You May Have This One Wrong -- Here's Why

If you're like me, you probably think you've got it pretty much figured out -- the stuff that matters, anyway. But just in case, I hope you'll take a moment and read on.

In June 2007, and again this time last year, I was shoved aboard a plane and dragged around the globe. The idea was to test my impressions of the world, its markets, and most importantly, its people. What I found made me a better investor and a better person.

Myth No. 1: Two wheels good …
For reasons you will soon find apparent, I'd like to focus today on China, a sprawling mini-continent home to more than 1.3 billion people. If you are like I was, you're probably thinking "Man, that's a lot of Wizard of Oz-era Schwinns and pointy straw hats." And you'd be right -- 10 years ago.

Now it's a lot of cars. Don't misunderstand: Even I knew that Shanghai and Beijing -- with its five-loop beltway -- would be a Jiffy Lube paradise. But if, for you, China's "smaller" second- and even third-tier cities conjured images of Chinatown circa the 1906 earthquake, you're in for a shock (more on the tier-two story in a moment).

In fact, in light of recent events, you can't help but wonder how much better off General Motors or Ford (NYSE: F  ) would be if they'd gotten hold of a bigger piece of this market. It physically pained me to discover that, beyond the occasional Ford Focus and Toyota Camry, Volkswagen has all but cornered China's second- and third-tier markets. Or so it appeared to one American on the street in Shenzhen.

Myth No. 2: Small towns are small
Again, I knew Shanghai and Beijing would be big. What I didn't know is that the "smaller" tier-two cities are big, too. That is, until I had the pleasure of visiting five of the 20 or so Chinese towns bigger than Chicago. All are vibrant, modern cities -- no doubt twice the size they were this time last year -- my favorite being Xi'an, with its uncanny city wall.

Xi'an is also where I put to rest myths No. 3 and No. 4. The first seems a little silly in retrospect. I mean, maybe it's not completely insane to presume that a city home to IBM (NYSE: IBM  ) , Intel (Nasdaq: INTC  ) , and Applied Materials (Nasdaq: AMAT  ) , among other Western technology giants, would speak a little English -- the so-called international language of science. But it's not true, either.

In fact, despite an infatuation with things Western, I doubt China's burgeoning middle class ever will adopt English as a second or "business" language. I don't think they'll need to. Just as it's clear that China's top businesses won't always rely on exports and massive trade surpluses -- for instance, the three we'll discuss just below.

And now for a delicate point …
I mention my fourth observation cautiously -- having seen a tiny part of the country and knowing full well I may have this one wrong. But perhaps my biggest surprise was the apparent loyalty and buoyancy of the workers I encountered. I'm not sure what I expected, but these were not the ground-down, discouraged, and exploited laborers I'd read and heard so much about.

True, I visited a relative handful of Chinese companies. And some -- for example, travel agent (Nasdaq: CTRP  ) -- are admittedly white-collar businesses. China Green Agriculture (NYSE: CGA  ) , whose massive greenhouses we toured, is a relatively hands-on agri-science business, however. And our visit to China Fire & Security (Nasdaq: CFSG  ) included a tour of a full-scale factory, albeit a high-tech one.

To be sure, the living arrangements seem at odds with what we know here in the United States. Often, the workers, mostly young men and women from the countryside, live in dormitories on campus. But my impression is that they were happily employed, even happy to be there. They certainly are friendly -- and sure love their basketball.

Of this I have no doubt
Again, I know that human rights remains a challenge in China, and I have no illusion that all companies are as pleasant to work for as Ctrip, China Green Agriculture, and China Fire. Clearly, these three companies stand out among China's best. Which is a big part of why my colleague, global investing expert and Motley Fool Global Gains co-advisor Tim Hanson, named them his top picks from our 2008 and 2007 research trips to China, respectively.

It may also explain why one stock is up 100% and the other has already tripled in less than a year. Of this I have no doubt whatsoever: Disproving my No. 5 China myth -- my idiotic notion that Americans aren't welcome there -- was pure pleasure. Having visited no less than half a dozen of China's cities, I can assure you that nothing could be further from the truth.

