MI Rewind: China, Emerging & Frontier Markets w/ Kevin Carter

27:26And they were just nice and simple and tight, roomy enough for a family. And so then I was on my bicycle one day. Back then, I was riding my bicycle 20 miles a day, basically to my hometown and back, the town I was born in and back. And I was riding along the street, and I saw this car. And I said, what is that? I said, that's a good-looking car. And I went over and saw it, and it was a Tesla Model S, which I knew what Tesla was. And if I had an opinion on it before that, I was somewhat dubious because I think of the automobile business as perhaps the worst business in the world, or one of them, slightly better than buying airplanes and flying people around.

28:05And I looked at it and I said, that's a good looking car, right? And I said, huh. And I got back home and I went on the website for Tesla and I looked at the price and the performance figures. And I thought, wow, this is a kind of a bargain. And I had a relative that always had the high-end Porsche, the four-door Porsche Panmera, I think it's called, which by the time he walked out of the door, it was$150 ,000 car. and the Tesla looked a lot like it and was half the price and faster and electric. And I thought, wow, this is pretty slick. And then I noticed that they had an option where you could get two seats in the very back that would face backwards.

28:47So you can get a seven seat Model S. And I looked at that and I thought, wow, maybe I can replace the Suburban with the Model S. And I started thinking about the whole business model. And I remember thinking that this all happened in a couple of three-week period. One day I saw my wife, I was walking through the kitchen. I said, you know what? I think this Tesla could really work. And I said, when you go to the Whole Foods in our town, which is just over the hills from Berkeley, California, so we're in an environmental aware zone. And I would say, when you go to the Whole Foods, every third car is a Prius.

29:24Like we must have the most Priuses per capita in the world, but the Prius is parked between a Mercedes Benz and a BMW. And so I said to my wife, I said, I think this is the Prius for rich people was my quote. And my wife literally hit me on the chest and said, you have to buy that stock. And the next day was tax day. I think I'm going to say eight years ago. And I bought the stocked for$57 a share, pre-split. And it very quickly went to over$100 a share. Like in a couple of weeks, I doubled my money. And I thought, okay, that was fun. And then I said, I need to go drive one of these cars. And so I scheduled an appointment at the Tesla factory.

30:11They had a showroom. I don't know if it's still there, but one of the few showrooms they had in the Bay Area it was actually at the Tesla factory. So I signed in on the iPad and I thought there was a lot of parts of the business model, even if it wasn't an electric car. There was a lot of advantages, I thought, to the business model and not having the dealerships and all the inventory and just the car buying experience was and it's still so rough. So I signed in and waited and the guy came out and said, hi, Kevin. I said, yeah, and a picture of my driver's license or whatever, or scanned it, I'm sure, his iPad.

30:45And we walked out to go for my test drive. And we walked up to the car. And the first thing I said, I guess I could see the car had the back seats. I said, can I see the back seats before we even got in? And he said, sure. And he opened the trunk and two seats were there facing again backwards. And I looked at him, I said, can I get in? And he said, no, you can't get in. He said, you have to be five feet tall or shorter. Then he said, actually, 4 '11". And that immediately took the wind out of my sails, because my children were already well above that. My children are all, even my daughters are pushing six foot.

31:22So anyhow, I was disappointed. But anyhow, we took the test drive. And it was just amazing. Driving the thing and smoothness and acceleration and the fact that the center of, you know, that heavy center of gravity with the battery underneath the car. And I finished my test drive. And as I was walking out of there, I said to myself, I'm never buying a gasoline powered automobile again. And there's probably no company in the world I'm going to spend more money with in the coming 30 years. And I quickly estimated that I

32:03between myself and my family on this company's products. And that was it. I drove away in my Chevy Suburban or Tahoe. And then I got on the wait list for the Model X, which was the one I do would hold my family. And then at some point, I needed the money because I had a pretty good gain in that in the first couple or three years. And I sold it thinking, wow, it's really gotten expensive and I needed the money to deploy onto something else. And I have calculated how much money I left on the table and it makes me nauseous, but that's how I got involved with Tesla. And I'm a huge supporter of it.

32:43And actually, there's a lot of problems with this ESG meets investing thing, not with the idea, but with the way that it was playing out and not resulting in the outcomes, I think people are hoping. But as part of our ESG policy for our own company, since all we can really control is what we do, is that we now provide a Tesla to all of our employees after they've been here for a year as part of our environmental efforts. And someone asked me, well, why not just any electric vehicle? And my response was there wouldn't be any other electric vehicles if Elon Musk and Tesla hadn't done their incredible thing that they've done.

