Sovereign society profit-seeker-trading manual

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Sovereign society profit-seeker-trading manual

  1. 1. A Publication of The Sovereign Society How to Make a Fortune with Sigma Stocks By Jeff D. Opdyke, Editor The Sovereign Society 55 N.E. 5th Avenue, Suite 200 Delray Beach, FL 33483 USA USA Toll Free Tel: (888) 272-0413 Contact: http://sovereignsociety.com/contact-us Website: www.sovereignsociety.com
  2. 2. Copyright © 2013 The Sovereign Society, Ltd. All international and domestic rights reserved. This report may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of The Sovereign Society, Ltd. 55 NE 5th Avenue, Suite 200, Delray Beach, FL 33483. 2
  3. 3. How to Make a Fortune with Sigma Stocks 3
  4. 4. Legal Notice: This work is based on what we’ve learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It’s your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments such as futures, options, and currency trading carry large potential rewards but also large potential risk. Don’t trade in these markets with money you can’t afford to lose. Sovereign Offshore Services LLC expressly forbids its writers from having a financial interest in their own securities or commodities recommendations to readers. Such recommendations may be traded, however, by other editors, Sovereign Offshore Services LLC, its affiliated entities, employees, and agents, but only after waiting 24 hours after an internet broadcast or 72 hours after a publication only circulated through the mail. Please note that due to our commercial relationship with EverBank, we may receive compensation if you choose to invest in any of their offerings. 4 HMF.SVS.VI.07.25.13 The Sovereign Society 55 NE 5th Avenue, Suite 200, Delray Beach, FL 33483 USA USA Toll Free Tel: (888) 272-0413 Email: http://sovereignsociety.com/contact-us Website: www.sovereignsociety.com
  5. 5. Table of Contents Sigma Stocks................................................................................................... Page 4 Let’s Get Started.............................................................................................. Page 5 Your Intro to ‘In Country’ Investing................................................................ Page 7 How $10.68 a Day Can Make You Rich......................................................... Page 7 Where You’ll be Investing ............................................................................... Page 8 Meet Your Personal Sherpa for Global Profits.................................................. Page 13 What to Expect............................................................................................... Page 13 Who is Jeff Opdyke?........................................................................................ Page 13 Jeff’s Investment Style...................................................................................... Page 13 GARP+ Investing............................................................................................ Page 14 Theme: The American Dream Goes Abroad.................................................... Page 16 Why Invest Directly Overseas (Not in ADRs)................................................. Page 17 Owning Stocks Overseas: Tax and IRS Issue.................................................... Page 18 Price Quotes of Foreign Shares........................................................................ Page 18 ‘Lot’ Sizes........................................................................................................ Page 19 Gaining Access to Asian Markets..................................................................... Page 19 5 U.S. Brokerages............................................................................................ Page 20 Benefits of a U.S.-based Account..................................................................... Page 20 Drawbacks of a U.S.-based Account................................................................ Page 21 2 Local (Overseas) Brokers.............................................................................. Page 21 Benefits of an Overseas Account...................................................................... Page 21 Drawbacks of an Overseas Account................................................................. Page 22 What You Can Expect in This Service............................................................. Page 23 5
  6. 6. How to Make a Fortune with Sigma Stocks In 1845 a Belgian mathematician discovered a phenomenon that has an impact on pretty much everything we do. Since then, scientists have used it to explain our learning patterns…why civilizations rise and fall…how epidemics and new technologies spread… and even why Mozart’s symphony production peaked in the early 1780s. And yet, almost nobody knows this phenomenon can also be used in the markets. But once I discovered Sigma, I never really looked at the stock market the same way again. It’s made a difference for me, personally of tens of thousands of dollars. So what exactly is Sigma? It’s a natural phenomenon that dictates the growth pattern of many things in life. It consists of three different phases of growth. It starts with a modest and shallow growth. After a certain point, growth accelerates rapidly. Then growth starts to decline and the cycle reaches a mature stage, where there is little to no growth. In short, the pattern is this sequence of three different speeds of growth: slow-fast-slow. Here’s how Sigma looks like… Growth in earnings and sales also follow that same predictable pattern. At the beginning growth is slow, then it accelerates until it reaches a plateau. The sales of products, for example, will eventually slow down and reach a plateau after potential buyers have bought what they wanted. The key to make money in the financial markets with Sigma is to find companies that are just beginning to experience rapid growth. That’s where you will find the greatest potential for profits. 6
