By William Patalon III
And Jason Simpkins

Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) – on a railroad kick since early this spring – has purchased 6,000 more shares of Burlington Northern Santa Fe Corp. (BNI), the latest in a series of significant railroad-share purchases made by the Omaha investment firm.

Berkshire Hathaway purchased the shares of the No. 2 U.S. railroad on Thursday, bringing total ownership to nearly 53 million shares – equal to about 15% of the company, according to a new Securities and Exchange Commission filing. In that Form 4 SEC filing, the Buffett-led Berkshire reported that it bought the shares for $79.97 apiece on Thursday. Burlington Northern shares closed yesterday at $81.56, up 67 cents each.

In that same SEC filing last week, Berkshire reported that it has options to acquire another 7.85 million shares of Burlington. If all those options are exercised, Berkshire’s total ownership stake in Burlington would climb to 17.2%, according to a CNNMoney.com report.

Berkshire reported in an SEC filing last week that it has options to buy 7.85 million shares of Burlington Northern. If the company exercises all the options, it would increase its stake in Burlington Northern to 17.2%. The 15% stake Berkshire already owns is worth more than $4.3 billion.

Berkshire paid $39.10 for each option with an exercise price of $40 per share, CNNMoney.com reported. That means the company could acquire the Burlington Northern shares at a cost of $79.10 each, well below yesterday’s closing price of $81.56 a share. The options give Berkshire until Oct. 3 to decide whether to exercise them. But the company can also extend that deadline by a month to Nov. 2 by paying an additional premium.

The options reported last week are apparently in addition to 7.46 million more that were reported by Berkshire in a Sept. 4 filing with the SEC. Those options, also, expire on Oct. 3.

Warren’s Been Working on the Railroad(s)

The so-called "Oracle of Omaha" has been on a major railroad-buying binge since April, when Berkshire Hathaway made its first move on Burlington Northern. In a series of highly publicized moves, Buffett & Co. acquired nearly 40 million shares, or close to 11% of the railroad. Berkshire also snapped up 10.5 million shares of Union Pacific Corp. (UNP), and 6.4 million shares of Norfolk Southern Corp. (NSC).

At the very end of August, investors learned that Berkshire boosted its holdings in Burlington Northern by 2.5 million shares. SEC filings said he also bought a block of 6.8 million shares on Aug. 23 and Aug. 24.And we now know from filings with the U.S. Securities and Exchange Commission (SEC) that Berkshire bought a total of 6.8 million more shares on Aug. 23 and Aug. 24.

On Aug. 27, Berkshire went shopping again, loading on an additional 3.3 million shares at $80 each. Its total stake in Burlington now stands at nearly 53 million shares.

While there’s no telling just what, specifically, prompted Berkshire to move so aggressively into the railway sector, Buffett has been one of the shrewdest U.S. investors over the past five decades, so there are a few things to consider …

Buffett Basics

When it comes to successful investing strategies, mimicking the moves of a professional investor with a long-term record of success can be a shrewd move of your own.

Berkshire Hathaway, once a New England textile mill, became the holding company and financing vehicle for all of Buffett’s other investments: GEICO Insurance, newspapers, furniture, jewelry and chocolate-candy companies; and major holdings in such firms as Wells Fargo & Co. (WFC), and Coca-Cola Co. (KO). [Indeed, for a book review of the very best Warren Buffett biography out of the many published, please click here].

As a stock, over long periods, Berkshire has been a perennial top performer. Over the past year alone, Berkshire Hathaway’s "A" shares are up 25%, compared to about 14% for the Standard & Poor’s 500 Index. And over the long haul, the difference is even greater.

As a long-term investor who often views himself as a "partner" of the firms that he buys into, Buffett has long favored very basic businesses that are easy to analyze and understand. Some of his favorite sectors include basic industrials, financial-services, and consumer-goods firms. For the most part, he’s steered clear of high-tech companies.

There are as few things as simple, sturdy and time-tested as railroads. A six-year old with an MTH, Lionel or HO-scale train set could tell you just what a railroad does. And for an investor such as Buffett, an asset-intensive business like a railroad is likely a joy to analyze financially.

Buffett on ‘Value’

That last point is particularly important because Buffett also looks for "value," although his definition of the term is much more liberal than his mentor, the late Benjamin Graham, in determining just what constitutes a "value," or bargain, stock. Graham used a rigid, math-based methodology to ferret out stocks that were trading at a steep discount to their true net worth – thus providing a "margin of safety."

Buffett uses those techniques, but has proven masterful at valuing such intangibles as a product line, a specialized customer base, the value of a franchise or brand name, or a dominant market position, which he likens to having a "toll" booth in place on thoroughfare that travelers have to use.

Railroads are definitely not fast growing – and largely unknown – small-cap companies trading at steep discounts to their actual net worth. They’re not even trading at super-favorable Price/Earnings (P/E) ratio. But railroads do meet several of Buffett’s investing criteria:

• With their massive capital investments in rights-of-way, railways, rolling stock and locomotives, the railroad industry has the high "barriers of entry" that Buffett favors. Let’s face it: John Henry, The Steel-Driving Man, isn’t going to help hammer down any new railway lines anytime soon.
• The majority of railroad technology has remained unchanged for the last 50 years to 100 years, so there’s little chance of some new discovery that could come along and "leapfrog" the existing know-how, rendering the current railways obsolete and bankrupt. [The chance of being "leapfrogged" is one of several reasons that Buffett has traditionally avoided technology-oriented companies].
• The odds are excellent that the current industry giants will remain industry giants. If anything, with the current trend toward consolidation in virtually every major global industry, the roster of large railroad companies may get even smaller.

Railroads Benefit from Global Shipping Boom

Buffett clearly sees that there is also a strong business case for railroad stocks, right now. For one thing, these giants are seeing a growing number of imports coming into the West Coast from Asia. There is a considerable need for the products in question to be dispersed throughout the country, and long-haul trucking, which has been the traditional solution, may be losing favor.