33:25So I wish I was still a shareholder, but I'm still a big fan. So what do you make of the run that Tesla went on over the last six months? How do you think about that as the investor you are today? I think that Elon Musk is the most important human we have on the planet. And while I haven't looked at the financials or the market cap or the projections for Tesla, obviously, there are lots of people that have done that and do that. But I think whatever it's worth to shareholders, I don't know. But it's got to be the most valuable company to the planet in terms of helping to shift the environmental issues in a meaningful way.

34:06When I see the CEO of Mercedes-Benz showing off his new electric car, and I see that Porsche has sold more electric 911s than regular 911s. That wouldn't have happened had it not been for Tesla. There's no way. It would have been probably a decade or more before those things would have occurred. So in terms of value to the planet and the people of the planet, I don't know what the market cap is, but it's probably worth more to the planet than its market cap, but I don't know about for investors. Fast forwarding to where you're at today, you're an expert on emerging and frontier markets, but a lot of people listening to the show are not, and I would include myself in that group.

34:51For those listening who may not know exactly what emerging or frontier markets are, please explain to us what they are and which countries they consist of. Robert Leonard Sure. I didn't know anything about China either before I got dragged in, which was 16 years ago. And what had happened was, so that fractional share brokerage company that we started, we sold to E-Trade in the year 2000. And then after that, we had another idea, which has also become mainstream, which was called direct indexing. We started a firm called Active Index Advisors that would allow investors to basically buy a managed account that rather than try to beat the market, tried to match the market on a pre-tax basis, and then allow people to customize their holdings, and also try to beat the market on an after-tax basis by loss harvesting.

35:45And so we started this company called Active Index Advisors, and the flagship product was the active S &P 500, where we would buy 50 or 100 stocks that were in the S &P in a way that would match the performance of the broad index. But if you wanted to leave out tobacco stocks or oil companies, you could customize that way. But then you could also do loss harvesting. So if the autos were down, you could sell General Motors and take a loss and replace it with Ford. And so at the end of the year, you'd have the same pre-tax return as the index, but you could beat the index on an after-tax basis, which has worked extremely well.

36:19There's one way you can easily beat the index. It's to copy the index and do loss harvesting. We sold that company to at Texas at the very end of 2004. And at the same time, a few months before we sold it, Google went public. And when Google went public, they asked my partner, Bert Malkiel, to give a talk to their employees about investing. And I wasn't involved with that, but I knew Bert did it and it sounded cool. Everyone was talking about Google. It was the hot IPO. And a few months later, a guy from Google called me and said, hey, I heard about this act of S &P 500. I want to invest with you.

36:54And I said, well, great. You'll have to get an advisor at Morgan Stanley or Credit Suisse or Deutsche Bank because that's where we're available. And he said, no, I don't want to do that. I want to just invest directly with you. And so I ended up becoming the advisor to that Google engineer and several of his other Google engineer friends. They were all very early employees and all very wealthy, even just right after the IPO. And meanwhile, Burton had gotten interested in China. And so he's going back and forth to China. A couple of his colleagues at Princeton were Chinese and had gone back to teach economics in Beijing.

37:32And they said, Bert, you have to come see what's happening. Our economy is coming back. And it's real. And it's capitalist. And you have to come see it for yourself. And And all of his back and forth resulted in a white paper that was published in the Journal of Investment Consulting in 2005. And the Google people found out about this and called me and said, can Burton come talk about investing in China? And I said, sure. Next time he's in San Francisco, we'll come down. And so 16 years ago last month, we drove from San Francisco to Mountain View one morning and Burton gave his talk about investing in China.

38:11And then all these Google people looked at me and said, we want to invest in China. And I had no idea what that even meant at the time. I didn't know anything about China. I had traveled in some other emerging markets, but I had no interest in China, very little knowledge of it. But somehow from that moment, the moment that talk ended until today, my entire life has become involved with trying to figure out what does that even mean to invest in China and how should an investor do that? And so I didn't know anything either. And just in terms of the way to think about China in the investment world, there's basically four categories of companies, or rather four geographic asset class delineations.

