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May 20, 2009

India: The Easiest Investment You Will Every Make

By Andrew Mickey, Q1 Publishing

What if I told you I found an investment opportunity so simple that even a two-year-old could make a fortune?

Would you believe it?

Or, would you say thatís impossible. Investing isnít that easy. Investing successfully takes a lot of experience.

Well, either way, there is one investment which should be getting experienced investors and novice investors excited. I consider it one of the easiest ones youíll ever make. Itís one which will only get better with time. Best of all, it could be one of the most lucrative investments you ever make.

Sound interesting?

I thought so.

Thatís why yesterdayís news, which sent an entire index up 17% in a single day, didnít really matter much to me. Itís just a sign of things to come.

A Shooting Star

Iím talking about India.

Long-time readers of the Prosperity Dispatch know the India story well by now. India is one of the very few countries which has laid the foundation for a genuine economic boom. Iím talking about the type of boom which could last for decades.

As we looked at back in the winter when we were looking for gifts to give better than U.S. savings bonds (Give the Gift of Prosperity):

India has everything going for it. It has a relatively young population. Its workforce will be growing for decades. It has the government institutions in place to protect property rights to support a capitalist economy.

You see, India is different than all of its BRIC counterparts. India is young.

India is home to more than 500 million people under the age of 25. About half of the country is under 25. About 35% is under the age of 15. Theyíre all young. And in a few years will be entering the workforce.

This is the exact opposite of China, Russia, Western Europe, and the United States where the populations are aging.

This is the most important part of the equation. You see, young people are able to produce more. Once they are done school or training for a specific trade, they can work longer hours, produce more in those hours, and wake up and do it all over again the next day. Theyíre young and versatile.

As a result, there will be plenty of labor in India to have a truly fast growing economy. An entire baby boom is reaching its productive years. There is a lot of growth ahead for India and there will be plenty of young people to fuel that growth.

Demographics Donít Lie

Think of a theoretical town of 10 people (warning: youíre going to have to bear with me on this oversimplified example of economic systems from a demographic perspective). They are all young and work. One builds cars, one produces oil and electricity, one farms, and on and on. They all buy and sell each otherís goods and services. All is good. Then, two farmers get too old to work. That leaves eight producers and 10 consumers. So everyone, in an economic sense, is poorer. Thereís less stuff per person.

Then those two people get even older. They now need to be taken care of and one of the bakers has to stop baking and take care of them. Now, there are only seven producers and 10 consumers. Everyone gets even poorer. This is whatís going on in the United States and many other more mature countries right now.

Take another 10 person town. Instead of two elderly people, they have two kids. The kids donít produce much either. But they are two mouths to feed. So there are only eight producers (only seven if one is a teacher) and 10 consumers. Again, everyone is poorer.

But young people donít stay young forever. They grow up and become producers so there will be 10 producers in the future. This is where India is now. There are a lot of kids there, which is a net economic cost. But they wonít stay kids forever.

Thatís why Indiaís young population provides a very strong foundation for decades of economic growth ahead.  Other economies, which appear to have lots of upside, actually face some strong demographic headwinds. Demographers Richard Jackson and Neil Howe summed the implications of demographic trends on economic growth best when they said, ďToday's great powers became affluent before they became ageing societies. China may be the first major country to grow old before it grows rich.Ē

Itís not just a young population which will propel Indiaís growth for years and years ahead. They need a free market (or as close as you can get) to unlock all the productive forces of a young population.

Embracing a Free Market

A freer market is where the country is headed too. Earlier this week, India unveiled its recent election results and they were overwhelmingly in favor for Prime Minister Manmohan Singh.

Singh is largely credited with bringing free market principles to a state-directed economy from his role as Finance Minister. His policies allowed direct foreign investment while eliminating other constraints.

Singhís moves allowed the countryís leading entrepreneurs to build businesses with little interference from government. Itís still not a truly free market, but since Singhís initiatives began in the early 90ís, Indiaís GDP has increased 400% and created millions of middle class jobs.

