Dec 2007

CHANCES ARE you’ve heard the expression, “Any Port in a Storm.”

Those of us on land tend to take the phrase lightly.

But for those at sea, it’s a much more serious matter – as two American ships recently discovered.

A few weeks ago, the New York Times reports, two U.S. minesweeping vessels were threatened by “a serious Pacific Ocean storm.” The sweepers were caught far from home, and sought shelter from the elements in the waters of Hong Kong. Perplexingly, China denied them permission to enter.

Fortunately the storm passed without inflicting damage – a lucky thing. But American naval forces were not happy about the snub.

It isn’t clear why China refused entry to the American ships. Perhaps it was a low-level bureaucratic bungle… or a quiet message… or even a calculated provocation. (China may have been “testing the waters” in a rather literal sense.)

Either way, those ships had the right idea at least. Hong Kong has been a highly prized “port in a storm” for centuries. The area’s importance stretches back more than 1,000 years, to the Tang dynasty. Before Europeans learned to eat with a fork, Hong Kong was established as a bustling center of international trade.

A little more recently – 150 years or so ago – Hong Kong’s virtues were used to great advantage by the Taipans.

And just who were the Taipans? Wikipedia explains:

A tai-pan was an influential foreign businessman doing business in China or Hong Kong in the 19th century. The Chinese term is now used in a more general sense for business executives of any origin. The Chinese term literally means “big class,” which is equivalent to the English term “big shot.”

The original Taipans were fearless Scottish and English traders who built their fortunes linking Europe and the Far East. They shipped anything and everything of value across the high seas… tea, silk, opium, cotton, grain, bullion, you name it.

The most successful of the Taipans headed up powerful trading houses and made Hong Kong a pivotal base of operations for their merchant ships. Victoria Harbour served them well as one of the deepest sheltered harbors in the world.

When dangerous typhoons raged on the open ocean, the Taipans discovered they could moor their ships in Hong Kong's protected waters, and then venture out again when the coast was clear. It was this advantage as a safe haven—and its excellent location at the mouth of China’s Pearl River Delta region—that made Hong Kong such a prize for the British. (China ceded control of Hong Kong to Britain as a result of the first opium war in 1841. They have it back now.)

Here and now in the 21st century, we can take a page from the original Taipans. Just as those bold traders saw vast fortunes to be made linking East and West, there are new fortunes to be made in emerging markets.

For example, legendary investor Jim Rogers believes that Shanghai today is the equivalent of New York City a hundred years ago… except everything is happening much faster now. And in addition to the Asian tigers, you have the new tigers of Eastern Europe… things happening in South America, India, Africa, Indonesia, Russia, and Turkey, just to name a few places… billions of newly aspiring middle class, hungry for bank accounts and lap tops and air conditioners and automobiles… new technology, new infrastructure, new wealth, and so on.

Over the next few decades, the lion's share of exciting investment opportunities will be linked to the developing world.

There are dangers too of course. The Taipans knew this all too well, and investors have been reminded of it recently. Storms can rage in markets just as they do on the open sea.

In line with Hong Kong and the merchant ships analogy, the safety of Victoria Harbour represents the cornerstone of the sound investment portfolio. Everything should be built on a foundation of low risk and financial strength. And then, once that base of safety is established, more aggressive opportunities can be pursued. Just as the Taipan ships ventured out into speculative waters for gain, the smart investor, once protected, can confidently venture out in pursuit of high returns.

Risk and reward, safety and opportunity… they are the yin and yang of trading and investing. It all ties together in the same way that a smart portfolio ties together. You start safe, and then venture out.

Nathan Rothschild caught the gist when he said this:

It requires a great deal of boldness, and a great deal of caution, to make a great fortune.

Rothschild was no Taipan, of course… but he would have fit right in. (And of course, the Rothschild family hasn’t done too badly for themselves.)

Don't think an emerging markets focus leaves other areas in the cold either. We just made a case for safe-haven investing with the Victoria Harbour analogy – and, like the Taipans of old, it's easy enough to see many areas of the market as new frontiers.

You can’t see it, but here is an imaginary glass raised in toast. To safe harbors, new frontiers, and new fortunes waiting to be made.