The Good, The Bad and the Oddly

 

It’s easy to be angry at China, or at least at its leaders. Those leaders are unelected, dictatorial, communist (in theory), corrupt (some of them, at least), and repressive. They use the death penalty as a tool of political PR and the judicial system as a means of political control. They deny their citizens access to the Internet (if they don’t approve of the information) and even make rules to control people’s online game playing. They tolerate pollution, tell families how many children they should have and manipulate the yuan to give Chinese goods an unfair advantage in the international marketplace.

But we don’t have much patience with people who believe that China is evil … or even unusually bad. And it makes no sense to us to avoid investing in Chinese stocks because things happen there that we don’t like.

It’s useless to try to minimize the crimes and excesses of the Chinese leadership. And from the standpoint of the U.S. in the 21st Century - now that we’re environmentally sensitive, deeply egalitarian and enjoy the protection of the Constitution, a free press and responsible government - there’s not even much to say in mitigation. All we can do is to try for some perspective.

Probably the most enlightening place to go to get that perspective is a history of the United States.

Anyone familiar with the U.S. during the industrial revolution will recognize what’s happening in China. A nation undergoing the transformation from a rural, agricultural economy to an urban, industrial economy is a wide-open Wild West town. There are big fortunes to be made and the rules apply only to the timid.

Anyone who is outraged about the tainted pet food and toothpaste coming out of China should research the quality of the human food delivered by some big suppliers during the Civil War, the widespread inclusion of opium in over-the-counter medicines well into the 20th century and the horrors of U.S. slaughterhouses. For a more recent episode, one might remember that tainted Mexican-style cheese caused nearly 100 deaths and hundreds of illnesses in 1985.

If Chinese political repression is affronting you, you might want to look at the response in the U.S. to the early labor movement, which caused deadly reactions by police departments, private armies and corporate thugs. More recently, the McCarthy-led Red scare gives a good model for government action when faced by too-rapid changes.

And should it be Chinese environmental damage that particularly irks you, it might help to remember that the Cuyahoga River around Cleveland last caught fire in 1969 (although it was the 1952 blaze that caused nearly $1.5 million in damages), and that the bottom of the Hudson River still has a thick layer of PCBs from the manufacturing of transformers. The environmental damage from mines, factories, tanneries and habitat loss in the 19th century U.S. was incalculable.

None of this is to say that the leaders of China should be forgiven for the repression, environmental damage and dangerous products that are occurring on their watch. But in one short decade, they have guided their country much of the way through a modernization process that took the rest of the world nearly a century. That’s not to say that their transgressions should be excused. But it should be understood that they are not unique … they’re not even unusual. Neither should the examples above be taken as indicating that the U.S. is particularly flawed; episodes of bad behavior, corruption and cruelty occur in the history of almost all nations, especially when the winds of change are blowing and there are big profits to be made.

In another twenty years, if things go well, the old hard-liners who grew up under the tutelage of Chairman Mao will retire and go to their reward. And if the country is able to avoid the rise of a new dictator, those old communists will be replaced by leaders who have more on their minds than ideology. With luck, China will gradually submit to the pressures of the modern world and begin treating its citizens, its environment and its neighbors with respect.

And as for the people who have avoided investing in China because they don’t approve of its policies … I can’t argue with them. But I also can’t argue with the people who are making money by investing in Chinese companies. I might argue that owning a piece of a Chinese company is a civilizing force, giving investors a tiny source of influence on the company and, ultimately, the country. But that might be going too far.

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Leona Helmsley, the self-styled “Queen of Mean,” made her reputation back in the 1980s as a hotel owner/manager who ensured the comfort and satisfaction of her guests by her pit-bull attacks on any staffer who violated her rules. Personally, I always thought that anyone who had to resort to bullying employees into compliance wasn’t much of a manager, but fame is a value-neutral commodity.

The Queen died recently, but managed to grab one last round of headlines from beyond the grave by leaving her dog, Trouble, a bequest of $12 million in her will. Interestingly, two grandchildren got $5 million apiece, and two others, “for reasons which are known to them,” got nothing.

This got me to revisiting the whole issue of wills, and their uses and misuses. I used to get some good discussions going by raising the issue of what would happen to Warren Buffett’s bucks when he shuffled off this mortal coil. Then it came out that his kids, grandkids, etc. all already knew that they would receive only $50,000 a year for life, enough to keep them out of the poorhouse, but nowhere near enough to live large.

