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Announcer: Live from the Internet, it’s Tradestreaming Radio, with your host, Tradestreaming.com’s own Zack Miller.
Zack: Hey, this is Zack Miller and you’re listening to Tradestreaming Radio, our place on the Internet where investors learn directly from experts. We’ve got a great show today. We’ve got Jeffrey Towson, the author of “What Would Benjamin Graham Do Now?” Towson was Head of Direct Investments, Asia Pacific and Middle East for Prince Waleed of Saudi Arabia, who is the world’s fourth wealthiest person. He manages a portfolio of over $22 billion, and Towson worked for him for many years, having grown up in the States. Lived overseas and was very much involved in direct investments, buying up properties, investing directly into companies.
His book is a really interesting take, because for many years, obviously, U.S. investors have recognized that there is the rest of the world, and it’s getting more and more interesting. Unfortunately, the way we do it is somewhat, according to Towson, very contorted. Buying a multinational that has exposure to the Middle East is one way to play this game, but obviously not the best. So, in his book, he lays out sort of a framework for investors of any sort, whether they’re retirement investors or professional investors, private equity guys, hedge fund managers, who really want to understand and learn from a framework of how to do business in the Far East. He lays it out in this book.
It’s a very good book. The book, in fact, is probably more suited for the classroom, but it was a very informative read. Lots of interesting anecdotes, and to me, the most interesting thing about the entire enterprise is how Waleed grew his business from a $30,000 loan from his father into a $22 billion investment portfolio, really with two or three staff. It’s a bare bones operation, yet he has his hands in investments all over the world. Being able to understand that model, to me, was really one of the most interesting takeaways from this book.
So let me know what you think. You can find this podcast on iTunes. You can also find this podcast on my website, Tradestreaming.com. We have archives there as well. Hopefully, we’ll throw up a transcript in the next few days. Drop by, let us know what you think, and we’ll speak to you soon.
Jeffrey: Hello, Zack.
Zack: Where are you based in the States?
Jeffrey: New York.
Jeffrey: It’s usually New York, Shanghai and then Dubai, Riyadh is the sort of normal commute.
Zack: Okay. Are you representing your own concerns, or you’re helping other people? What are you doing currently?
Jeffrey: It’s a bit of a transition. I was sort of one of Prince Waleed’s guys for a long time, and then I transitioned out of that to helping other Middle Eastern investors, which is kind of a natural . . .
Zack: Okay. Are there many?
Jeffrey: Yeah, I mean, everybody knows Waleed.
Jeffrey: But there are hundreds of people with as much money as him that you’ve never heard of.
Jeffrey: So that was kind of a nice natural transition for me. So now it’s a mix. It’s half my own concerns and half helping the . . . and the difference between them and Waleed is, honestly, Waleed doesn’t need anybody.
Jeffrey: If he wants to do banks, he calls up Sandy Weill, but the others don’t have his reach.
Jeffrey: So it’s actually a pretty nice position, and it’s about 50/50 right now. I suspect in a couple of years, it’s going to be much less.
Zack: What about representing U.S. based firms trying to invest into the Middle East?
Jeffrey: Yeah, I think that’s long term. I think that’s long term the best position to be in, and that’s what we’re doing is you sit between the developed and the developing economies.
Zack: Right, you’re the bridge.
Jeffrey: And that’s kind of a moving . . . what is valuable in that space is a little bit of a moving target. You go to China now, Carlyle’s pretty good in China now. That wasn’t the case three to four years ago. So, some of the major firms, the institutionals are doing better than they used to. Remember five years ago there were a handful of us out there. Now, the institutionals are doing pretty well. But for all the attention they get, 95% of American business is not famous names. It’s regular investment firms, family offices in Ohio and Nevada. Similar to the Waleed and the other prince scenario, they don’t have the reach of those big guys. So, it’s really actually kind of a pleasure to work with them.
Jeffrey: And I came at it very weird because in most cases it’s a western person who’s going abroad. I’m one of the few that came from there here.
Jeffrey: Like I started on the other end of the coin, like the other end of the spectrum.
Zack: There’s obviously value there, I think. The fact that you’ve cut your teeth over there provides a different perspective, I think.
