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A Not-So-Random Walk Down the Great Wall


My colleague David Bogoslaw and I attended a session on exchange-traded funds this morning, sponsored by Barclays Global Investors, and starring Burton Malkiel, author of “A Random Walk Down Wall Street.” Here’s David’s take, along with a few comments from yours truly:

Right on schedule as investors mull recent losses in Chinese stocks, Malkiel gave us sneak peek at his newest book, “From Wall Street to the Great Wall,” slated for release at the end of this year.

The subject, of course, is investing in the Middle Kingdom, which Malkiel highly recommends, not only for what he sees as sustainable growth for several more years but for “the most undervalued currency in the world.”

Amid all the talk of the impact of interest rates, stock valuations and currency moves on a country’s economic expansion, Malkiel declared, “The only thing that is really important for economic growth is culture.” China fits the bill by virtue of its reverence for education, its strong work ethic, its entrepreneurial ability and spirit, and its risk-taking culture. Also required, he says, is a sense of history, which in China’s case is the knowledge that it accounted for one-third of worldwide GDP in the 1700s.

Contrary to those who question China’s willingness to continue down the road of capitalism, Malkiel sees the Chinese as true believers in the free market. That’s a result of the memories of hunger that many people who lived through it associate with the Cultural Revolution under Mao Zedong. Now the Chinese have a hunger to prosper. “Within 20 years China will be larger than the U.S.,” Malkiel predicts. “The energy you feel walking down the street in Shanghai makes New York look sleepy.”

Malkiel suggests a strategy of investing half of your money in H and N shares — the shares of Chinese companies that trade in Hong Kong and New York –- and the other half in non-Chinese stocks and countries that are major trading partners with China. And it’s actually not that hard to execute. His simple strategy is to combine the SPDR S&P China ETF (GXC) with Vanguard Pacific Index Viper (VPL). More sophisticated investors might construct a portfolio using a 30% stake in the SPDR S&P China ETF (GXC); a 20% stake in iShares MSCI Hong Kong (EWH); a 40% position in Vanguard Pacific Stock Index (VPL); 5% in Vanguard Energy Viper (VDE), and another 5% in Vanguard Materials Viper (VAW).

The nod to Vanguard ETFs isn’t surprising, considering Malkiel serves on the board of Vanguard Group. Even so, Malkiel doesn’t see eye-to-eye with Vanguard Founder Jack Bogle on the topic of ETFs. (Bogle likens trading ETFs to gambling at the casino.)

So how will Bogle feel about Malkiel’s latest push to invest in the volatile Chinese markets? “Jack doesn’t know about my China book, but he won’t like it,” Malkiel says.


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