Why India Is No China

 

It's true -- India is no China. And Brazil's no Russia.

They've never been all that similar, really. In fact, Standard & Poor's recently questioned "whether the BRIC [Brazil, Russia, India, China] countries ever shared much in common, other than scale and high portfolio inflows."

Well, of course they didn't. In other news, S&P 500 components Google (Nasdaq: GOOG) and General Electric (NYSE: GE) don't share much in common, except that they're both large U.S.-based companies.

You wouldn't think that Google and GE are interchangeable -- so don't fall for the idea that countries are interchangeable. If you do, you'll get burned.

First, the status quo
As investors (heck, as humans), we like to group things together. It simplifies complex information and gives us a way to make complicated decisions.

And when it comes to international investing, it's convention to lump countries into one of two categories: developed markets vs. emerging markets.

The exact distinction is hazy. Former Secretary-General of the U.N. Kofi Annan defines a developed market as "one that allows all its citizens to enjoy a free and healthy life in a safe environment." Political scientist Ian Bremmer defines an emerging market as "a country where politics matters at least as much as economics to the markets."

Basically, to be considered developed, a country needs a high standard of living that isn't continually threatened by political crisis. Besides the United States, think of countries such as Japan, France, and Australia.

The emerging markets are then split into the BRIC countries -- a term coined less than a decade ago by Goldman Sachs, because it was sexy to bundle together the four emerging-market countries that combined size with tremendous growth prospects -- and everyone else (countries such as Peru, Turkey, Egypt, and Thailand).

These groups are dangerous!
All of that splitting and grouping gives investors the false sense that the BRIC countries are essentially interchangeable: emerging, large, poised for growth.

Even basic country data demonstrates just how large this fallacy is:

Country	GDP per person (in U.S. dollars)*
United States	47,165
Russia	12,487
Brazil	8,480
China	3,174
India	1,078

*Calculated using nominal GDP and population per CIA World Factbook, correcting for a typo in Russia's GDP figure.

Gross domestic product (GDP) per person is one way to gauge the standard of living and productivity of a country -- and they demonstrate just how different these countries really are.

Yes, the emerging markets are quite different from the developed market -- the U.S.'s GDP per person is more than 40 times greater than India's -- but the chart also shows the great disparity among the BRIC countries. Russia is almost 12 times as prosperous as India, and even China is roughly three times so.

And this is just the economic disparity.

You also have to factor in the country's political situation, overall economic stability, market conditions, cultural differences, and still more economic data such as national debt, balance of trade, inflation, savings rates, etc.

In other words, in international investing, country differences are at least as important as company differences -- because any potential that company has depends upon the context of its location.

For example, even though they're both companies that deal in global commodities, it could be argued that Vale (NYSE: RIO) is more closely linked to its fellow Brazilian Petroleo Brasileiro (NYSE: PBR) than it is to Aluminum Corp. of China (NYSE: ACH) -- aka Chinalco. In a more extreme example, Chinalco may be more closely linked to Chinese search engine Baidu (Nasdaq: BIDU) than it is to Vale.

Why? Because country-specific considerations frequently outweigh industry-specific considerations. Ask any company that has been subject to onerous regulation, excessive taxation, a devalued currency, or nationalization by its home country.

If this is true for a company like Vale, whose prices are dictated by global commodities demand, it's even more true for a company like Toyota (NYSE: TM), which relies on demand from its home country for more than half of its revenue.

What does this mean for investors?
The substantial differences between countries -- not to mention between developed and emerging economies -- lead to three takeaways.

• Because of the addition of tricky country-specific dynamics, diversification may be even more important in international investing than it is in domestic investing.
• Emerging markets demand a greater risk premium than their developed brethren. In other words, you should demand a larger margin of safety (and lower earnings multiples) for companies in emerging markets.
• It isn't enough just to pore over the financial statements of a company and its competitors. Knowledge of a company's country is just as important as knowledge of the company itself.

5 Stocks You Should Avoid Right Now

By Brian Richards and Tim Hanson
April 9, 2009 |  

Editor's note: Contrary to reporting in a previous version of this article, Ford has accepted no bailout money from the federal government. The Fool regrets the error.A few weeks ago, we profiled five unbelievably solid stocks -- companies that have been paying uninterrupted dividends to shareholders for more than 45 years. That consistency is incredible.