The people I met across China are among the most gracious and friendly I've met outside of Iowa. And this from a guy who accepted more than one dinner invitation with the awkward confession that "I won't likely eat anything with a head on it." (I feel oddly homesick just writing this column.)

The best China idea out there
But this is an article about investing, after all. As I mentioned earlier, my colleague Tim Hanson and I returned from our research trips to China in 2007 and 2008 with actionable investment ideas that are now up 100% and more than 200%, respectively. That's what got me thinking about this column today.

Unfortunately, I couldn't make the research trip this year. But Tim landed in Shanghai a few days ago. He wasn't in Shanghai long; this year he and his team plan to spend most of their time traveling across China's rural heartland, visiting companies and searching for the next China Fire, China Green Agriculture, or other three-digit gainer. I have a suspicion he'll find it.

If you'd like to hear about Tim's No. 1 China stock for 2009, here's how to do it. Click the link below and sample Tim Hanson's global stock research for 30 days absolutely free. That way, you're automatically set up to receive his dispatches live from the road in China. You'll also be the first to hear about his top China stock for 2009.

I just received Tim's second dispatch and will be following along avidly over the next two weeks. Even without the stock ideas, reading the dispatches is a blast. If you're interested in joining along and being among the first to receive Tim Hanson's top China stock for 2009, simply click here now.

Fool writer Paul Elliott doesn't own shares of any stocks mentioned. Ctrip is a Hidden Gems recommendation. China Green Agriculture is a Motley Fool Global Gains selection. Intel is an Inside Value selection. You can see the entire Global Gains scorecard with your free trial. The Motley Fool owns covered calls of Intel and has a disclosure policy.

Read/Post Comments (26) | Recommend This Article (82)

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  • Report this Comment On July 10, 2009, at 2:32 PM, prose976 wrote:

    What you say is true, but let's not overlook the obvious. China has built a moder peasant society, where the majority of its workforce are "happy" to receive the crumbs from the King's table. They or happy or they are living on the street or worse. Who wouldn't be happy when the next step is abject poverty.

    China's economy runs on the backs of its modern peasant class, and it can never flourish as the world expects it to until the masses are allowed to dream, to reach beyond their borders and to access information freely. In order to sustain China's "utopian" society, the masses must remain as working wards of the state.

    It is a little naive to say that these people are truly happy until they actually have free will to choose their own destinies beyond the destinies the state has already chosen for them. Business will boom, no doubt, but it will be on the backs of the kept peasantry.

    Capitalism, democracy, even socialism have no place in their society (except for their elite) if their economic "miracle" is to continue along its path.

    The recent protest was put down with deadly force. This is the real China. As long as you stay quiet and do as we say, everything will be fine. How dare the comrades actual disagree with anything the fine and all-knowing benevolent rulers have declared.

    China's system is a farce - albeit a very attractive one for investors.

  • Report this Comment On July 10, 2009, at 4:55 PM, XMFRael wrote:

    On some level, I'm tempted to agree with you. Then, I wonder if everything you describe about China doesn't apply equally to the US -- certainly it did when we were a developing nation.

    John Kenneth Galbraith makes the case that at some point corporations took over the dirty work for the govt. in what he describes as the US "planning" state.

    Whatever the case, it's hard to argue that US workers -- especially the less affluent -- choose their own destinies.

    That said, I hope human/worker rights keep improving in China -- but I don't know that centralized/single party government is the real issue.

  • Report this Comment On July 10, 2009, at 5:57 PM, DinkSinger wrote:

    The situation for the peasants working in China's factories is similar to that of Black South Africans under apartheid. They are only allowed to live near a city in company provided housing. If they loss the job, they must return to the rural village they left.

    China has largely financed their "economic miracle" by totaling abandoning the peasant glass. Back before the Communists decided to follow a capitalist model the peasants received free public healthcare and education. Today that "wasteful" spending has been eliminated. I think a big part of what happened is that the Chinese learned all they know about capitalism from reading Karl Marx, who said capitalism can only be successful if the workers are exploited.

  • Report this Comment On July 10, 2009, at 5:58 PM, DinkSinger wrote:

    class not glass. sorry.