The real question, for me, was always why someone like Buffett, who literally had more money than he knew what to do with, was still working. I enjoy my job, but all of my co-workers know that if I ever hit the lottery, they shouldn’t expect to see me at staff meetings for a while. So did The Wizard of Omaha really have nothing that he’d rather do than research and invest? It made for some interesting conversations.

And then, as if Warren personally had it in for my conversation starters, he announced that he was giving the bulk of his estate (about $37 billion) to charity, with most of it to be administered by the Bill & Melinda Gates Foundation. So I guess, in a way, he really did have more money than he knew what to do with! It also made it abundantly clear that his work wasn’t simply about increasing his pile of money.

But to get back to Leona and the topic of weird wills, I read a story recently about a couple of additional oddities in how some people craft their wills. One involved a father who figured out a way to keep managing his two sons’ lives even after he was six feet under. His will doled out 10% of each son’s inheritance when they graduated from a four-year college, an additional 10% when they got a Master’s degree and 10% more for a PhD. Then they got 20% if they postponed their marriages until age 27, another 20% for staying married to the same person for five years, and the remainder, in five-year increments, for staying married. All told, their father expected to influence how they lived their lives until they were 45 years old.

It’s interesting to me, and a little bizarre, that the dead parent could demand whatever he wanted, while a live parent probably couldn’t get away with that kind of high-handed interference. Not that I’m being judgmental.

Another strange will, authored by a childless husband and wife, left money to five relatives with the stipulation that it: 1) had to be spent within five years, 2) had to be spent on activities that would “generate immediate enjoyment,” and, 3) couldn’t be used to gamble or buy anything of permanent value like a car or a house. The estate planner who wrote the will reported that everyone really enjoyed themselves, with the exception of a brother who thought the whole thing was frivolous and refused to blow his allotted amount. Sounds to me like he was the one who could have profited most by being forced to have a good time.

I could make a serious point here, probably about the need to have an up-to-date will to avoid probate … naaaah, mostly I just enjoy collecting stories about the idiosyncrasies that come out when people and money mix.

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My investment idea today is from a company that’s based in Santa Clara, CA, but that does 90% of its business in China and Taiwan, which puts it squarely in the sights of the Cabot China & Emerging Markets Report. The company is Synaptics (SYNA), and it’s a relatively small company (2007 sales of $267 million for the fiscal year ended in June) working on the development of tactile controls for hand-held devices.

The stock has made a number of appearances in Cabot Top Ten Report beginning back in October 2004. For its most recent write-up in the August 27 issue, Top Ten editor Mike Cintolo had this to say about the company.

“Synaptics introduced the world’s first touchpad interface for a computer in 1995, and it’s been on the leading edge of the industry ever since. The company’s biggest hit, at least from the stock’s perspective, was the clickwheel for the iPod, which helped the stock soar from 2002 to the end of 2004. But the company has also developed pointing sticks and a variety of other “pads,” including SecurePad, RoundPad and LuxPad. Today Synaptics products are found in notebook PCs, MP3 players, PDAs and PC peripherals. Most interesting to us is the ClearPad, a thin, high-resolution capacitive touch screen that can be placed over any viewable surface for finger input. ClearPad, introduced in August 2006, appears to be exactly what’s used in the Apple iPhone, but no one will officially confirm this! In any event, both revenue growth and earnings growth at Synaptics are accelerating, and that generally makes for a great investment.”

Since that description appeared in Top Ten, SYNA surged to a new all-time high, pulled back to support and then ripped to another all-time high on Friday. As a company that’s benefiting from the growth of the Chinese manufacturing sector, it may appear in Cabot China & Emerging Markets Report at a future date. Or it may remain just another strong stock discovered by Cabot Top Ten Report and confirmed by multiple appearances there. It’s a good story and the stock is in a powerful uptrend.

Paul Goodwin
For Cabot Wealth Advisory

Editor’s Note:

Cabot’s family of investment newsletters offers both individual and professional investors trusted, unbiased analysis and recommendations that are timely and strategically sound. Cabot accepts no compensation of any kind from any source. We make money by helping our subscribers to make money, and our ultimate responsibility is to them. Investing can be a stressful business, and having a trustworthy, well-written newsletter can provide a great ally. To take a look at our newsletters - from the conservative Cabot Benjamin Graham Value Letter to the moderately aggressive Cabot Market Letter and Cabot China & Emerging Markets Report, to the aggressive Cabot Top Ten Report - just click on the link below.

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