Today, we thought we'd take the flip side of that coin and examine five stocks that are anything but incredible.

Why they are so dangerous
What first caught our eye about these five dogs is that they are five of the six most heavily traded stocks on our major exchanges:

exchanges:

Company	Average Daily Trading Volume, Last 3 Months	Recent Share Price
Citigroup (NYSE: C)	48.1 million	$2.85
Bank of America (NYSE: BAC)	43.7 million	$7.60
Ford (NYSE: F)	40.8 million	$3.25
General Electric (NYSE: GE)	29.7 million	$10.94
Fannie Mae (NYSE: FNM)	29.4 million	$0.70
General Motors (NYSE: GM)	27.2 million	$2.10

Source: Capital IQ, a division of Standard & Poor's.

Millions upon millions of these shares have traded hands -- on a daily basis -- over the past three months. That might make sense; after all, every one of these stocks has headlined the nightly news at least once during that time period.

Now, we have to acknowledge that many of these transactions were from the big-money institutions or the short-term day-trading crowd. But somewhere in there is the little guy.

And you should stay away
Of the six most heavily traded stocks, we believe you should avoid five of them outright:

• Citigroup
• Bank of America
• Ford
• Fannie Mae
• General Motors

Why? Because these five stocks have three troubling commonalities:

1. Convoluted relationship with the government.
According to the Center for Responsive Politics, the "Finance, Insurance, and Real Estate" industry spent more than $3.4 billion on lobbyists between 1998 and 2008 -- more than any other industry. Over that same time span, General Motors and Ford "donated" nearly $200 million to Washington.

What did those five companies get for all of those political contributions? All but Ford have received well-publicized bailout funds. And while the taxpayer money will be used to save these companies from a far worse fate (we hope), Uncle Sam's money comes with strings attached.

Under normal circumstances, businesses are accountable to three constituencies: their customers, shareholders, and employees. Businesses will do well when they do right by all of them. These five companies, however, are now accountable to a supra-constituency: the federal government. That frightens us, because it's unclear how customers, shareholders, and employees will fare when these companies try to do right by the feds.

2. Gordian knot-like financials.
Take a look at Citigroup's balance sheet. For all of the information, for all of the numbers, it's among the most confusing documents we've ever examined. Call us when you figure out what it owns and what it owes. Heck, call Citi CEO Vikram Pandit first. He may benefit from the knowledge.

See, it's seemed to us that as the credit crisis persists, insiders haven't been totally clear about what's on their books. Though some have a vague sense that mark-to-market accounting has forced them to write down asset values too far, only time will tell ... and time may not be on these firms' sides right now.

The auto companies have some of these same issues -- they have consumer finance/lending divisions -- but their pension obligations present an entirely different yet similarly complicated set of problems.

3. No near-term catalysts.
The financial companies will survive in some form -- our government has committed to that. But their future will be unlike their past. Regulation will be stricter. The massive 30-plus-times leverage that drove outperformance earlier this decade will be a dark relic of a bygone era. And now, skeptical investors may never ascribe the same market multiple to profits.

We just can't see a world in which these companies post the same kind of profits that we saw for the past 10 to 15 years.

But wait, I count six ...
GE is the sixth company on that list, and it faces some of the same issues mentioned above. In fact, GE lost its AAA credit rating earlier this month for the first time in 40 years.

Yet we're hesitant to write GE off, because GE is a massive conglomerate that owns a collection of diverse and cash-generating operating businesses. As a result, its balance sheet is in better shape than some others, and its recent deal with Berkshire Hathaway shows that the company can tap resources that smaller, more troubled names cannot.

So we're taking a wait-and-see attitude here. That may not be a satisfying answer for anyone looking to buy GE, but remember Warren Buffett's observation that there are no "called strikes" in investing.

What you shouldn't avoid right now
Contrast the future of Citigroup or General Motors with, say, the future of Apple (Nasdaq: AAPL). Apple was recently named the "World's Most Admired Company" by Fortune. It hasn't received any TARP money from the government; even better, as of the end of 2008, Apple had more than $25 billion in cash and short-term investments ... with zero debt.

