Needle in a haystack?
I'm a firm believer in the value of first-hand experience, which is why I spend some 250+ days a year circling the globe to uncover companies that meet our quality criteria. No matter where we are looking to invest, the first step is research-and we do a lot of it. We have to confirm foreign exchange is available and look for a good global custodian.
Our research starts with a bottom- up approach, analysing each individual stock. Who owns and controls the company, how does it operate and in what markets? The balance sheets have to be audited. We like to see statements going back five years so we can analyse them and make our projections five years out in time.
We try to get to know not only the management, but also the employees. We do a lot of factory visits too, so we can see things going on outside the boardrooms and gain a better understanding of the production processes. I also like to talk to people living and working in a country to get a sense of their lives and their views of the economy. Often, local people can offer you insights about a company-or a country-that you won't find in a glossy brochure.
Corporate governance is a very, very important issue for us, because we want to assure the interests of shareholders are being addressed. So one of the first things we look for is a strong culture and ethical conduct; we won't invest if we perceive there to be any impropriety or hints of corruption. We conduct analysis of ownership structures, the management team's track record, the company's corporate governance history and its commitment to creating shareholder value. We look for managers who know the business well and have experience in a given field. They should be properly motivated through incentives such as stock options on shares of the company they manage. We also pay attention to management's ability to cope with a rapidly changing business environment.
Of course, there are always risks, and not all companies can survive crisis periods. Vetting processes aren't perfect. But, with experience, you try not to repeat the same mistakes twice.
Successful investing is not only about picking the right stocks, but also finding values others may not recognise. During market downturns many stocks can be cheap, but if there is no future growth potential, than that stock could be considered a value trap. If a company is inexpensive and growing (and our earnings projections for it look good), then there can be a good case to invest.
Patience and a willingness to go against the crowd mentality is a very difficult thing for most investors to do, but we believe it is critical as a long- term investor.
One issue I'm often asked about is liquidity, which is particularly important when investing in frontier markets, where, in some cases, liquidity is very low and you may have to wait a long time to buy the stock and gradually build a position. The disadvantage is that when you want to get out, you may not be able to do so. The advantage is that if it's a good company and other buyers want it, they often are willing to pay you a premium.
Obviously the world is a big place with a variety of countries, cultures, languages and industries. But no matter where they live, people are still people. Gaining an insight into the hopes and desires of the people who live and work in the counties we invest in, we think, is really the secret to global investing. By examining not only the statistics, but also the motivation of the management and owners of companies, we can then join with them in seeking to achieve their goals.
Mark Mobius, Executive Chairman, Templeton Emerging Markets Group.
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