| Thoughts
On Off-shore Investing Part 1 |
| The Escape Artist
reader is a different breed; we resonate a culture of those who have
the courage and vision to be different and follow our instincts to the
other side of the world. As a contributor to EA, I love the diversity of
the magazine’s articles topics. But with the tremendous response and questions
I’ve received regarding some recent articles I wrote on foreign real estate,
I thought it was time to submit an offshore investment primer. |
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| Have you ever watched
the so-called investment experts on CNBC? They remind me of TV sports
analysts who seem to think they always know who’s going to win and never
admit when they were wrong. Almost everyone jumps on the bandwagon, dishing
out the exact same advice from their collective ivory tower; few have the
courage to question, to think differently - they praise investor confidence
and brag about huge profits during a bull market run-up, then they chastise
irrational exuberance after the market crashes, as if they didn’t have
any part in it. Just once I’d love to see one of them on national television
accepting responsibility for their mistakes and oversights. But I digress... |
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| The mind-numbing mantra of “stocks,
bonds, mutual funds” pervades American investment canon. |
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| Any other deviation
from the norm is immediately labeled as high-risk, fraudulent, or illegal;
people seem to rule out global investment from the realm of possibilities,
and yet, quite literally, there is a whole world of opportunity out there.
In my business, I travel overseas seeking profitable, low-risk investment
prospects… yes, they exist. And they’re everywhere. |
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| So what do we mean by ‘off-shore’
investing? |
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| At its simplest, ‘off-shore’
means ‘international’. Over the last 20 years, the government, movies,
and media have portrayed off-shore investing as a dirty, illicit trade
undertaken by drug dealers and terrorists. Nothing could be further from
the truth. Tax evasion is illegal. Investing your money overseas isn’t. |
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| For example, maybe you think the
new Honda hybrid car so fantastic that you want to buy stock in the company.
You could purchase shares of Honda on the New York Stock Exchange in US
Dollars… or you could purchase shares of Honda on the Tokyo exchange in
Yen….. and actually you could purchase shares of Honda on several other
markets across Europe and Latin America. Each of these shares represents
ownership in the same company - Honda is Honda, regardless of which country’s
exchange facilitates the transaction. |
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| If you buy from one of the international
exchanges, you’d be investing off-shore. If you buy shares into an international
or emerging markets mutual fund, technically you’re investing off-shore. |
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| Currency |
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| Global currency trade is the
mother of all financial markets; there are quite literally hundreds
of trillions of dollars each year being exchanged between individuals,
businesses, speculators, and governments. As with all markets, there is
a supply of currency and a demand for currency, and the juxtaposition of
these factors largely influences the price of currency. To an inexperienced
investor, currency trading can be a bit bewildering - Dollars per Pound
versus Pounds per Dollar… it can become confusing to determine which is
rising and which is falling. |
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| Imagine currency as something
more tangible… like a sports car or a pencil (or whatever else is
on your mind). Suppose the price of a pencil is $0.20; you could
also say that $1 = 5 pencils. Generally, if we’re investing in pencils,
we want to buy pencils at a low price and sell them for a high price; so
if the price of a pencil goes from $0.20 to $0.25, we can now sell them
at a $0.05 per pencil profit. Similarly, we could say that a dollar used
to be worth 5 pencils, but now it is only worth 4. |
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| Back to currency; substitute a foreign
currency for your pencil. Let’s use one of my favorites, the Yeni Turkish
Lira (YTL). The rate is approximately 1.35 YTL to the Dollar…. (remember,
1.35 pencils to the dollar). In order to make money, we want the YTL
to get stronger relative to the dollar; so next month, lets say the YTL
is now 1.25 to the dollar. So when we bought it was 1.35 pencils to the
dollar, now its only 1.25 pencils to the dollar… so when we sell our pencils,
we get more dollars than we started with. |
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| The nice thing about currency
is its duality with the economic health of a country; if a country
is on the path to economic growth, chances are, the currency is rising
too. |
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| If a currency is falling, chances
are, the country doesn’t have its economic house in order (cough, cough).