38:57You have the United States stock market, then you have international developed. So the developed countries other than the United States, which is largely Europe, Japan, Canada, Australia. So that's the international developed world. And then you have the emerging markets, which are China, India, Brazil, et cetera. And these are simply stated, these are countries that have lower per capita GDPs, right? They have incomes are$2 ,000 a year or$5 ,000 or$10 ,000 a year, and not the sort of $40 ,000 a year incomes that we might have. So that's what the emerging markets are. There's a little less than 30 of them.

39:35And then there's a whole nother category called frontier markets, which are like the junior pre-emerging markets. And these are places like Vietnam and Nigeria. And so in terms of investing internationally, the way I would summarize it for your audience is that The developed international, the Europe, Canada, Japan, Australia group, that's a pretty staid set of economies and markets and companies. You have the pharmaceutical companies, the auto companies, you have the very dynamic US stock market, also a developed market. And then finally, you have the emerging markets. And that's where I'm focused on emerging and frontier markets.

40:16And frankly, everybody should really be focused on them. I mean, And ultimately, they're the world. It's 85 % of the world's people are in emerging markets, and 90 % of the people that are under the age of 30 are in emerging markets. So this is really the world, and it's really the future even more so based on demographics. There's a bias called the home country bias, which refers to an investor's tendency to favor companies from their own country over those from other countries. It's not unique to just the US. it actually happens worldwide. Why do you think this is? What are investors potentially missing by focusing only on their domestic markets?

40:58Well, I mean, why it exists, I think, occurs not just in investing. I mean, people are comfortable with things they're familiar with. By definition, these are foreign countries. And so that home bias is prevalent everywhere. And now, fortunately for US investors, we have a very dynamic market of amazing companies that have grown and grown their earnings and grown their value. The same can't be said for a lot of the other developed markets that don't have the sort of innovation that we have. And what are people missing out on? There's probably other things that they're missing out on, but what we do and we are focused on, I think particularly your audience, they should get familiar with and comfortable with this because this is where the future is happening now.

41:45Now, if investors aren't looking outside of the US, they're missing what I believe is the fastest growing sector in the world, which are the emerging markets internet companies, the Googles of Russia and Brazil and the Amazons of India and these types of things. We've seen how much wealth has been created and how these companies have disrupted all of our economy. Certainly, there are people losing as Amazon and Facebook and Google and Netflix are winning. but the same thing's happening all over the world. And again, because emerging markets is where all the people are, in many ways, it's a much bigger deal.

42:23And again, I'm obviously biased because this is what our focus is. But essentially, when you look at investing in emerging markets, there's really two things historically that I've told people they need to know, based on my 16 years of experience. The first thing is that the thing that's emerging are the people, right? You've got billions of people moving on up and they want stuff. They want more and better food, more and better clothing. They want appliances. They want entertainment. They want vacations. They want cars. And they want their kids to go to college. And this is a well-documented story and it's a huge deal.

43:03McKinsey and Company calls it the greatest growth opportunity in the history of capitalism as all of these billions of people want the same sort of stuff that we have. And so that's the first thing people should be focused on and why they should be interested in the emerging markets in particular. And then the second thing I tell people about emerging markets is that the traditional indexes, the traditional ETFs are terrible. And you won't make money investing in emerging markets, even though emerging markets are growing. And the reason is that the stocks, the companies that comprise the indexes, they're not great businesses at all.

43:45And they're certainly not capturing the real growth. And I remember after Burton gave his talk that day, 16 years ago, we drove back to San Francisco. And the first thing I did is I walked over to our portfolio managers and I said, look, the Google guys want to invest in China. Give me a list of all the companies in the China ETF for my shares, which has the ticker symbol FXI, because I assumed that for the Google people, that's what we would use. And before they gave me the list, Burton pulled me aside and he said, look, when you look at the list of all the companies in the China ETF, you're going to see that most of them are Chinese government owned banks and oil companies.

44:27And I said, yeah, I've heard about this. And he said, let me give you an example of how these companies work. And the example was, you've got a Chinese manufacturing plant with 15 ,000 employees, and it's been losing money for a decade, and it's about to run out of money again. And so the management team goes across town to the Chinese government-owned bank and says, hey, we need more money. Now, a normal banker would say, no, you can't have any more money. You didn't pay us back the last money we loaned you, so you're basically bankrupt. But the state-owned banker says, well, if you run out of money, then these 15 ,000 people are all going to be out in the streets protesting that they don't have jobs.

