11. It’s Still About Price and Quality

I sometimes think investing is a slow, step-by-step, career-long process of experiencing all the things that can go wrong. You discover hidden liabilities in your investment. The company’s products inexplicably start losing market share. A CEO quits or has to be replaced, and then the new CEO turns out to be no better. The economy retreats and revenue collapses, causing your high-fixed-cost companies to start bleeding cash and sending management and shareholders into a panic. Such reversals always bring to mind the counsel that elder surgeons give to anxious medical students: “Relax. All bleeding stops eventually.”

There is something inherently punitive about the process of improving as an investor. Understanding an investment strategy is fairly straightforward, but it seems to take a lifetime of hard lessons before you can consistently find the narrow path from investment to return.

This chapter switches from frameworks to tactics to finding companies, structuring deals, and getting things done. From one side, I adapt some of Buffett and Graham’s well-known investment advice to different environments. From the other side, I detail the tactics of some of the rising global investors.

But after all the theoretical and tactical considerations and permutations, successful global investing boils down to the same bottom line as traditional value investing: the need to capture the economic value of good companies at a discount. Returns are still about price and quality.

From Screening to Networking

The first challenge in going global is entering foreign markets in a smart way

How is it that U.S.-based George Soros ended up buying an airline on Hainan Island, China? How do you go from trading in London and New York to negotiating an airline deal in a southern Chinese city? Entering a new market, let alone a new country, a prudent investor is rightly cautious. And doubly so in developing economies, with all their quirks. Usually as you get closer to signing, an alarm goes off in your brain. What am I doing? Do I really want to buy into something illiquid so far away? Have all the local investors already passed on this? Am I the “dumb money”?

The first challenge any investor faces when going global is learning how to enter a market in a smart way. Being a foreigner, you almost always have serious disadvantages (less information, fewer connections, fewer local operating assets, etc.).

But as necessity is the mother of invention, investors have over the past decade learned to cross borders fairly intelligently. Doing so usually consists of three activities:

1. Building a partner network
2. Getting access to unique information
3. Creating a deep “capability bench”

These activities can collectively be described as going from screening to networking. Traditional value investing is usually about screening investments—filtering stocks against price/value algorithms, reading annual reports, and so on. Value point is about putting together a network through which you can locate investments, build partnerships, and structure deals. If the primary objective is to find an opportunity to add value, this often means understanding people and their needs in a way that cannot be done just by reading reports. But in both screening and networking, you still spend 90% of your time waiting for the right investment to come along.

Tactic #1: Building a Partner Network

Prince Waleed’s frenetic lifestyle and hyperintensity are always remarked on by journalists who meet him, and I can attest that their descriptions are not exaggerated. He lives at a truly crazy pace—17-hour workdays, nonstop meetings and calls, as many as six televisions going at all times. On one trip, Arabian Business estimated that in a single day he met 573 people, took more than 200 phone calls, and sent more than 100 text messages.

His vacations are not much different. Waleed and the entourage pile into his 767 (soon to be replaced by a private Airbus 380 that may or may not have a swimming pool) and jet from country to country. At each stop, meetings are held with local government officials and business leaders. It is not unusual for these meetings to consume 13 to 15 hours in a given day, sometimes in three countries.

My favorite story, related to me by the prince’s head of communications, had to do with a trip that covered Eastern Africa, South America, Los Angeles, various parts of Asia, and Paris all in one month. Since the trip included places where GSM cell phone service is not always available, the communications head had the task of moving satellites so that the Prince’s cell phones would be uninterrupted throughout the trip. The net result was that a few Caribbean locations got GSM service for the day as Waleed passed through.

However, what is often missed is the logic behind all of this hyperactivity. The prince is continually building his partner network and has been systematically doing so for 20 years. He knows government officials—typically the president, king, or prime minister—in almost every major country. He knows the CEOs of most of the world’s leading companies. He has built a unique and powerful global network of partners that he can mine for investments and deals. And if he decides to enter a new market, such as Hainan Island, he can reach out through this partner network, most likely entering the market through an old friend—say, the head of the provincial government, the CEO of a large local company, or the regional head of a multinational that is already there.

Tactic #2: Accessing Unique Information

The second intelligent market-entry tactic is to get access to unique information. If you are a foreigner, you need to assume that you are at a disadvantage relative to the locals in terms of information. Therefore, your standards need to be higher. You don’t just need information; you need unique information.

Fortunately, getting unique information—not insider but unique—is fairly doable in developing economies and especially in cross-border situations. The markets are not very transparent and contain large information asymmetries. And often, the base data (government statistics, databases, transaction records) on industries and companies just doesn’t exist. Things tend to be underdeveloped, and the general level of chaos often means nobody really knows things.