Jeffrey: Yeah. I find really the beauty of it, which was totally unintentional. I’ll take credit for it, but it was totally unintentional. It’s very difficult to really understand a place like China or the Middle East, if you haven’t lived there and just done deals for a long time. It’s very hard to get to that level of comfort by flying in, reading reports. You kind of got to suck it up and spend a good 5 to 10 years on the ground. It’s very hard to replicate that, unless you’re willing to do it. Some people are, but yeah, it’s surprisingly durable and sort of a unique experience.
Jeffrey: Especially somewhere like the Middle East.
Zack: For sure. But it’s interesting.
Jeffrey: China’s a little funky, but Saudi’s really out there.
Zack: I don’t know if I mentioned it before, but I’m actually calling you from Israel.
Jeffrey: Oh, yeah.
Zack: Yeah, so we’ve had this natural gas find, which sort of surprised everybody here. It’s interesting watching the U.S. based firms position themselves to get that business now. Because the government plays such a big role in sort of parceling out that business, I could see them sort of fumbling over themselves to try to figure out exactly how it works over here. Israel’s probably a lot more accessible than Saudi, I would assume.
Jeffrey: No, it’s about the same.
Jeffrey: The thing that throws the westerners, like it’s one of a couple of things. Like Israel, you’re going to have rule of law, contracts are going to mean something. It’s going to be a lot more comfortable than say China or Russia. But the other one I find that particularly Americans have trouble with is this idea that government is not the exception in many industries. It’s the rule.
Jeffrey: It’s not like an aberrant thing. If you’re doing natural gas in Israel, which I don’t know much about, I assume that’s all government all the time.
Zack: Yeah, I would assume so, also.
Jeffrey: And that’s a good half of China. It’s a good half or 70% of Saudi. And this idea that like that’s okay. It’s not some long tail risk you got to avoid, which is how I’m kind of seeing here a lot. I wrote about this in my book in a sort of simplistic way. But look, these are naturally political markets, and they’re always going to be that way. If you boil water in China or natural gas in Israel, there’s never going to be a private sector. It’s not heavily . . . it’s too strategic.
Jeffrey: And as you get into smaller countries, I find that those issues . . . like go to Singapore, go to Dubai. The whole country is like a company almost.
Jeffrey: It’s not like there’s a private sector and the government. The government is like a private equity shop almost. Dubai is like a big private equity firm, which actually makes it really easy to do deals, I find.
Zack: That’s interesting.
Jeffrey: Well, you sit down with them and they’ve got business plans. It’s kind of convenient actually.
Zack: So, after our last call, we had trouble with the audio and stuff like that. I went back and listened to it. It was spotty, quite spotty, even in the meat of the conversation. Do you mind if we end up – and I apologize about this – but like just going back and starting over?
Jeffrey: No, no. That was all me last week, I think. That was . . .
Zack: Hard to tell where it originated.
Jeffrey: Yeah, I was at [Guiyang], China.
Zack: Okay. Well, we’ll blame it on you. Again, I’m thinking I’d like to try to squeeze it into a 25 minute or so session. So if we could sort of hit on the big points. If you could start out by describing your background and sort of the thesis of your book, we’ll start to drill down from there.
Jeffrey: I was in financial services out of New York. Basically, I was a mathematician dabbling in business still trying to find my way a little bit. This was back in 1999, the tech bubble. I was on my way down to become an equity researcher, and then Prince Waleed randomly hired my company, totally unintentional. I’m taking credit for it, but it’s completely unintentional. I was sort of fascinated that this guy had three staff. That was it. Actually, it was just two at that point, two and an accountant, and then he had a bunch of good administrative staff. But really just two people in this tiny little office on a side street in Riyadh. You would drive past it and you would have thought it was a little rinky-dink real estate shop. It was between an empty field and a supermarket.
This guy was 49. He was the fourth richest person in the world. He basically took a $300,000 loan from his father and turned it into $28 billion. The largest foreign investor in the United States, the largest investor in the Middle East, the largest owner of media, after Rupert Murdoch. I got fixated on this question of, how did this guy do it with only two staff? It’s a crazy story. So I ended up joining him for a couple of months, which ended up to be about nine years.
