Uncommon Wisdom : Investing, Stock, Boom

To Catch a Trophy Fish, You Have to Fish in a Trophy Lake

Tony Sagami — Fri, 27 May 2011 08:05:00 GMT

HSBC Holdings, the U.K.-based banking behemoth, said it was going to hire 2,000 employees in China and Singapore. Since over 50% of its profits come from Asia, HSBC knows a thing or two about the region.

“Opportunities for growth are many in China. We forecast that the combined middle-class population of India and China will exceed the population of the U.S. by 2025,” the company said.

HSBC already has more than 5,000 employees working at its Chinese banks and clearly expects to make a mountain of money there by offering wealth management and insurance in addition to traditional banking services.

I know a thing or two about the wealth management business because I’ve been doing this for almost 30 years.

My first investment job wasn’t what I was expecting, but I had to start somewhere. That job was as a commissioned stockbroker at Merrill Lynch. I thought I was going to be an investment professional, but truth is I spent most of my day pestering strangers on the telephone.

Yes, I was one of those pesky phone solicitors who interrupted your dinner or favorite TV show with an unwelcome sales pitch. I hated that part of the job.

That job wasn’t a total waste, however, because I learned that the key to making big bucks in the investment business was to focus on wealthy multi-millionaires.

That lesson was reinforced by Bing Carlin, one of my early heroes in the investment business and manager of the highly-rated IAI Regional fund.

Bing was the spitting image of the legendary football coach Bo Schembechler, and he was one of the brightest investment minds I’ve ever met. Morningstar regularly gave his fund its highest rating until he retired in the early 1990s.

Fortunately for me, Bing took the time to share some of his knowledge with me and helped me become a much better investor.

One lesson I will never forget was Bing’s exhortation that the key to big profits was to invest in the right market. “If you want to catch a trophy fish, you got to fish in a trophy lake,” he said.

In the 1990s, the “trophy lake” was technology stocks.

Today, the new trophy lake is China.

The reason is simple: China has been the fastest-growing economy in the world. Over the last five years, China’s gross domestic product has grown between 8% to 12% each year, and all that growth has created a mountain of Chinese millionaires. Those new millionaires need guidance on how to invest.

Noah Holdings (NOAH), is one Chinese stock that is the profitable combination of the lessons I learned at Merrill Lynch and from Bing Carlin.

Noah Holdings is the largest independent-wealth manager in China, and it is making a mountain of money catering to new multi-millionaires. Investing in Noah today is analogous to investing in Fidelity 20 years ago.

The best thing about the money management business is the recurring revenues you earn on money under management. As long as Noah keeps accumulating a big pile of money, it will accumulate a mountain of recurring profits.

Source: publicradio.org
China’s rapid economic growth has helped create loads of new millionaires.

Noah has 300 relationship managers spread across 28 branch offices, has more than 12,000 clients and sells four types of products: (1) fixed income; (2) private-equity fund with underlying assets in unlisted private companies; (3) publicly traded stocks; and (4) investment-linked insurance products.

Here’s why I think Noah’s future looks so bright.

Reason #1: New Millionaires. If you want to be in the money management business, China is the best place in the world to set up shop because it’s creating millionaires (as well as billionaires) at an amazing pace. Those millionaires are super savers and have mountains of money to invest.

According to a new report from Huran Research Institute, there are now 875,000 millionaires in China and 128 billionaires, the second largest number in the world only behind the United States.

China created 48 new billionaires in the last year, proof that the rich are getting richer in China.

How’s that compare to the United States? The United States had 2.9 million millionaires in 2009, or about one in every 106 people. We had 391 billionaires or roughly one in 785,166 people.

That is why China is currently ranked fourth in the world by its number of high-net-worth individuals with investable assets of $1 million or more. China’s wealthy had about $5.6 trillion in assets in 2009.

How much of that money will Noah Holdings eventually grab? There is no way to know but I think the number is very, very BIG.

Reason #2: Just Scratching the Surface. I said above that investing in Noah today is like investing in Fidelity 20 years ago. Fidelity is a private company you can’t invest in, but the opportunity is the same. Fidelity understood the need for professional money management and became the largest mutual fund manager in the world by being in the right industry at the right time.

The same is true of Noah Holdings.

Noah is growing like mad, but its number of clients with more than $400,000 of investable assets accounted for 2.5% of China’s total. It is the other 97.5% that presents the great growth opportunity.

