10. Global Tycoons, Value Tanks, and Other “Go for the Jugular” Strategies

New investment frontiers don’t open up that often. And certainly the world will globalize only once. It is a very rare, possibly singular, occurrence for so many new markets around the world to suddenly open up—and at the same time, for so many investors to be so hesitant. This is one of those times when ambitious people should go as big as they can as fast as they can.

This chapter is about going for the jugular. It is for people who think, like Prince Waleed, “I knew from the beginning I wanted a global empire.” It pulls together the theories described in previous chapters and presents a series of strategies, vehicles, and habits for truly ambitious global investing.

Global Tycoon Investing

Applying multiple value keys to undervalued companies with multiple inefficiencies can create particularly large returns

Per Graham, a company worth $100 million purchased for $50 million is usually a good investment. The lower the price, the better the returns become. If an investor adds value at the same time, those returns get even better. The idea is to buy a $100 million company for $50 million and quickly increase its value to $150 million. Value point investors strive not only to push down the price as much as possible, but also to add as much value as they can.

In a special subset of value point deals, all the value keys (political access, reputable capital, management, and local and foreign capabilities) are used together on a company that is beset by multiple problems and inefficiencies (mispricing, investor bias, capability gaps, a lack of political access, and so on). If value point is about adding value, the idea here is to add value with a bazooka. We want a good or great company with a massive inefficiency and a massive value-add.

I refer to these as “five keys” strategies (see Figure 10.1), or “global tycoon investing,” because powerful deal-makers have an outsized ability to construct such deals. In one meeting, a piece of land in Dubai can be bought cheap and turned into the world’s largest theme park. Ten new tertiary hospitals can be launched as brownfield acquisitions in ten second-tier Indian cities. A distressed bank can be purchased at a steep discount and immediately merged with a leading one. A $10 million investment can go quickly to $50 million in smaller operating companies. $100 million can go quickly to $500 million in larger deals. The economics of such deals can be seen in Figure 10.2.

Figure 10.1. Global tycoon investing

Figure 10.2. Global tycoon economics

For all the ambition, such investments can be strangely anticlimactic in execution. Extensive business analysis ends up as a simple deal being presented to several, often quite different, partners. If done well, the presented deal adds such value to each participant that everyone immediately says yes. The more powerful the added value, the more the deal becomes a no-brainer.

Rethinking from Good to Great

Distinguishing among good, potentially great, and great companies in uncertain terrains

For nine chapters, I have been inartfully dodging a critical question: What kind of companies do you target when going global? This is actually Question 1 in Figure 10.1. And it is answered somewhat differently in different investment environments. Real estate mogul Sam Zell might target construction and housing companies when going from the U.S. into Brazil. KKR might target innovative entrepreneurial companies when going into India. What is a good or great company is the central question.

Warren Buffett speaks of putting companies in three buckets: good, bad, and too hard. But bad and too-hard companies are pretty easy to recognize in practice. It’s the various degrees of good to great that an investor can agonize over.

You run the target company through your various investment filters. Does the company have a share of the consumer mind, such as Starbucks in the United States or Jay Chou in China? Is it sustainable (Coca-Cola: yes; Lady Gaga: no; Chipotle: likely)? Is the company at risk from generic products (beer: no; soap: yes)? Can a technological change significantly impact the company (BYD’s electric car business: yes; BYD’s battery business: no)? How will the company do under really adverse economic conditions (luxury hotels in Dubai: not so good; health insurance in India: quite well)? And so on.

Running target companies through the standard qualitative and quantitative filters, the “bad” and “too hard” companies get rejected fairly quickly and confidently. It’s distinguishing between good and great companies that is the challenge. And there is the struggle to specifically define the “just not good enough” line at which you grudgingly pass on a company you really do like. This is the situation where having a pleasantly ornery partner, an in-house devil’s advocate, to kill off your “not quite good enough” ideas can be really helpful (greetings, Mr. Munger).

In the developed economies, there are various definitions of good and great companies for a long-term value approach. Recall my Buffett “Great Company” Corollaries from Chapter 2, “Rethinking Value in a Global Age.” I claimed that a great company has a competitive advantage or some other characteristic that not only eliminates the current and future downside uncertainties but also maximizes the potential gain in per-share economic value.

