An Interview at Stockopedia on Becoming a Global Value Investor (October 11, 2011)

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I did a related interview at Stockopedia which is run by Stephen Dotsch (he also has Dividend Income Investor).

The interview link is here and text is re-pasted below.

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Until 2009, Jeffrey Towson was Head of Direct Investments Middle East/North Africa and Asia Pacific for Prince Waleed arguably the world’s no.2 investor and nicknamed by Time magazine as the “Arabian Warren Buffett”. While many investors are advised to have some emerging markets coverage in their stocks and share portfolios via various investment funds and ETF’s, global value investor Jeffrey Towson instead suggest that successfully going global as a value investor requires successfully going direct.

He believes “going global” as a value investor means exponentially increasing your potential opportunities. However, experienced investors are finding themselves on rapidly changing and increasingly unfamiliar terrain.Issues like: when sitting in New York or London, can you really go long in China? Isn’t getting accurate information a problem?  Isn’t the absence of rule-of-law in many places a problem? What about the fact that there is often no real separation between commercial and government activities?

Most private investors with global ambitions look at China, India, Brazil, Russia and other places and are rightly cautious. Some investors decide to avoid the perceived risks by avoiding these markets altogether. Or they limit themselves to short-term and liquid strategies. Or they try to invest in an indirect way, such as buying an international retailer such as Tesco’s with significant exposure to the emerging markets.

Going direct – five common “going global problems”

Jeffrey Towson formulates five problems aspiring global value investors need to overcome when considering going global, including:

Problem 1: Limited access to investments.

Towson suggest following Buffett’s most important lesson: that you accumulate wealth by targeting the most mispriced assets and going long. Market inefficiencies are your best targets while time is your best ally.

Most of the really mis-priced assets in developing economies are private however. And these tend to be fairly tightly held – often by conglomerates, state-owned-enterprises and owner-managers.  Even Warren Buffett was denied in his request to buy 25% of Shenzhen-based BYD (he ultimately got 10%). Getting access  is a primary problem when going global.

Problem 2: Increased uncertainty in the current intrinsic value

Most developing economies are characterised by increased uncertainties and instabilities. The markets and companies are developing quickly. Government actors are changing the rules or disappear overnight altogether. Information is limited and inaccurate. This all plays out in a greater uncertainty  when calculating intrinsic value.

Problem 3: Increased long-term uncertainty, including worries about instability

The previous problem becomes even larger over the long-term. Five years in emerging countries is a very long time in terms of new regulations. It is hard to invest long-term if the future intrinsic value of your investment can change significantly. Long-term uncertainties (including long-tail risk) are a big problem and focusing on companies with a sustainable competitive advantage (i.e., Buffett’s approach) is usually not enough.

Problem 4: The availability of only weak or impractical claims against the target enterprise

Board seats and contracts can mean little in many of today’s rising markets. Minority shareholder rights even less. Keeping a strong claim to your asset over the long-term is a critical challenge.

Problem 5: Foreigner disadvantages

This is the catch-all for the various challenges you face when entering a market as a foreigner. You often have less information. The rules can be written against you. There are language and cultural gaps. You are often far away. And so on. All these, and many more, manifest themselves as disadvantages when investing direct in local companies.

According to Towson, if you can overcome these problems you can start your hunt for value investments virtually anywhere.  You will find, as Towson has, that most of the world outside the developed markets is wildly mispriced today.

Alternatively, you can buy publicly-traded multinationals with extensive emerging market operations. Buying an American or European company, in say retail or natural resources, with operations in China or India takes care of problems 1 and 4.

This approach also addresses problem 5 (foreigner disadvantages), which can be significant in many places (Russia and China being the most serious). A UK-based investor buying into an AIM-listed Chinese company is at the minimum going to have some information disadvantages relative to local Chinese investors. But a UK-based investor buying a UK multinational has no such disadvantage.

For an extensive interview about Jeffrey Towson’s global value investing philosophy click here: http://www.dividend-income-investor.com/jeffrey-towson/

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