In these situations, having unique information is doable and can be a big advantage. It’s hard not to make money if you’re one of the few people with accurate consumer purchasing information in parts of China or Africa. This is actually quite similar to the situation in Graham’s time when, prior to the passage of the Securities and Exchange Commission (SEC) Act, many corporations did not publish a lot of basic information. In Security Analysis, Graham estimated that only “half of our industrial corporations supplied this moderate quota of information.”

During one of my first major real estate projects (approximately $200 million) in the Middle East, I asked for local real estate reports, only to discover that there were none. At that time, the region had few analysts or specialized real estate firms. It became clear that the base data didn’t really exist either, as nobody reports accurate sales information to the government. I ended up hiring some former management consultants to gather independent data so that I could build my own market models on a large piece of land that the prince had purchased. This exercise had an interesting side effect. When word got out that Waleed was working on a real estate project, the price of that land jumped from Saudi riyal (SR) 19 per square meter to SR 28, increasing the total value by $43 million. I ultimately recommended that we hold on the project but definitely keep researching it.

It is actually much easier to enter Hainan than New York with unique information. All the characteristics of developing economies (lack of infrastructure, lack of laws, lack of reporting, autocratic governments) directly affect the quality and availability of information. Not only do government agencies rarely have the information, but the information they do have is often inaccurate or politically manipulated.

Apart from doing your own data gathering, I know of only three consistently accurate sources of information for developing and cross-border environments. The first is financial statements that have been audited by the big accounting firms. These firms are relatively powerful in these economies and can push back when the client tries to hide or falsify its numbers, which is not uncommon. Interestingly, you can now see this phenomenon migrating to the United States in the form of back-door initial public offerings (IPOs) by Chinese companies purchasing small but listed U.S. companies. The type of accounting firm they use (usually a small Chinese-owned accounting firm) is the tip-off in such situations. An important caveat is to be wary of the mentioned emerging-market shenanigan in which companies move profits between audited and unaudited (or weakly audited) companies. Unfortunately, although audited statements by the big accounting firms are accurate, the information they contain is widely available and therefore not too unique.

The second source is the commercial banks. They typically are conservative with their lending, both in types of products and approvals. They also have met the Basel banking standards, putting them several generations ahead of other local companies in terms of standards and reporting. They are sometimes the only institutions that really know what is going on in parts of the economy. And when a corporate scandal occurs in an emerging market, it is usually the local bank that brings it to light. With SEC and other regulatory-type bodies often underdeveloped, the commercial banks are most often acting as the local sheriffs.

Being able to see a developing economy’s industries through a local bank is a tremendous advantage if you can get it. (Waleed frequently refers to banks as “the eyes into the economy.”) It is likely not a coincidence that one of Waleed’s first major acquisitions in Saudi Arabia was United Saudi Commercial Bank. His first acquisition in the U.S. was Citigroup. And his first major acquisition in China was Bank of China. But for those of us who can’t buy banks, this goal is accomplished by networking.

The third source is any direct consumer information. Banks are great for learning about a target industry, but they leave you blind in terms of consumer behavior. You can often learn more about inflation from contacts at a local supermarket than by talking to the local banks or government officials. Or about healthcare spending by talking to local insurance companies (the eyes into the healthcare system). I know one company that regularly sends people to the customs house just to see what is being brought into the country.

A fourth source is political information. It’s not necessarily accurate, but it can be a big deal in places like China and Russia, where being aware of looming government changes can be critical. Of course, the temptation with unique information, particularly political, is to start speculating, trading in real estate and stocks. This is not something I think one should be involved in, but I mention it because it is common in so many markets today. In some unmentioned developing market exchanges, I sometimes think there is very little outside of insider trading and speculation. Just to reiterate, the described unique information approach is with the objective of leveraging unique information into constructing value-added private deals only.

Tactic #3: Creating a Deep “Capability Bench”

The third tactic for intelligent market entry is to create a deep capability bench. Ultimately, you need access to deals, and I have argued that capability keys are the best way to achieve that. However, most of us don’t own lots of companies, so we access capabilities through strategic partnerships and operating agreements. Accessing good Eastern European bank or insurance projects likely means having a Western technology or business services partner and creating joint proposals. Creating a deep bench of such capabilities is key for intelligent market entry. If I have partnerships with gaming companies in Las Vegas, my entry into Macau is both easier and smarter.

