Author: Vivian Lewis
Covestor model: International Yield
Disclosure: None
After going to see the brilliantly performed but puzzling play Jerusalem last night, I think we need some more simple truths. So here are remarks by Mark Mobius, from his Passport to Profits book of 1999. I grabbed it to read while sitting outside my office while a new carpet was laid. Mark wrote:
The Asian Contagion of 1997-8, much like the Latin American Tequila Effect of 3 years before, demonstrates that most if not all emerging markets are liable to take more than a few tumbles and stumbles on the road to wealth and prosperty before attaining anything close to the stability of the world’s more mature markets. On the other hand, it’s that very volatility which, if managed appropriately, can generate well-above-average returns for the long haul.
The reason for this is really quite simple: all markets, being based more in mass psychology than objective reality, have a tendency to overshoot and undershoot economic growth rates. Judging the influence of irrational emotion is the way we make most of our money.
Mobius Rule no. 5: If you factor emotion out of the equation and base your strategy on long-term fundamentals, you can win when markets fall and when they rise. Such overshootings and undershootings tend to cancel each other out over time. Which means that stock markets do eventually reflect economic growth in the long haul.
That is not the way the emerging market shares are behaving these day, with concerns about scams in China and corruption in India causing shares from these popular destinations to fluctuate wildly. Mark Mobius’s Method is being neglected.
Having been caught out in a Chinese water torture stock, Duoyuan Global Water (NYSE: DGW) which the wonderfully named short-seller Muddy Waters revealed to have fake phone numbers and probably faked accounts, I am taking it easy getting into the BRIC space. But others are braver and actually buying DGW, which is trading up on big volumes.
What Mobius is telling us is that when everyone is buying in an emerging market, stock prices are too high for long-term investors. The time to buy is when everyone is selling, on condition, of course, that the accounting situation at DGW is clarified.