Industry labor shortages, tightening regulatory restrictions, and rising gas prices will likely give railroad companies an advantage over trucking. Ray Kuntz, president of the American Trucker Association, recently said in an interview with the Independent Record that demand for drivers keeps increasing, and finding and keeping good people is a perpetual challenge. "One problem," Kuntz said, "is that people can’t legally drive [tractor trailer trucks] until they’re 21, and many potential candidates have chosen other work by then."

Another problem is America’s weakening infrastructure. The recent bridge collapse in Minnesota was a very tragic illustration of the disintegration of the U.S. highway system, bridges, water-and-sewer systems and other key components of the nation’s infrastructure. Indeed, the Minneapolis bridge was just one of 73,518 "structurally deficient" bridges across the country that state and federal inspectors have deemed to be in need of significant repairs. The nation’s highways are decaying faster-than-planned, too, due in no small part to heavy traffic that overburdens the roadways.

Then there are high fuel costs. Even if trucks are stuck in traffic they’re still on the road and burning fuel. "Congestion costs the industry $8 billion a year, and it’s growing at 8% to 10% per year," Kuntz said.
The situation has forced the trucking industry into a serious dilemma. It has been forced to lobby for higher fuel costs. Yes, you heard that correctly.

As Kuntz put it, "Our industry is ready for a fuel-tax increase, [the proceeds of which will be used to finance infrastructure upkeep and repair]. We believe it has to happen before our infrastructure gets in worse and worse shape and congestion costs get higher and higher. It’s pretty evident that if we don’t do something, we’re headed for big problems."

U.S. diesel prices have more than doubled in the past five years, according to the energy department, and with mounting concern about global climate change, more efficient trains should end up pulling more weight.

With an abundance of West Coast rail terminals – and railroad tracks covering two-thirds of the country – Burlington Northern enjoys a big advantage in shipping imported Asian wares to markets all across the United States. In fact, many of the big shipping containers coming into U.S. ports are delivered to shore and then placed directly onto Burlington Northern flatbed railcars. Over the past four quarters, the company’s cash flow has totaled nearly $900 million.

In an Aug. 31 filing, Berkshire told the railroad of its plans to increase raise its stake in the company to 25%. That would require the purchase of another 35.4 million shares, currently valued at $2.9 billion. That kind of purchase would depend on "market conditions," according to the notice provided to Burlington Northern.

Another Way to Play "Buffett Stocks"

Companies that Berkshire takes such a liking to normally experience a rush of popularity among the investing masses, whether it’s sustained or not. In this case, it might not be a bad idea tag along for the ride, even if you want to ditch the rest of the bandwagon jumpers for a quick profit.

There’s another way to follow Buffett’s lead and profit – without purchasing the exact same companies, since they’ve already run up in price on the news of Berkshire’s involvement. The strategy: Invest in companies that will benefit from the same trends fueling "Buffett stocks."

In this case, for instance, the "Big Idea" is shipping, and the gains that shipping-related firms have made thanks to the flood of imports from Asia.

In our sister publication, the monthly Money Map Report, we’ve uncovered just such a bargain stock. But it won’t remain a bargain for long. And, if you sign up now, we’ll also give you, free of charge, a copy of another of our investment research reports, "The Coming Big Money Bang" which chronicles a confluence of capital that will see $867 billion flowing through the capital markets in the months to come.

Our global research analysts have identified four companies, in particular, that are poised to benefit from this global trend, which is being fueled in a big way by all the growth we’re seeing in China, but which is creating profit opportunities throughout the world – including here in the U.S. market.

Forget about the subprime mortgage mess, and the resultant global credit crunch, because here are four companies we’ve identified that will benefit from "The Coming Big Money Bang."

Those companies include:

• A financial institution so tied into Asia’s booming development that we’ve nicknamed it "The One Stock You Can Retire On."
• A commodities-related company with ties to both agriculture and biotechnology whose product is provided by so few firms that it’s actually "more precious than oil."
• A power-provider involved in a $40 billion energy venture that’s central to China’s continued ability to grow.
• And a telecommunications company whose technology has the potential to revolutionize both Internet Video and VoIP telephony. Unlike other tech wannabes, however, this company also has the managerial talent to pull it off.

To access our free research report, and to find out how you can get all the information you’ll need to learn about these four investments our analysts have highlighted – as well all you’ll need to know about The Money Map Report and the up-and-coming shipping global shipping company we just mentioned as the perfect "Buffett-type stock," please click here. You’ll be glad that you did.

Related News and Story Links:

• Forbes.com News Report:
  
  Berkshire Hathaway Buys More RR Shares.

• CNNMoney.com:
  Berkshire Buys More Options for Burlington Shares.

• High-End Model Railroading Wares:
  MTH/RailKing Railway.

• Massive Railroad Histories Index and Articles Index:
  
  Railroad Histories Up to 1935.

• Money Morning Free Investment Research Report:
  The Coming Big Money Bang.

• High-End Model Railroading Wares:
  
  Lionel 2007

At the very end of August, we learned that Berkshire boosted its holdings in Burlington Northern by 2.5 million shares. And we now know from filings with the U.S. Securities and Exchange Commission (SEC) that Berkshire bought a total of 6.8 million more shares on Aug. 23 and Aug. 24.

On Aug. 27, Berkshire went on another railroad buying binge, loading on an additional 3.3 million shares at $80 each. Its total stake in Burlington now stands at 52.1 million shares.

There’s no telling just what precisely has motivated Berkshire’s buying spree, but here are a few things to consider …

Background on Berkshire

When it comes to successful investing strategies, mimicking the moves of a professional investor with a long-term record of success is not a bad approach.

Berkshire Hathaway, once a New England textile mill, became the holding company and financing vehicle for all of Buffett’s other investments: GEICO Insurance, newspapers, furniture, jewelry and chocolate-candy companies; and major holdings in such firms as Wells Fargo & Co. (WFC), and Coca-Cola Co. (KO). [Indeed, for a book review of the very best Warren Buffett biography out of the many published, please click here].