Zack: That’s a few months.
Jeffrey: Yeah, well, he’s a hard guy to say no to. He’s an unbelievably good deal maker. Back then, going to the Middle East was pretty crazy. This was before Dubai. I used to do turnarounds in Dubai for him, and Dubai was nothing at that point. There was nowhere to eat lunch. It was all deserts. There were no financial firms, no major western firms there, and that was Dubai, let alone Saudi Arabia. Nobody went to Saudi Arabia back then. Now, you’ve got every major financial firm and bank in the world trying to open office space there. So that turned out to be real lucky, because I kind of cut my teeth as an investor in emerging markets before anywhere else, and that turned out to be a fairly useful skill. Then I shifted out to China about four years later and ended up commuting between Riyadh and Shanghai for four to five years for him.
So, it was a little bit sporadic, but it turned out to be a really good place. I don’t group all the developing economies together. I think it’s not a great way to think about it. I think China’s phenomenal. The Middle East is absolutely spectacular, in many ways much better than China and then second some of the BRICs. But for me, the most developing economies are still China and the peripheral Asian impact of that and the Middle East. I still think that’s 80% of what I care about in developing economies.
Zack: Before we drill down into exactly the meat of the book and sort of the Waleed model, I have a question. I’m just curious. Is the book intended for individual investors? Is this the type of thing that somebody sitting in Ohio with his retirement and his IRA can start to be a global investor?
Jeffrey: Yeah, it’s basically a how-to book, but it’s a little bit of a mix. In Chapter 12, there’s one simple chart, which I don’t know why I buried it in Chapter 12, it should have been on page one, which basically shows if you’re sitting in the West, U.S., Europe, wherever you are, there are about nine strategies that . . . the book is not about how do you invest in the emerging markets or development. It’s how do you do that as a foreigner in the West. It’s not this idea you’re going to move to China and live there. It’s how do you do it sitting in New York. On that little chart, there are about nine strategies.
The first strategy is going to multinationals that have good exposure. This is Tom Russo doing value investing out of Pennsylvania. Another one is go for direct acquisitions of listed companies. This is Warren Buffett buying PetroChina and BYD in China.
Number three is go in and buy a company on its knees. This is Sam Zell going into Brazil from Chicago. It works the other way too. This is Waleed coming from Saudi Arabia and buying Citigroup on its knees in 1991.
So there are basically nine strategies, and some are clearly easier for big people with institutional power. Others are . . . I’m half in and half out at this point. I’m half on this sort of big boy platform like I was, and then I’m half doing my own, which are small stock picking deals out of Shenzhen. There’s no reason this can’t be done by anybody. But it does focus a lot more on private transactions, as opposed to stock picking, just because I felt the stock picking was already well explained by other people. So it does have a sort of bias on that side.
Zack: So can we start to drill down and define the Waleed model that you were a witness to over the past nine years?
Jeffrey: Basically, in terms of the book, the book is really simple. It’s only two things. It’s one important question and then one workable answer to that, not the only answer, but one workable answer. The question is, if all of this – China, Israel, Russia – if this is all part of the future, you can’t avoid this anymore. You can’t be a big investor in this world and just not be part of this. It’s harder and harder every single year, but these are fundamentally different systems. The rule of law is not coming to China. Government is part of every equation. There are a lot of uncertainties. That’s sort of the defining characteristic of these economies is there are a lot of uncertainties. There’s no governance. There’s no minority shareholder rights.
How do you as a foreigner go long in an environment like that? It’s easy to go short. You come in, you buy, you sell, you’re out of there. But if you look at the Buffetts and the Waleeds, that’s not how you make wealth over the long term is you have to buy and hold and ride the economic value up. So, how do you go long as a foreigner in environments that are inherently unstable? If you can crack that question, you can go to Africa. You can go to Israel. You can go to Russia. You can go wherever you want. So that was sort of the key question. Then I put one answer to that, which is pretty much 70% what I’ve seen Waleed do and 30% what I have done and I’ve seen others like Buffett do. That’s the strategy of the book. There are like nine tactics, a playbook I call it, that lets you go long in these sorts of environments.