To paraphrase Jim Rogers, currency doesn’t always tell you what’s happening,
but it’ll definitely tell you something’s happening. |
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| Back to Turkey. Anyone who
hits the ground in Istanbul can look around and figure out that Turkey
is on the move; the people are motivated, educated, and energetic, the
government is reducing inflation and unemployment to reasonable levels,
and the country is posturing for EU membership. While these may be long-term
socioeconomic issues, the currency has already been positively affected
in recent months - remember, rising economy, rising currency. To exemplify
the opposite case of a falling currency, consider the decline of the US
Dollar over the last four years. . .though I shall refrain from pontificating
further on this issue lest I weep all over my laptop. |
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| Offshore Real Estate |
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| Real estate - perhaps the most fun
(and for some, the most stressful) offshore investment you can make.
What could be better than 10 acres of Panamanian beachfront or a small
finca in Patagonia? I love taking business trips to look at property in
Latin America… And typically, the prices are phenomenal. |
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| My business is in the midst of making
a large beachfront acquisition in Panama for a tiny fraction of what we
paid for a sliver of a lot in Florida. Just like the currency market, as
Panama grows and improves, so will its real estate. In my assessment, it’s
simply a matter of time (and not much at that) until Panamanian
beachfront becomes much more expensive. Nicaragua is not far behind. |
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| Many countries have passed favorable
legislation regarding foreign ownership of real estate including tax holidays,
residency status, preferential banking, and other incentives. The general
risk that people typically feel about overseas real estate (and I get
this question all the time) is “What are the chances that the government
of so-and-so would take my property away?” to which I always say “What
are the chances that your local government would take your property away
(as in, to build a new road, or bulldoze your house for a strip mall)?
And, by the way, when was the last time your county assessor told you that
you don’t have to pay your property taxes? When was the last time your
government got you a better rate at the bank?” |
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| Deposit Accounts |
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| While US rates are finally creeping
up, I remember the days, not too long ago, when my savings account
was earning a whopping 0.75%. |
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| Oh yeah, I had to pay a third of
that back to the government in taxes, leaving me ½ of 1 percent
(that’s per year, not per month)… not even enough to outpace inflation.
So I thought to myself ‘Self, this is ludicrous, its time for a change…’ |
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| Enter The Off-shore Bank |
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| 6%. 10%. 15%.
20%. These are actual rates on deposit accounts (CDs, savings, etc.) in
different countries around the world. Argentina. India. Dominican Republic.
Turkey. Many foreign banks offer you the ability to keep your money in
US dollars, Euro, or Pounds (though at different rates), provide debit/check
cards, bill pay service, and a variety of other features you would find
in a domestic bank. If you want to get exotic, you could choose to exchange
your money into the local currency. Using Turkey as an example again, suppose
you changed US Dollars into Yeni Turkish Lira and deposited your new currency
into a Turkish bank yielding 20%. After one year’s time, the Lira has appreciated
10% against the dollar, turning your 20% return into a 33% return… slightly
better than ½ of 1 percent. |
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| Equity Markets |
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| When you hear equity markets,
think ‘stocks’. Stock trading has become quite popular in the United
States over the last 10-years with the advent of internet trading platforms.
Many people have heard of some overseas market indices - the London FTSE,
French CAC-40, etc. Many have never considered markets in the rest of the
world, particularly in Latin America; perhaps they would if they knew that
the Mexican stock market outpaced the Dow by 10 to 1 in 2004, that Brazilian
and Argentine markets outpaced the Dow by 4 to 1 in 2004. So far for 2005,
the Dow is down about 4% while Mexican and Argentine indices are up about
2.5%. In all honesty, I’m not much of a stock market person; I choose to
invest in opportunities that I have more control
over. But of the few public equities that my company has chosen, most are
foreign; in my business, we’re particularly bullish on Bolivia. Emerging
markets are like small businesses; with the right conditions, capital influx,
and leadership, the growth potential is explosive. |
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| Part II of
this article will focus on IBCs, legal and tax implications, and benefits
of off-shore. Feel free to contact me in the meantime for advice, questions,
feedback at james@blackknightgroup.net.
I’m glad to help. |
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| The following
is James's first article for the magazine: |
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