As a stock, over long periods, Berkshire is a perennial out performer. Over the past year alone, Berkshire Hathaway’s “A” shares are up 24.4%, compared to about 10% for the Standard & Poor’s 500 Index. And over the long haul, the difference is even greater [see accompanying stock-price chart].

As a long-term investor who often views himself as a “partner” of the firms that he buys into, Buffett has long favored very basic businesses that are easy to analyze and understand. Some of his favorite sectors include basic industrials, financial-services, and consumer-goods firms. For the most part, he’s steered clear of high-tech companies.

And there are as few things as simple, sturdy and time-tested as railroads. A six-year old with an MTH, Lionel or HO-scale train set could tell you just what a railroad does.

Buffett also looks for value, although he defines that much more liberally than did his mentor, the late Benjamin Graham, who used a rigid, math-based methodology to ferret out stocks that were trading at a steep discount to their true net worth – and that had a “margin of safety,” besides. Buffett uses those techniques, but has proven masterful at valuing such intangibles as a product line, a specialized customer base, the value of a brand or franchise, or a dominant market position.

Railroads may not be the fast growing – and largely unknown – small-cap companies trading at steep discounts to their actual net worth, or at extremely favorable Price/Earnings (P/E) Ratios. But they meet several of Buffett’s investing criteria:

• With their massive capital investments in rights-of-way, railways, rolling stock and locomotives, the railroad industry has the high “barriers of entry” that Buffett favors. Let’s face it: John Henry, The Steel-Driving Man, isn’t going to help hammer down any new railway lines anytime soon.
• The majority of railroad technology has remained unchanged for the last 50 years to 100 years, so there’s little chance of some new discovery that could come along and “leapfrog” the existing know-how, rendering the current railways obsolete and bankrupt. [The chance of being “leapfrogged” is one of several reasons that Buffett has traditionally avoided technology-oriented companies].
• The odds are very high that the current industry giants will remain industry giants. If anything, with the current trend toward consolidation in virtually every major global industry, the roster of large railroad companies may get even smaller.

Railroads “Keep on Trucking”

Buffett clearly sees that there is also a strong business case for railroad stocks, right now. For one thing, these giants are seeing a growing number of imports coming into the West Coast from Asia. There is a considerable need for the products in question to be dispersed throughout the country, and long-haul trucking, which has been the traditional solution, may be losing favor.

Industry labor shortages, tightening regulatory restrictions, and rising gas prices will likely give railroad companies an advantage over trucking. Ray Kuntz, president of the American Trucker Association, recently said in an interview with the Independent Record that demand for drivers keeps increasing, and finding and keeping good people is a perpetual challenge.  “One problem,” Kuntz said, “is that people can’t legally drive [tractor trailer trucks] until they’re 21, and many potential candidates have chosen other work by then.”

Another problem is America’s weakening infrastructure.  The bridge collapse in Minnesota was a very tragic illustration of the disintegration of the U.S. highway system, bridges, water-and-sewer systems and other key components of the nation’s infrastructure. Indeed, the Minneapolis bridge was just one of 73,518 "structurally deficient" bridges across the country that state and federal inspectors have deemed to be in need of significant repairs. The nation’s highways are decaying faster-than-planned, too, due in no small part to heavy traffic that overburdens the roadways.

Then there are high fuel costs. Even if trucks are stuck in traffic they’re still on the road and burning fuel.  “Congestion costs the industry $8 billion a year, and it’s growing at 8% to 10% per year,” Kuntz said. The situation has forced the trucking industry into a serious dilemma. It has been forced to lobby for higher fuel costs.

As Kuntz put it, “Our industry is ready for a fuel-tax increase, [the proceeds of which will be used to finance infrastructure upkeep and repair]. We believe it has to happen before our infrastructure gets in worse and worse shape and congestion costs get higher and higher. It’s pretty evident that if we don’t do something, we’re headed for big problems.”

U.S. diesel prices have more than doubled in the past five years according to the energy department, and with mounting concern about global climate change, more efficient trains should end up pulling more weight.

With an abundance of West Coast rail terminals and railroad tracks covering two-thirds of the country, Burlington Northern is instrumental in the transportation of imported Asian goods. In fact, many containers coming into U.S. ports are delivered to shore and then placed directly onto Burlington Northern flatbed cars. Over the past four quarters the company’s cash flow has totaled nearly $900 million. 

In an Aug. 31 filing, Berkshire told the railroad of its plans to increase raise its stake in the company to 25%. That would require the purchase of another 35.4 million shares, currently valued at $2.9 billion. That kind of purchase would depend on “market conditions,” according to the notice provided to Burlington Northern.

Companies that Berkshire takes such a liking to normally experience a rush of popularity among the investing masses, whether it’s sustained or not. In this case, it might not be a bad idea tag along for the ride, even if you want to ditch the rest of the bandwagon jumpers for a quick profit.

Related News and Story Links:

• Forbes.com News Report:
  Berkshire Hathaway Buys More RR Shares.
• High-End Model Railroading Wares:
   MTH/RailKing Railway.
• Massive Railroad Histories Index and Articles Index:
  Railroad Histories Up to 1935.
• High-End Model Railroading Wares:
  Lionel 2007.

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As I stare at my trading screens today, I’m reminded of that Hans Christian Anderson fable in which the Emperor has no clothes.

In case you don’t recall that story from your childhood, the “Emperor” walks around naked while all his subjects “admire” his invisible garments. Finally, a young boy states the obvious and all hell breaks loose.

We’ve had the equivalent of that this morning on the heels of an overnight statement by BNP Paribas (EPA: BNP), France’s largest listed bank, which said “the complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating.”

At the same time, BNP froze some $2.2 billion of mortgage-exposed funds and also barred redemptions. Even though this represents a scant 0.5% of total BNP funds under management, the damage was done – and continues as I write this. A few hours later, a separate European fund worth 750 billion euros ($1.03 trillion) was frozen. And a Dutch bank pulled a new one after it, too, got trashed thanks to additional sub-prime losses.