That means the company has a bulletproof financial position and can continue with business as usual -- snazzy marketing and innovating new products -- while competitors are spending their time figuring out ways just to survive.

This isn't to say that Apple doesn't face challenges. It's tricky to be in a business where you need to keep pace with rapid development cycles. But at least Apple isn't encumbered by convoluted relationships with the government and convoluted financials.

Buy one-foot bars
There's value in a company like GE. Heck, there may even be value in one or all five of the stocks we've advised you to avoid. But given their complexity, they're the proverbial "seven-foot bars" that Warren Buffett says he avoids in investing. (Remember, Berkshire got a 10% dividend on those preferred shares it bought from GE -- shares that are far more interesting to us than the common stock.)

Instead, Buffett looks for "one-foot bars that I can step over." In other words, lay-ups, short putts, or fastballs down the middle (to diversify our sports analogy). These are easy investments where the reward profile far outweighs the risk profile.

Fool co-founder David Gardner believes Apple represents just such an opportunity today, and he and his brother Tom have found all sorts of similar opportunities for their Motley Fool Stock Advisor subscribers. That, after all, is the silver lining of a down market, and if you're prepared to be a long-term investor, you can take advantage.

Click here to join Stock Advisor free for 30 days and enjoy immediate access to all of David and Tom's proprietary research. There is no obligation to subscribe.

Brian Richards does not own shares of any companies mentioned. Tim Hanson owns shares of Berkshire Hathaway. Apple and Berkshire Hathaway are Motley Fool Stock Advisor recommendations. Berkshire is also an Inside Value pick and Motley Fool holding. The Motley Fool has a disclosure policy.

The Greatest Company in the History of the World

The greatest
Meet the world's greatest company: ExxonMobil (NYSE: XOM). Biggest, strongest, most efficient, most evil -- there's hardly a superlative that hasn't been said about this most successful of the Standard Oil grandchildren. But while much is made of just how great or how evil folks peg Exxon to be, there's strangely little discussion over the core drivers of why its stock has been a huge success.

It would be easy to say that Exxon's success and that of Standard Oil's other grandchildren -- Chevron (NYSE: CVX), ConocoPhillips, Marathon Oil, etc. -- was just a function of their being in the right place at the right time. Hawking oil and gasoline at the dawn of the Industrial Revolution, after all, is a Category 5 tailwind.

But there's much more to Exxon's success. And, fortunately, those discernable traits are ones we can spot in other opportunities.

1. An owner-operator culture
John Rockefeller didn't run an infamously efficient organization just for kicks -- as the largest shareholder, he had a vested interest in the success of Standard Oil. When managers and employees are shareholders alongside you, they share your desire for the business to be managed for the long term.

Take a look at the cutthroat world of discount retail, where a fanatical focus on controlling costs and smart growth are crucial to long-term success. Which companies in this space have proven among the biggest winners for investors over the past 20 years? None other than Costco and Wal-Mart (NYSE: WMT). Both are known as much for their insider ownership as for their tenacious zeal for efficiency and delivering value to customers.

And, by the way, there's still plenty of alignment between Exxon's leadership and outside shareholders. The company consistently posts better margins and returns on capital than its Big Oil brethren. CEO and Chairman Rex Tillerson has plenty of incentive to keep it that way -- he owns 1.1 million Exxon shares.

2. Enduring demand
Demand for oil is strikingly consistent. For most companies, steady demand equates to steady cash generation. But just as importantly for Exxon as the consistent demand for oil is the lasting nature of that demand. Constant doubt over the staying power of oil has helped keep Exxon's shares perpetually undervalued, allowing Exxon and dividend reinvestors to consistently gobble up shares at attractive prices.

Back to the importance of demand. Consider Procter & Gamble (NYSE: PG), which I recently recommended to our Income Investor members. P&G's core products (razor blades, toilet paper, disposable diapers, etc.) all face little chance of technological obsolescence. Even better, demand is regular and firmly entrenched. Maybe I'm just a pretty boy, but I'd be living in my car before I stopped buying razors.

Now consider a company whose fate hinges on innovation: Apple (Nasdaq: AAPL). Sure, there's a lot to love about Apple, but long-term demand for its products is downright unknowable, if for no other reason than we've no idea what Apple will even be selling years from now.