To LP or Not to LP

A final note on becoming a limited partner (LP) in an overseas fund. Private equity groups from developing economies are continually meeting with Western investors about raising funds. And the pitch often includes the idea of using an LP position as a market-entry technique, a way of getting direct access to deals in developing markets. This approach may work well in some circumstances, but in my experience I have never seen it succeed in terms of building effective mechanisms for direct investment.

An approach that does appear to work well is investing as an LP in a developing economy venture capital (VC) fund of funds with follow-on rights. The wide spread in VC performance makes this a good way to target the high-performing VCs and then invest more in those few star performers (i.e., a heightened alpha approach). Or by investing directly in a VC fund, the follow-on rounds for most companies create opportunities for larger direct follow-on investments as well.

Picking Your Hunting Ground

The second challenge in going global is defining your advantages (and disadvantages) in an investment terrain

I have painted a simplistic picture of different landscapes and some of their inherent characteristics: their fundamental differences with developed economies, the additional challenges, the additional advantages, and so on. I have also argued that this is all fundamental to a colliding and multipolar world. In other words, it probably won’t change anytime soon. But if you think about all the geographies, industries, transaction types, and my expanded definition of market inefficiency, there is really a lot of room for creativity in picking a hunting ground. Turnaround situations in weak-management godfather economies. Growth equity in state capitalist retail. Political access deals in cross-border situations. (I have a dream about launching an investment group in Washington, DC called Crony Capital.) Choosing your hunting ground is one of the areas where moving onto a global landscape increases your options by an order of magnitude.

Typically, you choose your terrain (industry, transaction type, amount of equity) and then search for the best deals. You pick your spot on the lake before you fish, and it is usually the first decision that bounds your possible returns. Not many groups doing middle-market U.S. private equity are making a 50% internal rate of return today.

However, this two-step approach creates a couple of problems when you start to go global. The first is that it assumes that you can pick your hunting ground and then just go execute. But choosing your hunting ground means identifying the largest opportunities that can be captured. It can mean finding unrecognized value and simply buying it. But it can also mean finding value that you can access and others cannot. It can mean finding deals where you have an advantage in getting the deal, often over entrenched locals. And most importantly, it means identifying deal types where you can stabilize the margin of safety over the long term.

The two-step approach doesn’t capture the deal-making aspects of choosing your hunting ground. It doesn’t consider what combination of value keys you are using and where those keys can create an advantage. The formula for choosing a hunting ground is “unrecognized + inaccessible value + created value.” Medium-sized public companies in China can offer unrecognized but accessible value. Real estate in godfather capitalist Qatar can offer recognized but inaccessible value.

So quite a few additional factors come into play between the time you pick a hunting spot and then execute. We can effectively collect all these factors into an additional step in the process.

Step 1.5: Targeting Advantages (and Avoiding Disadvantages)

If the first step is choosing an attractive hunting ground and the second step is finding the best investments within that space, we can add a middle half-step for assessing where you have the strongest deal-making advantages in a given geography (see Figure 11.1).

Figure 11.1. What is my advantage?

“Creating a deal advantage” is a catchall for many of the mentioned factors: accessing inaccessible deals, lowering the negotiated price, creating defenses, strengthening the claim to the enterprise, overcoming foreigner disadvantages. It’s a combination of advantages at the deal and company levels. Hunting where you can leverage advantages can be very profitable (such as Saudi Hollandi Bank). Hunting where you have weak or declining advantages can result in rapidly collapsing investments (such as Danone in China). The main point is that you should have a fairly strong answer to this question when going global: What is my advantage?

Advantages are also about timing. A well-constructed deal that brings in various capabilities can create a strong advantage at certain points in time. For example, a foreign capability value key such as insurance adjustment expertise can be an advantage in acquiring or developing insurance companies in Africa today. But it may not be much of a capability advantage 5 years from now. Reputation, capital, and political access can be advantages in accessing real estate investments in Kazakhstan now and likely in the future.

This “What is my advantage?” half-step is particularly good at predicting bad investments. And it captures the wing-walking phenomenon of investors entering foreign markets showing initial success and then quietly collapsing several years later. That foreign investors frequently enter China and Russia with big public announcements and later leave quietly (or never break out their losses in their financial statements) obscures this very common phenomenon.

Look Again Before You Leap

Be sure about short-term versus long-term advantages

Ultimately, much of value investing is about negotiated deal-making. It’s about buying, building, or fixing a good, potentially great, or great company and getting in at a really low price. In practice, that’s often about who is sitting in the room, who is strong, and who is weak. Or, as discussed in the preceding section, who has the advantage and who doesn’t.