Meanwhile, Germany’s Bundesbank held an emergency meeting for those banks involved in the IKB rescue and the European Central Bank (ECB) has promised to step in and “ensure smooth function of markets,” which is central-bank-speak for: “We’re preparing to bail out your tail-ends” – albeit in much-less diplomatic language.

Considering that the ECB has already pumped a staggering 95 billion euros ($131 billion) into the Eurozone banking market, the sub-prime credit woes finally are getting the attention they deserve. In fact, this is the single-largest liquidity intervention in the Eurozone banking system since immediately after the 9/11 terrorist attacks in the United States.

I’d expect a similar intervention here in the U.S. financial markets, but “Team Bernanke” seems to be asleep at the wheel.** People I regularly talk with on an “off-the-record” basis at trading houses around the world are literally pulling their hair out in frustration. The fallout from this could be far worse than the idiots inside the Beltway realize or even understand. The U.S. economy may not be a Ferrari, but it’s also not Chitty Chitty Bang Bang: Somebody has to guide it and steer it or there’s going to be one hell of a wreck.

[**As a side note for any conspiracy buffs out there, my reference to Team Bernanke is an admittedly snide – though public – reference to the European equivalent of the mythical U.S. Plunge Protection Team, which has long been rumored to exist, but which seems to operate in the shadows of our own financial markets…but that’s another story for another time.]

For now, the real question is this: How long will this downdraft last, and how bad will it get?

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Personally, I believe we’re in for a long and nasty stretch. As I’ve been saying for months, now, this has a long way to play out. Keep watching the headlines and you’ll see story after story about hedge-fund flameouts. And if you keep a running tally on the loss totals as they’re announced, you’ll soon become very worried about the staggering dollar figures that are mounting on your little scratch pad (and if it’s that little, you may well be on Page 10 or 11 by the time the cold chill takes hold). As if that’s not difficult enough for the regular retail investor to stomach, the extraordinary volatility we’ve seen in recent weeks will only continue, with the wildest gyrations accompanying each new breaking story. That’s great for a trader like me, but is very disconcerting for someone looking to be a true “long-term investor.”

I realize that I sound a bit like Dr. Gloom and Doom (unfortunate, given that this is my introductory investment note to all you new readers), but you can take some solace in this one important fact: From a historical standpoint, this kind of periodic “backwashing” of the capital-markets’ pipes is actually a good thing for your investment portfolio.

And the reason is actually quite simple. One of my Contrarian-oriented colleagues here at Money Morning loves investing adages, and one of his favorites is the old French saying: Achetez aux canons, vendex aux clarions – which translates roughly to “Buy on the cannons, sell on the trumpets.”

And as I like to say, history shows time and again that investors with the “intestinal fortitude”  (i.e. “guts”) to wade in and buy at the points when all hope appears lost are almost always the biggest winners when the sun is shining brightly again. If you buy on panic, you’re likely getting bargain-basement prices, and that can only magnify your gains when the markets inevitably rebound.

I’ll let you know when the dust settles…and when the outlook appears bright once again – at least in my opinion.

And I’m looking forward to sharing my opinions with all of you. I hope you’ll find them useful.

Contributing Editor Keith Fitz-Gerald, a brand-new addition to the Money Morning research team, is one of the world’s foremost experts on the Asian markets, especially China and Japan. A professional trader who works with wealthy investors and institutions, Fitz-Gerald is also a truly global investor: He and his family split their time between Portland, Oregon, and Kyoto, Japan.

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“The Prince” has targeted China’s booming hotel sector.

If you’re a confirmed Contrarian, like me, or are merely an avid investor, you already know that I’m talking about Saudi Prince Alwaleed bin Talal Alsaud, the shrewdest and most-successful investor to come out of the Middle East. Prince Alwaleed is best known for the $590 million he invested in Citicorp back in early 1991, an outlay that saved the struggling U.S. banking giant – and that netted the prince a fortune.

Prince Alwaleed’s subsequent financial triumphs are too numerous to list here, but suffice it to say he’s become an investing legend. And now he’s back in action again: The prince is searching for investment bargains in China’s burgeoning hotel sector and has a $1 billion kitty to help finance this latest foray, according the latest issue of Forbes.com.

I’m bringing this story to your attention for several reasons – and my objective with every single one of them is to make you a better investor, with a greater propensity for making profits.
Let me explain;.

The Three Pathways to Profits

If someone offered to tell you how you could profit with virtually every investment you make, would you listen? While I can’t quite make that claim, I can offer several bits of wisdom that will tip the odds well into your favor. And the story about Prince Alwaleed’s latest business venture reminded me of most of them.

To be the very best investor you can be:

• Follow the money, and not the crowd.
• Watch the moves the “real” experts are making.
• And whenever possible, go global.

If you think that these snippets of wisdom are overly simplistic, you’ll one day discover that the best profit strategies usually are. Let’s start by studying why it’s dangerous to follow the crowd;

What Goes Up Can Also Come Down;

While researching my book Contrarian Investing back in the middle 1990s, my co-author and I made an interesting discovery: Probability research demonstrated that, as a group, stocks that have run up a very long way are more likely to decline than to continue their run. Conversely, stocks that – again as a group – have fallen a long way are more likely to reverse course and -rise. If you take a moment to really think that through, the concept makes a ton of intuitive sense.

Indeed, that’s really the entire philosophical basis for the discipline of Contrarian Investing. Members of “the crowd” are more likely to buy the stocks that everyone else is buying – the ones that are soaring right now. And the investing masses are just as likely to avoid the ones that have fallen. But it’s the stocks that have fallen that offer the biggest profit potential, while the shares that are trading at stratospheric levels are the riskiest ones to own. Simply put, the high-priced shares are the most prone to a big decline.

