers an organized way to have friends. The growth of these groups is not because there are more problems than thirty years ago. The growth is because of the increasing market for friendships.
We can see this trend spreading everywhere. For example one telephone company has recognized this growing trend and has successfully built its business around the idea of calling “family and friends”.
Love Love is an even deeper extension of togetherness and friendship. Though we often link love with romance, it is something far deeper. Love is the moving force of humanity, the world, the universe and possibly all of existence. The 14th century Sufi poet, Rumi, describes love as the spark that gives grass the animal enthusiasm.
The market for love affects multitudes of markets, jewelry, perfume, movies, music, (most songs are about love) weddings, funerals and the home.
Living in the mountains of North Carolina and Ecuador this last year has given me insights about how the funeral market is changing. I have had a chance to attend funerals in a modern US city and in both mountains. When a neighbor's mother passed away in North Carolina, I saw that the tradition is to dig the loved one's grave personally and bury them in the family plot. The minister and the congregation have known the beloved their whole lives long.
In Ecuador the whole village comes out and carries their friend to the cemetery. What a reflection on how wonderfully different this is from the slick (expensive) funerals so often choreographed in our busy, modern era. Time savers such as drive through viewings, non individualized services and other efficiencies get one group out and another in as fast as possible. The car procession behind the hearse is gone. Waiting for the body to be laid to rest is eliminated. Time for the service is limited by the time until the next customer can come in. Sympathy is for sale but the service is set by market conditions not love nor the loved one's grief.
Yet this is the way the world has been going and though we may not like this, change will remain for some time to come.
Watching what we like and don't like is one secret in investing success. Changes bring new cultures but also counter cultures. Big banks are efficient and reduce banking costs, but also create markets for small community banks where you can still talk to your banker.
Impersonal funerals may lead to a counter market where the commercialization is taken out of this rite of death. I for example predict that books on how to bury your loved one personally will do quite well. Land in the country for family burial plots and simpler cremations followed by a country like service out of the city are the types of counter services that are likely to rise.
Smart investors spot both the trends and counter trends and can make money in both ways. So watch for ways to make money in old fashioned funerals. But watch for the modern trends to continue to.
If the world becomes a more mobile, busier, crowded place, the trend of more efficient, time saving funerals will also rise. There could be mass funerals where a group of people are buried in one service. This is not as far fetched as it may seem. This type of funeral would reduce costs and could fill needs for love and togetherness. Family members, especially those who are not from an the area could assure a well attended funeral and be together with others suffering in similar sad circumstances while reducing costs at the same time.
I use the word if because the market for love could push society in a quite different direction from the commercial trends we have seen over the past 100 years. I will review the potential of this totally different trend in a moment. First, I want to stress that the key here is we all need love. No song ever stated a truth better than the song “What the World Needs Now is Love Sweet Love, That's the Only Thing That There's Just too Little of”. No matter what technology brings, no matter how fast the world turns, one thing we can be sure of is that everyone will be seeking in one way or another to receive and express love.
Investors and businesses should never forget this truth! On one hand we can see that, as with the friendship market, the love market is skewing in the direction of organized love.
Our fast paced lives make it increasingly difficult to be together and express our love in traditional ways. As we have less time to spend in our house we will spend more making the house a symbol of family togetherness. Houses will become more than status symbols they will become love symbols (matching accessories, communal living rooms, etc.) Look at who is advertising in many, many publications and you will see ads for new modern designed, super comfort beds. This is partly created by a growing market caused by sleeplessness in an increasingly hectic, unknown and worrisome world, but is also due in part to the love market. The bed is a symbol of love, the place where couples spend time together.
Perfume and chocolate shops abound in airports so that overworked executives, forced away from home for longer than desired can easily return with these tokens of love. Expect jewelry shops to grow in airports as well.
Love is the key market for the Disney corporation, its theme parks and movies offering organized ways that parents can express love for their kids.
Film manufacturers that succeed also know that love is more important than the quality of film. People take pictures at love events (family reunions, holidays, vacations, birthdays, etc.) and want these pictures back quickly so they can affirm again and again their love.
Carry this thought along the avenues of modern technology and you can understand the phenomenon of family home pages. Millions have been posted on the web. Why would someone go to the trouble of putting their family tales and pictures into a computer? This is a modern way of saying, “See how much love we have”.
In the future psychologists may look back and talk about the movie “You Have Mail” as a harbinger of what was to come. We have moved from mail order brides to email relationships.
But make no mistake about it, these love markets are supported by the desire to meet and fall in love. Just as in “You Have Mail” the users of electronic getting together services eventually want (at some level) the virtual experience to become physical.
This also explains the explosive growth of false love, such as telephone sex and Internet and movie porn. These relationships may remain virtual porn but are still supported by the need for love. Eporn by the way is quite different than some aspects of live porn. Strip joints, etc. are often a place where buddies (men or women) get together. In this instance strip joints are a theme for togetherness. The computer on the other hand is currently a solitary instrument and the user of this type of porn is expressing a deeper need than the groups that visit the strips.
Perhaps we should examine how large a market will develop for a different type of group computer use where the group is together at one
keyboard and screen rather than being at opposite ends of a computer. We can see the underlying desire for making the computer a more social instrument with the growth of computer cafes where the solitary nature of computer use is juxtaposed with the need for togetherness.