The trick is not to go buy a company in China and sell it after six months because you’re nervous. The point is to go in and buy that company and hold it for five years as it rises. But that becomes harder and harder to do the more uncertain an environment is. So that’s kind of the whole point of the book is how do you go long? How do you go long in Russia as a foreigner?
Zack: So let’s take an example. Let’s talk about China. Can you talk about how you’d advise somebody to go in and do that?
Jeffrey: Well, let’s take the most natural first step. If you’re a stock picker in Ohio, the most natural first step is sort of what Tom Russo and these folks have been doing for 20 years is you look for multinationals with good exposure to the developing economies. Retail products, tobacco, alcohol, those things tend to be fairly successful with this approach. You basically capture the growth, but you avoid all the inherent problems, because you’re ultimately not buying a Chinese company. You’re buying a, let’s say, German company.
You’ve got rule of law on your side. You’ve got contract rights. So you’re capturing the economic value, but you’re avoiding a lot of these governance rule of law. Then it turns out the government of China or Russia, they’re not that concerned with Starbucks. So those sorts of retail products avoid alliance and problems, and that’s kind of been a pretty solid strategy for people for a good 20 years.
Now, I would argue that this strategy is so conspicuously contorted. It’s like, could there be a less direct way to go into investing in China than buying some European multinational with exposure there? It’s like saying I’m going to go into Texas. I love Texas, so I’m going to buy . . . I’m only going to look for Idaho firms that are there. It’s like that fundamental question of how you go long. It’s clearly a way of avoiding that question.
Zack: Well, it’s an imperfect proxy, right?
Jeffrey: Yeah, it’s conspicuously contorted. I think it shows that the investors are really uncomfortable with this, and they’re stretching themselves in a twister-like fashion to get around this problem in a way you would never do here. If you were in New York and you wanted to buy a Virginia firm, you’d go buy the Virginia firm. There’d be none of this crazy, twister-like posture. You just go buy it.
Jeffrey: So I’m sort of arguing like that. That’s really conspicuous. That tells you that your strategy’s not working when you start stretching yourself so obviously. Your strategy’s not working.
Zack: Okay. So maybe the investor’s gotten beyond saying the typical, “Let’s buy Philip Morris for exposure into Asia. Let’s get something more direct, something more juicy.”
Jeffrey: I think long term, if China is the number two economy in the world, how can you be an investor and not be able to buy Chinese firms?
Jeffrey: Really, you’re just going to look for the handful of multinationals. China’s number two in the world. You have to learn how to buy Chinese companies. There’s no way around that.
Zack: Some of these economies, to be fair though, to take the skeptical hat, to put the skeptical hat on, a lot of them sort of began in the early stages with capital controls making it hard for outsiders to invest. Right?
Jeffrey: Yeah, but that’s not . . .
Zack: That’s a legacy thing.
Jeffrey: Yeah. The beauty of this whole system is . . . Warren Buffett, you don’t have to swing at every pitch. 2010, the U.S. is in recession. Shenzhen opens its new small and mid-cap company exchange. In the first six months of that year, while the U.S. was in trouble, a hundred companies went public in Shenzhen. You don’t have to swing at all of them. There are so many companies coming out of India, Russia, maybe not as much Russia, India, Brazil, China, the Middle East. It’s a sea of companies and they’re all mispriced. Nobody talks about efficient markets in Saudi. The price is just swinging wildly. It’s a value investor’s dream. You don’t have to figure out how to buy all of them. You just have to have a couple workable strategies and then pick a handful. So multinationals are good. I just think it’s a little overplayed. It works fine. I do this as well. But I think, ultimately, you need to be able to buy Chinese, Russian, Saudi firms directly.
Zack: How did Waleed sort of just start to dissect the world? Was he looking at sectors, then trying to find the geographies that played into them? Was he looking at the geography and then trying to find value? Where did he start?
Jeffrey: Right, he’s a great . . . there’s a chart in that book – I don’t know if I sent you the book – that compares Buffett to Waleed, and it’s the exact same philosophy. These are value people. They want $1.00 selling for $0.50, and they want that $1.00 to grow to $1.50 within five years and they’re value guys. But Buffett has really been shaped by the fact that he applied a value methodology in the American economy, and the American economy with its rule of the law and developed status, you can see that reflected in his strategy. It’s baked into it. So Buffett is the search for value. He’s hunting for Coca-Cola’s trading at 70% of its true value. He’s hunting for mispriced value. He doesn’t worry that much about actually getting the company. He can just buy it. Once he buys it, he doesn’t worry that much about it degrading or losing his claim to it, because he puts it in his portfolio.
