History shows that trades and investments that deliver big returns have one thing in common – they are all based on thinking differently from the herd.
Hitting movie theaters in December 2015, The Big Short focused on this theme. While everyone deemed mortgage-backed bonds (especially the higher-quality mortgages) a safe investment, a few perceptive investors saw the reality – that they were a house of cards.
The investors in the film, realized the truth because they did some serious independent thinking backed by on-the-ground research. Their research included going door to door in Florida to see just how speculative the housing market had become.
This same formula applies to all sorts of markets, but is perhaps most effective in overseas investing.
In a recent issue of Foreign Affairs, Ruchir Sharma of Morgan Stanley puts it like this:
“No amount of theory can trump local knowledge… there is no substitute for getting out and seeing what is happening on the ground.”
Networking – Strength in Numbers
Whatever my experience in economics, finance, investments, politics, and foreign affairs brings to bear, it’s multiplied many times over by my network of contacts based all around the world, which I’ve spent years putting together.
This intelligence network includes chief investment officers, analysts, investment advisors, bankers, stockbrokers, hedge fund, private equity and pension fund managers, a sprinkling of tycoons, diplomats, naval captains, professors, and intrepid tycoon entrepreneurs.
Others are top-ranked economists and strategists, partners and investment bankers in the U.S., Latin America, Asia, Australia, Japan, and Southeast Asia. And there are also others like me in the equity research business constantly scouring the world for hidden gems across the world.
Some of this network is based in major financial centers like San Francisco, London, Hong Kong, Vancouver, Singapore, and Tokyo. But I really prize those contacts plugged into places like Santiago, Panama City, Jakarta, Saigon, Manila, Rangoon, Kuala Lumpur, Malacca, Melbourne, and Taipei.
But to take advantage of this intelligence, we all need to start thinking differently to get ahead of the crowd. Here are just some of the new realities we need to act on.
New Reality #1: Wealth and capital, power and diplomacy are making a dramatic pivot to the Pacific Rim. Just as the 20th century was centered on the Atlantic, the 21st century belongs to the nations bordering the Pacific Ocean – including the United States, Canada, Mexico, Panama, and Chile.
New Reality #2: Where the West sees chaos, turbulence, and poverty in emerging markets, the new tycoons sense emerging growth, profitable change, and opportunity. They don’t need a think-tank or professor to tell them about the rise of the middle class in the Pacific Rim and emerging markets – they see and profit from it every day.
New Reality #3: While this economic pie of $6 trillion in new spending power is huge, the new tycoons would laugh at investing in traditional blue chips like Procter & Gamble Co. (PG). Instead, they invest in the next blue chips with some serious monopoly power.
New Reality #4: Markets always swing sharply between euphoria and despair. This is why we need to pay very careful attention to price – investing in high potential opportunities only when they are “on sale.” This minimizes downside risk and maximized upside potential.
New Reality #5: In order to survive and prosper, it is important to anticipate shifts in politics and diplomacy, and look beyond stocks and bonds to alternative assets such as timber, property, commodities, precious and strategic metals, and even rare coins and stamps.
As economist Rudi Dornbusch said, “Things take longer to happen than you think they will, and then they happen faster than you thought they could.”
So rather than just react to headlines and events, we need to think three to four steps ahead.
That’s the difference between you being a king or a pawn.