45:06And so the bank makes another loan. And when Burton gave me that example, it made me literally nauseous inside because with my simple Omaha brain, earnings equals value and the growth of earnings equals the growth of value. And if you're telling me the people that run these companies don't care about that, why would you invest in them at all? And in the case of the China index, it was over 80 % government-owned banks and oil companies, and it was less than 10 % in the consumer stocks. If you look at the broader emerging market products from Vanguard or iShares or Schwab, there's still about a third, over 30 % in state-owned enterprises.

45:48These things are terrible. They're full of corruption. You've got the best example in Brazil, where Petrobras, which is the Brazilian state-owned oil giant, think of it as Chevron meets the Department of Motor Vehicles. And it was being systematically looted of billions of dollars by people, including the last two presidents of Brazil, who both went to jail for basically stealing your money if you're using a traditional approach. And that's the second thing to know about emerging markets is if you're expecting the broad indexes to catch the growth for you to make money in emerging markets, I think you're going to be waiting a long time.

46:30And I think that ultimately, this is a problem because people have invested in emerging markets. They've heard this incredible growth story, how these GDPs are growing twice as fast. And for the last 14 years, if you invested in the broad emerging market index 14 years ago, you just got back to break even in the last few months. So you've got nothing. So you've had all this growth has happened, but investors haven't made any money. And it drives me crazy when I see, which I see over and over again, emerging markets have become the biggest value trap in the world because I see a chief investment officer every month or two from some big firm will say, we are very bullish on emerging markets.

47:16Look how cheap they are. The P.E. is 12 or 13, and the S &P 500, it's twice as expensive. The P.E. is 24 or 25. So it's half the cost of the S &P. And the economies are growing twice as fast. So I've got twice the economic growth, half the valuation. How can that not be a bargain? If you knew what the Agricultural Bank of China was, you probably wouldn't want to own it for three times earnings. So I think this is a real problem because people don't realize that ultimately when you buy an ETF, no matter what the title is, you're buying the companies and becoming an owner of the companies that are in that ETF.

47:57And if those companies are not trying to grow your value, or in the case of emerging markets, if they represent the legacy economy, the corrupt government-owned economy, you're not going to make any money. And so you really need to be focused on where the real growth is and get more precise in your allocation. And that's where the consumer is in emerging markets. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you. We've got a handful of other shows for you to explore, from learning about Bitcoin to embracing a richer, wiser, happier lifestyle.

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51:45All right, back to the show. I'm so glad you just had that discussion because that was one of my biggest questions. One of the reasons why I haven't had a lot of international exposure in my own portfolio is because of that exact reason. When I look at the broad ETFs for all of these emerging markets, if you look over the last 10 years, basically you've made no money and And it makes no sense to me why I would invest there. And I know historical performance is not indicative of future performance. But to me, I say, well, if this hasn't happened for 10 years and there's been growth, what is the catalyst now that's going to lead to growth?

52:16And I just couldn't see it. So for exactly all the reasons you just said, I never bought those ETFs. People ask me today, how much money should I invest in emerging markets? And I tell them is, if you mean the Vanguard fund or the iShares fund, you shouldn't put any in emerging markets. What I concluded after my first eight years was that investors in emerging markets should do what we call emerging markets 3.0. And it's a concept that I lived. I didn't call it that. I stumbled on a blogger that covers endowments, and he wrote a white paper. And I knew exactly what he was talking about because I lived it.

52:53And so from the moment that talk ended 16 years ago, First thing we did was Burton and I launched a number of China ETFs with Guggenheim Partners, which are now owned by Invesco. But I spent most of my time in New York City and Boston with a couple dozen of the biggest family offices and foundations and endowments, including several of the Ivy League endowments. And I watched how they were evolving their approach as they increase their allocation from small to medium to large, sort of over 10%. But then when they get to that 3.0 version, the 10%, 12%, 15 % allocation, they don't just buy the index because they've seen that they haven't made any money in that.

53:35They've seen people go to jail. They get a little bit more precise. And so the best example of this was Yale University, David Swenson, who recently passed away. He took a Chinese kid that was an analyst for the endowment and said, here's$50 million, go back home and find some good growth investments for us. But most investors weren't David Swenson and didn't have$50 million to deploy. And so what I told people was, look, this is easy. The way you want to invest in emerging markets is you want to buy the emerging market consumer sector, right? That's what's emerging, the people, they want stuff, you invest in the stuff that they want.