If you’re doing such negotiated deals with one eye on the door (you’re thinking short-term or buy-to-sell), it’s pretty easy and can be done almost anywhere. Short-term strategies are numerous and profitable. All you need is a short-term advantage—just enough to get the deal done. You can focus on pre-IPO investments in high-growth countries. You can do short-term venture-capital-type plays in technical industries. Buy real estate or other fixed assets during an oil boom. Do contracting based on political access. There are quite a few options, and most Western investors do tend to stay short-term when going global.

I have argued that the largest opportunity is to go where few others are comfortable going—global, long-term, and mostly private investments (or PIPEs)—and to benefit from a company’s growth in economic value over time. If you’re in the room to stay, and you’re negotiating an acquisition or development deal, how strong are you now? How strong will you be in 5 years? How do you maintain an advantage over time? Do you need to? After you have structured the deal and captured a healthy margin of safety in a good company at a great price, take a second and reconsider such questions. Look again before you leap.

In somewhere like India or the Middle East, I am quite comfortable with a short-term advantage at the time of the investment. In cross-border deals between, say, Asia and Africa, I am also fairly comfortable with a short-term advantage. It’s usually enough. In hypercompetitive markets, particularly in state-capitalist countries, I want much more durable advantages that will protect my claim and my margin of safety well into the future. The two advantages that are particularly strong in the long term are foreign capability keys and local economies of scale. I’m sure there are many others, but these are the two I know best. Note that one is a deal advantage related to the claim on the enterprise and the margin of safety, and the other is a company advantage related to its strength relative to competitors. Having both is the best scenario.

The competitive advantage of local economies of scale is well known. Large scale, whether geographically or functionally, relative to the size of the market means that fixed costs are a smaller percentage of operating costs, relative to competitors. An auto servicing company that dominates a Chinese province spends less on marketing as a percentage of costs than a smaller competitor. Assuming that the company actively defends itself against entrants (it’s surprising how often they don’t), the company’s market share and competitive advantage should persist and show up on the financial statements as a higher-than-normal ROIC. Achieving such economies of scale is occasionally doable at the national level and sometimes even globally. However, given the size of such markets it is much more difficult and rare, which is why I have argued that most attractive value opportunities are local.

In many cases, local economies of scale are not enough. I discussed in Chapter 9, “Capability Deals in Practice,” how GM achieved significant scale in China yet still is likely to lose its market share or earnings. GM is both weakening in its claim on the enterprise and facing a competitive threat from new entrant Shanghai Automotive Industry Corporation (SAIC) Passenger Cars, against which it has no strong defense. In these cases, foreign capability keys are needed. The United Automotive Electronic Systems (UAES) case, also discussed in Chapter 9, was successful due to its proprietary technology, effectively creating a foreign capability key for UAES in China. This gives UAES a strong advantage at both the company and deal level. Other common foreign capability keys include overseas customers, credentials, and critical offsite services.

However, even in difficult environments, creative and clever deal-makers can usually figure out ways to build in and sustain an advantage. I mentioned at the start that Graham’s Net Nets was essentially a clever way to eliminate the critical uncertainty. Structuring global deals is a lot about coming up with similarly wiley ways to eliminate key uncertainties.

One of my favorite examples involves a Saudi gentleman I met doing small, private investments in China. For many years, only a handful of us commuted between the Middle East and Asia, so we tended to meet at some point. This young man had built a strong track record doing small private deals out of a Beijing office. In contrast to the large private equity firms and multinational companies, he was using family money and just a few staff. His strategy was to look for small, growing, family-owned companies. In this, he avoided the large private equity deals, the explosive-growth VC-type opportunities, and the pre-IPO investments that are somewhat synonymous with emerging-market PE today. And unlike almost everyone else, he did not care about near-term liquidity. Instead, he looked for well-run family companies that were seeking $5–10 million.

By the time we met, he had enjoyed 5 years of successful investments with this approach. The question is, did he have an advantage? Did he need one? He was targeting companies that others were missing or were uninterested in, mostly because they did not offer the explosive growth, liquidity, or big PE opportunities others were looking for. Coming from a Saudi family office, he also understood family businesses—that they were not just businesses but the family’s lifeline. By offering a long-term relationship, he ensured that they could grow their business safely and find funding for the next one. He was offering a relationship as an additional safety net. This is really an example of classic value investing in that he searches for mispriced value in “undesirable” companies. He avoids the crowds and goes where others aren’t.

My point is that even the most difficult environments offer lots of workable approaches. Your advantage is an important consideration, but it often does not have to be as overwhelming as a foreign capability key. It can be structured into deals in lots of ways. I generally find that if you’re in the room and focused on a long-term partnership with the objective of adding value to your partners and your project, you are 80% of the way there. In this case, a young Saudi investor with the right attitude was succeeding in the long term with a fairly soft advantage.