  7. 7. I call these stocks “Sigma stocks.” I’m talking about cash-rich, dividend-gushing foreign companies that are growing revenues at a double-digit rate. But not the kind most people invest in. These shares don’t trade on U.S.-based exchanges like ADRs. They trade on local exchanges in places like Australia, Hong Kong, Singapore, Tokyo and Taiwan, to name a few. And they’ve beaten regular American stocks by an impressive margin. For instance … • Chinese department store company, Golden Eagle Retail jumped 336%… while Macy’s edged 15% higher…and JC Penney plunged -75% • Dutch Lady Milk, a dairy company in Malaysia soared 280%… while Nestle went up 25%. • The Bank of the Philippine Islands gained 368%… while Wells Fargo climbed 70% and Bank of America tumbled -65% • Interra Resources, an oil company in Singapore, vaulted 227%… more than 22 times higher than Exxon Mobile. • Indonesia’s Multi Bintang Brewery zoomed an amazing 2,578% higher… while Budweiser added 48%. The only catch is – your regular Wall Street broker will likely never recommend them to you. That’s why most people don’t know about them. But if you’re looking for the next Wal-Mart… you won’t find it on the NYSE, NASDAQ or any other major U.S. exchange. You need to look outside the U.S. to make real money these days. To markets where … • Demand is white-hot. • GDP is zooming higher. • And new customers eagerly open their wallets. Sigma stocks have great potential for gains because they have a huge tail wind that is propelling them higher: the rise of a new middle class.. In fact, tThe U.S. National Intelligence Council’s 2030 report calls the rise of this new middle class this tail wind “a tectonic shift”. It’s a $30 trillion force that’s creating wealthy investors at a frenzied pace. Let me put it this way…Imagine owning a business that attracted 200,000 new customers each day. Day after day… for the next 10-30 years. That’s what happened to Wal-Mart when it was in middle of the Sigma curve during the 1980s and 1990s…and it’s what made its stock go up about 60,000% in those two decades. You can’t expect this kind of growth from American companies any more. But this kind of profit opportunity DOES exist overseas. There’s a giant, new middle class that’s demanding access to clean water, clothing, TVs, healthcare, housing, food... you name it. This exploding middle class outside America wants a lot of stuff … and they increasingly have the money to buy it! And McKinsey Global Institute calls itthe rise of this new middle class “the biggest growth opportunity in the 7
  8. 8. history of capitalism... an economic force that’s over 1,000 times as big as the Industrial Revolution.” It’s this force that’s largely creating lots of Sigma opportunities across the globe. And the easiest way to start trading Sigma stocks directly on foreign exchanges is through Opdyke’s Profit Seeker. Let’s Get Started... Welcome to tomorrow. Welcome to the world. An odd greeting, possibly. But it accurately conveys one overarching fact: The world of tomorrow is unfolding today as billions of people pursue a better life. From the eastern tip of Indonesia, to the western shores of Africa, from Southern Chile to Northern Russia, the global population is growing fat in the middle. And therein lies one of the biggest trends — one of the biggest investment opportunities — of our lifetime: The growth of the middle class in the developing world, and what this means for investors. Take a look at the graph below. It’s from a Brookings Institute report on The New Global Middle Class. The opportunity we’re pursuing is plain to see. 9,000 7,000 6,000 5,000 4,000 3,000 2020 2016 2012 2008 2004 2000 1,000 2028 Poor Middle Class Rich 2,000 2024 Population in Millions 8,000 Look at how the middle-class population begins to ramp up right around 2010, and continues higher as the fastest-growing segment of the world’s population through 2030. Consider what that means… This gives us at least two decades of investment opportunity as the underprivileged pull themselves into their versions of the good life, however the locals define that. We’re talking about rising incomes and increasing discretionary dollars (or rupiah or kwacha, or whatever the local currency). We’re talking consumers spending not just on food to survive today but on cell phones and wine and nicer clothes and motorbikes and vacations and… the list goes on and on. In short, the opportunities are nearly limitless. Indeed, as this investment-service unfolds we will explore investment opportunities on every continent, save, of course, for Antarctica. To begin, though, we’re limiting our focus to Asia. Asia provides a good exampleWhy Asia? Simple. 8
  9. 9. It’s the most-vibrant and economically exciting patch of Earth at this stage in the 21st century. And, Asian markets are exceedingly easy to trade for U.S.-based investors. Milk: Investing in a Cash Cow What kind of opportunities stem from Asia’s rising middle class? Well, consider for a moment an ordinary glass of milk. It’s nothing special to Americans. But milk is a big deal in Asia, where diets historically never included milk because incomes could never afford it. Today, milk is one of the fastest-growing segments of the consumer-food market in Asia, particularly China. Increased spending on better nutrition is a defining, economic hallmark of increased disposable income. And milk does a body good. It also does a portfolio good… if you’re wise enough to run a few steps ahead of the pack. I identified a dairy company as a winning investment in 2004, when the milk-maker first went public. The company was a leader in the Chinese dairy industry, and well-known brand in China. The company’s market was growing, and its sales were exploding as dairy consumption surged in the land of tea. At the time, though, the Chinese market was too expensive for my taste, so I sat on my idea and waited for the right moment. That moment came on Dec. 22, 2008, when, amid the global financial crisis, China’s stock market tumbled. Shares dived below $10 a share on the Hong Kong market. And the company dived below $10 a share on the Hong Kong market. I pounced, grabbing my piece of China’s dairy consumption. A year later, I had gained 193%. But here’s the caveat: That gain came in a stock you won’t find trading as an American Depositary Receipt (ADR) on the New York