Publication Plans for the Intelligent Option Investor

I am happy to announce that my first popular press book, The Intelligent Option Investor: Applying Value Investing to the World of Options, will be published in mid-2014 by McGraw-Hill.

The Intelligent Option Investor the first book to offer a clear, comprehensive, and common sense approach to the valuation of stocks, shows how to avoid common behavioral biases and structural impediments, and explains how to safely use listed options to tilt the balance of risk and reward in the intelligent investor's favor.

Options are wonderful--but often misunderstood--financial tools that are peerless in their ability to boost growth, generate income, and protect gains in an investment portfolio. Once an investor understands how options work and glimpses options' great flexibility and power, they will look at all their investments in a whole new light.

I am excited to be working with Mr. Knox Huston, an influential and talented editor at McGraw-Hill, and very happy to be represented by Mr. Sam Fleishman, of Literary Artists' Representatives.

Even though there is still a great deal of hard work in front of me, I also want to offer my thanks to Brent F., Neil K., and Ben L., whose consistent encouragement and wise advice has helped me manage to get to this point.

Should I Close a Short Put Position Early?

I got a question from a long-time reader--Wilson M.--today, that I thought was a good one. I'm sure a lot of people have wondered the same thing, so I asked Wilson if it would be okay to post our conversation on the IOI Blog. He graciously assented, so here it is. Hope this exchange helps you as well:

Original Question

Hi Erik,

Do you have any rules that you follow on when to close out a put write position early?  I had a position in TDC and SYMC that were set to expire at the end of the week.  Both were trading within 2-5% of their respective strike prices.  I closed out of SYMC early and it looks like I could have just let it expire worthless, while with TDC I held on and they preannounced and the stock plummeted.  Argh!

Regards,

Wilson

Erik's Answer

Hi Wilson,

Thanks for the mail and sorry about the TDC—I feel your pain on that as similar things have happened to me in the past too…

There are a couple things that I usually look at.

1. Option liquidity and bid-ask spread. If the spread is too large, I usually just assume I’ll have to own the stock eventually, so do a lot of valuation work up front. Doing that, I feel more confident about keeping the thing open until expiration and don’t mind owning the underlying.
2. Perceived probability for negative news. For liquid options, I don’t mind trading out ahead of time if I start to see more signs that there could be something negative to valuation on the horizon. I did this with Western Union WU a few years ago, because I started to get worried that the Morningstar analyst was not being realistic in his assumptions for the possibility of a slow-down in European and North American migrant worker populations (one key driver to WU’s business model).
3. Unrealized profit. If I find that I am worrying about negative new on a stock in which I have a position in a liquid option, and on which, if the option expires OTM, I’ll only make an additional $0.05 or something on premium of $1.75, for example, my fear usually overwhelms my greed and I’ll leave the extra $0.05 on the table and close out.

Remember that in the case of TDC, you can write covered calls on top of your new stock position that will help you to keep lowering your effective buy price. Just make sure that the strike price at which you write your covered calls is above your original effective buy price, otherwise you run the risk of locking in a loss on your investment.

Western Union Stock Price
Source: Yahoo! Finance

Thanks again for the question--this is a good one that I think a lot of people wonder about some time or another.

All the best,

Erik

New LEAPS Listed - CAT as a Bearish Investment?

One aspect of option pricing that I discuss in The Intelligent Option Investor is that very long-tenor options tend to be structurally mispriced. This mispricing allows for an intelligent investor to tilt the risk-reward equation in their favor when investing in LEAPS--especially LEAPS on companies whose statistical volatility is low.

Today, I noticed several news stories about new LEAPS being listed for some large market capitalization stocks. These options will expire in January 2016--giving an investor more than 26 months of economic exposure to the underlying companies.

The LEAPS I saw announced today were on:
The Boeing Company BA
Caterpillar, Inc. CAT
ConocoPhillips COP

At the VALUEx Vail conference hosted by Vitaliy Katsenelson, Kynikos Associates' founder Jim Chanos presented what he described as his favorite short idea--Caterpillar. His argument deals with the company's exposure to Chinese infrastructure overinvestment, which he believes to be an issue of epic proportions.

After listening to him speak, I pulled together a quick valuation of CAT and presented an option strategy to gain exposure to CAT's downside using a put option. Vitaliy posted my CAT presentation on the web, so please take a look at that if you have not already.