Now, if you’re a guy like Waleed, you’re not worried about finding value, because these markets are so mispriced. You don’t have to look for little footnotes on the income statement to find that some company is mispriced by 10%. These companies are massively mispriced. This is just pure chaos in China.
Your problem is not finding value like Buffett. Your problem is getting the company, getting someone to sell you part of a company that’s probably closely held. Then if you do buy it, keeping your claim to the asset, even though the law is not going to protect you, or you’re probably a minority shareholder, so you’re going to get abused because there’s no minority shareholder. Your challenge on the Waleed side is, “How do I get the deal?” And then, “How do I secure it?” Not, “Is it mispriced?” So, the difference is Buffett placed the company. He looks for companies with mispriced value. Waleed looks for situations where he can come in as a deal maker and structure a deal that gets him access and then locks it down. One’s more of a deal maker posture, one’s more of an analyst posture.
Zack: What about the last stage though, maybe, of investing of sort of unlocking that value? Do either of those models drill down far enough to basically say that the investor helps to release that value or fix that mispricing?
Jeffrey: Well, let’s say you’re Buffett and you’re buying Coke. Right, standard value of that. It’s trading at 70% off. You buy it. You put it in your shares, in your portfolio. No problem. Now, let’s say Waleed is going into Egypt and he wants to buy a hotel in Sharm el-Sheikh. It’s on the coast. Okay. Now, Egypt is government from top to bottom. It’s political. Real estate in these economies, whether it’s India, China – I assume Israel’s the same way – very tightly held by people. This is often a source of a family’s wealth. It’s their lifeline. Maybe it’s owned by a state-owned conglomerate. Getting access to that deal is incredibly hard. Then if you do get access, the guy is only going to sell you 10%. So then you’re a minority shareholder of a private company in a no rule of law economy, otherwise known as the sucker at the table.
So, Waleed would go into a situation like that, and he would go to the owner of the old hotel in Sharm el-Sheikh and say, “I don’t want to buy 51% of your company. I understand it’s very important to you and your family. I want to buy 20%, and I’m going to bring the Four Seasons with me. And the day we buy it, we’re going to turn it into a Four Seasons, and your balance sheet’s going to get a big bump, because you’re going to get a lot of intangible value. Then at the same time your income statement is going to go up. We’re going to add real economic value the day we buy it.”
Anyone is going to say, “Sure”. That person’s going to say, “Absolutely. God bless. Come on in.” And then Waleed’s got 20% of a Four Seasons in Sharm el-Sheikh, which is the deal he did, although it wasn’t 20%. And now he doesn’t have to worry about his claim to the asset. You think that person is ever going to say, “Hey, let’s mess around with the minority shareholders”? If they ever do that, he’ll just pull the Four Seasons’ contract.
Zack: Well, Waleed – and you describe this in the book – has built, obviously, this huge global network of partners. So he has found a scalable way with him and his minimal staff to basically go in and do these types of deals. How do you build that reputational value of your capital if you don’t necessarily have that network? Or is that essential basically to go in?
Jeffrey: What he does is, if Buffett is searching for mispriced value, Waleed is searching for the opportunity to add value to people. He’s looking for someone like the owner of a hotel, where he can come in and offer a deal on the table that creates so much value for the partner that he gets access. Now, he does that, because he measures political access.
We did this project in Jeddah, which is a one mile skyscraper. It’s unbelievably tall. That was a huge piece of land in Jeddah, but he went to the king directly and said, “Look, this city is in decrepit state. Let’s build something spectacular. Here’s what we’re going to do.” He added so much value that he got a royal decree to do this. So that was sort of a political approach.