But is this the same thing as a great company in India? Does a different landscape or set of regulatory rules change what makes a great target company? Do the increased uncertainties, instabilities, and other differences change what you look for in a company? A company with significant fixed assets might be far more defendable in a limited rule-of-law country. But don’t such fixed assets also mean a lower ROE? Does the ability to add value or the existence of much larger mispricings change what constitutes a great investment? Does applying Graham’s Method de novo in fundamentally different environments lead us to fundamentally different definitions for good to great companies?

Ben Graham, investing in a time of limited information, great depressions, and world wars, might have argued that a “good company” is one with verifiable assets or earnings. Modern value investors, investing after a period of more than 50 years of relatively stable economic growth in rule-of-law liberal democracies, might assert that a good company must have an attractive return on capital. Whether measured by return on invested capital (ROIC), return on equity (ROE), or a similar measure, good companies are generally regarded as those that produce large earnings relative to the amount of capital required. Buffett might define a good company as one that is easy to understand and that has honest management, an above-average return on capital, no big capital needs, and some degree of franchise. However, Prince Waleed, investing across developed and developing economies, would likely say that a “good” company is one that is global (having a presence in many countries), has trustworthy management, and has a premier brand.

Narrowing from “good” to “great” companies, the viewpoints begin to vary much less. Buffett would likely say that a great company has a sustainable competitive advantage. Waleed would likely say that a great company is one-of-a-kind and nonreplicable. In any case, a great company should already have clearly compelling financials: usually a high and stable return on invested capital, a low cost of growth with an ability to self-fund, and a very long-term and protected competitive position (usually demonstrated in market share over time).

My point is not to very briefly and badly summarize the thinking of such great investors, but to point out that the difference between good and great companies is most often in the uncertainties and in the current and long-term per-share economic value. For the purposes of translating this to differing economic systems, I define good and great companies as follows:

• Good companies have relatively protected profits and/or distributable earnings. Most important is that the per-share economic value won’t decrease from the time of the investment going forward. The goal is to protect the margin of safety that was the basis of the investment and eliminate the downside uncertainty.

• Great companies are good companies that additionally have the greatest potential for future gain in per-share economic value.

I assert that good and great companies are defined mostly by their uncertainties. All the various filters speak to such uncertainties. Good companies’ value can’t go down, and great companies maximize the upside as well.

That different economic environments impact what is considered a good or great company should not be surprising. The economics of an industry and a company’s position within that structure are major factors in assessing the attractiveness of a specific company. If the newspaper industry traditionally had one local paper per major city, that industry structure was a big factor in the assessment of The New York Times. Value investors have always talked about good versus great companies within a specific industry and within a relatively developed economy. They just usually left off the last part of that sentence. But can’t a company half in and half out of the Russian government with no effective competition meet these good-to-great requirements? Would you really call that a franchise? Or attractive industry economics? Or is it mostly about an attractive environment? If Saudi Arabia has a $200 billion influx of petrodollars per year, resulting in real economic development, can’t that environment make many companies, even mediocre ones, good or great?

As the line between government and commerce blurs in developing economies, so do the lines between company, industry, and environment. The line between investor and deal maker also blurs. A company can be good or great due to the company itself, its industry, its environment, or the investor’s impact on. So when I search globally, I am almost always looking for three situations rather than two:

• Good companies + environments such that the downside uncertainty is eliminated

• Great companies + environments where the upside potential is also maximized

• Potentially great companies where an asset can be rapidly structured into a great company

The company doesn’t have to be “great” right now. It can be great when I am through with it. I can buy a “potentially great” hotel in Kenya and rebrand it as a Movenpick hotel, making it “great.” I can identify an insurance company in a management-weak environment (such as Saudi Arabia), particularly if the earnings power value (EPV) is below the asset value (AV), and put in place a foreign management contract that improves it quickly (EPV equal or greater than AV).