Stock Exchange. Even U.S. investors hyped up about China’s red- hot growth never knew to look for the company. A Sea of Returns… Overseas, That is My name is Jeff Opdyke — your Global Profit Seekers Sherpa. I’ve been investing “in country” — or, on local markets within individual countries — across Asia since December 1995, when I opened my first brokerage account overseas, in New Zealand. Long before “global investing” was a popular catchphrase on Wall Street, I was trading in accounts from Auckland to Singapore. By the time Wall Street realized China was hot and began launching mutual funds, Exchange-Traded Funds (ETFs) and ADRs to lure American investors into the dragon economy, I was already trading Chinese shares directly in Shanghai and Shenzhen through a brokerage account in Hong Kong. In short, I’m unlike any other newsletter writer you’ll find when it comes to helping you uncover the great investments around the Globe of Asia. I’m taking you directly in country, to find the best local stocks from Tokyo to Manila, Beijing to 9
  10. 10. Bangkok, Auckland to Hong Kong. I’ve been investing there myself for 15 years, and I’ve built the wide-ranging knowledge necessary to lead you through the local stock exchanges. I’ve been traveling around the globe as a financial writer for over two decades now… that allowed me to build an extensive network of local contacts that I keep on speed dial… so I’m always able to get the perspective from a local consumer, even when I’m here in the U.S. They act like my private researchers… always keeping me informed of what’s going on in the local market. In short, in the last 15 years I’ve built the wide-ranging knowledge necessary to lead you through the local stock exchanges. $10.68 a Day in Asia Can Make You Rich in America Asia provides a great example of how powerful this new middle class is. In the summer of 2007, I spent a week reporting from Hong Kong and Shanghai for a book I wrote on investing overseas. At a meeting with an investment research firm in Shanghai, I asked the director of research to quantify China’s middle class. She didn’t know, but said she would research the answer. A week later, I received an e-mail: “Mr. Jeff, I called an economist friend in Beijing University and he tells me (the) China middle class is estimated at 300 million to 400 million.” To put that in context: The United States’ entire population at the beginning of 2010 numbered roughly 310 million. While China is the vortex around which all of Asia and Oceania today spins, the Middle Kingdom represents only one destination for investors looking to profit from the rise of Asia’s middle class. Indonesia, a land of 17,508 islands strung between the Indian and Pacific oceans, isn’t a place many people think about unless an earthquake or tsunami makes the news. Yet, this nation of 240 million people is home to Asia’s third-largest — and fastest-emerging — consumer population behind China and India. Toss into the mix Malaysia, Thailand, the Philippines, Vietnam, Cambodia, India and Sri Lanka, and you have between 100 million and 500 million people who have moved into — or are rapidly approaching — the middle class throughout Asia. Japan, South Korea, Taiwan, Hong Kong, Australia and New Zealand are all helping to feed the trend. That long list of developed and developing countries defines the broad borders of this global investing service. This is our field of play as we pursue the Asia-based companies that are benefiting from the explosion of their own consumer economies. (See the map opposite for a visual representation of where we’re investing.) Let me be clear about one fact: The middle class throughout developing Asia looks nothing like the average American suburbanite. 10
  11. 11. In Asia, the middle class is emerging from some of the most-desperate conditions iimaginable. These are people who have never had running water… who have lived on beans and rice and whatever crops they might grow… who’ve lived in jury-rigged housing with jury-rigged electricity, assuming it existed… who pushed carts along rutted dirt paths through ramshackle villages… and who subsisted on less than $1 a day, in many cases. Today, those who’ve “made it” in China and India are living on as little as $3,900 a year, or $10.68 a day, according to Indian economist Sujit Bhalla. And those are considered upper-middle-class! MIT economists Abhjit Banerjee and Esther Duflo report that elsewhere in Asia, people with daily expenditures of $2 to $4 define “middle class” as well. And we’re not restricted to Asia. There are other countries around the globe that will benefit from the rise of a new middle class, such as Colombia, Mexico, Turkey etc… That’s we call this research service “profit seeker.” We’ll seek profits around the globe, wherever there are opportunities to profit from the rise of this middle class. A Beautiful Asian Woman is Something to Behold… In Your Portfolio Investing in the Asian middle class doesn’t always look like investing in America’s middle class. In Asia, a rising middle class needs everything from roads and water and utilities to supermarkets and convenience stores that replace roadside vegetable stalls and “wet markets.” All are sectors ripe with investment opportunity. 11
  12. 12. That’s not to imply all middle-class Asians have few dollars to spend. Tens of millions are increasingly wealthy, even by Western standards. And that means new cars and appliances and beer consumption and shopping malls and vacations. Indeed, Chinese travelers in 2009 made 46 million overseas trips, according to China’s National Tourism Association. That placed China as the largest source of outbound tourism in Asia, displacing Japan. Those, too, all represent opportunities for the investor seeking profits from Asia’s new middle class. The inescapable fact of middle-class economics is that, as income increases, the amount of discretionary spending increases. In turn, the variety of items on which consumers spend those dollars also increases. Part of the money goes to better food — like dairy products — part of it goes to better education for offspring, and part of it goes to lifestyle/personal improvements. For