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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. 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. Currency 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. 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. 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.
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. 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. 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. Offshore Real Estate 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. 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. 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?” Deposit Accounts 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%. 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…’ Enter The Off-shore Bank 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. Equity Markets 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. 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. The following is James's first article for the magazine:
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