It is in this “potentially great” category that Prince Waleed is arguably the world’s master deal-maker. When he purchased his stake in Citigroup in 1991, it was a company on its knees, on the verge of bankruptcy. Only later would it become one of the world’s leading banks. When Waleed purchased the George V hotel in Paris, now rated the world’s #1 hotel, it was not even within the top 1,000 hotels. When he purchased 5% of Apple Computer in 1994, it was in a “down but not out” condition, and Steve Jobs had yet to return. When he purchased United Saudi Commercial Bank, it was the weakest of all the Saudi banks. In fact, going through Waleed’s investments, from the Four Seasons, to Saks, to Canary Wharf, to the Fairmont, to DKNY, most were in the “potentially great” category when he bought them. He is sometimes referred to as the “prince of fallen angels,” but it is really just one consistent value strategy.

Note how dramatically the term “potentially great” expands the number of companies one can target with a value approach. It expands the target list way beyond just underpriced and underperforming companies to a whole host of developing companies that in many ways characterize developing economies and cross-border situations. I argue that “potentially great” as an asset class is the most direct and logical application of value investing to the world’s markets today. Also note how many targets this creates within the EPV versus AV cases shown again in Figure 10.3.

Figure 10.3. Good, potentially great, and great target valuation cases

Also note how “potentially great” fits into Figure 10.4. The left side of the chart describes a traditional value-investor approach: Find a good-to-great company and buy it cheap (the search for value). The center section illustrates the deal-making aspect of value point investing: accessing investments, adding value, strengthening claim to the enterprise, overcoming foreigner disadvantages, and actively stabilizing the margin of safety. It is this center section that enables an investor to not only target private investments but also to expand into “potentially great” companies. Not only can I now target the much larger market inefficiencies (value minus price) of today’s colliding markets, but I can also actively create an opportunity (value minus price plus value-add). I can both capture and create inefficiencies. It’s basically more hands-on, which is the most logical posture for more uncertain and unstable environments. Compare this fairly simple and logical posture to the contorted postures so many investors are using to stretch out to global opportunities.

Figure 10.4. Is the company good, great, or potentially great?

A Note on Mergers

Much of the strategy described is about negotiated deal-making at the point of entry or acquisition. However, subsequent mergers are another potential method for adding value, particularly when a company is in the “potentially great” category. For example, Prince Waleed’s mentioned acquisition of Riyadh-based United Saudi Commercial Bank in the late 1980s began as a typical value point investment. It was an investment in a bank that had suffered 3 years of operating losses (i.e., a down-but-not-out scenario). Waleed bought in and began restructuring and cost cutting, quickly reducing staff from 428 to 314. In under a year, the bank returned to profitability. But what made the deal great was what happened next. Waleed merged the bank with Saudi Cairo Bank after separately leading a group of investors to acquire 33.4% of that bank. He followed this with a subsequent merger with Saudi American Bank (Samba), at that time 30% owned by Citibank. The end result was significant ownership of one of the Middle East’s leading banks and a company that fits the “great” company definition. This was a series of transactions that quickly turned a “potentially great” company into a “great” one. It can also be viewed as investing along a capability consolidation trend (in this case, modern banking in the Middle East), as discussed in Chapter 8, “Capability Deals in Theory.”

Waleed used a Western version of this same strategy with his luxury hotel assets. His $5.5 billion Fairmont Raffles merger in 2006 created a luxury hotel company with 120 properties in 40 countries, a “great” global company. However, this is a far cry from Waleed’s initial purchase in 1994 of 50% of three of the five existing Fairmont hotels. Waleed described the deal as being about “burnishing a gem—the Fairmont name.” I do not focus much on these types of merger strategies as they are much longer term approaches. We overwhelmingly focus on very surgical approaches where you make your returns at the time of investment.

Beware of Low Prices in Exotic Places

A final warning on cheap assets in exotic places. Virtually everyone who goes to Cancun or Cabo San Lucas ends up taking a look at real estate and ponders the idea of buying a beach home. After all, the weather is nice, and the beach homes just seem so cheap. Looking globally for investments, the same thing often happens. Companies in India and China seem so cheap, and the locations are somehow compelling in a way less exotic locations are not. Why not just buy a couple?

The reality is that most really cheap assets, including homes in Cancun and small companies in Mumbai, are cheap for the right reason: They’re not worth much, and they’re not increasing in value any time soon. Anything less than a good-to-great company, even when purchased at a very steep discount, is unlikely to return a profit. This is why I put company quality as Question 1 and price as Question 2. Quality is still the #1 issue.