Asian women, it means cosmetics and skincare. In the summer of 2006, I was walking through one of Hong Kong’s glitzy shopping malls and noticed a large klatch of women huddled around a cosmetics counter, jabbering with great animation and volume. Now, I know nothing about makeup. But I am married. So I know women love their makeup and skincare regimens. When I saw all these women in a giggling frenzy as aestheticians made over each customer, I knew I had to look into the cosmetics business. That led me to another investment gem. It’s a Hong Kong-based distributor of several global cosmetics/skincare brands. The company operates retail outlets in Hong Kong and neighboring Macau, as well as Singapore and Taiwan — all wealthy enclaves where price is often beside the point. More interestingly, as the company expanded throughout urban China, growth strategies were structured largely around Mainland China … where demand for high-end Japanese and Western- branded cosmetics was exploding. I did my due diligence — research from cosmetics giant Clinique, among others, indicated China was second in Asia only to Japan in terms of the dollar volume spent on cosmetics, and that demand for high-end cosmetics, in particular, was strong. I liked this company’s numbers; sales and earnings were escalating; and the stock was cheap — plus it paid a dividend. I liked the prospects in China, where the store count was expanding (and still is today). So in the fall of 2006, I put my money on a play on the beautification of Chinese women. And I am as confident as ever about the emerging middle class of Chinese women and their desire to spend part of their discretionary income on cosmetics and skincare. The stock has returned more than 215%, an annualized gain of 38% — and that doesn’t include the chunky dividend yield, in excess of 5.5% a year. U.S. investors saw none of those gains, however, because this company’s stock does not trade on the NYSE, the American Stock Exchange or the Nasdaq. Nor is it a stock anyone on Wall Street follows. 12
  13. 13. To profit from trends like this one requires someone with knowledge of Asia, who knows what to look for and who’s guiding you to opportunities unavailable on Wall Street. Getting Fat on H20: Profiting from Asia’s Insatiable Need for Clean Water A few years ago the world of water investing changed. A water trust listed on the Singapore Stock Exchange for pennies a share. Few, if any, U.S. investors knew. I knew, because I’ve been paying attention to Asian markets since 1995. The company operates water plants in China. Like REITs in the U.S., the Singapore firm pays out 90% of its distributable cash as a dividend. I watched this trust from the start, convinced investors wouldn’t know what to make of a water REIT and, thus, would likely sell the shares over time. Yet, I recognized the significance of this company’s business model: managing the potable and industrial water needs of Chinese cities, where clean water is such a significant concern that the Chinese government listed water as a major priority in China’s 11th Five-Year Plan that ran from 2006–2010. Plus, given its distribution policy, I knew this stock would pay its shareholders well over time. It became the rarest of investments: a high-growth, high-dividend stock. But it was only available to investors with the capacity to trade directly on Asian stock exchanges. I jumped in for less than 35 cents a share and gained 141% in a year. Don’t Miss Out on the Next Big Winner Most As with Chinese dairies and cosmetics, U.S. investors missed this flood of profits — and the ongoing stream of dividends the water trust continues to pay… because no brokers, no , financial planners and no research analysts in the U.S. don’t is paying such attention to the Sigma opportunities that exist outside America directly on Asian exchanges. I am paying attention. And I’m taking you in country to collect some these profits for yourself, not only in Asia but around the globe. Think of me as your Global Profits Sherpa. I’ll do the heavy lifting: trekking across the globeregion, meeting the companies, tapping the contacts I’ve accumulated through the years, reading the industry and corporate reports — all to uncover Sigma stocks that are reshaping Asia. The stocks I’ll bring to you are ones you will likely never hear about from a stockbroker or the financial media in the states. They are stocks that, for the most part, do not trade in America. But travel with me, and the treasures of Asia’s stock global markets will open up before you. What to Expect From Your Global Profits Sherpa Who is this Sherpa? 13
  14. 14. First and foremost, I am an investor with a keen passion for finding great opportunities that trade well outside the purview of most of Wall Street’s financial machinery. Along with having bank and brokerage accounts across Asia — including New Zealand, Australia, Singapore and Hong Kong — I trade for my family through accounts in countries as diverse as South Africa, Egypt, the United Arab Emirates, Romania and Gibraltar, among others. I’m also a former Wall Street Journal reporter, with 17 years of experience writing about personal finance and all facets of investing. I’ve written ninesix books on various aspects of money and investing, including a book on how to invest directly overseas. And I’m currently working on my 10th book, which will cover the rise of prosperity in countries such as Poland, Colombia, Ghana, Malaysia, etc… Additionally, I spent a year as a trader and analyst for a small-cap hedge fund, to better understand how professional investors think when it’s not just their money at risk. During the past decade, I’ve spent a large amount of time in Asia, traveling widely from Tokyo to Auckland. I’ve attended investor conferences hosted by the biggest names in the investment-banking industry, contacts I remain in touch with today. My wife and I even adopted a little girl from Hefei, China, in 2004. In short, I know this region. And I feel at home when I’m wandering the streets in a place like Shanghai, thinking to myself, “Hmmm, I think I just realized how to play the Asian fast-food theme.” (And, no, it’s not via YUM! Brands and its