Now, for guys that aren’t like Waleed, which is all of us, I don’t have to do something like that. I can go and find a good technology company in Ohio. Let’s say they’re very good at deep sea drilling. Then I can go to a developing economy company. I don’t know, out of Singapore somewhere and say, “Let us buy into you. We’re going to bring with us the best tech that’s going to add so much value to your company.” Those sorts of capabilities, you don’t have to own them. You make a phone call. And yeah, we’re . . .
Zack: Jeffrey, Let me stop you for a second. I’m sorry, the sound is going crazy. Do you hear me okay?
Jeffrey: Yeah, I hear you.
Zack: You’re sort of like pulsating in and out. Hold on a second.
Zack: I hear this small pulse in the background.
Jeffrey: A little scratchy on my Skype, but it sounds all right.
Zack: I think I just need to reset the call. I’ll call you immediately right back.
Jeffrey: Hey, there.
Zack: Yeah, it’s fine now. I don’t know what happened. All of a sudden in the middle, it just started doing this kind of vibration thing.
Jeffrey: I think let me make one last point, and then I’ll get off this. If you start with a posture of adding value to your partner or to the company, you can do that in a thousand ways. It can be reputation. It can be political access. It can be money. Money is a type of value. It can be technology. It can be brand. It can be foreign customers. If you think about the posture, you look at the developing economies from 30,000 feet, they’re defining characteristic is they’re developing. They’re advancing. They’re going from hutongs to apartment buildings, from bicycles to scooters. So it’s a much more logical posture for that sort of developing situation to, “Look, we’re going to help you move along the development curve.” It’s just a more natural play than, “We’re going to buy a mispriced value.”
Zack: This sounds to me like the successful person that you’re describing. A successful global investor reminds me more of a next generation investment banker, than it would necessarily like a typical value investor.
Jeffrey: Yeah, it’s a bit of a mix. I sort of paint it in broad strokes. You could easily apply this to private equity people, the value investors. I mean Buffett’s a straight value investor. Waleed is mostly a value investor. You can apply this to business development executives. If you’ve got a great franchise, if you’re In-N-Out Burger . . . I don’t know if people need to eat In-N-Out burgers, but you’ll see In-N-Out Burger and you’re going to go into India and open a thousand stores. Buffett’s been trying to buy In-N-Out Burger for 20 years. If you’re going to be the development head for that company and go into India, why wouldn’t you invest? If they’re dying to have you, why wouldn’t you invest as well as open the stores? So I kind of painted a fairly broad brush.
Now, in practice, I spend 90% of my time just cutting deals and using money, and not bringing in tech that much, but both work. Obviously, Buffett is a pure . . . if you look at what Waleed does, he’s still two or three guys in an office. So that means he’s still primarily a deal maker. There are no operations going on. It’s still the cut the deal, make the investment.
Zack: You started to enumerated earlier in the interview a couple of what you thought were the most prime destinations right now. Can you just talk about a couple of those?
Jeffrey: Yeah, I was giving a conference end of last year, and I think it was like a BRIC investing conference, and it turned into a China conference. It was kind of Henry Kravitz, and everyone’s talking China.
Maybe just to be a little contrary, I said, “Why are we thinking about China? What is the . . . it’s overvalued. What is this great urgency to go there this year? I’m far more interested in somewhere like Macao and Qatar this year than I am in China.” Now, there are parts of China I like. I like Qing Ming. I like some of the western side, but Shanghai and Beijing, there’s too much money floating around there right now. Qatar, it’s like Israel. You got natural gas all over the place. And not only do they have this booming economy, they don’t have that many skills. There’s not a lot of deep bench of management and investment strength there yet, so it’s a nice environment.
A buddy of mine started a company a couple of years ago called SinoLatin, and he opened offices in Latin America and Shanghai. He does resource deals between Chinese state-owned enterprises and various businesses in Latin America, and he’s doing spectacularly well. If you hunt for those sorts of areas that people aren’t paying that much attention to. If you’re flying in to have a good real estate in Beijing, forget it. That’s like going to Ghana or Kenya and saying, “I’m going to do long distance running.” It terrifies me. I won’t do real estate in Beijing or Shanghai. It’s hyper competitive. It’s insane. But Qatar is great. Macao is spectacular right now. I have another friend who started a company in Macao doing early-stage investments. He’s doing amazingly well. So, I think China’s a little bit of a fad at the moment. I’m hoping it crashes.