“Value Tanks”

Building all five value keys into a focused investment vehicle is a powerful way to roll across borders and invest globally

For the past 15 years, Prince Waleed has been firmly established at the global tycoon level, having built a global empire and achieved effectively unlimited reach. While most investors struggle to go global, he struggles against limited bandwidth. In a colliding world with fairly spectacular mispricings, he simply has more options and opportunities than resources to execute against them. For every good-to-great investment he makes, there are probably ten he doesn’t do.

One of his more effective solutions to this problem has been to launch focused investment vehicles that contain multiple value keys in a stand-alone structure. Because of the bazooka-type value that they can add to deals and their suitability to almost any environment, I call them “value tanks.” They are particularly good at entering and investing in the established emerging markets.

An example is Kingdom Hotel Investments (KHI), a Dubai-based hotel acquisition and development group focused on the emerging markets of Africa, the Middle East, and Asia. Launched in 2000, KHI’s primary business is to buy and build hotels and resorts in rising markets and then position or reposition them with Western hotel brands such as the Four Seasons or Fairmont. This is value-added deal-making between Western operating companies, local emerging-market assets, and Middle Eastern capital. And the resulting resorts have been fairly impressive, such as the Sharm El Sheikh Four Seasons and the Fairmont Mount Kenya Safari Club.

Kingdom Hotel Investments also makes periodic acquisitions of Western hotels such as the George V in Paris, the Hotel Des Bergues in Switzerland, the Plaza in New York, and the Savoy in London. Sometimes these are straight acquisitions, and other times they are renovation and repositioning plays.

Generally, KHI targets good, potentially great, and great hotel properties. A Four Seasons hotel in Damascus or a Movenpick in Beirut is a good company but not great. It has a lot of fixed assets, and growth is expensive. Plus, it doesn’t deal with adverse conditions well, and economic downturns can result in significant losses.

Other investments have met the great and potentially great criteria. The Plaza Hotel in New York was a great company when purchased from Donald Trump. The George V in Paris and the Four Seasons Sharm El Sheikh were potentially great. All became one-of-a-kind assets with attractive financials.

Luxury hotels in developing countries have lots of the pricing issues and room for added value. First, they are hardly a favorite Western investor target. Even the Western hotel companies themselves are often hesitant to own such assets or invest directly in places such as Nairobi and Beirut. Middle Eastern investors tend to be even more hesitant about dealing with partners in Africa and China. So there is a lot of attractive bias by competing investors. Also, luxury hotels in developing markets have significant capability gaps that deal-makers can address, such as the absence of branded hotel management, operating systems, and access to Western tourists.

KHI attacks all these problems. First, the company can utilize fairly powerful political access with Waleed as its chairman. Waleed has long-term relationships with governments across Africa, the Middle East, and Asia, which are clearly important for securing prime land or assets for development. As Waleed travels and meets with government leaders from Mongolia to Kenya, he routinely looks for hotel opportunities, which are then forwarded to KHI.

Second, KHI has a strong reputation with companies and investors in both developing and developed economies. That means it can draw international investing partners to opportunities they might not have pursued otherwise. Deploying hundreds of millions of dollars from the U.S. into Africa is difficult. Deploying these amounts from the Middle East into Africa takes an exceptionally strong reputation. The Kingdom reputation solves these problems and acts as a catalyst for investments. KHI went public on the Dubai and London stock exchanges and serves as a bridge between international capital (particularly Middle Eastern money) and these emerging markets. Additionally, Western hotel companies generally become more comfortable investing in places like Beirut if Waleed and KHI are their partners. Per the framework, KHI effectively uses both political access and reputable capital.

Third, KHI can impact the management and operational issues that plague many developing market hotels, because it has exclusive management contracts with the Four Seasons, Fairmont, and Movenpick. This alone can add tangible value to hotels almost anywhere in the world. Buying a hotel or acquiring land in a downtown location is difficult, but when the seller knows that you will turn it into a Fairmont, things become much easier. Western brands and management ability can both reposition the hotels and add other operational advantages.

Using all five value keys, KHI is a focused investment vehicle (a value tank) that can add significant value to deals and invest virtually anywhere in the world (see Figure 10.5). Unsurprisingly, KHI has rapidly grown to 34 hotel properties in 17 countries across Africa, the Middle East, and Asia. In most cases, KHI hotels are the premier hotels in these cities. And the deal structures have the value equation one looks for: good-to-great companies captured with a healthy and sustainable margin of safety. With a mixed strategy of development and acquisition, they can target most of the cases shown in Figure 10.3.

