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

If you're like me, you probably think you've got it all figured out -- the important stuff, anyway. But just in case, I have a story I hope you'll take a moment to read.

In June 2007, and again one year later, I got on a plane and flew around the world. The idea was to test my ideas about the world, its markets, and its people. Along the way, I debunked five myths, making me a better investor and, I think, a better person.

Myth No. 1: Two wheels good ...
My first stop was China, a sprawling mini-continent home to more than 1.3 billion people. If you are at all like I was, you may be thinking "Man, that's a lot of Wizard of Oz-era Schwinns and pointy straw hats." And you'd be right -- 15 years ago.

Now it's a lot of cars. Don't misunderstand: I knew that Shanghai and Beijing -- with its five-loop beltway – was a thriving modern city. But if, for you, China's "smaller" second- and even 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, 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, Buick LaCrosse, and Toyota Camry, Volkswagen rules the roost in 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 cities 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 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 Ctrip.com (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 more than quadrupled in a little over a year. And of this I have no doubt whatsoever: Disproving my No. 5 China myth -- my idiotic notion that Americans aren't welcome there -- was a 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.

Tim just returned from another research trip -- this time to India. His goal was to dig up an investment opportunity that can earn you as much as his top picks from his previous research trips, including China Green Agriculture, which is up more than 500%.

I have a suspicion he's found it. If you'd like to hear more about what Tim and his team of analysts discovered on their recent research trip and get his No. 1 idea for your new money right now, here's how to do it. Click the link below and sample The Motley Fool's top global stock research for 30 days free.

Your first 30 days are absolutely free and there's no pressure or obligation to join. If you don't agree that Tim Hanson and his team are making you money, you won't pay a cent. To find out more about this special free trial, click here now.

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


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 02, 2010, at 4:21 PM, MKArch wrote:

    Paul,

    I live and work in the Atlantic City, New jersey area which was the beneficiary of a big expansion of the local casinos over most of the past decade. In fact just before the economy collapsed there was a spate of announcement and preparations for about 4-5 multi billion dollar mega casino projects.

    Except for some construction that was already under way when the stuff hit the fan all of those plans are on indefinite hold right now and given the leverage the casinos were employing during the great expansion of the past decade has bit them in the rump it's doubtful much expansion will take place anytime soon.

    Yet if I were to take you for a ride around the area it would look pretty vibrant. And if you were to visit some local businesses to talk to the people with jobs, they'd probably be fairly cheery. Does that mean the growth A.C. experienced in the past is coming back soon?

    China was the beneficiary of a mass migration of jobs to it's low cost labor force over the last decade that I posit was the major factor in it's amazing growth. It looks like that catalyst has mostly played itself out by now and even the China bulls seem to concede it's going to take a pick up in internal consumption to keep the growth going.

    Do you really think people averaging $3,500.00/ year salary living in dorms are going to replace all of the factories that were relocating to China over the last decade? I have to laugh at our treasury secretary going over to China warning them they need to convince their people to start spending money. I guess the Chinese government just flips a switch and people making $3,500.00/ raised in a culture of thrift start buying iPODs?

  • Report this Comment On January 03, 2010, at 6:11 AM, Riot5000 wrote:

    ANOTHER CRAP from MF asking losers to continue sending money and getting recommendations and UNRELETING pumping of AOB, FEED and other useless stocks they recommend.

    Any dilligent investors can do it without paying for the hype of a guy who early last year, chose DDRX as the worst company for 2009 when it traded way below $1.

  • Report this Comment On January 04, 2010, at 4:12 PM, Ironbob wrote:

    YES! Well said Riot. I can't believe this site sometimes. Does ANYONE believe that ANYONE with half a brain would think that China is bicycles and pointed hats? I mean GOOD GOD! How stupid does this guy think we are???

    On to point two! I guess us ignorant rubes out here can't figure out that over a billion people have to live somewhere! And certainly, we gots to take one of dem dar aeroplanes over to China to figure out where all them thar Chineses are a livin! Good GOD! We can figure it out using http://www.citypopulation.de/China.html

    MKarch also makes an excellent point. The major migration of jobs is over. That occurred starting in the 80s and wrapping up by 2000. There are very few jobs left to send over there.

    What the Mr. Elliot fails to mention is that China has more people then they have bullets and one day those people are going to get sick of living in dorms and making chicken feed. Don't sit there and tell me that people living in dorms and working their asses off are happy. If they are it's only because two months ago they were starving out in some rural bungalow.

    What do you think they are going to do? Complain to you when their government will basically blackjack them into submission? Hitler's death camps were able to put on a happy face whenever the Red Cross came over to investigate as well.

    So I want to thank you for an excellent article. I now know not to serve you fish with a head on it. As far as investing is concerned, I'm still waiting.

  • Report this Comment On January 08, 2010, at 5:27 PM, parcheymex wrote:

    It is reassuring to read that Americans (some anyway) are learning about world geography. I come from a generation who had to spend 25 years learning that not all communism is ipso facto wrong before learning that 1.3 billion people who are hungry will some day soon start developing. Motley Fool should reprint the history of Pres. Roosevelt being seduced by the Soong sisters til' he couldn't believe anything bad about Chang Kai Shek. And then there is the story about big Ed Healy. Not until real recent times have we taken China seriously. Personally, I think you are incorrect about China learning to speak English. But that is a detail.

    In 1962 I was passing through Tokyo, Japan and chanced to be near the Ginza at 11:30 PM (local).

    Worker's in hardhats, joking, running, hammering and welding in the bowels of downtown Tokyo. The reason: The 1964 Olympics. And they were ecstatic. Someone above commented that happy people does not an economic summertime make. Yeah, well; like hell it doesn't. Within 10 years the Japanese were well on their way to replacing the U.S. auto industry. How and what makes people feel happy is cultural based. Economics is something else but has cultural links. My wife on the other hand has always been an aficionado of latinoamerica. I, on the other hand eat rice, while my eyes are no longer perfectly round. Asia will replace the Americas as the world's premier producer.

    Fool On my friends.

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