There is another far pleasanter aspect in the development of the love market which is the revival of spirituality. Humanity's affluence has allowed us to see that logic, science and affluence don't have all the answers we are allowed to live more in our imagination.
Consumers in the sixth era will place more value on intuition and beliefs that seem to defy socially accepted norms or scientific standards. They will respect their feelings more and their thought processes less. They will understand better how little their brain can really compute compared to what their entire being can know. Consumers will become more holistic and do more based on what they feel. Values will become much more important than things and processes more valuable than products.
I use the term spiritual revival instead of religious revival because there is a crisis of values in religion as well as at home, business and in politics. The wisdom of the cleric has been unmasked and we have shifted from the eras of the Church and Guru to the era of the individual.
The individual has been empowered economically and educationally by technology as has become empowered spiritually as well.
I have seen a direct analogy in these trend shifts between the worlds of finance and religion as they have moved through the various industrial eras. I call the religious era when the industrial revolution began the “Era of the Church”. The clergy were controllers of the soul and told the congregation what to do. They explained that the congregation was doomed to sin. The individual could not succeed spiritually without the Church. Members were told they would sin and were expected to stray from the flock. Only the church had the power to absolve members from these sins and bring them back to God's grace. Many churches in this era professed to have the only way to salvation and only those who followed the church's edicts were guaranteed to be saved from the horrible lot of the flesh. The connection to God was only available through the clergy and the Church.
In the world of money, bankers had similar powers at that time. Money was placed at the bank for low, guaranteed return. Investors did not question what bankers did with the money or how much bankers made. They just did what the banker said. When this image was threatened in the U.S. in the 30s, the government even stepped in to prop up this belief. Deposits at banks were FDIC guaranteed. The only way to stable wealth was through the bank.
As mankind became more educated a shift into the “Era of the Guru” gave individuals more responsibility for their actions and developed a more flexible, personal attitude towards spiritual growth. Beginning with Yogananda, gurus from the East became popular. The transendental meditation movement which began in the 60s attracted millions of followers. The message of these gurus was, “There are many paths to God. You should take your own unique path.” Salvation was not guaranteed but success was implied. “Everything will be okay if you follow my exact instructions.” The follower was eventually allowed to share a direct connection with God but only by following the Guru's direction.
About the same time the world of finance began a radical change. The era of the mutual fund began to unfold and mutual fund “Gurus” began to emerge. Their message was different from that of the bank. These financial Gurus said, “There are many paths to wealth. You should take your own unique path. Nothing is guaranteed but if you follow my selections you can sincerely be rich.” The investor had a direct path to wealth and took the risk.
Now we have entered the era of the individual. A recent interview with the inventor of Hotmail gives us a clue of how this era's spiritual development might unfold. When asked to define what he meant when he said he was a practicing Hindu he explained that Hindus select their own set of values, live by them and accept the responsibility of that action. There is potential for this type of concept to grow in the era ahead. The spiritual guru is no longer needed, though he can be of help. The master becomes a guide or a partner that helps the individual (when asked) rather than dictating a direction.
Simultaneously in the world of finance, day traders and better informed investors can now skip mutual fund managers and even stock brokers to buy and sell shares for themselves. The entire securities industry is being squeezed by the inability to charge high fees. The customer knows too much (including the fact that of the 3100 U.S. mutual funds in business for the last ten years only 21 outperformed the Dow). The average investor has access to as much data as the pro! The costs of mutual fund managers and brokers can be avoided. Instead fee based advisors (Certified Financial Planners) are becoming the leaders within the industry. The investment guru is no longer needed, though he can be of help. The investment manager becomes a guide or a partner that helps the individual (when asked) rather then dictates a direction.
There is a chance that we will see fragmentation in religion, investing and politics in the era ahead. A variety of stories will compete to attract the hearts, wallets and loyalties of people. More and more consumers will shift their buying habits, life styles and even the countries where they live based on the images they accept.
We can see this trend in U.S. politics with the formation of a new Reform Political Party originally formed by H. Ross Perot. This was a sign that more and more voters were dissatisfied with what the big parties were telling them what to do. An even deeper indication is the rise of the many militia groups across the U.S. These voters are so dissatisfied with government they consider it the enemy. Now the government is beginning to accept even these groups. A recent article in USA Today tells how the Justice Department uses the FBI to reach out and set up lines of communication with militias to let them know that the police respect the Militia's rights to be anti-government as long as they don't break laws.
Yet there are huge discrepancies in the beliefs of the various militia. This is the sign of the drift. We are likely to see many smaller political parties, many smaller groups each claiming sovereignty over their rights. These smaller groups will decide how they want to educate their kids (this could bring growth to religious and charter schools), how they want to take care of their health (this could bring growth to alternate health care), how to eat (diet books) and how to put their faith into practice (this could bring growth to businesses that have a moral as well as economic drive).
Yet all of these trends are ultimately driven by the individual's need to give and receive love. Care
In the next issue of World Reports, we will continue by looking at the market for care. This is another extension of the love market. We have a need to give and receive help to and from others in the tribe and this trend will change the largest industry in the US. The heath care industry is over a trillion dollar industry and is undergoing profound changes. Few other places offer such opportunity.
Thank you for sharing these thoughts about the world with Merri and me. We wish you happiness, peacefulness and very good investing!