A Secret Only a Tiny Number of Investors Understand

BY BILL BONNER

At 7am on Saturday morning we were in our room at the China World Hotel, looking down on eight lanes of traffic that had come to a dead stop in the Beijing traffic.

‘The last century was America’s century,’ says our Chinese colleague. ‘This is China’s century.’

‘You know why America was such a success,’ he continued. ‘Because it was a fairly free market with massive domestic demand. Companies could scale up in the highly competitive US market. That would make them larger and more advanced than their foreign competitors. They could then enter foreign markets and easily beat the locals.

‘Now, the US is gummed up by taxes, debt and regulation. Outside of Silicon Valley most of the companies are old. There are few new businesses and not much new technology.

‘I think you wrote something about the declining number of start-ups in the US. It’s a big deal that few people recognize. I think you said it was a result of crony capitalism. The feds subsidise and protect the big boys… and bail them out when they get into trouble. That’s why GM and Fannie Mae are still in business. But the little guys can’t even get credit.

‘China, meanwhile, is full of new companies. Everything is new. And the internal market is fairly free compared to America. Talk about scale. These companies have massive domestic growth and learning capacity before they have to compete on the world markets.

The largest IPO ever

‘Take Alibaba, for example. It’s a huge company already. It recently introduced a new kind of bank account, where you earn interest daily… at a much higher rate than banks in the US. Within a week, it was the third biggest, in terms of deposits, in the world.

‘Alibaba is going public soon. It will be the largest IPO ever.’

More evidence of the liberty with which Chinese firms operate comes from a dear reader:

‘Bill,

‘I probably shouldn’t bother you, but this one (about China) is right on and close to my heart. My wife has been a naturalized US citizen for 3 years, an LPR for 3 years before that. For the year before that (2007), we were waiting for the I-190 immigration processing.

‘We were married in 2007 in Nanchang, Jiangxi province, her family hometown. She had been running a business in Guangzhou. At start-up, she went to ONE place for a license.

‘She started to tell the guy she planned to deal in Suzhou silk embroideries, calligraphies, and paintings. He cut her off with, “You want to buy and sell things. Okay.”

‘She paid nominal taxes. In the US there is Schedule C, state B&O tax, county property tax, city license and taxes, and aaaarrrgggghhh…

‘We own a small “fangzi” in Nanchang and visit China every few years (her daughter is our partner and manages the property). For some time I have felt that China is MUCH more truly “free market” than we are. How tragic!’

Can the market be beaten?

But let us leave China and return to the subject of these last few Diary entries: how to invest intelligently in a world where real knowledge is scarce.

This is the third in our series. We have one or two more coming. So keep an eye out for those…

We grew up with the Efficient Market Hypothesis — which was popularised by economist Burton Malkiel in his 1973 book, A Random Walk Down Wall Street.

The hypothesis is that stock market prices reflect the sum of all publicly available knowledge about a company. Because no one could know more than everyone could know collectively, an individual would be unable to ‘beat the market’ over the long term.

Of course, many investors did outperform the market. But efficient market proponents believed this to be a matter of luck, not skill.

Academics and investors attacked EMH from several directions. Some, such as a well-known investor from Omaha, pointed out he and others schooled in Graham-and-Dodd-style value investing had been able to earn the consistent above-market gains EMH theory said was impossible.

How did they do it?

We recently put the question to colleague Porter Stansberry. His reply:

Read the full article at The Daily Reckoning