If you follow one of our other key strategies and search out newly developing money-flow trends, you can spotlight investments that either haven’t risen yet, or are just starting to rise. And you’ll pocket the biggest share of the profits when those shares take off, with the accelerating money flows acting as the fuel.

Watch the “Real” Experts

If you have a tough time using this kind of analysis to ferret out such opportunities, take the next best approach and watch what the acknowledged experts are doing. As an avowed Contrarian, I tend to favor value-oriented investors, including such folks as:

• Warren Buffett, the so-called “Oracle of Omaha (If you want to read a terrific book that really illustrates how this super-investor operates, and is also a fascinating biography, take a look at Roger Lowenstein’s: Buffett: The Making of an American Capitalist.
• Bill Miller, manager of the Legg Mason Value Trust mutual fund, and a fascinating and genuinely decent guy who I interviewed many times during my business journalist days (though I was never able to persuade him that Eastman Kodak Co. was a misguided play. Still, any investor who’s a genius, but is still a regular guy who enjoys shooting the breeze at a cocktail party, is aces in my book).
• Jim Rogers, TV personality, world adventurer, author of such best-sellers as Investment Biker, and a noted Contrarian who was kind enough to allow my co-author and me to adapt one of his terrific essays for the “forward” for our Contrarian Investing book. Check out the piece I wrote about Rogers just last month, and make note of the new book he has coming out late this year.
• Prince Alwaleed, whose career I’ve followed since he purchased those Citicorp (NYSE: C) shares at a split-adjusted price in the $1.50 to $1.75 range. His timing was so perfect, and his windfall so massive, that I used his Citicorp investment as a key case study in the Contrarian Investing book. The shares of the largest U.S. financial-services firm closed yesterday (Wednesday) at $49.49 each.

There are others, as well, but I was merely trying to provide a representative overview. You might well have in mind other investors whose style or philosophy is more in tune with your own approach. That’s actually a smart way to go: If you’re not comfortable with a strategy, you won’t stick with it. And changing horses in mid-stream can only lead to you taking an unwanted soaking.

Story continues below…

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Go Global

If you only take one lesson away from this report, make sure it’s this: International investments are no longer a nice bit of diversification, or a way to “spice up” your portfolio. They’re a necessity. You go global – or you get left behind.

Best-selling author and famed Wharton Business School Professor Jeremy Siegel recently pronounced that the long-held conventional wisdom on international investing should be thrown out the window. For decades, we’ve heard over and over how international investments should comprise 5%, 10% or at most 15% of our portfolio’s total value. Any more than that is foolhardy and risky, we were programmed to believe.

But according to Siegel, the truly foolhardy act is to limit our international exposure that much. In other words, the biggest risk we now face isn’t just the possibility of losses incurred when some foreign market plunges. The real risk now is the possibility U.S. investors face – getting left behind financially because most of the major global growth that will come in the decades ahead will be generated outside U.S. borders – by such countries as China, Japan, Taiwan, Korea and Brazil. We’ll even eventually start to see growth from such countries as Vietnam.
Investment advisors who stick with the old asset-allocation model are actually doing their clients a huge disservice, Siegel says.

Siegel now believes that international investments should comprise about 40% of your total holdings. Most individual investors know Siegel for his best-selling book, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. The book first came out in 1994, and is considered one of a handful of “must-read’ titles in investing finance. But when the fourth edition appears in December, there will be something new to look at: This edition will include a long addition addressing the international arena, and how investors must adapt their strategies to the new realities of globalization.

And Siegel isn’t alone in this assertion that global growth is a huge investment opportunity. From 2005 to 2010 alone, the worldwide value of all financial assets – stocks, bonds, CDs and other investments – will soar from $118 trillion to $200 trillion, according to projections made by the McKinsey Global Institute in a just-released report.

That’s an increase of $82 trillion, or 69%  – and in only five years. And a big portion of that increase will be realized outside U.S. borders. The longer-term projections are even more sobering for investors who have traditionally held themselves to a “U.S.-only” investment strategy. Consider some statistics recently released by the World Bank and several other researchers.

Right now, Asia and the United States each account for about 28% of the worldwide economy. Forecasters say that the U.S. share of the global marketplace will slip a bit, dropping back to 24% by 2030.
But Asia’s share of the worldwide market will double during that same stretch, reaching a staggering 55% by 2030. Think about it this way: The Asia of tomorrow will be twice as powerful as the United States is today.

It’s a transition that’s too powerful to stop. But the next best thing we can do to protect our futures and to advance this country’s standard of living is to personally profit from these trends. It’s the greatest wealth-producing opportunity most of us will ever see. Climb aboard. Or get left at the station.

The nation’s wealthy already really understand what’s at stake and are already profiting from these trends – and in a big way. According to a study by the Spectrem Group, 40% of affluent U.S. households are continuing to invest internationally, while a full third are actually planning to invest more. Their chief country of choice when it comes to investing abroad: China.

Alwaleed Redux

With the $1 billion he reportedly has earmarked for the purchase of hotels in China, Prince Alwaleed has essentially been kind enough to make my case for me. And please note that this isn’t a standalone foray: It’s just the latest piece of a broad strategy in which he’s positioning himself to profit from the newly capitalist markets emerging around the world.

According to the Forbes.com report, Prince Alwaleed is aiming to buy 10-15 hotels in some of China’s small- or even medium-sized cities over the next three to five years. The investments will be managed by his hotel-investment operation, Kingdom Hotel Investments, which is listed in both London and Dubai.

Forbes.com based its report on a story that ran in this week’s Shanghai Securities News, which interviewed Sarmad Zok, the CEO of KHI.

KHI is looking to acquire “mature” properties in China’s second- and third-tier cities, where growth rates will even exceed the quick pace of the already-soaring national economy, Zok was reported to have said.

Forbes lists Prince Alwaleed as the world’s 13th-richest billionaire, with a net worth of $20.3 billion. He has an affinity for the hotel business: He recently announced that he and Microsoft Corp. (Nasdaq: MSFT) founder Bill gates would take the famed Four Seasons Hotels private for $3.8 billion.