54:15And that was easy to do because there's an ETF that tracks the emerging market consumer sector. It owns the 30 largest emerging market consumer stocks, and it has the ticker symbol Econ, E-C-O-N. Now, I have nothing to do with that fund. I never knew anybody that worked at that fund, but I knew it existed. And so when people would ask me, what's the best emerging markets ETF, I said Econ. And it was about seven and a half years ago that I decided I had lost my way as an investor. I was this young, cocky value investor, Charlie Munger wannabe, but somehow I got mixed up with this Vanguard guy at Princeton.

54:59And now I build Chinese index funds for a living. And I've obviously lost my way. And I need to get out of this because I'm getting older every day and I want to do my stock picking. And so I told the Guggenheim people I would support their efforts, but I was going to set up my own investment partnership, which I modeled after the original Buffett part. And once I had it all organized, I opened an account and put my own money into it. And I bought five stocks, all five of which were parts of this emerging market consumer story. And after a few days, I thought, well, I should at least go around town and see if any of my friends want to invest in this partnership with me.

55:41And so I scheduled some appointments. And the morning of those meetings, I made a few slides to show the people I was going to be meeting with. And one of the slides was a list of the five companies that I had invested in. And the first three companies on the slide were all part of the emerging market consumer ETF. They were three stocks trading in Hong Kong, Want Want, which is like the Nabisco of China, branded crackers and snack foods. The second and third companies, sportswear companies, trading in Hong Kong, Li Ning and Peak Sports, which you can think of as the Reebok and Converse of China.

56:24So those were my first three stocks, all of them in the database called Consumer, and all of them part of the emerging market consumer ETF. But then I had two other stocks that I had invested in that weren't in the emerging market consumer ETF, but they were clearly plays on the emerging market consumer. They were put in the database as technology companies. The first one traded on the New York Stock Exchange was Wuba, W-U-B-A, which is the Craigslist of China. And then the fifth and final company trading on the NASDAQ is called Mercado Libre, M-E-L-I, which is the Amazon and PayPal of Brazil and Mexico and every other country south of our border.

57:08And after I made that slide, I looked at it and I thought, well, the first three companies, the consumer companies are great. They're growing at 15 or 20%. I think they each have a moat in form of brand equity, to use a Buffett term. And the management owns the same stock that I own. And at least I can expect that they are wanting it to be worth more. But then I looked at the two other companies that weren't called consumer companies, even though they obviously were. They were growing at 100 % and had incredible margins. Wubah had a 94 % gross margin, which is where I look for moats. and that is still by far the highest gross margin I've ever seen.

57:50So these companies were growing seven times as fast as the regular consumer companies. They had incredible profitability. And while the PE multiples were higher, the PE multiple divided by the growth rate, the PEG ratio, which is the only multiple investors should care about, the PEG ratio was in fact lower than the consumer companies and quite reasonable. And I just remember thinking, These are the two best companies I own, and they're not even in this emerging market consumer ETF I tell people to buy. And that was it. I had that thought. I drove around town, and I had a few meetings and got some checks.

58:29And I was on my way back home, and I was at a stoplight, and my phone rang. And it was a friend of mine with a three-year-old daughter. And she said to me, what's the best emerging markets ETF for my daughter's college fund. I started to tell her to buy econ because that's what I always told people. But then a light bulb magically appeared above my head. And I said, wait a minute, the best way for investors to invest in emerging markets for the long term doesn't exist. And I drove right back to my office and started to organize EMQQ that afternoon. And it launched 100 days later on November 12, 2014.

59:10So I think that the way that investors should invest in emerging markets is the way that I created because someone asked me that question at an opportune time and thought I knew the answer. And now it turns out for the last six and a half years since there's been a product tracking this, it has been by a pretty good margin the best way to happen to the growth of emerging markets. Robert Leonard I actually just had someone who listens to the show send me a DM last week on Instagram and ask me if he should focus on his home stock market in Australia or if he should invest in the US. He went on to tell me he's a newer investor and wasn't sure where or how to start.