  • Report this Comment On July 10, 2009, at 7:51 PM, dad2be wrote:

    This was pretty selective reporting. It has not been a consistent ride up for both these stocks. I like them but China Fire was at 18.00 21 months ago and now it is at 12.00.

  • Report this Comment On July 10, 2009, at 8:29 PM, NoMoeMoney wrote:

    You know, you hear about how wonderful China will be for investing and that they have billions of consumers waiting to spend money and investors are clamoring to jump on the China wagon. This may be true but all I see China as, is nothing more than a massive leveraged ETF (x3). Looks like it could generate huge profits but is nothing more than a shell game. Didn't one of their provenances just have a big riot where hundreds were killed? I guess since they have billions of happy contented labor bots then a few hundred dead is of little news. Sometimes its the small things that determines the fate of others, in life and investing.

  • Report this Comment On July 10, 2009, at 9:32 PM, XMFRael wrote:

    Again... i don't disagree. But let's be fair...

    On March 25, 1911, a fire, which broke out on the top floors of the 10-story Asch Building in lower Manhattan, New York, killed 146 of the 500 employees of the Triangle Shirtwaist Company in one of the worst industrial disasters in the nation's history.

    Reminds me of the recent carbon debates. Sometimes we forget how we got where we are. The US was a good investment in 1911... and a good place to work and live today.

    A shell game. Maybe. But that may be another discussion altogether.

  • Report this Comment On July 11, 2009, at 3:53 PM, wuff3t wrote:


    I echo your sentiments. The names of political systems are semantic functions. The truth is you're either rich, poor, or somewhere "in-between". The only real goal of any society is to make those in the "in-between" group think they have a chance of breaking into the "rich" group. As long as the ruling group can keep that balance they're okay.

  • Report this Comment On July 11, 2009, at 7:26 PM, thisislabor wrote:

    you know, I hate to analyze it so superficially, but if you walk the city streets and talk to citizens and they look like they're happy, work like they're happy, and tell you that they're happy.... then must be happy, right?

    if looks like, walks like, and talks like a duck?

  • Report this Comment On July 11, 2009, at 8:52 PM, InvestorKong wrote:

    TMFRael -

    First of all, thanks for the thoughtful article. You made me think. Second, what does Rael stand for it reALly a simple misspelling?

    I would like to hear how you think China will profit in light of the forecast that says exports from developed countries will fall 14% this year. China is getting hammered with tariff increases and suits.

    This retraction and rise in protectionism needs to be dealt with in order for a global economic recovery to take place....

    I worry there are may land mines that cant be seen in the far east......

  • Report this Comment On July 12, 2009, at 10:33 AM, booyahh wrote:

    They're happy in China because their best days are ahead of them. Every year is better than the last, and their children will be better off than they are. Meanwhile, the West is declining: it's filled with a sense of entitlement and resentment. While China actually produces tangible goods and lives within its means, the US relies on financial shenanigans and debt. And debt continues to enslave the US, making it more and more likely that the long term decline will continue.

  • Report this Comment On July 12, 2009, at 11:10 AM, lebaresq wrote:

    China presents inescapable economic megatrends.

    Nation is bound to grow based on sheer numbers. In near term, they're spending accumulated trade surplus on infrastructure which in due time should benefit USA construction equipment and vehicle manufacturers helping to revive our economy and spur imports anew. (Trade imbalance could be partially redressed if Chinese appliance manufacturers were coaxed to set up assembly plants in the US as occurred with Japanese autos).

    China is currently pursuing commodities acquisitions.

    Enterprises addressing China's societal necessities (energy, sewage treatment, construction equipment, food & beverage) and suppliers should be reliable long-term winners.

  • Report this Comment On July 13, 2009, at 11:21 AM, XMFRael wrote:

    Wuff3t... you raise an interesting point that resonates with what I was thinking in response to some of the earlier posts. While I don't believe the same holds for misery or serious want/need... "happiness" does seem somewhat relative. I read somewhere of a guy driving home from work one day, totally happy, until he passes through a fancy neighborhood and sees another guy about his age in front of a house, bigger, and more expensive that his own -- suddenly, and for no good reason, our guy finds himself unsatisfied and aggitated." Is it any wonder "the man" -- be it a one-party govt. in China or a multi-national corporation in the US-- finds it so easy to control us?

