I just finished reading A Bull in China by Jim Rogers, and at the end I gave thanks for income investors, because my days of throwing my money at such ideas are over.
China has Grown Incredibly in the Past, and May Continue in the Future
Investing in China is a good story, and Rogers is the perfect one to tell it. Years ago he made his fortune by partnering with George Soros on the Quantum hedge fund. He's ridden around the world (including China when it was still more socialist than capitalist) by motorcycle and car. He was probably the first foreign devil to buy a share of stock in post-Mao Shanghai, back in 1988.
So a Bull in China is an interesting book by someone who knows China a lot better than a cut and paste journalist.
However, China's Growth is Not News
The problem is, China is not a new growth story. Rogers has a unique perspective on it, based on his experiences, but investing in China has been fashionable since the early 1990s.
In his book The Future for Investors, Dr. Jerome Siegel calculates the average return for investors who put money in China, and those who bought up stocks in Brazil.
He discovered something interesting -- and too important to neglect.
Brazil Investors Did Better Than China Investors
Brazil investors outperformed China investors, even though China's economy (and stock market) grew at a much faster rate than Brazil's.
Because investing in China was trendy and popular, the shares of stock available were driven to a high price by market demand for them. Because Brazil was perceived as a lot riskier, its stock shares were relatively cheaper.
Investors vastly underestimate the importance of reducing costs as much as possible, including the cost of overpaying.
Too Many Investors Pay Too Much For Growth Prospects
And they vastly overrate the importance of growth, thinking a high rate of growth will make up for overpaying for stocks.
In fairness to Rogers, he does mention several periods when he believed Chinese stock markets were too high, and advises readers of his book to get in during their bear markets instead.
Not only that, but Brazil is now fashionable as well. In international investing circles it's hip to talk about the great promise of "BRIC" (Brazil, Russia, India and China).
Where are the Chinese Companies Paying Dividends?
However, although Rogers lists many Chinese companies in a variety of important industries, that could grow into winners over time, he doesn't even mention dividends. Do any of these companies pay them? Probably not, but Rogers doesn't even tell us.
We're just supposed to buy for the future. Do our due diligence (as though any ordinary investor living outside of China has the ability to accurately evaluate the business risk of Chinese companies), then buy shares when they're down and wait until China's fabled growth rate continues.
Personally, I believe the basic story. China is about one-fourth of humanity, and so will eventually become one-fourth of the world's economy as well -- maybe more, given their culture.
Maybe Former Super-Successful Hedge Fund Managers Can Afford to Ignore Dividends, but Not Us
In the meantime, however, there are many companies with proven records of paying consistent, and growing, dividends. I'll be glad to buy stock in Chinese companies when Chinese companies join the ranks of consistent, proven dividend-payers.
Therefore, I caution all income investors to read books such as Rogers as a form of real-life international thriller -- enjoy them, but don't risk your retirement money on fashionable growth stories.
Author Resource:
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