59:53For someone like this, whether they're in Australia looking to potentially invest in the US or if they're in the US and they're looking to potentially invest outside of their country, where do they get started? How do they even get started? Robert Leonard First of all, I've become quite radicalized in my thinking about this, how investors should approach their asset allocation, how much should they have in their own country, how much should they have in bonds, right? And this whole idea of modern portfolio theory and the making of pie charts and asset allocations, I'm rejecting all of it now. A lot of this has happened just in the last year, but any young Let me also say, I'm obviously, this is self-serving and I am in a position of conflict, but I have become quite convinced that any young investor who has 5, 10, 15, 20 years timeframe have a meaningful part of their investment portfolio in the emerging market internet companies.

1:01:01And I think that while they will be more volatile, this is where the growth is. And so I don't know. I'm sure there's wonderful companies in Australia. I'm sure there's some wonderful growth companies that will be worth a lot more in five years and 10 years. I know there's some wonderful growth businesses in the United States, and I'm sure there's wonderful growth businesses everywhere. But the Emerging Markets Internet Group, I believe, is the fastest growing sector in the world, not just today, but ever in terms of public companies, because what's happening in the world is this. So when I got that call, as I mentioned, from my friend about seven and a half years ago, I answered it on my iPhone.

1:01:49That was a pretty new device in my life seven and a half years ago. I had an iPhone, but it had only been in my pocket for a couple of years. And I was already seeing how it was changing my family's consumption. Back then, my family used to go to the Target store four times a week, which was easy to do. It's only a few miles from our house and we have a car and the roads are paved. But all of a sudden, these brown trucks started showing up in front of my house once a week and then twice a week. And now, before the coronavirus came to town, my family didn't go to Target anymore. And the trucks were in my house 20 times a week, dropping stuff off.

1:02:26So if you think about how the smartphone has changed our consumption, But remember, I had a computer for 20 years before I got a smartphone. So what EMQQ represents is really three megatrends, three of the most powerful themes in the world in one easy group. And so all of those billions of consumers are getting their first computer ever, and it's not on their desk, and it never will be. So the first megatrend is 85 % of the world's people wants the same stuff we have. The second mega trend is called the computer, but it's in the pocket and it doesn't have an Apple logo. We're talking about$60,$80, $100 Android-based smartphones are bringing the computer to the world for the first time.

1:03:15And they're bringing with it the third mega trend, which is another thing that we take for granted, something I've had for 25 years here in San Francisco called the internet. So, I had internet access in the Marina District of San Francisco in 1995 on a telephone line, and now the internet shows up wherever I am. Well, most of the world never got wired. And so, you have this once-in-a-lifetime generational confluence of these three megatrends, billions of people getting a computer, getting the internet. And importantly, Secondly, because the consumption infrastructure in the emerging markets is by definition undeveloped, and when I say that, the consumption infrastructure, I'm talking about bank accounts with debit cards, I'm talking about TVs on the wall with a thousand channels, and I'm talking about target stores.

1:04:13Because the emerging markets don't have those things like we do, they're leapfrogging past us and going to the cutting edge of consumption in a digitized fashion. And this is a very big deal. And as I said, this sector, I'm not 100 % sure of anything in the world, but I've offered $100 ,000 reward to hundreds of CFA members. I've probably given close to 100 presentations to the CFA societies around the world that I've offered cash rewards. I've asked everybody I know that's smarter than me and older than me, if they can think of a sector that's ever grown this fast, which by the way, the average revenue growth for the sector for the last 11 years annually was 37%.

1:04:58And for the decade ended with 2019, it was almost 40%. So I'm not sure, but I think this is not only the fastest growing sector in the world, but the fastest growing sector in the world ever. And I think on top of that, it's a very profitable sector. I think these businesses have moats, many of them. So again, I'm radicalized and I'm obviously in a position of conflict of interest in that I generate revenue based on people using this approach, but it's worked. And I think it will continue to work for long-term investors. And we've had a decent sell-off recently. And I think that the PEG ratio is now down again below one.

1:05:37So I don't know if I went off in the wrong direction, but I can't speak for the opportunities in Australia versus the US, but I can tell you there is one very large opportunity that I think any young investor should be focused on. And it's the same kind of things we've seen in our own lives with Google, with Facebook, with Amazon. Everybody else in the world is doing the same thing with their localized versions of those things. Robert Leonard One of the biggest concerns a lot of investors have when investing internationally is fraud and accounting standards. Since China has been growing so rapidly, it has grown in interest from investors, but there are concerns of fraud there frequently.