Singh and his free-market principles won in a veritable landslide. Singh and his political partyís margin of victory was described by Bloomberg as ďthe biggest any Indian politician has scored in two decades.Ē

As you might expect, Indian investors loved the news. Indiaís benchmark index soared 17% on the day. Itís the equivalent of the Dow closing up 1,400 points today. Thatís an incredibly strong vote of confidence.

Of course, India isnít perfect. But it has got a lot going for it.

Nowhere But Up

The moves India is making are good, but itís still a long way from becoming an ďemergedĒ market economy.

The country is still in its relative economic infancy. Indiaís 1.1 billion people produce a mere $3.2 trillion GDP in purchasing power parity. That works out to about $2,900 per capita GDP. On the global GDP per capita tables, India sits right in between Nicaragua and Uzbekistan Ė certainly not economic powerhouses.

Of course, not everyone is making $2,900 a year either. There are many ďhave notísĒ which havenít benefited much in the 8.8% annual GDP growth. The World Bank says more than 40% of Indianís live on less than $1.25 a day. The Food & Agriculture Organization claims 231 million Indians donít get enough food.

There is one more big advantage most people havenít realized yet. And itís actually Indiaís infrastructure.

More Money, More Problems

Infrastructure is crucial to the development of an advanced economy. You need water and sewage systems, electrical production facilities and grid networks, roads, ports, and all kinds of other infrastructure projects.

This is no secret. And Indiaís need for more infrastructure is well-publicized. In this case, Indiaís lack of infrastructure is actually an advantage.

Thatís right, itís an advantage. Just compare the U.S. and India right now.

The U.S. needs infrastructure repairs and improvements and India needs infrastructure desperately.

In the U.S., the Recovery Act earmarks $60 billion for infrastructure projects. That sounds like a lot, but itís not if you look at where itís going. The duck ponds, dog parks, and unnecessary high-speed rail systems, will do nothing to increase economic productivity. Thatís not even accounting for all the money that will be squandered on planning projects which will never be started. Itís easy to see how it will be nearly a complete waste.

India is in a completely different position. Take roads for instance.

The U.S Interstate Highway System took 35 years and about $450 billion (adjusted for inflation) to complete. It was a massive undertaking which even the government would have trouble screwing up. The reason is because the needs were so obvious.

The highway system was built on simplicity.

Would it make sense to build a road from New York to Los Angeles and connect dozens of cities in between? Would it make sense to connect Minneapolis, St. Louis, and Houston?

Of course it would. The need was easy to spot and the highways were built.

India is in the same position. Any highway that connects to any major city would be utilized tremendously. The benefit of a road in India will be an order of magnitude greater than a new highway in the U.S.  Any amount of money would be somewhat wisely spent. The needs are just so much more obvious.

Thatís the difference. In the U.S., commission on top of commission is currently debating whether it needs infrastructure projects like a high-speed rail line from Los Angeles to Las Vegas. Meanwhile, money in India would be put to use on a much more beneficial project.

Hereís the Catch

All may sound great, but thereís a catch. Thereís always a catch.

The catch is India is going to take a long while to really pay off.

Thatís where youíll actually need the discipline and time horizon of a two-year-old to reap the huge rewards here.

My nephew is the perfect example. At the age of two he would be incapable of moving the money in his account. He wouldnít get scared by any conflict with Pakistan. He wouldnít run off if the global markets melt down again. He would be consistently buying because he wonít need the money for at least 16 years.

So, in a way, even a two year old would be able to make a fortune in India, but it would take the discipline of being able to ďbuy and forgetĒ with money you donít need for a long time to take full advantage of India.

I bought India last year. I bought India this year. I will buy India again over the next five, 10, and 15 years. Itís tough to think of a better place to put your very long-term money than India.

Good investing,

 

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

 

 

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