ubiquitous Taco Bell, KFC and Pizza Hut stores that are popping up all over China). My Investment Style I’m not a gunslinger. I’m not a trader. I am an investor. A strategist. And between those lines lies a vast gulf. Traders are quick to pull the trigger, whether buying or selling. They see opportunities for quick gains… at the risk of quick losses. Their time horizon is days, maybe weeks. Sometimes, it’s minutes or hours. I know my weakness as an investor, and that weakness is trying to be a trader. I can’t tell you if a stock is going up or down tomorrow or next week or next month. But I do have conviction that the stocks I choose will go up over a three- to five-year holding period, though that doesn’t mean I necessarily look to sell when a specific period ends. I find good companies, in good businesses… and I buy them with the intention of holding for a long time. Indeed, I joke that the only time I’ve ever sold a stock in Asia is when, in a corporate takeover, Japan’s Kirin Breweries forcibly took my shares of Australia’s Lion Nathan Breweries — a company I had owned at that point for 12 years. (I’m still mad about that, by the way.) I’m best defined a “GARP+” investor. I look for Growth At a Reasonable Price. 14
  15. 15. I start with a single, broad question: If that answer is “yes,” I begin building a mosaic that helps me determine whether to buy a stock or not… or whether I need to keep watching the company for a while. My mosaic includes not only financial data, but an analysis of country data, local demographic data and industry trends. When I’m in country, I often visit stores or buy the products, where it makes sense, just so I can judge the quality or taste myself. Last time I was in China, I waited outside a Li Ning store in Shanghai for an hour, watching 43 women, all in red, practice tai chi. I waited because I really — really — wanted a pair of Li Ning running shoes. Li Ning is the Nike or Adidas of China; the leading sporting-apparel maker in China. The company has something like 7,000 outlets across mainland China — a real brand, even by Western standards. Shaquille O’Neal is one of its high-profile endorsers. And, I honestly will tell you, my all-white Li Nings with the oddly familiar, though slightly backward, grey swoosh are my favorite pair of sneakers. They fit like a glove. The stock, though, remains too expensive as I write this. So I have yet to put my money into the company. But if and when that day comes, I have mosaic in place… and I know from personal experience that the quality is there — that the brand is a solid one and the product line is solid. As part of my decision-making process, I generally want a stock’s P/E ratio below the market as a whole. I often look for stocks where the earnings growth rate exceeds the P/E. I do not like paying up for a stock, and I don’t want to chase it higher. And I like to see more cash than debt on the balance sheet, though the lack thereof is not a deal-breaker. As for the “+” — that means I often require a dividend payment of some kind as a sweetener. I see dividends as proof that some level of earnings is real — and that goes for Asia and America. Many of my Asian holdings yield between 4% and 10%, depending on the industry and the country. Why do I think this way? Because I’m buying a business. I am not buying a lottery ticket. Businesses, and the economies in which they operate, do not move in a prescribed arc. They’re volatile. My aim is to buy during moments when volatility or investor fear/complacency/blindness has pushed a stock to a compelling valuation. Once I buy, I tend to hold the shares for years while the business or the economy improves… or while other investors come to realize their mistake in overlooking a particular company or industry. Let me give you another example of what this looks like. I bought a New Zealand appliance company in 1995, long before anyone in the U.S. had ever heard of a twodrawer dishwasher that’s now a popular style. I paid $4,770.50. 15
  16. 16. Between July 1996, when my first dividend payment arrived, and June 2008, when I stopped counting, I received dividends and special payouts totaling $7,517.01. Along the way, I also received shares in a rapidly growing respiratory-healthcare company that is a global technology leader. Those shares, as of summer 2010, were worth more than $8,500. And I still have the original appliance stock. The global crisis hit the stock hard; the shares fell to about 50 cents from more than $4. But even at 50 cents, the stock was above my split-adjusted cost basis. So, I bought more at what I saw as a compelling valuation. My point: I found a good company, and I bought it… and I held on through thick and thin… and the company rewarded me well for doing so. That is my idea of investing. The Broad Theme I Pursue My overarching theme as an investor is the emerging middle class, not just in Asia, but in Africa, the Middle East, Latin America and Eastern and Southeastern Europe. I grew up traveling the world with a mom who worked for international airlines; I’ve stood on every continent except Antarctica. The one common denominator everywhere is the unrelenting desire for a better life. No matter where you go, people are doing the exact same things we do in America — buying furniture… shopping for groceries… planning a vacation… sending kids to school. The only difference: They’re relying on local companies to supply the goods and services. In this, I see great opportunity to grow alongside the businesses benefiting from economies expanding at a rate far faster than the United States. Think of is as: The Quest for the American Dream… only substitute your country of choice for “America.” When you marry that trend with the rising standards of living that now define so much of the world, you see the immeasurable opportunities that exist. Let me be clear, though: Investing in the emerging middle class is not defined singularly by consumer stocks. Increasing income ultimately touches everything from roadways, airports and bridges, to water and utilities demands, to agricultural needs… and even the consumption of plastics. Thus, while the Rising Middle Class is our umbrella theme, within that you’ll find sub-themes on agriculture and infrastructure, travel and leisure, food and the products of living, etc. Ultimately, I cast a very wide net to find the common and uncommon ways to profit from the emerging middle class. The Reason I Invest Directly Overseas (Or, Why You’ll Rarely Find an ADR in My Portfolio) ADRs, or American Depositary Re16