Before moving on, it is worth looking back at a few Waleed deals to identify the advantage. In 1991, he famously purchased a large stake in Citigroup. It is important to appreciate what an unusual investment this was at that time. An emerging-market investor buying a large piece of a major U.S. bank today would be very noticeable, but in 1991 it was really quite extraordinary. Waleed’s advantage was mainly reputable capital, which was a powerful tool at that particular time. During this period, he acquired large positions in one Western company after another and has been seen ever since then as a distressed-value investor and a bargain hunter. But I don’t think he was committed to this strategy. Instead, he was just using capital at a time when it offered him his strongest advantage. And he has done much fewer of these types of investments since. Were these investments a search for mispriced value or recognition of a strong deal advantage?

It depends on whether you think Waleed read the balance sheets and saw mispriced value. Or did he realize that he was in a position of strength relative to other parties in the deal? Was he thinking as a hunter of mispriced value or as a deal-maker in a position of advantage? I have argued that these are basically two sub-versions of the same global value approach.

In comparison, Waleed did not employ this strategy in China, even though such a capital advantage would have been much stronger there. But capital is a short-term advantage and China usually requires a long-term one, such as foreign capability keys or local economies of scale. Waleed’s investments in China have overwhelmingly relied on his capabilities and political access, not his capital.

Filling Your Global Dance Card

Targeting companies and potential partners are both good starting points for going global

Parroting Buffett yet again, if you could invest in only 40 companies in your lifetime, which ones would they be? Which 40 would create the greatest economic value and let you capture the greatest wealth over time? Who would fill your dance card?

You probably can tell that I focus a lot more on certain types of companies than others: real estate projects, banks/financial services, entertainment/casinos, consumer finance, healthcare, and insurance companies. The last one is close to an obsession. Insurance is very attractive almost everywhere, particularly in large-population, low-GDP-per-capita, and low regulatory environments. And the technical requirements also enable a strong advantage and value-add by foreign investors (“technical but not technological” being my mantra in most things). As a foreign investor, insurance works out well at both the company and deal level. I consider the economics in insurance and the other sectors so attractive in developing and cross-border situations that they are always on my target list. And if I do not target them directly (some are too big), I go at them indirectly with “bird on a rhino” and other ancillary strategies. But these are the company targets for my global dance card.

However, you can also think about your dance card in terms of potential partners. Sands casinos would be a great partner in many places (family-friendly casinos in Dubai?). GE Energy Financial Services and GE’s technology division could be fantastic partners for entering many markets. Dubai-based Emaar could be very strong in mega real estate projects in many developing economies—say, in Morocco. FocusMedia in China has tremendous scale in indoor media, which could be leveraged into various types of investments (Middle Eastern mega real estate, Indian healthcare). I generally hunt for a good-to-great company with attractive economics—or for a potential partner with impressive capabilities that can be used in other investments. You can come at the question of who should be on your global dance card from either the company or potential partner direction.

With a clear company and partner target list, you realize opportunities are everywhere. Why isn’t Ralph Lauren in China? Why has Victoria’s Secret barely left the U.S.? How will Marks & Spencer turn around its China initiative? Why are most Middle Eastern and African insurance companies still multiline, with healthcare not pulled into separate specialized companies? Note: Individual mandates have made healthcare 50% of many developing market insurers’ income statements. What will Dubai and its state-backed companies do now that the “build it and they will come” real estate/tourism strategy of the past 15 years has collapsed? Who holds the eight Indian licenses for inbound cash remittances? Note: Expatriate cash remittances between Saudi Arabia and India are second only to those between the U.S. and Mexico. Attractive companies and partners are everywhere.

Moving the Castle to an Island

Some investments need to be more than competitive

A Columbia Business School student once asked Warren Buffett what he would want to know about a company or investment if he could know only one thing. Paraphrasing, Buffett’s reply was, “Whether it has a sustainable competitive advantage.” With a long-term value approach, it is not so much about identifying companies with abnormally high profits or returns on invested capital. It is about identifying companies that have profits and distributable earnings that are strongly protected from competitors. Protected profits (i.e., a sustainable competitive advantage) are the most important thing.

Such barriers to competition go by quite a wide spectrum of names and analogies: a competitive advantage, a franchise, a barrier to entry, “building a moat around your castle.” My recent favorite example was in a Wall Street Journal column by Dilbert creator Scott Adams, in which he described his investment strategy as buying companies that he hates. Adams hates certain companies either because he must buy their products (oil companies) or because he cannot resist them (Apple, Starbucks); both are types of competitive advantages.

