The Cushioning Power of Cash
PriceSmart Looks Smart Again
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I'm about done writing about my recent trip to China. The dust has been washed out of my clothes, I've shown my slides to my colleagues at Cabot and the suitcases are safely stowed in the attic again. Well, most of them. My trusty Samsonite hard-sided suitcase finally fell to the baggage-handlers hammer. The frame had been sprung for a few years by what I assume was a drop of at least 20 feet, and I lived with that. But this time they tore one of the wheels off, and a suitcase that doesn't roll doesn't survive.
Anyway, here are some final thoughts on China travel, some of which have practical applications and some of which are just for your enjoyment.
1. When you're in China, don't buy anything because you think it's worth a lot more than you're paying for it. The Chinese have years of experience with making things look old or like jade or like anything you might want. Your best bet is to find a "Rolex," "Ming teapot" or "ancient" scroll that you really like, assume it's the product of a modern workshop in Shanghai, and then bargain like crazy for it (See #6 below). You should always assume that the Chinese manufacturer's ability to make something look old and valuable is superior to your ability to spot a fake.
2. If you learn just 10 phrases in Chinese, you will be regarded as a very clever person indeed, and the Chinese will often tell you so in much better English. I suggest the old standards: Hello. Please. Good, or very good (which also means "yes"). Your child is very pretty. I don't want it (for use with street peddlers). Does anyone speak English? Where is the toilet? How much is it? Thank you. Goodbye.
3. Don't assume that that taxi (bus, scooter, bicycle, three-wheeled bicycle hybrid) is going to stop for you just because you're in a crosswalk or have the traffic light on your side. The moral high ground claimed by pedestrians in the U.S. doesn't exist in China. Where we might reason "I'm afoot, without protection, so you should yield to me," Chinese drivers are resolutely realistic. "You're soft and defenseless, so you should act like it and get the heck out of the way."
4. Venture outside your safety zone in China and you will probably be rewarded with the best stories of your entire trip. My wife and I have never liked the idea of tours; you're told where to go, what to see and what to think about it. But a walk down a completely unmarked street can show you people who aren't used to seeing tourists (who may show it by staring at you, which isn't considered rude in China). But a smile and a nod will go a long way toward easing any discomfort, and you will probably see sights that tourists never get within a mile of. We have never felt physically threatened in China, and you can go pretty much wherever you want.
5. If you think the age of heroes is over, China will sometimes prove you wrong. When my wife and I missed our train in Hangzhou, a Chinese engineering undergraduate (who gave his name as Peter) spent more than an hour shepherding me through the lines in the sweaty ticket hall, fending off queue jumpers, negotiating the exchange of our tickets and, once we had them, sprinting with me to be sure my wife and I were in the right waiting room. After that experience, we enjoyed the high-speed train to Shanghai (300 KPH and smooth as glass) with warmed hearts.
6. Patience is more than a virtue in China; it's also a great bargaining tool. There are generally said to be two ways to bargain for goods in China, the nice way and the nasty way. The nice way involves complements to both the quality of the goods in question and the integrity of the purveyor. The basic idea is to let the seller do you a favor by reducing the price. The nasty way uses an all-out assault on both goods and seller, pointing out every flaw and feigning great dissatisfaction, even indignation at the proposed price. Whichever approach you choose, the seller will keep after you to make a counteroffer, and when that happens you're probably going to meet somewhere midway between the offered price and your bid. But if you're willing to take some time (especially if you're willing to walk away), the seller will often keep lowering the price. After three or four one-sided discounts by the seller, you can safely make your offer.
7. Being deaf and mute--which is effectively what you are if you can't talk to or understand the Chinese people around you--is really irritating. But being illiterate--meaning that you can't even read directions or street names unless they're given in English--is a disaster. Beijing, as a result of a massive overhaul of signage surrounding the Olympics, is very good about putting English on its signs. Shanghai is also not bad. But most other places have about as much English in their signs as U.S. cities have Chinese. Often the only way you can get places is to have your hotel concierge write out the address in Chinese for you to show your cab driver.