Caterpillar Valuation Range
Source: Company statements, IOI analysis

As I explain in The Intelligent Option Investor, it is better to gain upside exposure through LEAPS than to gain downside exposure, but if Chanos is right about the future direction of iron ore, the January 2015 puts mentioned in that presentation look attractive, and have gotten much cheaper since I originally presented the idea.

I have been meaning to do a more complete valuation of CAT since then, but keep getting sidetracked. This is another of my many back-burner projects that I hope to come back to soon.

How Do You Know the Sun Acquisition Helped Oracle's Business?

Introduction
I recently posted an article on SeekingAlpha (Oracle's Sun Acquisition is Paying Off in Spades) that drew from the data about operational leverage that I posted previously on this blog. The SeekingAlpha posting received several good questions, and I wanted to post those questions and my answers here.

In a nutshell, the questions are:

1. Oracle seems like its obfuscating its financial picture. How do you know that it is making good acquisitions in light of the continuing shrinking in the hardware business?
2. Your operational leverage argument may not be causal, but coincidental. How do you know the software update segment wouldn't have done better without the Sun acquisition.

I split edited versions of the questions and my answers in two blog postings since each Q&A is fairly long.

How Do You Know the Sun Acquisition Helped Oracle's Business?

Your main contention is "The Sun acquisition was good, and we can show that by pointing to the increasing operational leverage of the software update segment since the acquisition."

I don't see your argument for a causative connection here. There is a temporal overlap which, in and of itself, isn't explanatory and might be coincidental. It's perfectly possible that the software update segment might have been doing even better without Sun.

Answer
Thanks for your comments and questions--I'm glad the article was thought-provoking for you.

Regarding causality, you are right that it is hard to draw causal connections with any data, and I agree that one should be careful about doing this. The points you raise are valid and you'll notice that in the text of the article, I am careful to use verbiage like "suggests" and "likely" rather than "proves".

To address your question of causality, from a statistical standpoint, the first step is to see whether or not the new data is really anomalous to prior results. In other words, before we show that X has changed due to Y, we should show that X has really changed.

Looking at the leverage data, I would say that there is the strong indication that the results of the last three years have been anomalous in comparison to its prior history:

Estimated Operational Leverage for Oracle's Software Update Business
Source: Company Statements, IOI Analysis

Looking at the above, it is clear that the firm had fairly stable and maybe even declining operational leverage in the years preceding the merger; after the merger, the measure increased markedly.

There is not enough data in this series to do a scientific comparisons of means with a high statistical confidence, but this kind of study is rare in the analysis of single companies, so we do have to make a bit of a leap of faith. Certainly, looking at the above graph, it would be harder to make the case that something substantive had not happened after 2010 than that something substantive had happened.

So, I am comfortable saying that something in the business likely changed subsequent to the Sun acquisition. The next step is to consider if there is a plausible causal link between the the acquisition and the increased profitability. Indeed, I can think of two:

Bundling Advantages
Oracle may be bundling its software in such a way as to generate greater profits from every sale. This might come from telling Solaris owners:

"You don't have to buy a new box, but we can sell you an inexpensive upgrade that will help your old box run faster. If you buy your normal db upgrade, we'll throw in this Solaris software upgrade for just 10% more and you'll get 50% faster access speeds."

Obviously, I'm making this conversation up, but this kind of "vertical integration of the stack" mechanism is one of the stated strategic goals of ORCL, so it's probably taking place in some form or another. This is the first mechanism that hit me as I was looking at these data.

Java Monetization
Along with the purchase of Sun's hardware lines, ORCL also got access to Java. There is evidence that ORCL is doing a better job at monetizing its ownership of Java than Sun was. Certainly, considering that Sun was mainly a hardware company and wasn't nearly as concerned with the software side, this improvement under ORCL shouldn't be a surprise.

A lot of programmers were worried that ORCL's ownership of Java would mean that Java would be too commercialized. It seems like ORCL has so far been very skillful in walking the fine line between playing nice in the game of the Java Standards Committee and making sure that it was getting paid for the programming resources it was expending on Java.

There is good evidence that the programming community now believes that Java has improved under ORCL's stewardship, and it is hard to believe that Ellison would not make sure he was getting some economic return on these improvements.

Regarding opinions whether the Sun acquisition was positive or not, there is anecdotal evidence on both sides of the argument.

Some ORCL insiders have criticized the Sun acquisition saying that the hardware business is terrible. Some salespeople are not happy that they're not getting credit for hardware sales that come about because of their relationship with software clients, etc. These are the kinds of things that take time to work out in an acquisition, so I tend to discount the stories as anecdotal and figure that the issues will be worked out over time.