Forbes.com also noted that Prince Alwaleed’s recent foray into China’s hotel market follows a profit windfall reaped from a series of Chinese IPOs. Indeed, the magazine said the prince “became a habitual investor” in these deals, including the public offerings of China Merchant Bank, Industrial and Commercial Bank of China and China Communications Construction

And if you go back to my three central investing rules, Prince Alwaleed is clearly telling us that China is a market with such immense long-term potential that U.S investors can’t afford to avoid.
William (Bill) Patalon III is the Managing Editor and Senior Research Analyst for Money Morning, and is also the Managing Editorfor The Money Map Report. A published author, Patalon is an award-winning journalist with 22 years experience that included stints with Gannett Co. Inc. and The Baltimore Sun. He has an MBA in finance from the Rochester Institute of Technology.

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If there’s one key to investing success, it’s this: Manage your risk.

If you take special care to protect the profits you have, and to keep your losses to a minimum, you’ll find that you can maximize your long-term profits. It’s a message I convey time and again. In fact, I just returned from the Agora Financial Conference in Vancouver, where I had the pleasure of presenting to packed audiences. I also especially enjoyed getting to speak to some of the other presenters – it’s always good to trade ideas and to hear what other analysts are thinking. And while I always present my market overviews at these events – and take pleasure in doing so – I make sure to remind investors of the fundamental rules for success and profit in stocks.

And don’t think that I ignore these fundamentals myself. Not a chance. Indeed, my strict adherence to these time-proven rules allowed some of the subscribers to my trading services to keep their short-term profits, and position themselves for some very nice long-term gains. Allow me to tell you what happened.

In several of the financial services that I manage, we completed our portfolio review and profit-taking several weeks ago – well ahead of the recent sell-off and ensuing volatility. I’d like to outline some of the broader moves we made, as well as the strategies behind them, and then tell you what to be looking for in the days and weeks to come.

Since that timely portfolio review, we’ve seen a large sell-off in energy stocks – despite the fact that crude oil keeps trading higher. Just yesterday (Thursday) crude oil traded above $77 a barrel and was within sight of its record high.

In fact – as if to ignore the spiraling price of crude oil – we’ve seen a large sell-off in energy stocks of late. And while oil prices rise, natural gas and gasoline have been weakening. Believe me when I tell you that oil is vulnerable to a strong correction, given the ample supplies in the absence of hurricanes (absent this season) or a troubling geopolitical event. With respect to the latter, Iran seems to be "behaving" better recently, although I would not count on this continuing.

We sold all our positions in which our short-term upside was very limited – and where we had sizable profits. And we kept the positions that had a very limited downside, but which also still had huge upside potential.

The bottom line: We ended up being very well protected against the ensuing market sell-off, and we avoided any major losses in our portfolio of stocks.

Let’s now look at what’s to come…..

The Credit Crunch

As we anticipated, ongoing concerns about the sub-prime mortgage problems are creating better buying opportunities in some sectors, and in some stocks. With the recent widespread losses a number of major hedge funds and financial institutions were forced to take because of sub-prime related investments, these major players were forced to de-leverage – a maneuver that forced them to raise cash by selling unrelated assets. These losses not only left these players with less capital to carry existing positions, it also left them with less capital to lend.

This is Economics 101: With a reduction in the available supply of credit, the price of that credit increased. And the price of that credit is its interest rate. We saw this play out across asset classes. For example, even though the yield on U.S. Treasuries achieved new recent lows, the rate on 10-year mortgages INCREASED. Similar effects were felt in the riskier spectrum of the debt markets, leading to a general re-pricing of credit spreads for the worse.

Add in the fact that banks are having problems placing key financing deals like the Cerberus Capital Management loans for the leveraged acquisition of automaker Chrysler, and you get the picture: The flow of liquidity that was financing these massive takeovers – while still there – has slowed, and is now more expensive.

All of this translates into lower expected equity valuations, as well as a slowdown in takeover activity for the future. Hence, the virtuous cycle of takeover pressure – which forced CEOs to either buy out other companies, or aggressively buy back their own stock to avoid becoming a takeover target themselves – is lessened.

Higher credit spreads also mean slower future economic growth, since it makes capital pricier and less available to Corporate America.

This combination of factors also shows a disruption in credit markets that at a later time might catch a big player off guard, creating a large default risk. Should something that significant occur, the Federal Reserve would likely have to step in and lower interest rates to stabilize the financial system – just as it did with the September 1998 rescue of Long-Term Capital Management, the vaunted hedge fund founded and run by Nobel laureates. But this time around, the Fed probably wouldn’t step in until after much pain had already been suffered.

In the meantime, I’m glad to see that the central bank is doing yeoman’s work, slowing inflation via higher credit spreads. And speaking of inflation…. it clearly must be getting closer to the Fed’s “secret” rate-reduction trigger point – whatever that might be – as the economy’s core PCE is about 1.4%, well within the Fed’s so-called “comfort zone” of 1% to 2%.

At the end of the day, the fundamentals are still very good for the U.S. economy. But our anticipated second-half recovery will be a bit-less pronounced than we’d hoped for – a new reality that justifies the market correction we saw.

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Markets to Watch

Investors can still profit, however. For instance, companies that are awash in cash and that do not need to tap the credit markets for costly additional capital right now will continue to march forward. Focus the closest on large-caps, high-tech firms, non-cyclicals, and those that pay high dividends.

U.S. companies are awash in cash, which is a key reason the government’s second-quarter Gross Domestic Product (GDP) report said there’s been a strong pickup in investment spending by businesses, which we’d earlier said to watch for. With that boost from business spending, high-tech companies in particular should enjoy a very strong second half of the year. Given that global competition is as intense as it’s ever been, U.S. companies will need to ratchet up their labor productivity to outpace their rivals from abroad, and the best way to do that is via high-tech investments. We are also at the very beginning of a new PC upgrade/replacement cycle, thanks to the new Microsoft Corp. (Nasdaq: MSFT) Vista operating system.

