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A Timeless Strategy, A New Opportunity

“However beautiful the strategy, you should occasionally look at the results.”

-Winston Churchill

Investors should be wary of any guru, advisor, or fund manager who advocates a “new” investment formula or strategy.

History shows that there is only one way to achieve above average, consistent returns over the long haul – find a select number of high quality growth stocks, and invest in them only when they trade at a great value price.

The challenge here is that this demands an unusual combination of diligent research, patience, and discipline.

The Perfect Storm

The first step in his investment process is to find quality.

This means focusing on companies that demonstrate strong and consistent growth – and cash flow – as well as a high return on invested capital. And this requires that the company have a prolific combination of some competitive advantage, superior management, low debt, and target markets showing unusual potential.

Then, when all of those cards fall into place, a degree of patience is required – investors must wait until the companies are trading at a sharp discount in order to achieve maximum upside while limiting downside risk.

This strategy – combining growth, quality and price – takes the noise out of decision making which is something most investors have a very hard time doing.  Even the pros tend to pay too much attention to macro-political and economic news and headlines trending in the financial media.

Another of Winston Churchill’s famous quotes further describes the nuances of making the most of this scenario: “A pessimist sees difficulty in every opportunity; an optimist sees opportunity in every difficulty.”

But what Churchill’s statement doesn’t address is that where there is great difficulty, there is often great value with significant upside potential.

Benjamin Graham, Warren Buffet, J. Paul Getty, Sam Zell, John Templeton, Carlos Slim, and Li Ka-shing, all had brilliant and bold instincts for distressed situations and bargain-priced assets.

Sam Zell built a $5 billion real estate empire buying deep-value real estate in down markets in the 1960s, and followed this strategy over the next forty years.

John Templeton was a Rhodes Scholar, but it was his street-smart independent streak to scour the world for bargains – such as Japanese stocks that were ignored by everyone else in the 1960s – which made him a legend.

Seize This Opportunity

Take a closer look at Hong Kong – a market full of quality companies with an inside edge to take advantage of the massive selloff in China’s stock markets over the past year. There are a number of reasons why Hong Kong presents such a great opportunity right now.

China’s leading companies that trade on the Hong Kong Exchange are called H shares.  An easy way to capture a basket of these shares is through the iShares China Large-Cap ETF (FXI).  This basket includes many of China’s leading trades as H shares, such as Tencent Holdings Ltd. (0700), China Mobile Ltd. (0941), and China Life Insurance Company Ltd (2628).  As a basket, FXI is trading at just nine times earnings. 

But even better, these H shares are now trading at about a 20% discount relative to the company’s share price on the Shanghai Exchange. This is an unusual arbitrage opportunity that surely won’t last long.

Additionally, the iShares MSCI Hong Kong ETF (EWH) is also full of great companies, with a stake in the Hong Kong economy, as well as China and Southeast Asia – which is perhaps the most dynamic region in the continent.  These companies include Jardine Matheson Holdings (JM), Hang Seng Bank Ltd. (0011), and Cheung Kong Property Holdings Ltd. (1113).

And despite charges that it is losing its competitive edge, Hong Kong leads the world rankings for competitiveness, knocking off the US in the top spot, with Singapore dropping from third to fourth place.

While Singapore did manage to rank first in tech infrastructure and international trade, Hong Kong is the leader in public finance, business legislation, labor market, and finance.

This is an unusual opportunity – one that it would be wise to take advantage of.

Good investing,

Carl Delfeld

Carl Delfeld

, Special Correspondent

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