On the other hand, Ellison has said that the Sun acquisition is the best one he has ever made. He is a software guy and the profits of his company largely stem from the software business. He's not an idiot--he can see that the paring down of the hardware business is affecting the top line--so he must be thinking that the Sun acquisition has helped his software business somehow. Looking at the data on operational leverage, we see that after the Sun acquisition, the software business is rapidly an anomalously increasing its profitability.

Taking all of this into consideration, I am pretty comfortable in making the contentions I have in this piece. Of course, I cannot be completely sure, and I am constantly looking for proof that my contention is wrong.

Thanks for your excellent question--your point is well taken,
Erik

How Do You Know Oracle is a Good Acquirer?

Introduction
I recently posted an article on SeekingAlpha (Oracle's Sun Acquisition is Paying Off in Spades) that drew from the data about operational leverage that I posted previously on this blog. The SeekingAlpha posting received several good questions, and I wanted to post those questions and my answers here.

In a nutshell, the questions are:

1. Oracle seems like its obfuscating its financial picture. How do you know that it is making good acquisitions in light of the continuing shrinking in the hardware business?
2. Your operational leverage argument may not be causal, but coincidental. How do you know the software update segment wouldn't have done better without the Sun acquisition.

I split edited versions of the questions and my answers in two blog postings since each Q&A is fairly long.

How Do You Know Oracle is a Good Acquirer?

I have been following ORCL for some time now and my unease stems from the following: 

• ORCL stopped breaking out its database and middleware business from its applications business and now reports everything under "cloud revenues." Now you do not know how each business is doing. Maybe all lines are doing well - maybe not. 

•  Too much goodwill ($40 billion) sitting on balance sheet. 

• The hardware business is yet to find its bottom. Even for Q2, Safra has guided to minimal to negative growth for the hardware segment. If the business keeps shrinking, I think they will have to write down the Sun acquisition in the same way that HPQ had to write down the Autonomy acquisition.

Answer
Thanks for the thought-provoking questions--much appreciated. I'll address each one-by-one.

Oracle financials are confusing
I know how you feel. I get frustrated with companies too when they change reporting categories seemingly to obfuscate performance of a certain segment or business. CSCO has driven me crazy with this tactic and I think ORCL is guilty to a lesser extent.

The one thing I would say is that for something as large and complex as a modern multinational, there is simply no way to get all the detail one would like and I'm not sure that having all the data would do a great bit of good in terms of tightening up the valuation.

My goal is to be 80% right rather than 100% wrong--get the direction basically right and try to find clues (like the op leverage) to either deny or confirm my educated guesses.

As an analyst, I believe that I and other analysts get caught in a behavioral trap where we can never have enough data without realizing that the marginal impact of what they are trying to figure out is very small to the valuation overall. I do think that sometimes we simply cannot know everything but think that my valuation assumptions have pretty good .

Goodwill
I know a lot of people are concerned when they see goodwill in a statement of accounts, however, it is best to keep in mind that goodwill is only an accounting convention and that its link to economic reality is tenuous.

Goodwill simply is the amount paid for an asset above the book value of that asset. There are a lot of issues with book value in the first place, but keep in mind that most of the companies ORCL acquired in the mid-2000s were software companies and that software companies have a higher proportion of 'assets' that are not reflected on a balance sheet then say, a widget manufacturer (e.g., IP of present products and those in development, worker know-how and experience, etc.).

Because the intangibles were not listed on the balance sheets of the acquired companies, their book value was understated. This understatement leads to a good bit of the goodwill on Oracle's balance sheet now.

The best way I have found to think about acquisitions and whether they are creating or destroying value is to look at a chart like this one:

IOI Estimate of Oracle's Marginal Growth in Economic Profits
Source: Company Statements, IOI Analysis

The most important thing is whether or not the acquisition of another firm is adding or destroying value for the shareholders; the easiest way to think about value creation or destruction is to look at how much wealth the firm is creating versus some benchmark (like nominal GDP growth). ORCL has done, according to this measure, an excellent job of creating value for its shareholders and that is what the second chart expresses.

The Hardware Business Hasn't Found Bottom Yet
Right--I agree that the hardware business has not found a bottom yet and its revenues may continue to shrink.

That said, ORCL's primary business is software and its cash cow is selling subscriptions to updates. My point related to operational leverage is simply that the acquisition of Sun seems to be generating steadily increasing margins for the most important of ORCL's divisions, and that no matter what happens shorter term with the small proportion of sales and profits stemming from the hardware business, it is the improvement to the software update business that is really important for ORCL shareholders.