Figure 10.5. Kingdom Hotel Investments “value tank”

Another Waleed value tank is the previously mentioned pan-African private equity firm Kingdom Zephyr. Zephyr targets the high growth rates and low asset prices in Africa. The approach of Kingdom Zephyr is similar to that of KHI. Target good, potentially great, and great companies in emerging markets—in this case, the African continent. Benefit from high growth rates. Take advantage of sizable market inefficiencies, particularly widespread investor bias against Africa, and buy the companies cheap.

Kingdom Zephyr as a value tank deploys all five keys, as shown in Figure 10.6. As mentioned, Prince Waleed has strong political access in Africa. Africa is considered the backyard of the Middle East. Past direct investments include a 17% stake in Senegal Communications and a 10% share of West African Ecobank. In terms of capabilities, Kingdom Zephyr can build strategic partnerships with both European and American companies in multiple industries. In this case, the capabilities are not so much in-house as an ability to put in place through partnerships. Again, reputation serves as a bridge to international and Middle Eastern capital. In February 2010, Kingdom Zephyr closed a new $492 million Pan-African Investment fund with commitments from private-sector investors, development finance institutions, and wealthy families in Africa, Asia, Europe, the Middle East, and the U.S.

Figure 10.6. Kingdom Zephyr “value tank”

The result is a focused investment vehicle (value tank) that can access private deals and add value anywhere on the African continent. Their portfolio companies now include everything from producers of canned tuna in Madagascar to housing developers in Morocco and Algeria.

This is all fairly straightforward. The approach is to keep it simple so you can go big fast and focused. And you might have noticed that the two mentioned value tanks actually overlap and support each other. Waleed has two direct lines of entry into the African continent—his hotel and the private equity vehicles. These two lines also make it possible for him to initiate a third type of entry—“direct spectacular” investments, which are discussed in the next section.

“Direct Spectacular” Investments

Building all five value keys into one large, direct, and spectacular investment is a surgical way to cross borders

Waleed is often quoted as saying that he does something spectacularly or he doesn’t do it at all. This is usually taken as a statement of ambition (which it probably is), but it is more important as a statement of investment strategy. An investment that is “spectacular” is, by its definition, rare and difficult to do.

Waleed is drawn to investments that the overwhelming majority of investors could not achieve. These usually result in his being the only real bidder at the table, a situation investors always like. Additionally, if an investment is “spectacular,” it implies that it will be very difficult for others to replicate later. It results in one-of-a-kind assets that can command a premium over the long term and can have the type of “great company” economics one seeks. Therefore, in terms of investing and deal-making, doing something spectacularly means both focusing on great one-of-a-kind companies and minimizing competition for the deal. Striving for a spectacular project also creates a momentum that can be helpful when doing deals in difficult environments. As they say, it is often easier to accomplish the impossible than the merely difficult.

“Direct spectacular” investments are very large, bazooka-type value-add direct investments. You construct one large project that leverages all the value keys and takes advantage of multiple market inefficiencies. The returns are high and the approach is still surgical, with the investor coming in at one specific point. If focused vehicles are tanks, “direct spectacular” investments are long-range cruise missiles.

The previously discussed ultra-high Saudi-China skyscraper project is an example of a “direct spectacular” investment. As a symbol of both countries, such a cross-border project would require unique political access in both China and the Middle East. That is pretty rare. It would also require a reputable lead investor who could bring enormous amounts of international investment capital in a politically infused, limited rule-of-law environment. And because the facility would likely be positioned as an energy hub, bringing in the right strategic partners—such as PetroChina, Sinopec, Saudi Aramco, Sabic—would also be key. Such a “spectacular” project could be accomplished by only a handful of investors and, if built, would likely never be replicated. Thus, it fits the “direct spectacular” profile.

Note now this fits the value point framework. It’s a potentially great company. It’s cheap. The deal structuring of the various components and project phasing guarantees that the lead investor will do very well financially. The margin of safety is very large, the downside is eliminated, and the upside is maximized.

