In June 2007, and again last summer, I had the good fortune to fly around the globe. The idea was to confirm my impressions of the world, its markets, and its people. What I found made me a better investor and a better person.
Myth No. 1: Two wheels good ...
How about we start with China, a sprawling mini-continent home to more than 1.3 billion people? If you are at all like I was, you may be picturing a bunch of Wizard of Oz-era Schwinns and pointy straw hats. And you'd be right -- 20 years ago.
Don't misunderstand: Even I knew that Shanghai and Beijing -- with its five-loop beltway -- would be overrun with cars. But if, for you, China's "smaller" second- and third-tier cities conjure images of Chinatown circa the 1906 earthquake, you're in for a shock (more on the tier-two story in a moment).
In fact, you can't help but wonder how much better off General Motors would be if it'd gotten hold of a bigger piece of this market. It 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 were big. What I didn't know is that the "smaller" tier-two cities are big, too. That is, until I had the pleasure of traveling with my colleague Tim Hanson to five of the 20 or so Chinese towns bigger than Chicago. All are vibrant, modern cities -- no doubt twice the size they were when I was there 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 silly in retrospect. I mean, maybe it's not completely insane to presume that a country that counts Coca-Cola (NYSE: KO ) and PepsiCo (NYSE: PEP ) among its top brands, and goes gaga over YUM! Brands' (NYSE: YUM ) KFC, would speak a little English. But it's not true, either.
In fact, despite an infatuation with all 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 I'm sure 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 small part of the country and knowing full well I may have this one wrong. But 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 only visited a handful of Chinese companies. And some -- for example, travel agent Ctrip.com -- are white-collar businesses. China Green Agriculture, whose massive greenhouses we toured, is a relatively hands-on agriscience business. And our visit to China Fire & Security included a tour of a full-scale factory, if a high-tech one.
To be sure, the living arrangements are not what we're used to 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 is 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 fellow traveler Tim Hanson, named them his top picks from our 2008 and 2007 research trips to China.
It may also explain why one stock is up 100%. The other has already quadrupled in less than a year -- not only outperforming highly touted U.S. stocks such as ExxonMobil (NYSE: XOM ) , IBM (NYSE: IBM ) , and everybody's darling Goldman Sachs (NYSE: GS ) , but China's celebrated winners Baidu.com and CNOOC as well.
Of this I have no doubt whatsoever: Disproving my No. 5 China myth -- my idiotic notion that Americans aren't welcome there -- was a pure pleasure. 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, 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 400%, respectively. That's what got me thinking about this column.
Unfortunately, I couldn't make the trip this year. But Tim and his team just returned from China, where he traveled the country's rural heartland, visiting companies and searching for the next China Fire, China Green Agriculture, or other three-digit gainer. I think he's found it.
It's an even smaller agricultural products distributor with a remarkable marketing machine that's reminiscent of Home Depot's (NYSE: HD ) expansion in the U.S. According to Tim, this company may have even more potential than China Green Agriculture -- last year's triple.
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This article was first published July 10, 2009. It has been updated.
Fool writer Paul Elliott does not owns shares of any of the companies mentioned in this article. Ctrip is a Motley Fool Hidden Gems recommendation. Coca-Cola and Home Depot are Inside Value recommendations. China Green Agriculture and CNOOC are Global Gains selections. Baidu.com is a Rule Breakers pick. Coca-Cola and PepsiCo are Income Investor choices. You can see the entire Global Gains scorecard with your free trial. The Motley Fool has a disclosure policy.