1:06:14We recently saw the fraud with Luckin Coffee or the Starbucks of China. That's not to say that fraud doesn't happen domestically as well, because of course it does. We've seen quite a bit of it here in the US too. But it seems to be more of a concern when investing internationally. How do investors combat against this when investing internationally? Okay. So let me first say, as I mentioned earlier, the biggest problem in emerging markets of the state-owned enterprises, which have all sorts of corruption, maybe not outright, maybe not fraud in the way you're thinking, but they definitely have problems with governance.

1:06:47Let me say this, as regards to the Chinese companies and the Chinese, anything Chinese, people have, I think, too strong of skepticism and suspicion around whether or not you can believe the numbers, whether it's the GDP numbers or the accounting of the publicly traded companies. And this is a big problem. And let me tell you how to think about this. So in terms of the internet companies, another reason why I think investors should feel very comfortable with the emerging market internet sector is that most of the companies in the EMQQ index trade in the United States on the New York Stock Exchange or the NASDAQ.

1:07:30And the reason is this. These companies,

1:07:36Jack Ma at Alibaba, but they're getting funded by professional US institutional investors. They're getting funded by Harvard and Stanford and Yale's endowments. They're getting funded by US corporate investors. Jerry Yang led a billion-dollar investment into Alibaba, which turned into$50 billion. In my very favorite personal story from the last couple of years, Berkshire Hathaway bought 5 % of a Brazilian fintech company called Stone, which went public on the NASDAQ and is part of the EMQQ world. So the point is, these companies have very good corporate governance because of the capital formation process they've gone through.

1:08:21So in emerging markets where your biggest problem is corporate governance and people going to jail, like the last two presidents of Brazil and the last president of Korea, you could actually sleep better at night. These companies, on an absolute basis, they have very good corporate governance. And on a relative basis to things like Petrobras, I think they have fantastic corporate governance. Now, in the case of the China companies and the distrust around China, let me tell you what we have. And I spent a couple of weekends last year during the lockdown going through every single Chinese company listed on a US exchange, because you may know that there is this effort being made to quote unquote, delist Chinese companies from the US stock exchanges.

1:09:05And that was finally was signed and passed, signed by the president and passed in the fourth quarter, but it was first passed by the Senate in May. And when it passed, I watched the press conference from the senator that sponsored it. He said, we just want Chinese companies to play by the rules and all the other companies play by the rules, but the Chinese companies don't play by the rules. And so I had two questions immediately. What rule are we talking about and who in the world is in charge of enforcing the rule? I mean, it doesn't make any sense. You're saying that Chinese companies are just showing up at the New York Stock Exchange and saying, yeah, we're not going to follow the rules.

1:09:40We're just going to start trading here. It didn't make any sense to me. So what turned out was that in 2002, almost 20 years ago, we put in place an organization called the Public Company Accounting Oversight Board. And the reason it got put in place is because Enron, which was considered the most respected company in the United States for two years in a row, according to Fortune Magazine, turned out to be a big accounting fraud. So one of our leading companies was a big fraud. We passed Sarbanes-Oxley and created the PCAOB. And one of the things that they were supposed to be able to do was to review the audit notes, the paperwork associated with the audits of any company that trades on a US exchange.

1:10:25And as it turns out, there's three countries in the world that don't allow that. France, Belgium, and China. So I don't know what's going on in France and Belgium. But I do think it's ironic that Anheuser-Busch, which is about as red, white, and blue as you get, they are also on the list of companies that would be delisted if they don't comply because they're technically a Belgian company now. But in the case of the Chinese companies, there's about 150, maybe 200 companies. And I went through every single one of them. And the way to think about the Chinese companies, the Chinese stocks in the United States, you've got three groups.

1:11:03The first group is the state-owned enterprises, the Chinese banks and oil companies and phone companies. And you don't want to invest in those anyhow, but those are the reason that these rules were never enforced because those companies, including the Chinese state-owned oil companies, were already trading on the New York Stock Exchange when we passed the bill 20 years ago. And the lobbyists went to Washington and said, look, the Chinese government is not going to let you come in and review the audit of the Chinese government-owned oil company. And so we didn't enforce our own rule for 18 years, which frankly gives me more questions about how we operate than the veracity of Chinese accounting.