  17. 17. ceipts, are the U.S.-listed shares of foreign stocks. They’re fine as far as they go. But, for me, they don’t go very far. ADRs, ETFs and mutual funds as well, represent a limited way to invest in other countriesAsia. Sure, there are a couple hundred different Asian ADRs. But there are thousands of public Asian companies around the globe. Why limit yourself to the green Skittles when there are so many other flavors to explore? You won’t find me recommending Pink Sheet stocks, either. Even though they’re listed here in America, they’re often far-riskier than investing directly in a foreign market to begin with. Once you get beyond a small klatch of high-profile, multinational foreign companies that trade in the Pinks, Pink Sheet stocks often see limited trading volume on any given day. This represents big liquidity risk to you. The Pink Sheets effectively act like a giant grocery-store bulletin board, where folks list what they want to buy or sell. Market-makers aren’t in the middle guaranteeing any degree of “order flow.” As such, while I can sell 50,000 share of stock in Thailand — where millions of shares of that company trade every day — here in the States I might not find a buyer for days, thus exposing me to excessive risk. As for ETFs and mutual funds, they’re largely built for liquidity or to track the largest companies in a particular country or region. Mutual-fund managers, because they’re judged every 90 days, concentrate mainly on the biggest companies in a given market, because they want the ability to dump the shares and get out in an emergency. Bigness provides that liquidity. Yet big foreign companies (incidentally, almost always the same companies that pop up as ADRs) are typically multinationals focused on the U.S. and other Western markets. This doesn’t benefit an investor who wants a pure play on the growth of the local economy. Now, on some occasions, I will suggest an ADR, ETF or a mutual fund, but that will largely be for investors uncomfortable with investing directly overseas. The Tax and IRS-reporting Issues of Owning Stocks Overseas First, I’m not an account or a tax lawyer, so I encourage you to talk to your own CPA. However, I can tell you the U.S. government imposes taxes on global income — meaning that if you earn $1 in dividends in Sri Lanka or St. Louis, the IRS wants its cut either way. Managing tax obligations has never presented any problems for my CPA. I keep a file in a desk drawer and collect all the dividend statements that land in my mailbox or my email inbox through the year, and I print copies of all my trade-confirmations to stick in there as well. (And those confirmations are almost always “buys;” I don’t think my CPA has ever seen a “sell” confirmation in the batch.) At the end of every year I just tally up all the numbers on a spreadsheet, hand it to my CPA, and that’s that. No fuss, no muss. For investors who open an account overseas, the Treasury Department requires you complete a special form that you file with your taxes each year — TDF 90-22.1. 17
  18. 18. Again, my CPA handles this, but the form is nothing difficult. If you invest overseas through a U.S. brokerage account, you won’t have this concern. Price Quotes of Foreign Shares People I talk to about foreign stocks often look askance when I tell them some great company in Australia or Singapore is trading for 73 cents a share. These are invariably American investors who grew up trading on the NYSE and who naturally see such low prices as signs of a penny-stock scam. It’s not. They just don’t know about the pricing mechanisms overseas. U.S. pricing — by that, I mean shares typically priced between $10 and $75 — is not widespread outside America. Throughout much of the world, stocks are priced at $5 a share or below… or they’re priced at several hundred dollars a share or higher. As such, in many countries, particularly in Asia, a stock trading at 71 cents could well be a local Blue Chip. Briefly, here’s what’s going on. In many countries — including Australia, Singapore, Thailand, Malaysia and the United Kingdom, among others — companies issue billions of shares. In America, companies generally issue tens or hundreds of millions. Those billions of shares dilute earnings, so that a Blue Chip company earning 8 cents a share and trading at 10 times earnings is, well, an 80-cent stock. Meanwhile, places like Switzerland and much of Southeastern Europe are primarily institutional markets populated by insurance companies and pension funds. They don’t care about the nominal price of a stock, and the underlying companies don’t have to issue billions of shares because they’re not catering to individual investors. As such, you find companies that earn $80 a share and trade at $800 each. My point: Two Blue Chip companies that do pretty much the same thing can trade at 80 cents in once place at $800 somewhere else… and they’re both trading at 10 times earnings. It’s just a matter of perception, and understanding the underlying mechanics of the local markets. Lot Sizes In parts of Asia, you must be aware of “lot sizes.” In the U.S. you can buy just one share any stock, if you want to. Or you can buy 73 shares or 418 shares or whatever number you want. Not so in Singapore, Hong Kong and elsewhere. In Singapore, stocks trade in 1,000-share blocks. That means you buy 1,000 or 2,000 or 3,000, etc. You can’t buy 1,500… or 2,910. Hong Kong’s lot sizes are more forgiving, but also more random. Sometimes the minimum purchase is one share, sometimes it’s 100. Sometimes it’s 500… or even 2,500. 18