Another Waleed “direct spectacular” investment was his 2006 purchase of Bank of China’s supplemental IPO shares. Following Bank of China’s 2006 oversubscribed IPO, the bank decided to float a small number of additional shares it had held back. Waleed led a prominent group of Saudi investors in a bid for $2 billion of these shares. This large request to the Chinese government drew on the unique Saudi-China political relationship. It had a lot to do with political access. Waleed’s reputation also connected the deep stores of Middle East and North Africa (MENA) capital to Chinese pre-IPO opportunities. And it leveraged his knowledge of China from Citigroup and his other portfolio companies operating there. Again, probably only a few investors could leverage such large MENA dollars and political access into such a Chinese opportunity and possibly succeed. The group was eventually awarded several hundred million dollars’ worth of shares, making them one of the largest foreign recipients.

These two approaches, “value tanks” and “direct spectacular,” are value-adding strategies that are particularly effective when investors cross borders and go global. They also reflect an investment style that focuses on coming from a position of almost overwhelming advantage in situations that most Western investors avoid. You add tremendous value at a specific point (ie., a value point).

Rethinking Good to Great Environments

With an environment focus, Macau and Liujiazui jump off the map

When Warren Buffett purchased PetroChina in 2002–2003, he was buying a state-owned monopoly with a market capitalization of $37 billion—and an actual value he had estimated as being at least $100 billion. The subsequent almost ten-fold investment returns were a classic value investment by its greatest practitioner.

But at second glance, the investment also seems a sharp contrast to Buffett’s investments in companies like Sees and Coca-Cola. State-owned entities do benefit from politically limited competition but they also tend to be managed rather poorly, lack innovation, and be fairly risk-averse. Political risks are often the primary consideration of management. Is PetroChina really a great company like Coca-Cola, or is it an OK company in a great environment (a state-owned monopoly in a state-capitalist system)? Does the distinction matter if the resulting financials are similar? At what point is a great company created by the environment instead of the company or industry structure?

I find it to be a worthwhile exercise to occasionally start not at the company level but at the opposite extreme—the environment level. Instead of filtering companies for certain characteristics, I filter environments for factors that will either drive away price from value or produce abnormally high profits for even mediocre companies. I look for environment characteristics such as rising or falling wealth, political involvement, capability gaps, cross-border inefficiencies, and investor bias.

Viewing the world this way today, one environment that jumps off the map is Macau. Macau sits at the intersection of multiple previously unconnected cultures, countries, and economic systems. It is a true creature of an inefficient, colliding world. Chinese and Japanese gamblers coexist with Hong Kong bankers, Filipino laborers, and Las Vegas managers. Regulators range from the Nevada gaming authority to the Beijing government. And just for fun, all the legal documents must be filed in Portuguese, a legacy of Macau’s colonial heritage.

Not surprisingly, Macau is a great investment environment with lots of mispriced assets amid spectacular economic growth. Since 2002, so many casino and hotel projects have been launched that they figuratively and literally dwarf the actual physical geography. A new land mass, the Cotai Strip, had to be created to accommodate the buildings. It’s the kind of very large economic trend we like to see.

Additionally, cross-border inefficiencies and biases are everywhere. Western casino, entertainment, retail, and hotel companies, having made large financial commitments, are now struggling with Macau’s changeable political landscape. Meanwhile, the Chinese government is struggling to manage the flood of Chinese capital and gamblers moving across the border. Everyone is trying to figure out consumers’ still-evolving tastes. And all this seems intensified by the small geography in which everyone is forced to operate. If Biosphere contains all the world’s ecosystems, Macau contains its different cultures, companies, and politico-economic systems. Meetings between various Chinese, Japanese, Western, Indian, and Russian professionals occur all across town in this strange global business, Biosphere.

Macau-based companies also have massive capability gaps. Casino owners need construction companies to build their projects and expert management to run them. The casino managers need advertising, human resources, and gamblers. The gamblers need banks, hotels, and, in the case of Chinese gamblers, loans. And everyone needs staff. The capability needs of this rapidly developing economy are a deal-maker’s paradise.

Recall MKW Capital, which was mentioned in Chapter 5, “How Political Access Adds Value,” as an example of the “bird on a rhino” approach. Within Macau’s environment, their investment in an online human resources company, MacauHR, can be seen as an astute understanding of Macau’s staffing problems (a capability gap). Their investments in hotel and tourism websites, such as Macau.com, and media companies, such as Aomen TV (“Aomen” is Chinese for Macau), clearly benefit from all of these environmental conditions.

