Profit from the chaos

banker xIf you’ve been following the news or watching the markets you can’t help but notice that many are linking the current correction to Emerging Markets. These are markets that are not considered solid or stable places to invest a lot of your capital. Markets like Thailand, Indonesia, China, India, Turkey, South Africa and Brazil share several common characteristics, which put them squarely in a category of their own. These characteristics are:

1)    non unified currencies meaning they do not belong to a currency bloc like the European Union

2)    high growth and frequent boom and bust cycles

3)    governments that are prone to policy changes that often surprise and scare investors

4)    illiquid markets meaning there are few stocks that are being chased by a lot of money

5)    lack of transparency in accounting and regulation of markets

6)    difficult to invest in by foreigners

Now, the list above is enough to scare away the most enthusiastic investor in the best of times to be sure. But, it’s the same list that can produce double and triple digit profits if you know how to trade these markets like a pro…

Remember, most of the world’s population lives in emerging markets and that means growth and opportunity of major proportions compared to developed markets.

There are a few simple rules that you need to follow to turn the chaos of emerging markets into major profits for your portfolio:

1)    allocate a small portion of your portfolio to these markets; they are not cornerstones of a portfolio but should make up the section devoted to speculation and growth

2)    buy when “blood is running in the streets”, when the pundits are calling for total chaos

3)    invest when the crisis is caused by political and not economic difficulties, For example, the current crisis in Thailand is a result of a political crisis where a big chunk of the population is against the current government

4)     invest using closed-end funds

5)    trade these markets as if they were short-term investments not long term core holdings. Over the past twenty five years emerging markets have crashed and boomed more than markets in developed markets

Closed-end funds are my vehicle of choice for these markets. These funds are mutual funds that trade in real time like stocks. These funds issue a limited number of shares and mark their holdings daily to come up with a net asset value (NAV). The managers charge an annual management fee and you can buy the funds in any type of account during market hours just like stocks. There is one thing, however, that makes these funds different from any other vehicle and the reason I choose them over all other vehicles when investing in Emerging Markets.

You see, these funds trade at a discount or premium to their net asset value depending two factors. The first is investor sentiment and the second is supply and demand. Supply and demand is the result of how many people are buying and how many are selling. And, when there is a panic or crisis more people are selling than buying and as with any stock type of investment, that can result in a crash in the price that is not related to the funds’ net asset value. In theory the price should reflect the net asset value otherwise an inefficiency exists.

During crashes and panics, it’s possible to buy the funds at a major discount to its actual asset value. This is like printing money because you can buy $1 of assets at discounts of anywhere from 10% to 40% or more depending on the severity of the panic. My rule of thumb is to buy emerging market closed end funds anytime the discount exceeds 15% and to back up the truck one the discount crosses 25%. These markets are not going out of business, yet because of the supply/demand characteristics of closed end funds, they can be priced that way.

To get a list of closed end funds and to find out which ones are trading at discounts all you need to do is type the fund symbol (which you can Google by typing in the country name and the term closed end fund) at this website: www.cefa.com, which is the Closed-End Fund Association. it lists every fund, the holdings and whether the specific fund you are looking for is trading at a discount. Don’t leave money on the table by ignoring what could be one of the best investing opportunities in a decade!

To your wealth,

Banker X.

P.S. from Midas Legacy Editor: Through his Washington contacts, Banker X exposes insider trading activity and sends appropriate specific BUY recommendations to subscribers to his C.H.I.R.P. service.

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