Translating Buffett’s comment to various global environments, we immediately see complications. Competitive advantage implies a certain range of competitive behavior. But at this time, some Chinese solar panel manufacturers are selling their products at below the manufacturing cost. In fact, the competitive dynamics can go all the way from monopolies to credit-fueled hypercompetition. There is also the competitive impact of shifting state-commercial collusion. None of this actually conflicts with the previously mentioned competitive-advantage economics, but it does complicate things when looking at individual companies. A sustainable competitive advantage in the U.S. may not be sustainable in Russia or Africa.

But here I mention one main factor that needs to be considered alongside Buffett’s comment on competitive advantage—defensibility. This is a basic all-inclusive term to recognize that, in some cases, competitors are not the only players on the field, and competitive forces are not the only threats to profits. Whether it’s Russian seizures of foreign-invested companies or French companies being squeezed out by their Chinese JV partners, profitable investments can face many more threats than just competition, particularly if the owner is perceived as foreign.

It’s easy to focus on competitive forces and give mild or cursory consideration to these other factors, considering them anomalies to be avoided (various types of long-tail risk). But they are fundamental to many different politico-economic systems and need to be structured in to the investment. For these risks, like any other, Graham’s sage advice holds that the ultimate test of an investment is its ability to withstand adversity, whether it be a depression, a government action, extreme volatility, actions by nonmarket players, or something else equally dire. A sustainable competitive advantage can be seen as a strong ability to withstand competitive adversity. But in other systems it fails to incorporate other adverse conditions.

An example of a company that both has a sustainable competitive advantage and is well defended is General Biologic in Shanghai. Run by Jon Zifferblatt and Matthew Chervenak, the company provides information and advisory services for the growing pharmaceutical and biotechnology businesses of Mainland China. Its clients include both local and Western pharmaceutical companies, for which it does in-depth analysis on the increasing number of pharma and biotech companies across China. It also supports targeted acquisitions. In terms of competitive advantage, General Biologic has built local economies of scale in information, advisory, and increasingly in transactions. But it is also highly defended. In value-point-speak, its foreign capability key is its foreign customers, who are evaluating something highly technical and with significant financial and clinical risk. It would be very difficult for local Chinese companies, governments, and other entities to enter General Biologic’s business in a significant way. Additionally, research and development in general, and biotech in particular, is an area government actors are attempting to bring to China in a large way. General Biologic is well defended from various government officials and other nonmarket forces. Unsurprisingly, as the biotech market is growing, General Biologic is doing very well.

Defensibility is not a bunker mentality. It means preparing for serious threats to your profits from more than just competitors. And defensibility can be achieved through foreign capability keys, reputation, trust, political access, geography, and many other approaches. It’s sometimes a requirement but certainly isn’t a pessimistic worldview. In the Gulf Cooperation Council (GCC), India, and Brazil, and in cross-border situations such as U.S.-India and Europe-GCC, defensibility usually is a consideration, but usually not a big one.

Finally, defensibility has a curious twist. Although competitive advantage implies that there are few threats other than competitors, it also implies that profits are the result of competing successfully. Defensible investments imply that there are more threats to a company but also that high profits do not necessarily have to come from competitive performance. In many markets, you have to be better defended, but you don’t necessarily have to be very competitive to make a lot of money. Many times it’s not about being smart and competitive, but being functional and defended.

All Your Eggs in One Basket Versus All Your Baskets Tied Together

Interlocking investments in unstable environments

Value investors minimize the risk of a single investment by getting the price way below the intrinsic value (a quantitative approach) and by staying in their circle of competence (a qualitative approach). But after you’ve made about five of these types of value investments, the question of portfolio risk arises. How much risk am I really exposed to here? What if all the investments have problems at the same time (value at risk)? Does a marginal increase or decrease occur in the portfolio risk with each additional investment?

Buffett’s classic answer to the question about portfolio risk is to “Put all your eggs in one basket, and watch that basket.” Natural follow-up questions are how many eggs are enough and how many are too many to watch carefully. In his book You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits, Joel Greenblatt argues that once you have six to eight investments, you have minimized your portfolio risk, and each additional investment doesn’t decrease your net risk. However, the number of investments in many good investors’ portfolios does seem to vary widely.