  19. 19. And you have to buy in multiples of the underlying lot size assigned to a particular stock. I note this because you will see me mention “lot sizes” as a fundamental piece of information when I make recommendation. I will tell you the minimum lot size required for purchase, but how many multiples of that lot size you wish to trade is up to you. Brokerage Firms Providing Local Access to Asian Markets Mine is a specialized investment service, and it requires investors operate from an account that provides access to Asian markets. But let me tell you immediately that following my recommendations is easy. Honestly. You can trade online or call a broker who can place the trade for you. It’s nothing difficult at all. That said, brokerage firms like Merrill Lynch, Morgan Stanley or others of that ilk generally will not place these trades for you overseas unless you’re part of the firms’ high-net-worth group. And even then, you’d need to trade in $50,000 to $100,000 blocks. Most folks are not trading at that level. But you have other options — and, honestly, better options. You can trade overseas in multiple countries, from one account, and pay between $10 and $25 a trade to do so. You just have to decide if you want to trade from a U.S.-based account, or an account based in Hong Kong or Gibraltar. Each has its pros and cons. The Sovereign Society receives no special consideration or compensation for listing any of the mentioned brokerages. However, we do have an advertising relationship with EverBank and may receive compensation if you choose to invest in certain products. That said, in the U.S. five brokerage firms provide varying degrees of Asian-market access: www.etrade.com www.fidelity.com www.schwab.com www.interactivebrokers.com www.everbank.com The Benefits of a U.S.-based Account No need to wire money overseas. You can trade online in foreign markets just as you would trade online in the U.S. (although, live trading in overseas markets only occurs when those markets are awake, and in Asia that means early- evening and late-night U.S. time). 19
  20. 20. Your cash remains in the States, under the protection of the Securities Investor Protection Corp. (SIPC) that protects customer accounts up to $500,000 in the event of a brokerage-firm bankruptcy. Foreign stock prices and dividends are converted to U.S. dollars, so you don’t have to figure out your account’s dollar value. Theoretically, ease of access in reaching a customer-service agent. (Although in practice I’ve found — from New Zealand to Egypt — that I can communicate with customer-service agents through e-mail just as quickly and efficiently.) The Drawbacks of a U.S.-based Account It’s in the U.S., and many investors who go global with part of their net worth want their money offshore for any number of reasons. It’s based in U.S. dollars, and many investors who go global specifically want their money in the local currency, unhedged. Limited scope. Aside from Schwab and, to a degree, EverBank, online brokerage firms in the U.S. provide access to just two or three Asian markets, and they’re the same trio: Australia, Japan and Hong Kong. Schwab offers full access to nine markets, while EverBank has six. Commissions, depending on which firm you use. Fidelity, E*Trade and Interactive Brokers are just a few dollars per trade, but have limited Asian scope. Schwab and EverBank have broader scope, but higher commissions. Schwab is $100 per trade, or 0.05% of the trade value, whichever is higher. EverBank charges $50, plus whatever additional fees are imposed in the local markets. Account minimums. Fidelity offers international trading only in accounts that place at least 120 trades a year and have $25,000 in assets, or for clients with at least $1 million in household assets at Fidelity. Interactive Brokers, meanwhile, requires accounts generate a minimum of $30 a month in trading commissions or other fees. If the account doesn’t generate that level, the firm deducts it from your account. For investors willing to go directly overseas, you have two options for broader-based Asian trading — what we call a “Secret Brokerage Account.” www.boom.com (Hong Kong) www.investorseurope.com (Gibraltar) The Benefits of an Overseas Account Direct access to local markets through a local brokerage firm. Access to multiple markets across Asia from a single account. InvestorsEurope.com also provides widespread trading across Europe, from Ireland to Russia, for investors who also want to trade that region as well. The accounts are based offshore. Nearly all trading is online, and live during market hours. Or you can place market or limit-order trades when local stock exchanges are closed. (For some smaller markets, InvestorEurope only offers phone-based trading.) Margin trading is also available, allowing you to use leverage, if you choose. 20
  21. 21. Ability to denominate your account in multiple currencies, usually the Hong Kong dollar, Singapore dollar, Australian dollar, Japanese yen, euro or British pound. Reasonable commissions. Boom charges the equivalent of US$12 to trade online in Hong Kong. Trading China’s B-share market is $25, on par with commissions for other Asian markets. InvestorsEurope is in the same range. Low minimums, generally. Investors at Boom can open an account with whatever sum is necessary to place their first trade. InvestorsEurope generally requires a minimum initial deposit of about US$15,000. The Drawbacks of an Overseas Account The accounts are overseas, and subject to the rules of law that exist in those countries. That’s not a particular problem in Hong Kong and Gibraltar, both of which have British heritage. The accounts are denominated in a foreign currency, if you so choose. That exposes you to currency fluctuations, which is an additional risk you face when owning foreign assets. You must wire money overseas to fund the account. There’s no risk in that, though it is an added step in the process. The account-opening process is more time-consuming. You will often need notarized copies of your passport, as well as copies of a utility or phone bill to prove you live at the address listed on the account application. Sometimes, those copies must be notarized too. Ultimately, your decision on what firm to use is based on how you weigh cost vs. comfort. If you’re comfortable sending money overseas, choose an overseas broker because costs are cheaper and you will immediate, easy access to every