8. Everything you can learn about China before you go there will help to enrich your experience, including history, geography, economics, politics and philosophy. This is true of any place to which you travel, even Des Moines, Iowa, of course. But China is another universe, and even a small amount of study will help you get a perspective on what you're seeing. A good guidebook can be an excellent place to start, as the bigger names have been honing their summaries, descriptions and anecdotes for many years.
9. Now that digital cameras are better in almost every way than your old point-and-shoot film camera, the only pictures you will regret are the ones that you don't take. During my latest trip, I noticed that just about every company with a sense of its own importance will tend to have a big rock in front of its building. And I mean BIG, often as much as 12 to 14 feet tall! Rocks can also be wide, but going for height seems to be the rule. But I neglected to take any pictures of such rocks, and I'm kicking myself for it. So the rule is, if you see something that makes you want to nudge your companion and point it out, take the picture first.
10. Just to throw in a little business content, I have to say that entrepreneurship seems to be built into the Chinese character. My wife and I went to a Wal-Mart in Beijing to buy a case of bottled water. And the very next day, just outside the Forbidden City, we saw hawkers selling the same bottles of water for about five times what we paid. Chinese salesmanship has a fierce quality to it even if the item being bargained for is worth only a buck or two. My conclusion is that if China can successfully build a substantial middle class, the internal economy will flourish like a bandit!
Markets have been stumbling downstairs like a man with a hangover and one shoe, and that's a challenging environment for any investment strategy. But for the Cabot growth disciplines, it's a time to shine, at least in a defensive way.
The essence of Cabot's approach to market timing is a shift in exposure and risk tolerance depending on the general trend of the market. When markets are advancing (you remember what that feels like, don't you?), we move steadily toward fuller investment and loosen our loss limits to allow leading stocks more room to fluctuate.
Cabot Market Letter is now just over 40% in cash and Cabot China & Emerging Markets Report is about 50% in cash.
Think about it. If you followed the strategy of Cabot China & Emerging Markets Report, of which I'm the editor, half of the capital that you had earmarked for emerging market stocks would be sitting in a money market fund. With only half of your money at risk, no matter how challenging the market gets, you would have the comfort of knowing that half your risk was off the table.
That's the kind of move that helps you sleep at night.
That cash also becomes your best friend when markets turn up again and you go hunting for the new leaders.
Keep in mind also that Cabot's growth newsletters use the rules that Cabot has developed over the course of more than four decades to pinpoint when a new bull market is born. So we don't guess; we know.
I hope you have your virtual mattress stuffed with cash as the bears continue to knock stock after stock to the ground and stomp on them. Cash is king when the bear's in the ring.
My stock pick for today is a useful illustration of the challenges of growth investing. It's PriceSmart (PSMT), a company that's bringing the warehouse store concept to Latin America.
PriceSmart has an interesting pedigree; it's the brainchild of Sol Price, the man who invented the warehouse store concept back in 1976. Price and his son sold their company (called Price Club) to Costco in 1993, then looked around for a new territory. They found it in the Caribbean and Central America.
PriceSmart now has more than a million cardholders who shop at the company's 29 owned and operated stores in 12 countries and one U.S. territory and annual revenues are $1.9 billion. Revenue growth has been consistently above 20% per quarter for the last seven quarters.
The challenge I referred to was PSMT's price action following my recommendation of the stock for my subscribers in late October 2011. PSMT began 2011 with a three-month correction, but had appreciated strongly from 31 in March to 77 when I recommended it.
At that point, the stock began a tortuous correction/consolidation that pulled the stock as low as 57, but never quite went over the falls. I advised bailing out in mid-November with the stock at 64.
Then came March, and PSMT, which had been range-bound for four months, made a strong two-month run that pushed it to as high as 84! Clearly the market has a cruel sense of humor.
The cranky market of the past three weeks has dropped PSMT back below its 25- and 50-day moving averages on middling volume. It's still not cheap, with a P/E ratio of 31. But for a high-quality company with a slow-but-sure expansion strategy (and a stock that pays a small dividend: forward annual yield of 0.8%) PSMT looks like a long-term winner.
Editor of Cabot China & Emerging Markets Report