Zack: You hope it crashes so you can get back in?
Jeffrey: Well, I’m there. I mean, I live there basically, but yeah, I’m focused elsewhere right now. Saudi Arabia, look at Saudi Arabia. This year everyone talks about Libya. Libya’s in trouble. Egypt has had problems. The net result of all the unrest in the Middle East is that Saudi Arabia’s got the biggest economic boom it’s had in about six years. The GDP has gone up 6%, because it turns out when people in the Middle East get nervous, the price of oil goes up. When Libya takes its oil facilities offline, the only country with spare capacity that it can make up for that is Saudi. So, the oil revenue is just flooding into Saudi Arabia right now. The last time Saudi had a boom like this was probably 2005, when the stock market doubled in 18 months. For the Saudis, it’s boom times right now.
Zack: One question, I like to end the interviews with this, and something we ask all of the participants on the show. What do you read typically to stay abreast of all the material that’s impactful for your investment career? Either online or offline sources you come back to you, you find of value?
Jeffrey: Yeah, I’m probably a little different than most on this. I don’t find most of the standard value investing thinking that helpful. The stuff that maybe is more useful is there’s a group in Saudi Arabia called Jaqua, which is the first securities firm there. It does very good research. There’s a handful of newsletters out of China that I read.
Zack: Any that you can name?
Jeffrey: They’re all in Chinese, unfortunately.
Zack: Not a help.
Jeffrey: Well, the truth is, most westerners looking at China are reading The Wall Street Journal. The days of that being enough are over. You kind of got to get someone to translate the local stuff where you can go in and read it. It’s just too many people read that. Then I sort of read the standard books over and over, the standard value investing text, the Joel Greenblatt and Fritz Greenwald and all that.
But I spend most of my time reading local Middle Eastern reports from local investment companies like Jaqua, [inaudible 35:40] If you look them up, they write stuff with Wharton on the Middle East that’s very, very good. And then in China, it’s almost all Chinese blogs at this point. I’ve stopped reading most of the major trades.
Zack: I guess that’s just a segue into my last question. So do you need to be fluent in the local language? It sounds like you have some proficiency, obviously, in Mandarin.
Jeffrey: Middle East, no. English is fine. Obviously, India, English is fine. The days of westerners flying into China with translators and money are almost over. It’s going to be in another couple of years, you can’t do business in China without speaking Chinese any more than you could do business in the U.S. without speaking English. You can do it, but you’ll be at a disadvantage.
It’s not that hard. Anyone who wants to learn Chinese, it takes two years. You just hire someone and there are a billion people that speak it, so it’s pretty easy to find a teacher. So it takes two years. But I think the days of that . . . now, if you’re in a technology field, it’s a little different, because you’re bringing something to the table. But if you’re a straight investor with money and knowledge, you’re going to be more and more at a disadvantage, I think, long term. It is hard to do. Look at all the reverse Chinese mergers.
Jeffrey: Look at this Jasco.
Jeffrey: A lot of this happens because you’ve got these firms listed in the U.S., the accounting firms, the auditing firms, they’re all here. People are on the ground in China doing your typical scuttlebutt type research, talking to customers and competitors. You would have picked this stuff up really early on.
I think that has a lot to do with the geography and the cultural difference and the language gap that this happened, and these weren’t little frauds. It wasn’t like they were lying about their numbers like 20%. They were saying, “Oh, we have $150 million in revenue,” and they had $1 million. The scale of the fraud is so big, that there’s something about the investment process that is clearly broken down. You would have picked the stuff up. If you were on the ground in Wuhan looking at these companies, you would have noticed, oh, the factory’s empty. That’s funny. So I think the days of that are probably coming to an end.
Zack: Okay. Jeff, this was a great conversation, and we’ll end it here. I’ll link to the book, and I think that there was a website also associated with the book?
Jeffrey: Yeah, just my name, Jeff Towson.
Zack: Okay. So I’ll link to all of that stuff and tell people where they can find it. I really appreciate your time. This was a fantastic interview.
Even more resources
Jeffrey: No, I appreciate it. Please keep in touch.
Zack: Okay. Good luck with the book.
Jeffrey: Great, thanks.