A write-down would be appropriate if the company could not show its auditors solid proof that the Sun acquisition was not impaired. Considering the sales increases in "engineered systems" and the profitability increase in its most important division, I don't think this would be a hard case for the management to make to the auditors.

Thanks again for your excellent questions,
Erik

Options for a Fully Valued Market

Warren Buffett, in a recent television interview, said that he was having a hard time finding stocks to buy these days. Carl Icahn seconded the motion a day later, saying the market was fully valued. What's an investor to do?

While options are not magical devices that can create cheap stocks out of thin air, they can be used to tailor an investment portfolio's risk and return profile, and this ability can be a great benefit in a fully valued market like today's.

There are three simple option strategies that can help investors in a fully valued market:

1. Protecting a portfolio from a market fall.
2. Generating income by selling upside potential.
3. Using the income strategy to subsidize the protection strategy.

The next three blog postings will look at each of these choices in turn. 

First, let's look at how best to protect a portfolio from a market fall by buying put options.

Protecting a Portfolio by Buying Put Options

Most people know that buying put options is the financial analog to buying home insurance. But knowing this doesn't help when it comes to figuring out the nitty-gritty details of how to most efficiently buy this financial insurance.

For instance, let's say you've got a diversified portfolio of 20 stocks with a value of $100,000. Should you buy puts on each of those stocks? Should you buy enough puts on each stock to insure the full portfolio value? If and when the market does fall, what should you do with the insurance?

The first thing to realize is that buying puts is a very expensive proposition. For example, let's say I have a position of 200 shares in Cisco Systems CSCO. Cisco closed on Friday at $24.51 and I want to insure myself from the stock falling below $24 / share for about the next six months (at which time, I might decide to buy another insurance policy). Today, I could buy one put contract (one contract is equivalent to 100 shares), good through April of next year, for $1.70 / share. To insure my entire 200 share position, then, I would need to spend (200 * $1.70 =) $340. This works out to paying insurance premium of 7% of the position's value for just a little over six months worth of protection (or around 12% per year). So, assuming that all of the other 19 stocks in my portfolio cost roughly the same to insure as Cisco, I will be spending $12,000 per year to fully hedge my portfolio! That is a pretty high bar to hurdle.

Even if I decide to protect my position against the stock falling below some lower point (let's say $22), but I'll still have to pay $0.90 a share, and in addition to that, will have to pay a "deductible" of ($24.51 - 22.00 =) $2.51 per share--over 10% of the value of the shares.

Don't despair, there are things you can do to use put options more effectively in a portfolio. I have these three rules of thumb:

1. Buy puts on an index (e.g., SPDR ETF SPY)
2. Buy puts for a purpose
3. Don't try to protect your entire position

Puts on an Index

Options on an index (both puts and calls) are always cheaper than puts on an individual stock, so to protect a diversified portfolio, you should always look to index options first. For instance, buying puts on SPY expiring next March and with roughly the same "deductible" as the Cisco puts mentioned above cost, on an annualized basis, just more than 5% of face value. Five percent of face value is still a lot for insurance--$5,000 per year in insurance costs is high--but it is a lot better than 12%!

Purposeful Puts

There is something psychologically satisfying to see a green arrow on your brokerage screen when the market is down heavily. No matter how bad things get for the Dow, one can always feel a little bit better by focusing on the gains from an index put contract. Psychologically soothing is not the most important reason to buy a put option. Ideally, we should be ready to use some of the proceeds from selling that put option to invest in something that will generate more wealth for us in the future and leave us better off long-term.

Most investors have a list of stocks they'd like to buy more of and an idea of what price they'd like to buy them. For me, I'd like to buy 180 shares of Oracle ORCL if it were to drop to around $28 per share. This transaction would cost me $5,040 and I believe net me a gain of around 30% over the long run. So, in this case, why don't I buy puts such that, if the market drops enough to bring Oracle down to my $28 buy price, I have a spare $5,000 to spend on buying those shares? This is exactly what I mean buy "purposeful puts."

From Friday's close, Oracle would have to drop around 20% to get down to $28. So, perhaps I will buy put options on the index that protect from a drop of greater than 10%--at Friday's close, that would imply buying put options struck at $152. These put options closed at $2.68 per share. If the market does drop 20% (i.e., SPY falls from $170 to around $135), at minimum, my puts will be worth ($152 - $135 =) $17 per share or $1,700 per contract. I say "at minimum" because if the market drops quickly, people will get scared and the demand for puts will increase and as it does, their value will be something more than the minimum.