stock I recommend. Otherwise, pay for the comfort of keeping your money at home by paying more for commissions at Schwab or EverBank. Boom provides access to every market in Asia that I will be writing about. So, too, does InvestorsEurope. Both are convenient and commissions are affordable. But, if sending money to a brokerage firm overseas causes concern, then the broader-based choice in the States is Charles Schwab or EverBank. But keep in mind that you won’t have access to every recommendation, since Schwab and EverBank don’t cover every market where we’re investing. But, they do cover the bulk of them, so you will only miss out on a few recommendations every now and then. Schwab provides access to all the markets I will be recommending except China, South Korea and Taiwan. (Most Chinese shares I recommend will trade in Hong Kong.) EverBank misses those plus several others, including the Philippines, Malaysia and Indonesia. The big caveat with Schwab and EverBank is cost, given that Schwab charges $100 per trade and EverBank $50. What You Can Expect From Me You will hear from me each week, sometimes with recommendations, sometimes with updates on positions or on market developments… and sometimes rants about news or political decisions at home and abroad that I think are misguided or boneheaded. 21
  22. 22. On occasion, you’ll hear from me more than once a week, when global or country-specific events warrant. Please feel free to send questions via e-mail to http://sovereignsociety.com/contact-us, and keep your eye on your weekly issues of Emerging Market Strategist, where I will regularly post questions (and answers) that can benefit the broader subscriber base. But from time to time, I will address reader questions in my routine correspondence, and might even use a question to prompt a visit to a particular company when I’m in country doing research. I will generally not tell you to place stop-loss orders. Stock markets are volatile creatures, particularly in some of the smaller Asian markets, and the market’s natural movement can trigger a stop-loss order, pull you out of a stock, only to then send that stock higher without you along for the ride. The way I look at investing is that you take it, warts and all. This goes back to my main thesis: Find good companies, hold on through thick-and-thin, and you will be rewarded. That doesn’t mean I won’t issue a sell recommendation. I will if the situation warrants. But I’m not going to sell a stock just because it misses earnings in some particular quarter. Again, we’re buying businesses, not lottery tickets. And sometimes the business cycle isn’t perfect for a particular company. When making recommendations, I’ll typically provide a limit-price range. Markets move quickly, and I don’t want you diving into a stock at any price, only to have the shares slide back when the initial enthusiasm fades. I’d rather you know the price range in which I’d buy, and then place an order somewhere within that range. And, well, that’s all for now. This is an extraordinary time of growth in Asia and, in turn, for your portfolio. It’s time to explore this new investing frontier together. So, from here on out, we’re in country… Keep a Global View, Jeff How to Reach Us Emerging Market Strategist is an elite service — our professionals are on standby to assist you. We want to make sure you know how to contact us whenever you need more specific assistance with our recommendations. So, feel free to contact us at 1-866-584-4096 if you have any questions related to this service, such as: • How the service works and the investment vehicles we will be using • Understanding our trading instructions For any questions about your subscription — renewals, changes of address, a retransmission of an issue, etc., there are three ways to reach us: 1. PHONE is the best way to reach us for routine questions about your subscription, changes of address and 22
  23. 23. non-receipt of Emerging Market Strategist issues. Please call 1-866-584-4096. 2. FREQUENTLY ASKED QUESTIONS PAGE on the sovereignsociety.com website is the next best way to reach us. Just log on to www.sovereignsociety.com with your username and password and click on Emerging Market Strategist, then FAQ’s under the section Your Account. 3. You may also contact us here: http://sovereignsociety.com/contact-us We urge you to periodically check your email program to ensure that you are accurately and promptly receiving our recommendations and alerts. Be sure to White list us at: http://sovereignsociety.com/wp-content/blogs.dir/1/files/2010/09/CCS_Whitelist.pdf To avoid delays in responding to your questions or processing your requests, include the name of this service — Profit Seeker — as well as your full name. • If you are changing your email or mailing address, please include both your current and new information. • For security reasons, and to prevent banking errors you must contact us by phone to cancel a paid subscription. Submitted email to cancel a subscription will not be processed. Please call us at 1-877-422-1888, to process your request. Our cancel service center is open Monday through Friday, 9 a.m.-5 p.m., EST. • Standard refund policy: Premium service subscribers may receive a 100% refund on their subscription fee within the first 60 days of their service (minus a 10% restocking fee). If you have subscribed during certain special promotions, other refund terms may also be available. Note on transmissions: The Sovereign Society shall not be liable to you or any third party for any loss, injury, damage, costs, expenses or compensation of any kind arising directly or indirectly from or as a result of any act, neglect, delay, error, omission, default, or negligence by the Company in relation to the transmission of, or any other dealing with, or other failure in the accurate receipt by you of Company publications containing recommendations, alerts, advisories, or other Company materials or information of any kind, even if advised of the possibility of such damages. In the event a transmission is interrupted for any reason, the Company cannot guarantee timely delivery. 23

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