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The Investment Secret That Will Always Work in China

By Larsen Kusick, analyst, Phase 1 Investor
Wednesday, September 1, 2010

I spent 14 years living in New York City, and I've never seen anything like this...
We've been driving for 30 minutes and all I see is skyscraper after skyscraper, thousands of trucks, construction cranes everywhere. This place makes New York look like a quaint little vacation town in Vermont.
I'm in China, sitting in the passenger seat of a 1980-something VW Jetta family car that's doubling as a taxi and driving through an enormous city.
But I'm not in the widely publicized cities of Shanghai, Beijing, or Hong Kong. I'm in Shenzhen, a city of 9 million people on the southeastern coast, near Hong Kong. I'm here with my Phase 1 colleague, Frank Curzio, for a 10-day, six-city trip.
Like most people, I expected the "glamour" cities of Shanghai and Hong Kong to be gigantic and impressive. They are. But no one in the U.S. has heard of Shenzhen. They will. There are miles and miles of huge buildings full of people. Laundry hangs from the balconies of the residential towers. The industrial buildings look just like everything you see as you fly over New Jersey heading into Newark airport – except the signs are in Cantonese.
Yesterday, we met with our contact in Hong Kong, who warned us that Shenzhen was a "dump." I immediately thought of something along the lines of Detroit. But it's not like that at all. Nothing here is falling apart. It's definitely not a gleaming trader center like Hong Kong, but it's no Detroit.
Shenzhen is a giant blue-collar city. Many of the people here live in "dormitories." When a company sets up a factory, they put a dorm right next to it and fill it with workers in their early 20s who move from poorer inland areas.
The construction workers we pass are all busy with a shovel or machine. In New York, the construction guys spend a lot of time sitting around, checking out the women walking by. I can't help but think every worker in China knows they're playing a big game of catch-up with the U.S.
I've read a lot of commentary about how China is a bubble. After the market meltdown of 2008, there are a lot of people who like to point at growth and predict it will collapse. Maybe some of it is true. Maybe Shanghai and Beijing real estate prices are too high and will come down at some point...
But from where I'm sitting – in this beat-up old taxi – I can say mainland China is just getting started. With its 9 million people, the city of Shenzhen is slightly larger than New York City. But in terms of its lifecycle, it's more like New York 50 years ago. I wonder if any investor drove through Brooklyn or Queens during the 1950s and said, "This growth is nothing but a bubble."
I've had a good chunk of my long-term investment money tied up in a China mutual fund I bought about eight years ago. After master investor Jim Chanos started bashing China early this year, I got a little worried...
But seeing what I'm seeing now, there's nothing excessive about what's going on here. There's huge demand for basic things like roads and buildings. And I'm not worried about a debt crisis here because it's such a conservative society. When someone buys a house, he puts down 30%. How much better would the U.S. be doing today if our housing industry stuck to that kind of standard?
All the blue-collar work going on in Shenzhen and cities like it is building China's middle class, which is going to consume a lot of beer, cigarettes, food... and eventually health care over the coming decades.
It's also going to create an extremely strong competitor for the U.S. China is a lot like the U.S. was 100 years ago – an up-and-coming economy driven by hard work and the desire for a better life. There will be booms and busts along the way, of course. But this is an extraordinary situation. And as all those consumers come online over the next 20 years, the profits will be enormous.
I'm going to gather more facts and figures to weigh against my first impressions here in China. And I'm expecting to have a lot of specific recommendations for our Phase 1 readers by the end of our trip.
For now, though, I'm seeing all of these workers building up a modern society. This gets me interested in owning companies that sell them the "basics"... like the aforementioned beer, cigarettes, food, and health care. This strategy worked beautifully in America from 1950-2000. It will work in China.
I'll let you know more of what Frank and I find next week.
Good investing,

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