Macau as an environment has all the characteristics—capability gaps, cross-border inefficiencies, and rapid growth—that make value-added deal-making easy and mispricing common. Good and even mediocre companies can end up with great financials. This is a situation where I would argue that a “great” company is defined mostly by the environment, and not the company or industry structure.

Another current standout environment is Shanghai’s Liujiazui district. Situated in Pudong and designated as China’s financial center, Liujiazui’s ambition is to one day become the Wall Street of Asia. For investors, its current situation is very similar to Macau’s:

• Surging mainland cash is fueling a large trend. As China’s GDP continues to grow at 8% to 10% per year, the country’s wealth (personal, commercial, and government) is increasing. Naturally, this is causing a large increase in the size of the financial services sector, which is increasingly centered in Liujiazui.

• Growing numbers of financial transactions are occurring between China and the rest of the world. Liujiazui is becoming a crossroads city for both domestic and cross-border, corporate and financial transactions. About half of Liujiazui’s rapidly expanding Grade-A office space is currently occupied by foreign banks, legal firms, and investment groups, with the other half housing major Chinese companies. The result is an increasing of cross-border inefficiences.

• The financial services industry is rapidly upgrading its capabilities. About every six months, the government opens a major new financial product or service class. In 2007, after mutual funds were introduced, over 300,000 new brokerage accounts were opened per day for five straight days. Insurance companies recently received permission to begin investing up to 15% of their assets in overseas capital markets. In April 2010, stock index futures were launched. And in October 2010, trials for credit derivatives were announced. The rate of development is startling, and all of this creates large gaps in required capabilities.

• The renminbi (RMB) is going international. The Chinese government’s increasing efforts to internationalize the RMB are particularly interesting for Liujiazui as a financial hub. Cash-rich China is increasingly offering RMB-based loans as part of oil and other resource deals with other countries. For example, in 2010, China gave Venezuela an additional $20 billion in long-term financing, tied to future oil purchases—but it was based on the renminbi as the currency. The Chinese government has even floated the idea of a new RMB-based Marshall Plan to support the development of other emerging markets. The increasingly international nature of the RMB creates needs for new capabilities, particularly in overseas and cross-border situations.

The takeaway is that because the variation in the types of environments is much greater internationally than within developed economies, it is often a good thought experiment to consider first the environment almost independent of any specific company. You can note that the additional market inefficiencies I have introduced into the traditional value investing equation (cross-border inefficiencies, capability gaps, large trends) speak more to the environment than specific company characteristics.

Invest Like a Global Tycoon

Going big depends on focus, discipline, and daily habits

Asset management groups, international private equity firms, and institutional real estate companies tend to be sizable operations. Lots of staff and offices. In contrast, value investors tend to be more solo or small-team operators. For example, all of Prince Waleed’s deals, with their grand ambitions and global reach, were put together with just four or five investment staff in a Riyadh office. This is possible because his deals are based on narrow value strategies that are applied with fairly impressive focus and discipline. It is simply impossible to go from $30,000 to $28 billion with a small staff without tremendous focus and discipline.

A look at what Waleed does in the course of a workday—and what he doesn’t do—is instructive. The Kingdom Holding office has no analysts reading annual reports or traders watching Bloomberg terminals. It has no workrooms or cubicle farms. In fact, you witness startlingly few of the activities you would see in a private equity firm, real estate group, or large hedge fund. There is only the prince sitting behind his desk with several sofas in front of him, and three or four investment staff working down the hall. Throughout the day, he reads reports and meets with various political and business leaders. He discusses current projects and possible new opportunities, which are then analyzed by both the few internal investment staff and also some outside firms hired for that purpose, like McKinsey, Booz and Co., and Citigroup.

Waleed’s process has a strict formality and discipline. There are no hallway meetings, and his schedule is managed to the minute. Presentations and discussion meetings are rapid and focused, typically 10 to 15 minutes. And those presenting must typically submit the relevant documents the day before—and can expect that Waleed will read them all and mark them up extensively in his characteristic green ink. Within the meetings, presentations usually last no more than 3 minutes before he jumps in and takes over the discussion (there is a certain art to speed presenting). And as you leave the office, there is always another group waiting to enter. There is a machine-like quality to the days.