As you construct a portfolio that includes investments in both developing and developed economies, it is unclear if the overall risk is decreasing or increasing. One can argue that having a lot of businesses concentrated in Kenya exposes you to risk if there is a political problem there. However, one could similarly argue that having extensive real estate assets in the U.S. in the last 2 years has been equally risky. I have seen some groups attempt to diversify across emerging-market geographies (Middle East, Latin America, Asia) or to focus only on companies with a global footprint, but I find both arguments unconvincing. When going global, the question of portfolio risk and how many eggs one can responsibly watch is one question I haven’t found a convincing answer to. But it’s an important question.

A tactic I have seen that I do believe is effective is to interlock investments. If investing in the U.S. is sailing on relatively calm waters (a big if), global investing can be seen as sailing on more turbulent seas. So when the seas get rough, you lash your boats together and ride it out. Or, to use Buffett’s “eggs in a basket” analogy, you tie all your baskets together for greater stability.

Waleed’s Riyadh skyscraper complex, named Kingdom Centre, is a good example of six interlocked investments and some particularly clever deal structuring. The development itself occupies a 1 million square feet site and is made up of a 984-foot tower (approximately the same height as the Eiffel Tower), a shopping center, and a wedding hall. Completed in 2002, it has become the city’s landmark development. If you’ve ever seen a picture of Riyadh, you can’t miss his big tower with the hole in the top.

In terms of market positioning, Waleed heavily branded the project with his name and targeted the luxury sector with its high-end hotel and Grade A office, retail, and residential space. In the shopping center, he built a large Saks Fifth Avenue store as the anchor tenant and as a separate direct investment. It was the first Saks store to open outside the U.S., a testament to Waleed’s persuasive abilities and to his status as a major Saks shareholder (he purchased 10% of Saks for $100 million in 1993). Having such a highly branded anchor store makes it much easier to get Ralph Lauren, Gucci, and other luxury tenants to come to somewhere such as Riyadh.

In the 984-foot tower, United Saudi Bank purchased six floors for its new headquarters. United Saudi Bank (USB) (now Saudi American Bank [Samba]) was a Waleed holding and the direct descendant of his first Saudi bank investment in the late 1980s. Also occupying 18 floors of the tower is Saudi Arabia’s first Four Seasons hotel (Waleed is one of the owners). The tower’s 65th floor was taken by Rotana, the Arab media company owned by Waleed (and now also by News Corp.). And the top floor became the Kingdom Holding Company headquarters.

The net result is six interlocked investments in one project. This has the benefit of maximizing the profits captured at various levels of the project. But it also increases both control and options in the event of an adverse event. If the tower’s vacancy rate increases, Waleed can see if Samba will take a few more floors. If the market collapses and the luxury stores start losing money, you can restructure the leases. This is similar to Graham’s thinking that you structure your investments to be able to withstand true adversity. So if you have already maximized your margins of safety for the individual companies and you are watching the companies closely, it seems the next step you can take to reduce the risk of loss is to increase your options in difficult times. Interlocking investments increase both control and options.

A side note on Kingdom Centre in terms of its clever value-added deal-making. Kingdom Centre was launched through a $453 million private placement, in which Waleed put in previously purchased land at a $100 million valuation (twice what he paid for it in the early 1990s), $22 million in contributed assets, and $50 million in cash—capturing 65% of the project’s shares. He both added and captured value at each stage of the project. Additionally, he captured the increased value of the adjacent land guaranteeing a large secondary return. The highly lucrative project was a greenfield development that closely followed the previously discussed value-add approach for his one-mile skyscraper in Jeddah (reputable capital + political access).

Kingdom Centre’s success also came much to the consternation of the owners of Alfaisalia Tower, located just down the road. The Alfaisalia Tower was built first, with the goal of becoming the iconic structure of Riyadh. Like Alfaisalia, Kingdom Centre’s height was limited by Riyadh regulations to 30 occupied floors. However, Waleed noticed a sort of loophole in the rules. Although a building can have only 30 occupied floors, additional unoccupied floors are permissible. So on top of the occupied floors, he added 394 feet in the form of a giant sculpture. This made his tower reach 984 feet, 184 feet taller than Alfaisalia, and gave it its distinctive hole in the top (large enough for a Boeing 727 to fly through). Also for good measure, before Waleed sold the surrounding land, he divided it into smaller pieces separated by new roads. This makes it effectively impossible to build anything very tall nearby, both protecting Kingdom Centre’s place in the skyline and ensuring that no other tower can block its views.

The net result is that Kingdom Centre dominates the Riyadh skyline and has become the symbol of the city. Next time you see a photo of the Riyadh skyline, note the much shorter Alfaisalia Tower next to Kingdom Centre.