These new PCs will house new generations of the more-powerful dual, quad and octo chips built by Intel Corp. (Nasdaq: INTC) and Advanced Micro Devices Inc. (NYSE: AMD). These powerful processors will easily handle the anticipated massive surge in streaming video, data-laden telecommunications services, and other bulky applications that will be making their debut in the months and years to come.

International markets, too, hold much promise. One market we like is India, although there’s a challenge to overcome: It can be quite difficult to find opportunities to buy quality names at reasonable valuations there. But it’s better to wait – and buy at bargain prices – than to jump the gun, expecting instant satisfaction.

From an investment standpoint, Brazil represents an outstanding opportunity. The world’s seventh-largest economy and one of its four promising “BRIC” economies – Brazil, Russia, India and China – Brazil is a market that I know very well. This may well be your best chance to invest there.

Over the past decade, Brazil has transformed itself into one of the most-dynamic growth economies on the planet. The country has rock-solid fiscal and monetary policies, as well as a proven ability to meet inflation issues head-on – and defeat them.

But what’s really exciting about Brazil is the fact that the country is at the forefront of a massive consumer boom that is about to ignite economic growth and unleash a torrent of corporate profits.

And investors should not turn their backs on the U.S. market, either. While we are undergoing a correction of the less-than-ration “credit exuberance,” the fundamentals of the U.S. economy are still very strong. The only problem is that it will be almost impossible to say when this troubling problem will end, enabling the financial-services sector to halt its slide, rebound, and then race for higher ground – a prediction we analysts refer to as “calling a bottom.” Ideally, we’d all like to know just when the market bottoms out, so that we could go in and scoop up stocks at the bargain-basement prices.

Unfortunately, it’s clearly premature to “call a bottom,” given that the de-leveraging process that needs to take place usually takes some time to play out. And it will. But in the meantime, we must follow some very careful defensive-investing strategies. We’re also starting to see some much-more palatable valuations in the stocks that are on our “candidate” list – the ever-evolving list of stocks that we’re keeping an eye on for possible purchase. At some point we are going to start adding new positions, as the price of these shares fall enough to reach our “buy” points.

Until then, stay tuned.
Horacio R. Marquez is an Advisory Panelist for Money Morning, and is also the Investment Director of The Money Map Report. Marquez also operates several proprietary-trading services.

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When Jim Rogers speaks, I listen.

If you have even a passing interest in the art of investing, you’ve no doubt seen investing guru Jim Rogers quoted in a news story, watched the bow-tie-clad Contrarian hold court on CNBC or FOX, or read the books he’s written about his globetrotting adventures, beginning with his bestseller, Investment Biker.

Because of a personal connection I have with Jim (he told me to call him that), whenever I see or hear his name, I always stop right then to see what he’s up to, and to listen to what he thinks.

You would be wise to do the same.

Sure, he’s a self-proclaimed “curmudgeon,” is opinionated, and can be dismissive of theories that don’t hold with his own – but that’s all part of his persona. In truth, he’s a terrific individual, and is one of the brightest investing minds of our time. Even if you disagree with his strategies, and don’t use his ideas, you’ll come out ahead of the game just by listening to what he’s trying to tell us.

And if you do use his ideas and strategies, you’ll come away a lot wealthier, too.

So when I saw that Rogers had spoken at an investor gathering in Singapore this week, you can bet I stopped what I was doing to find out what he’s saying and thinking about the markets right now.

And I decided that part of my role here at Money Morning, should be to share those thoughts – and my personal story – with you.

Let me explain …

The Contrarian Who Could

I was working the Eastman Kodak Co. (NYSE: EK) beat for Gannett Newspapers in the summer of 1997, and found myself in New York City for a Hewlett-Packard Co. (NYSE: HPQ) press conference.

Months earlier, I’d broken the story about H-P’s first foray into the consumer-digital-photography market with its new “Photo Smart” camera and printer system. It was a nifty, low-priced setup that had Kodak’s hugely profitable film and photo processing businesses centered right in H-P’s crosshairs. And H-P was good: innovative, nimble, technologically advanced and gifted at marketing – all the things that the Kodak of that period was not. I’d made all these points in my story, and then flew out to visit H-P out in Silicon Valley. So their marketing folks wanted to make sure I was on the invite list for their slick-and-glitzy “unveiling” news conference in the Big Apple.

My trip to New York had a second purpose, too: My co-author – a successful money manager – and I had recently put the finishing touches on our new book, Contrarian Investing, and we were to meet with publisher Prentice Hall to work out some of the details.

One big issue remained unresolved: We needed a prominent investor – preferably a well-known Contrarian investor – to write the “forward,” the essay that readers perceive as a kind of tacit endorsement of the book.

 Though the Prentice Hall folks and my co-author had all tossed around a lot of names, I already knew whom I wanted: Jim Rogers, the high-profile author, columnist, commentator and financial adventurer whose global-market insights were always unique and captivating. I always tuned in when he was a guest on CNBC’s morning “Squawk Box” program, I’d read all his books, and I regularly clipped out and saved the columns he’d written for Worth magazine and other publications.

From Soros to Shanghai

Rogers had earned degrees from Yale and Oxford, done a stint in the U.S. Army, and held several jobs on Wall Street by 1970, when he joined the firm of Arnhold & S. Bleichroeder. That’s where he met George Soros, the guy who today is typically referred to by his full name: ‘Billionare Investor George Soros.’

That same year, Soros and Rogers started The Quantum Fund, a hedge fund that’s often described as the first truly global investment fund. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%. Rogers “retired” in 1980, and since then has traveled the world (several times), written a cart-full of bestsellers, hosted several TV investment programs, and worked as a “guest professor” of finance at Columbia University’s Graduate School of Business.