Let's say I buy 3 put contracts on SPY struck at $2.68. This would cost me ($2.68 * 3 * 100 =) $804. If SPY does fall 20%, the minimum value of my puts will be ($17 * 3 * 100 =) $5,100--enough to allow me to buy the Oracle shares I want. Considering that the value of my puts will probably be much greater that the minimum, I might be able to buy more Oracle or some shares in another stock I might want to buy.

If I look at my expense for this strategy in terms of the value of my portfolio, it has dropped down to an annualized rate of only 1.5%--a much lower hurdle to cross than 5% or 12%.

However, while this strategy is cheap, has it really protected my portfolio? In a conventional sense, no. Perfect protection would be having enough cash to completely compensate one for the 20% drop in portfolio value suffered in the market drop. However, too often, investors who think about passively protecting their portfolio as they might their house are car, end up sitting on unrealized gains from their puts rather than realizing these gains and putting the cash profits to work to generate greater returns in the future. In this case, the puts may indeed provide some psychological benefit, but in terms of economic benefit, it is usually just about a wash.

If I have confidence that the market will recover from its 20% drop in within a time horizon that matters to me, I should also have the confidence to invest in my best investment idea when the market does drop. In this sense, purposeful puts whose profits are realized and plowed into a good investment does much more good than passive puts whose value is never realized.

This point leads naturally into the next point.

Don't Protect Everything

Seeing red marks on one's brokerage screen is never a pleasant experience. However, for an individual investor, real investment risk is not a risk of day-to-day fluctuations in the unrealized value of one's portfolio. Rather, real investment risk is not generating enough wealth over one's investing time horizon to meet one's financial goals. Whether your goal is to provide for a comfortable life in retirement, pass along a comfortable estate to your descendants, or build a new wing onto the local hospital, risk comes down to not being financially able to do what you want in the time frame you want.

If your investing time horizon is so short that a 20% loss in value of your portfolio would create significant hardship in terms of your financial goals, I maintain that it would be better to think of how to better allocate your assets--away from equities and other risky assets and towards government bonds--than to think about how to protect your gains using put options.

As we have seen in the preface, attempting to protect one's entire portfolio will incur a very high cost. The compound annual growth of the equity market since the end of the 1920s has been on the order of 10%. For large capitalization firms, you can expect to pay on the order of 12%-15% for a year's worth of protection. So buying protection on all of your holdings would end up generating something like a 300 basis point per year average loss. This is not good protection.

There may be times when protection on an individual name makes some sense. For instance, let's say you bought a stock on January 2 for $20 a share, and in October, it is trading for $50. Realizing profit on this investment in October will generate a higher tax bill because short-term capital gains are taxed at the same rate as one's normal income whereas long-term capital gains are taxed at 15%. If you are in the 35% tax bracket, this is the difference in paying $10.50 per share of tax by selling right now or $4.50 per share if you can wait another two months to sell. In this situation, it does make a lot of sense to buy option protection as long as you're paying less than the amount you will save in taxes.

Put Protection Summary

In my experience, most people use puts in a way similar to a security blanket. I hope that after reading this article, you will not make this mistake. In the end, security blankets are passive instruments that may make one feel better, but do not actually make one better off.

A good protection strategy starts with an intelligent assessment of risks: asking the question “Am I taking on too much risk by owning [this / this many / this kind of) stock(s)?” If you are confident that you can manage the risk of a temporary and unrealized drop in value of your portfolio, then ask the question “Is it a good time to gain exposure to a particular stock's downside potential and / or to that of the overall market?”

Given that your answer to this second question is also the affirmative, it is good to consider the characteristics of a good protection strategy:

• It should be a proactive investment based on a rational view, just like an investment in a share of stock is.
• It should create as low of a drag on one’s portfolio as possible. 
• It should provide you with the opportunity to increase your wealth over time.

Looking for index options when the market seems fully or overvalued, making a plan of what stock to buy if the market does indeed fall, then realizing put gains and investing in a wealth-generating asset when the time comes—this is the mark of a dynamic, intelligent put protection strategy.

In the next article, we’ll talk about another way of using options in a fully-valued market—generating income from selling away non-existent upside potential.

