I'm not sure when or where the traditional "top ten list" came about. But it is here and I suppose we will have to live with it for the rest of our lives. If I were to make a top ten list for our clients, it would probably be a compromise between one or two meaningful ideas, and the remaining slots being mostly filler. So I think I will start my own tradition and share with you a single best idea, a Top One List, an idea that can be used a lifetime and not discarded when the calendar rolls over to yet another year.
Top One: "Wherever there is danger, there lurks opportunity; whenever there is opportunity, there lurks danger. The two are inseparable. They go together" - Earl Nightingale.
Let's apply this to one of the more popular themes in many of this year's top ten lists- The emerging markets, and their leader China, is a sure bet for some of your money. After all, China has a billion or so people with a very low standard of living whose desire for more goodies guarantees the growth of their economy. With all these people moving from the farms to the cities, the infrastructure is sorely lacking and will need a continuous flow of new capital. Building this infrastructure will require a huge amount of energy and raw materials that China just doesn't have, thus a "guarantee" that basic materials and energy will continue to maintain a high price. All of this translates to an economy that is growing at over 10% a year. At least that is what we are told.
Yes there is opportunity in China, but what if these numbers being spread about are not accurate? Can we say for certain that the Chinese economy has grown at over 10%? Can we assure ourselves that it will continue to grow at this rate? The fact is that all countries have a limited ability to fully measure their GDP without a large amount of faith and a big dose of estimates. The record of accuracy in directed economies, i.e. Communism and Dictatorships, I would venture is not very good. As far as our ability to measure and verify the accuracy of the numbers that are provided to us, I will remind you of Enron and it's fully accepted accounting practices. Falling from the seventh largest US Company measured by market cap to bankruptcy, in just a few short months, is a pretty good indicator of our forensic accounting abilities.
What if the farmers are no longer moving to the cities in large numbers? What if the infrastructure is large enough now? What if the actual GDP growth of China is only 5% instead of 10%? What would happen to your portfolio?
So this year, as you sit down to review your portfolio, as you read the Top Ten Lists sent to you by your favorite gurus, as you take the efforts to make decisions on your portfolio, think of this Top One List and remember that danger lurks in places we cannot see and cannot verify.
Kendall J. Anderson, CFA
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