The Intelligent Global Investor

Going global is about high-speed, incremental microfundamentalism

Going global is a lot about adopting a posture that not only will be successful but that also enables you to consistently improve over time and expand into more types of opportunities. The posture is arguably as important as the strategy. I suggest that intelligent global investing has three aspects.

Remain Strictly Microfundamentalist

I am aware that this book is about global investing but strikes a somewhat odd, almost anti-macro, anti-globalization stance. It’s the anti-globalization global worldview of a microfundamental fundamentalist (if that makes any sense).

Something about going global makes smart people become untethered and kind of stupid. Everyone starts talking in grand theories. Indian versus Chinese growth rates. Sovereign wealth funds’ impact on global capital flows. Something about the topic makes normally fundamentals-focused analysts start talking in big theories. Where I have spoken in generalities, I hope it has come across that this is purely for orientation purposes (i.e., cloud-naming) and that such comments should be discounted as much as possible. I argue for a staunchly microfundamentalist approach, both because it works and to serve as a counterweight to this “untethering” tendency. It’s both a logical and prejudicial approach.

First, the world does look different depending on where you are standing. Investors in Singapore do view the world differently than those in New York. And it really does look different from the ground, as compared with flying over at 30,000 feet. So getting out of the clouds (both literally and figuratively) and back on the ground is critical. If macroeconomics is high-level, much of globalization today tends to be discussed at an order of magnitude above this (macro² economics). If you get the microfundamentalist approach right, the analysis and decision-making become easier. If you start talking globalization theories, things get murky pretty quickly.

Second, I am fairly prejudiced against multivariable modeling of complex systems. I have done quite a lot of it, and it is becoming more commonly used with the improvements in computing power. But even when done by the best practitioners, it has a fairly low yield rate and the correct conclusion is almost always “inconclusive.” And even if it is accurate and yields a conclusive answer, it can almost never (with the exception of macro trading) be translated into consistent micro actions, such as buying companies. Note that much of the analysis in this book has been presented empirically: equations and graphs. There are no quantitative methods. I have found that if I force myself to do things empirically and in long-hand, it restricts my tendency to computer-crunch the models.

To be fair, those of us who focus on small micromodels can suffer from notoriously poor uncertainty analysis. You routinely find micro-analysts predicting earnings with a specificity that is analogous to predicting to within 2 inches where a rubber ball will stop after being thrown off a roof. So there is plenty of criticism to go around. But recommendation #1 is when going global, stay in the trenches, firmly tethered to value and microfundamentals.

Incrementally Expand Your Circle of Competence

In his book The Age of Turbulence, Alan Greenspan compared his career to making a quilt. He worked on one square at a time, building deep experience and expertise in an industry, such as manufacturing or retail. Then he moved on to the next square. His understanding grew like a quilt, square by square. This is analogous to Graham’s circle of competence, but you add cantos instead of squares as you go through your life.

My experience has been the same, but I have been adding investment terrains as well as industries—private U.S. healthcare, Saudi royal-owned real estate, government-backed Chinese banks, chaotic Brazilian retail, developing Indian financial services. And I seem to be adding adjectives as well as geographies and industries.

This type of incremental approach has power over time. Although it’s not as good as interest compounding, it is similarly cumulative, and each new area of expertise tends to enhance all the others. Time is the real ally of the global microfundamentalist who is building expertise (and wealth).

Increase Your Velocity

In a world full of opportunities, your ultimate limiting factor is not your capital but the number of hours in a day. There are far more opportunities, more geographies, and more industries now than time to look at them. So against this constraint, your velocity matters. The faster you move, the more you can accomplish.

Chatting with a colleague in a Macau casino one night, we got to talking about a quirky article I had read titled “V-speed.” It argued that velocity has become a measure of wealth and ability in modern life. Driving a car, you can go farther in a day than when you ride a bicycle. Therefore, the faster you can move in life, the more freedom and ability you have (that is, wealth).

V-speed is a twist on this idea. You take your miles traveled per year and divide by time. Business leaders like Prince Waleed and GE’s Jeff Immelt have V-speeds of over 30 mph, meaning that they are moving at that average speed every moment of their lives. My V-speed tends to be 13 to 15 mph. This is more of a quirky idea than a serious one (moving quickly in investing is not the same as traveling). But the term has an energetic quality to it that I like. In a global gold rush of opportunities, how fast you are moving does matter.

Most of the global investors I look to for insight and inspiration have this sort of posture. They are all fundamentalists focused at the micro level. They are all incrementally building their expertise over time. And they are all moving as fast as they possibly can right now. This sort of intelligent global investor posture is a good tee-up for the next chapter in which I lay out a global investment playbook.