    InvestorKong... I agree with you that the global downturn is going to hurt China -- for a time. Just one man's opinion, but in the end I think it will help the country focus on its massive domestic markets -- which will be a good thing in the long run. While in China, I was most impressed by the companies that are positioning themselves to serve the Chinese people -- those that depended on low production cost production for export seemed like China's past to me.

    Great discussion here.

  • Report this Comment On July 17, 2009, at 5:54 PM, Dramamine wrote:

    Given the continuing and even accelerating centrally claimed surge of growth in China, with a boom in real estate speculation, both bank lending & state stimulus skyrocketing, and the Shanghai stocks up 75% this year alone, I sense a gigantic 'bubble'. If their exports are plummeting amid our global contraction, all this apparent growth arises, as did ours, from debt. The big diff between us is that they have the potential for severe social instability due to an already sub-marginal agricultural base, with their farmers translocated as unskilled labor to urban centers. 8% growth? Bernie delivered 10%!

  • Report this Comment On July 17, 2009, at 6:46 PM, skye76 wrote:

    I heard that the economic situation isnt that great over there with unemployment rising. One thing, they would be better off to invest in improving their own country rather than continue being a cheap producer for the west. I would sense an environmental disaster looming for them otherwise.

  • Report this Comment On July 17, 2009, at 9:12 PM, tomd728 wrote: need not sense an environmental

    disaster when, in fact,there are towns in china wherein the ash and soot gnerated has every citizen

    therein wearing face masks and unable to wash clothing.

    i don't know how those conditions effect the daily production of goods if at all.the governing powers seem to care little about these issues and while this

    may seem to be an opportunity for the u.s. engineering and construction industry it ain't something that is a "next" for china.

    which brings me to a very sore point on this global view that our environmentalists insist on.

    if china,india,russia et al do not clean up their backyards all that the u.s. does with the cram down cap and trade,new emission standards,blah..blah goes for naught when one puts the global atmosphere as a major issue.....

    thank you,


  • Report this Comment On July 17, 2009, at 10:27 PM, XMFRael wrote:

    agreed that China will do well to focus on domestic production and consumption. but this will require a cultural shift -- though one that i think is happeing very quickly.

    i honestly can't speak on the environment. we all want clean air and clean water. though it seems a little dicey for us to exploit our environment and "develop" over a century to a squeaky clean financial/service/ip economy... THEN tell developing countries they don't have the right to do likewise...

    maybe we should pay developing countries to preserve their rain forests... with money we made by building railroads, exporting steel, and stripmining across or own countryside and others?

  • Report this Comment On July 17, 2009, at 10:47 PM, boogiebdgeezer wrote:

    The ash, soot and grit may blind you in China, both to the realities of the Chinese economy as well as to your precious orbs.

    From one who has been there:

    1. If in Shanghai, try a little hike from the Bund (across the river from Podong). You know, the boulevard fronting the former Western concessions, above which proudly fly PRC flags. Walk toward the port (Podong to your right across the river) about 3/4 to one mile. There's a canal. You'll smell it. That's where they load the barges that go out in the evening fully loaded with garbage. They return early in the mornings, empty. Where the hell did the garbage go? A landfill? Ha. Guess what washes up on our Northwest Hawaiian Islands and on South Big Island beaches.

    2. Then go across the river and go up to an observation deck in one of those gleaming new hotels. How far can you see? Kind of smoggy, isn't it?

    3. Try going into the interior, as I did on a study tour several years back. You'll likely find a stark difference: for example, women comprise about 85 percent of the farmers now. So where are the men? Where is the "equality"? You'll find fewer of the gleaming symbols of industrial prosperity as you head inland (other than Beijing and, yes X'ian).