Since I’d made the suggestion to our friends from Prentice Hall, I was assigned to track Rogers down and ask if he would write the forward for our book. Working from my hotel room during my short stay in New York, I somehow managed to track him down, and we made an appointment to talk by phone.

We hit it off right away.

It helped, I think, that I’d read so much of his work (and was actually able to cite several of his columns by their title, as well as name the magazine they appeared in), that I’d recently returned from an extended reporting trip to China, and that I’d actually invested in one of his emerging markets stock recommendations, a Chinese poultry company that also manufactured motorcycles.  He actually gave me quite a bit of time, and we talked about many things besides my book and the needed forward. Even so, it seemed the conversation ended far too soon.

Needless to say, Jim Rogers is a super-busy guy, and gets hundreds of requests – perhaps thousands – but I think he wanted to help out a young journalist and aspiring author, and he agreed to let us to adapt and update one of his essays for use as our forward.

And the one we agreed on couldn’t have been any better had it been specifically written for our book: It was a perfect representation of his view of the world, and it meshed just as well with the message my co-author and I had spent more than a year researching and writing to bring to light.

It’s also the best piece of Contrarian investment advice an investor will ever get. The title of the Rogers essay that appears in our book: “Sell Euphoria, Buy Panic.”

An Investment Guru You Can Bank On

Unlike the “experts” that I’ve sometimes labeled as “celebrinvestors” – whose theories, strategies and recommendations are routinely changed so that they dovetail into the newest “flavor-of-the-month” investment theory – Rogers’ investment philosophy has always been consistent, clear and straightforward.

Overseas shares will beat U.S. stocks for years to come. China will continue to grow into a world superpower, bringing Asia along with it. There will be bumps along the way, but the long-term opportunities remain. And commodities may be the very best investment opportunity individual investors will ever find.

Many of these messages were repeated in Singapore last week, when Rogers spoke at a Nomura investment forum.

For instance, as he told his audience last week, Rogers continues to say that “China is the next great country in the world – whether we like it or not. And a lot of people in the West do not like it that China is the next great country in the world,” citing the work ethic of that country’s emerging consumer class, as well as their propensity to save.

That statement really illustrates why Rogers is one of the great investors of our time.

For one thing, where most investment strategists try to beat the market by recommending a U.S. transportation stock this week, a Canadian telecom stock next week, and a British consumer-staples company the week after that, Rogers looks at broad-based trends – trends that are fueled by powerful, unstoppable, global forces – and then fashions his investment thesis from that analysis. Even if you don’t want to act on his insights, you’ll learn an awful lot about what’s happening beyond the U.S. borders just by listening to his consistent, eloquent mantras.

A second point, which his comment about China makes completely clear, is that Rogers doesn’t care what others think of his analyses. He’s not going to sugar coat his views, or otherwise alter them just because “a lot of people … do not like it.”

Frankly, he doesn’t care. He sees his role as one of informing and teaching us often-dullard Americans that the axis the world spins on doesn’t go through Wall Street anymore.

Indeed, Rogers has a new book coming out that targets this point in a most-specific way. The book, A Bull in China: Investing Profitably in the World’s Greatest Market, is due out in the first part of December.

I can personally vouch for the fact that Rogers has been predicting this China boom (I use that term broadly to include Asia and the world’s other emerging economies) since 1990, when he and his girlfriend of the time circumnavigated the globe via motorcycle, a trip that spawned Investment Biker. That’s about the time I started following Rogers’ work, including his big-picture essays that ran in top investment magazines.

Some of those essays detailed the impact all this growth would have on commodities, which is one reason that Rogers has been a longtime commodities bull. The profit opportunities from the commodities markets will far outstrip the money that can be made in stocks and bonds, and isn’t a playground that’s restricted to the institutional investors and investment bankers of Wall Street; Rogers believes individual investors can profit from commodities, too – very much a Contrarian stance.

Rogers has certainly called the commodities boom perfectly. The thing is – and I’m not taking anything away from Rogers, for he’s a brilliant guy – soaring prices for oil, metals and other commodities is a logical result of the explosive growth in China and Asia and was there for anyone to predict and to see. But it’s the systematic way in which Rogers analyzes investment opportunities – and his ability to see the linkages and relationships between different markets and different asset classes – that sets him apart from most other investment “experts.”

We here at Money Morning approach our role in much the same way. We know that most global growth in the years to come will be outside the U.S. borders, and that those who embrace this reality and invest accordingly will amass real wealth. Those who refuse to accept this new global reality will end up facing some very lean times. So we follow worldwide money-flow trends of all types, analyze the effects we expect those capital flows to have, and then use those insights to bring you the best long-term profit opportunities that we’ve discovered.

During his speech in Singapore last week, Rogers said he thinks the shares of China-based companies are overvalued, especially since the Shanghai Composite Index is up more than 35% since the start of the year – and has actually been up by as much as 62%. While Rogers says that he isn’t selling his China holdings right now, he also says he wouldn’t add to his positions right now.

But Rogers said that if China’s stock market fell by 40% or even 50%, “I would increase my position in a big way,” because the long-term growth prospects are so solid for that part of the world.

Rogers did discuss one of the substantive moves he’s making to his investments. He told listeners that he was selling stock in Wall Street banks because he believes the housing slump will continue. And he suggests that investors buy into sugar as a way to enter the commodities arena, noting that agriculture is a very promising sector for investors considering new commodities investments.

“Financial companies, stockbrokers, investment banks … I am short. I am short financial-services companies, mainly in America. I am short [U.S. mortgage-market-maker] Fannie Mae (NYSE: FNM),” Rogers told journalists in an interview that followed his address to investors.

During that same interview, Rogers also said that, in his opinion, the U.S. financial sector offered the best opportunities for profit by investors who want to sell stocks short. That’s because there’s always a price to pay for Wall Street’s excesses and because “the problems with the housing market have a long way to go in the United States. Probably more so than in any other country. But the excesses in the world economy are on Wall Street – investment bankers.  Those guys are making vast fortunes [and] that’s not the way the world works.”