I once told a young analyst that if he really wanted to succeed in the investment business then he should turn off CNBC and read the Wall Street Journal thoroughly every day. He looked at me like I was a dinosaur so I tried to explain to him that by reading the WSJ faithfully he would develop valuable insights not found in more contemporary sound-bite media.
First of all, the Journal is an excellent compilation of mainstream opinions on current controversial issues. In my view, it is difficult to make correct investment decisions unless one fully understands mainstream thinking. As I explained to my youthful colleague, it is the masses that ultimately move stocks, in either direction. Any one individual’s view point is powerless unless it eventually becomes collective opinion. The young analyst left our conversation shaking his head. I knew that he still believed that his opinion was all that mattered. I tried one more time to reach him. “You can be just as successful following a good leader as you can by being a good leader yourself. Learn when to follow the crowd and when to travel the contrarian path.”
“Right,” he said.
Oh well, at least I tried… As the analyst left to invariably turn on the TV, I picked up the Wall Street Journal and began reading several articles about the ongoing controversy surrounding mutual funds. Interestingly, I learned that some mutual fund companies are attempting to repair their tainted reputation by advertising “low cost” mutual funds. It makes me wonder why these same companies offer “high cost” mutual funds, or at least why they didn’t advertise these “bargain” funds before. Other mutual fund companies have announced plans to lower fees. Does this mean they were over-charging investors all along?
For the record, we’ve chosen the contrarian path… It will be interesting to see how mainstream opinion adjusts to mutual fund reform. Meanwhile, I take great comfort in Willingdon Wealth Management’s contrarian strategy. We offer our clients separate account management through a portfolio of individual stocks while avoiding mutual funds altogether. Only time will tell, but my hunch is that the popularity of mutual funds has peaked and the level of interest in separate account management is on the rise.
One more plug for the WSJ… The Wall Street Journal is also a great source for timely articles on potential secular trends. (If any young hotshot analysts are reading this, I know there are other sources as well.) The more important point I am trying to make is that all bull markets rely upon the creative and economic energy that major themes produce. As long as we have a capitalist economic system that encourages and rewards innovation there will be future secular trends. Figuring out what they are and when they will erupt are critical to long-term investment performance.
China certainly has the potential to emerge as one of these major investment themes. Already many pundits predict that China will eventually transplant the U.S. as the dominant global economic super power. The low-cost production capability of China is definitely staggering, while its potential appetite as a consumer is enormous as well. China may in fact be one of the most important investment issues over the next decade. Nevertheless, prudent investors may want to approach China with some degree of caution.
The economic landscape in China is fraught with dangerous landmines. China’s banking system is burdened with bad debt, with some estimates of problem loans as high as 50%. China’s financial system also lacks consistent accounting standards, which are an absolute prerequisite to meaningful fundamental analysis and accurate valuation. Trade and copy write protection are also suspect, at best, in China. Given this backdrop, investing in China will require patience, risk management, political savvy, and deep pockets.
One other interesting trend is nanotechnology, a new manufacturing paradigm focused on using particles at the molecular level. For the record, a nanometer is one-billionth of a meter. Essentially, materials at the “nano” or molecular scale have different properties, allowing them to be manipulated and combined with other materials in unique ways. Nanotechnology has the potential to revolutionize production processes across multiple industries. Both the federal government and private industry are investing heavily in nanotechnology. A few months a go President Bush signed the 21st Century Nanotechnology Research and Development Act which authorizes $3.7 billion in spending for research on nanotechnology. Meanwhile leading technology companies like Intel, IBM, and General Electric have made nanotechnology a top R&D priority.
I hope to offer additional thoughts on China and nanotechnology in future editions of Willingdon Views. In the meantime, I will also be searching for other exciting developments that may warrant commentary. I imagine I’ll learn about some of these the old-fashioned way, by reading the Wall Street Journal.