When I was a child, about the only investment options my parents had was real estate, bank savings accounts, insurance policies, and savings bonds.

Until recently, the Chinese had ever fewer options. About the only alternatives were little gold figurines/ingots or stuffing money under a futon. Heck, the Chinese weren’t even allowed to own homes under the older, strict communist regimes.

Today’s Chinese investor has more options, and like wide-eyed Americans in the 1970s and 1980s, they need guidance and help. Noah is in the best position to deliver that assistance — and make a bundle in the process.

Reason #3: Absence of Any Meaningful Competition. The wealth management business in China is at an early stage of development and is highly fragmented.

Most of the competition is from Chinese banks that have an in-house sales force, but Chinese banks are mediocre at best at anything other than their core banking business and unlikely to mount any serious competition to Noah.

What about American or European money managers? While western money managers are salivating at the opportunity in China, they don’t have a chance at making it big in China. Why not?

Most Chinese prefer to do business with Chinese companies. Sure, they like designer labels when it comes to fashion, cars, or luxury goods, but when it comes to their life savings, they will stick with who they know. Even a bank as big and well-known as HSBC is going to find it tough going.

Reason #4: Brand Name Means Everything in China. Remember those old E.F. Hutton TV commercials? Two people in a crowded area and one says to the other “Well my broker is E.F. Hutton and he says” at which point everyone stops and leans in to listen.

Source: efhuttonalumni.org

The brokerage industry was different 30 years ago, and there was a certain cachet to doing business with high-profile, branded brokers like E.F. Hutton.

That is even more true in China. Whether you’re talking about Louis Vuitton handbags, a Tiffany wedding ring, or an Apple iPhone, Chinese consumers are obsessed with brand names.

Noah Holdings is becoming the established brand for wealth management among the country’s high-net-worth population. Noah is seen as an independent, personalized wealth manager with sophisticated products and is well on its way to becoming the first company China’s wealthy think of when they need help managing their millions.

Reason #5: Recurring Revenue. One of the big attractions of the money management business is recurring revenue on money under management. Noah’s revenues are fairly evenly split between its fixed income and private-equity fund products. While the conservative fixed income funds are less affected by market swings and provide a steady stream of revenue, the equity side is where the big home runs can be hit.

Reason #6: IPO to Fuel Expansion. Noah Holdings raised around $90 million from its IPO, and it is going to use those funds to expand its already rapidly growing business.

$15.0 million to set up new branch offices and expand coverage network, including hiring additional relationship managers

$15.0 million to upgrade IT infrastructure

$15.0 million for capital contributions to funds of funds formed by the Company

Don’t forget that the key metric to the money management business is assets under management and the forthcoming expansion should send revenues and profits to the moon.

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WARNING: There is another Chinese company listed on the NYSE with a very similar name: Noah Education Holdings. Its symbol is NED, so make sure you don’t mix up the two when placing your order.

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Source: wsj.net
Noah Holdings CEO Jingbo Wang outside the NYSE.

Noah is traded on the New York Stock Exchange, but has only been publicly traded since November when it sold its IPO for $12. It initially shot up to $20, but is now trading around $15 a share.

And as you know, timing is everything when it comes to investing, so you should wait for it to go on sale before jumping in or wait for my buy signal in Asia Stock Alert.

As always, you need to do your homework and decide whether any of the securities I talked about in this column are appropriate for your personal situation and financial goals.

Best wishes,

Tony

P.S. If you are looking for more specific buy/sell recommendations on my favorite Asian stocks, please consider a subscription to my Asia Stock Alert for only $199 a year. I think it may be the best investment you’ll ever make

3 Fertilizer Stocks to Play the Global Population Boom

Tony Sagami — Fri, 18 Feb 2011 15:56:00 GMT

All of us have enduring childhood summer memories.

I remember the sweet taste of fat, wild blackberries we picked by the Puyallup River, the neighborhood pickup game of baseball in the cow pasture, family picnics at Surprise Lake, clam digging in Hood Canal, and the summertime stink of rotting cow blood.

Rotting blood?

Long-time readers know that I was raised on a vegetable farm in western Washington. Our main crops were radishes and green onions.

Our family farm was small, and my parents worked like the devil to scratch a living out of its soil. Life wasn't easy, but we never went hungry and my parents found a way to send all three of their children to college by hard work and frugal spending.