1:11:46But the state-owned enterprises, those are the reason we didn't enforce the rule. You don't want to invest in those at all. The next group of companies trading on the NASDAQ or the NYSE are what I would call the real Chinese growth companies. There's about 50, maybe 60 of these companies now. Most of them are internet companies, and they're part of EMQQ index, Alibaba, et cetera. And of those 60 real Chinese growth companies, there are a couple dozen or maybe less than 20 non-internet companies. There's education companies, there's a REIT, there's healthcare companies. And yes, there was Luckin Coffee, which was, as you know, a super turbocharged growth competitor of Starbucks.

1:12:37And that was a real company, but it did get ahead of itself and they did manufacture a few hundred million dollars in revenue. And that blew up in their face and the stock got crushed and delisted and investors lost some money. So that happens. The reason we have Sarbanes-Oxley and the PCAOB is because the most respected company in the United States was a huge fraud. So that's happened. It will happen again. I am not aware of any of the internet companies having any irregularities. There's one actually that I'm sound or smell exactly right to me, but most of these companies, they have been founded by locals.

1:13:17They've been funded by US institutions from the beginning, which is why they trade on our exchanges. They've had real investment banks, real US accounting firms. So I think you can trust them with the caveat that you can't trust everybody. And a lot of times these companies like Enron are hard to identify. Now, the third group of companies is where the problem is. So when you get past the top 50 companies, which are the state-owned enterprises and the internet companies, then you get to the 100-plus Chinese penny stocks. And I was shocked that there were so many of these things still in existence because 12 and 13 years ago, early in my China days, mom and pop investors would find me and they'd say, what do you think about China battery or China roadway systems or China lighting?

1:14:15And it took no more than 30 seconds in any of those cases to identify the company as unquestionably a pump and dump, Wolf of Wall Street, penny stock fraud, which is a problem that I thought had gone away because it was so prevalent. So many people lost money. So many people lost money to the point where everybody says, you can't trust the accounting. But those weren't Chinese companies or Chinese frauds. Those were Long Island and Florida, Wolf of Wall Street, Pump and Dump, Stratton, Oakmont, frauds. And the bad people were not Chinese. There certainly were some Chinese people complicit in these things, but that was the real problem.

1:14:58And I was shocked that these companies still existed. And my favorite stock was stock 154 on the list called China Bat Group. So this is May last year when the COVID is kind of coming on hot and going through all these Chinese penny stocks. I get to one of them and it's called the Bat Group. And I'm thinking, oh my gosh, maybe there's actually bats involved. And I went to the company's website and all it is is a page with a picture of a Lamborghini and a Ferrari. And it says China Bat Group. Their logo is Batman's logo, by the way. And it says, China's first publicly traded luxury cars rental company, NASDAQ, and then it has the ticker symbol.

1:15:41Now, that is a classic pump and dump. There's no business there. It's just they're touting that it's NASDAQ listed. They've got misspelled words, both public and luxury are spelled wrong. And the business they claim to have is you can rent a Ferrari or a Lamborghini for an hour or to impress somebody in Beijing. That's what they claim their business is. Then I pull up the ticker symbol on Yahoo Finance to see what the stock's been doing. I see that the company's name has been changed. It's got the same ticker symbol, but now it's not called China Back Group. It's called TD Holdings. There's a press release telling you how they changed their name because they changed their business model.

1:16:23Instead of renting Ferraris and Lambos to young Chinese people. Now they trade non-ferrous metals. They're a commodities trading firm. So anyhow, my point is there is a ton of fraudulent Chinese companies, but they're all penny stocks. And most of them, most of the bad people are not Chinese. And part of the problem is you have these two junior level NASDAQ exchanges, which are not the real NASDAQ. And they're like the junior, or double junior NASDAQ with very low listing requirements. And so anyhow, that's a very long answer. Accounting frauds happen all over the world. I don't think that the Chinese internet companies are the problem, but there are some Chinese companies that are clearly to be avoided by investors.

1:17:14Kevin, thank you for joining me on the show today. For those listening that have enjoyed this conversation, want to learn more about you, international markets, some of your funds, where's the best place for them to go? Well, you can find me on LinkedIn or you can go to emqqindex.com. That's the website, the same as the ticker emqqindex.com is where you'll find out all about us. I'll be sure to put a link to the fund and Kevin's LinkedIn in the show notes below. Kevin, thanks so much for joining me. Thanks for having me. All right, guys. That's all I had for this week's episode of Millennial Investing.

1:17:52I'll see you again next week.

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