This process never slows or stops. At night, the activity shifts to Waleed’s palace. On weekends it continues at his desert camp. During vacations and business trips, it continues aboard his Boeing 767, on his yacht, or in boardrooms around the world. The people sitting on the sofa change, but this process of continuous meetings never stops.

All this activity represents Waleed’s systematic global hunt for opportunities. What does the vice president of China need? How about Fairmont Raffles or Canary Wharf? How can we increase the value of this real estate project? If United Saudi Commercial Bank merges with Saudi Cairo Bank, doesn’t that increase the value?

A simple equation is at the core of all this activity. And I think it is the same equation you see in successful value investors everywhere. If you invest only when you cannot lose money, time becomes your ally, and you must become wealthy—if you keep doing it consistently. A value-investing and deal-making approach, when combined with rigid operational focus and discipline, effectively guarantees wealth over time. In this, Waleed, Buffett, and Graham have an almost identical methodology. You search for value (unrecognized and added), eliminate uncertainty, quantify risk, and invest surgically—and big. Then just stick to it.

To operate over long periods of time with such focus and discipline, it helps to build an operational system around you that both amplifies and enforces consistency. The trick is to build discipline and focus into your daily habits. Scheduling strict meeting structures, limiting staff, limiting companies for review to specific types, and so on. I find you can often tell how successful an investor will be just by looking at his daily habits.

And on top of an operationally enforced and amplified discipline and focus, there is the additional power of an optimistic and positive nature. Whether achieved through an engaged, rational mind, religious faith, or other, an optimistic nature seems to be critical to the process. You have to be the one who sees value in a company when nobody else does. You have to be the one who doesn’t give up on a deal when everyone else thinks it’s impossible. You have to be the one who believes the distressed company can be turned around or that the parties can come back together even though everyone is frustrated and angry. I argue that the secret equation for becoming a Global Tycoon is the following:

value strategy + [focus + discipline + optimism] + time = wealth

The Best Deals Are Simple Deals

Keep it simple in complicated places

Successful investors frequently say that a good investment is one you can write on the back of a napkin. You keep it simple. I have always liked the version by physicist Niels Bohr, who said that he never understood an idea until he said it to himself in German, French, English, and Dutch. The idea is to look at an idea a thousand ways, but then boil it down to a few glaringly simple statements. So simple you can write them on a napkin or say them to yourself in multiple languages. My approach is a little different. I always convert everything to a physics or math problem, which basically makes it an uncertainty analysis, and then I boil the ocean. I do hundreds of pages of analysis on a given idea. And then I throw it all away, pull out a single piece of paper, and rewrite it in a few sentences.

This desire for simplicity in the value crowd is both a strength and a weakness. When it comes to investment strategy and execution, it is a strength. The more complicated the structure of a deal or investment, the more things that can go wrong. The more moving parts in the machine, the more things that can break. It’s also why you aggressively front-load the investment with a margin of safety, so you are less exposed to difficulties and risks going forward. Simple deals also have the mathematical advantage that can then be put together in complex situations or combinations without propagating uncertainties. Simple companies with no uncertainties can be looked at in complex situations and combinations without increasing the uncertainties; the reverse is not true. This “keep it simple” approach is clearly important when moving to more complicated and changeable environments. Execution takes longer. Operational changes take longer. Contracts are harder to sign. Everything that can go wrong eventually does. The more complicated the environment, the more important it is to keep it simple. However, this desire for simplicity in the value crowd also leads to a tendency to oversimplify reality. People want to start talking in simple anecdotes about investing or markets or industries. It is equally important to simplify in strategy and execution and resist the urge to simplify in analysis.

In the last step, the napkin stage, I always make sure that the investment answers the three questions in a powerful way. The company fundamentals are simple and attractive, the margin of safety is impressive, and the deal advantages are overwhelming. It has to jump off the page.

This chapter is a mix of big ambition, value strategy, and tactics. Value tanks and direct spectacular investments are very effective tactical approaches for Western investors looking to cross borders. In the next chapter, I expand on such tactical considerations and focus almost entirely on ways to find deals and get them done.