Progress Toward a Publishing Deal

I am happy to announce that my first book The Intelligent Option Investor: Applying Value Investing to the World of Options will be represented by Mr. Sam Fleishman, Literary Agent and Vice President at Literary Artists Representatives.

Sam has a long and fruitful career as an agent and has successfully brought a respectable list of non-fiction titles to market, including quite a few regarding value investing. Here is a list of some of the titles he has agented that look especially interesting to me:

JFK In the Senate: Pathwy to the Presidency (Title to be released on October 15)
Taking Charge with Value Investing
Think, Act, and Invest Like Warren Buffet
Dirt: The Erosion of Civilizations
Investment Mistakes Even Smart Investors Make and How to Avoid Them

Sam tells me that the fall buying season for publishers is just getting into full swing, so I have been busy preparing a formal Book Proposal and primping my draft to get it ready to show to publishers. As such, my IOI Tear Sheets and accompanying Valuation Notes may be a bit spotty for a few weeks.

Before I started full-swing into preparing the proposal, I was working on a covered call idea regarding ITC Holdings (ITC) an idea brought to me by long-time reader and friend, Ben L. I had gotten pretty far into research and valuation when I started in with the proposal, so I'm hoping I can prepare a Tear Sheet and publish it pretty soon.

Also, quite a few people have been asking me what I thought of Tesla (TSLA). I took a look at Professor Aswath Damodaran's valuation of the company on his blog, and while it seems it has gotten a good bit of play in the popular press, I think he underestimates the difficulty of valuing a company that is still in a rapid expansionary phase. At the very least, his (theoretically pristine, and I would argue excessively precise) lognormal valuation curve with a mean value in the upper $60 range does not, in my opinion, accurately reflect what I suspect to be the truly enormous valuation uncertainty of Tesla. If I can find some time to take a closer look at TSLA, I will do so, simply because so many people seem interested in it.

I have also had a suggestion to look at the valuation of a Canadian company in the throes of a special situation called Extendicare and will be looking at that as well.

Stay tuned regarding publication of The Intelligent Option Investor! I'm excited that I am so close to finally seeing this in print!

Value Investing in Overseas Markets

Recently, two things came across my desk regarding using fundamental analysis to value overseas companies. One was a client request to help them with a valuation of China Gerui (CHOP) and another was a posting regarding value investing in foreign markets on a LinkedIn value investing discussion group to which I belong.

Having worked in Japan for five years, invested professionally both in Japan and Europe, and done a great deal of reading and thought regarding behavioral finance, I have come to realize the very large effect culture plays in making investing choices.

An economic system is an outgrowth of cultural mores just in the way a governmental system is. To the extent that a system of government as well-understood as "democracy" can have such vast differences in implementation from one country to another (e.g., Russia, Iraq, Japan, and the U.S. are all representative democracies, but a "common sense" political move in one country might be an indictable felony in another), is it so strange that a system of economic risk and reward like the stock market might manifest itself very differently from one market to another?

Following is my response to another board member's question regarding the most important factors in successfully value investing in overseas markets.

===========

I'll bring a little different perspective to the conversation. I have invested professionally in Japan and Europe, lived and worked in Japan, and have consulted with the World Bank regarding valuation of their emerging market equity portfolios. The more I have seen throughout the world, the more I have realized that Anglo-American conceptions of "value" and corporate ownership are just that--Anglo-American. Basically, the tenant of "find a security trading for less than its intrinsic value, buy it, and hold it until the market realizes its true worth" is contingent upon such concepts as the sanctity of the rule of law, corporate control in proportion to ownership stake, and the primacy of the rights of the owners (vis-a-vis management, the government, and society at large).

Anglo-American investors treat these issues as if they were matters of common sense, but in fact, in other countries (OECD countries with highly developed securities markets), Anglo-American "common sense" notions are sometimes regarded with antipathy and fear. Look to the experience of activest investors in Japan (Osaka Stock Exchange, Bulldog Sauce, etc.) for examples. Look to Germany's corporate structure that includes worker and societal representatives as well as directors chosen by shareholders. Look to the Byzantine complexity in the ownership structures of some French and Italian concerns (all of which are designed to enrich one person or family...if you could only figure out which person it is and get on the same side of the trade as him / them!).

From my perspective, forex hedging and the rest of the bookkeeping details are secondary and of much less importance to understanding the cultural rules that operate in a market in which one is looking to invest. Believing that everyone in the world approaches business and valuation in the same way as those educated or otherwise brought up in the Anglo-American tradition is ethnocentric and bound for eventual failure, in my experience and opinion.