One way my father stretched a dollar was to avoid what he called 'store bought' fertilizer and used cow blood from a nearby cattle slaughterhouse instead. I remember being unable to fall asleep in August because the combination of the hot August sun and acres of farm land drenched with cattle blood created a horrible stench.

Heck, my father would have probably told us to poop in the fields if he thought it was sanitary and would have saved him a couple bucks!

Smelly or not, every farmer needs to use fertilizer and the most-used and most-important fertilizer is potash.

Potash is important because crops treated with potash are extremely high yielding. Potash also improves water retention, nutrient value, taste, color, texture, and disease resistance of food crops.

It is used for fruit and vegetables, rice, wheat and other grains, sugar, corn, soybeans, palm oil and cotton.

Potash is extracted from sedimentary salt beds formed by evaporation of ancient seas and is an essential element for all living organisms. Potash is not your typical fertilizer in that it is mined just like metals and looks like a crystallized rock before processing.

Plus, there is no substitute for potash. That's why even my frugal father bought some to supplement the cattle blood. That is why potash is one of the commodities that I am the most bullish on.

Global Population Growth

Source: Mining-technology.com
Potash is not a typical fertilizer. It is mined.

The world's population is growing. There are approximately 6.6 billion people on our planet, and that number is expected to grow to 8.2 billion by 2030, according to the United Nations.

That is a lot of mouths to feed, but the amount of food each mouth is eating is also increasing. The average human consumes about 2,600 calories a day, but the UN expects that number to climb to 3,000 calories by 2030.

That may not sound like much, but it is becomes a mammoth number when multiplied by billions of people. The world's daily caloric intake is going to surge from 17.1 trillion calories a day to 24.6 trillion.

Investing in the fertilizer business may not sound sexy, but the dynamics and fundamentals of the food business will turn it into one of the most profitable sectors you could find.

Rising Incomes = Higher Protein Consumption

Along with population growth, global incomes are also growing. This is especially true in China.

The Chinese are quickly becoming more affluent. In 2004, the average China's Gross Domestic Product per capita was just $1,000. By 2010, it more than doubled to $2,300.

What's the first thing you would buy if your income went from subsistence to middle class? A Mercedes? A Rolex? For most people, the first thing is better food.

Rising incomes are driving a dramatic change in Chinese eating habits. The middle class is no longer content to eat bowls of rice and cabbage with an occasional pig knuckle or chicken foot as a treat. They want fruit, candy, dairy products and particularly meat. FACT: Since 1980, per-capita meat consumption in China has nearly tripled

The wealthier a nation becomes, the more calories it consumes. That translates into more fertilizer demand to produce that food.

China's population is 1.3 billion, and its arable land is less than 1 acre per household vs. 100 acres in the United States.

As China's diet becomes more westernized by eating more protein, China has gone from being a net exporter to a net importer of food.

China's agriculture technology is far behind that of the United States, and one of the keys to improving its agricultural productivity is to use more fertilizer.

Potash makes it possible to supply more food to consumers and help farmers grow more and better food.

China Is a Potash Pig

China is the world's largest consumer of potash, according to Canpotex, a North American fertilizer trade group.

In fact China used 5.5 million tons of potash in 2010. That accounted for 20% of world demand.

This year, Potash demand is forecast to increase 18.3%, most of which will come from Canada.

Why Canada?

Potash is only found in significant quantities in Canada, Belarus and Russia, which means that the only stable supply for China is from Canadian producers.

Plus, it is cheaper to ship potash from Canada than from Russia, the second-largest producer. Freight from Canada is $20 to $30 a ton and $30 to $40 a ton from the Baltics and Russia.

How can you invest in potash?

The Potash Corporation of Saskatchewan (POT) is the world's largest fertilizer company, and produces fertilizer and animal feed products. Potash produces three primary plant nutrients: Potash, phosphate and nitrogen. Potash is, however, the main focus of its business.

Mosaic (MOS) isn't Canadian, but it is close by being based in Minnesota. Mosaic produces phosphate, nitrogen, and potash nutrients for use in crops and feed.

Calgary-based Agrium (AGU) makes a wide variety of agricultural nutrients including nitrogen, phosphate, sulphur, and potash as well as herbicides, fungicides, adjuvants and insecticides.

I'm not suggesting that you rush out and buy any of these stocks today. You need to do your own homework and decide whether any of them are appropriate for your personal situation and financial goals. However, if feeding the world's growing appetite is a sector that you want to include in your portfolio, these are three stocks very worthy of your attention.

Best Wishes,

Tony