    4. Is anyone reporting on the daily riots in the many provincial capitals?

    China has serious infrastructure problems. Obama may cap and trade us, but China will continue to pollute. And as for the friendly Chinese--yes, I met many friendly people, but there were some disturbing incidents as well. For example, when having dinner in an interior city with a group of mostly African-American academics, we almost had an ugly scene because some local Chinese objected to eating around foreigners (Africans?).

    Be careful where you invest. And be careful where your hosts guide you.

  • Report this Comment On July 18, 2009, at 12:33 AM, zrxman60 wrote:

    What bothers me is that we borrow money to buy things from China which we really don't need. This helps prop up the communist empire which our fathers and grandfathers fought against. What would they think now?

  • Report this Comment On July 18, 2009, at 7:01 AM, LMR366 wrote:

    I will pass on some information about China that was brought to my attention the hard way.

    If you took a cell phone with you on the trip and you turned it on anytime you were inside the borders of China – it was cloned.

    If you sync your phone and your laptop together for picture uploads, calendar updates, etc. – your computer was compromised and every bit of information you have on it is now in Chinese hands.

    If you use your laptop to interface with your company’s computer network – before you left the country, the network was penetrated and every bit of information that is vital to your company operations, trade secrets, interoffice email, etc. was delivered into Chinese hands.

    THAT is why they are so happy to see us.

  • Report this Comment On July 18, 2009, at 9:54 PM, BIGOLBrad wrote:

    What bothers me is my father and grandfather didn't fight against communism. My father fought against Nazi Germany. Now my great grandfather was from Lithuania and instead of fighting the Commies he hightailed it over to the US. So zrxman60 wear are your father and grandfather from?

    LMR366 you were very lucky to get out of China before your mind was highjacked and you turned into an assassin aimed at our black (but pink edged) President!

  • Report this Comment On July 19, 2009, at 1:04 AM, xperio wrote:

    One time, U may be glad about UR precident(the pink edged) if he focus on polution(not tobacco ban). The USA lets about 38 tonnes of quicksilver right up in the air every year(from coalfired generators), then ad the CO and other metals+the chemical industry vaste and 100 000 new molecules made, to ad in farming products. The medicine and oil industry may make alot of money(also on tobacco substitutes, they have the money for the comersials and so on), but the peoble gets ill, cant have children(or get deformed). China(the coyntry, yes) are longers/long time holders, they buy every mine and mill they can get treir hands on. Now they want a new currency. Ofcause, US ows china alot of money, they buy alot of gold. Do U see the picture. Yes, the dollar would go down, before that, they would have to change UR debt into gold or other currencies(have they done that?). Ok, they live on the same eath as we do, but dont forget they are longers.

  • Report this Comment On July 19, 2009, at 1:08 AM, xperio wrote:

    Persident, ofcause. My english. I apologize.

  • Report this Comment On July 19, 2009, at 1:21 AM, xperio wrote:

    Ok, President and the same planet:) Here in europe Turkey has just joined the tobacco ban. So it seems they like to focus on this rater than the problem. We in the west will have to do something about this before they limit our freedom of speech/isp.

  • Report this Comment On July 20, 2009, at 10:25 AM, 88woody wrote:

    It troubles me somewhat that the supposed expert on Chinese companies writing this is so naive about China, or was it faux naivety? Anyone who thinks that China is still bicycles and pointed hats is not only out of touch but bordering on racist. Don't you know that China is poised to overtake Japan as the second largest economy in the world? Don't you know that China has dozens of cities with millions of people? And none of them are twice the size of last year of course!

    I know that Americans are not always up to date with developments in the rest of the world, but someone who is touting Chinese companies who is so unaware about basic facts about the country makes you wary. Or maybe it is just lazy 'popular' journalism.

    Next time, don't bother visiting, as all of the facts you are so surprised about could be found by an intern in an hour on the web. It would save a lot of time and money, reduce carbon emissions and give someone a job.

    And as regards the happy workers, didn't it occur to you that maybe they were just happy to have a job given the downturn and the ruthless nature of Chinese capitalism where people are thrown out of work with no notice and with no unemployment pay?

  • Report this Comment On July 20, 2009, at 12:18 PM, BIGOLBrad wrote:

    Amen -- 88woody -- Amen

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