June 22, 2010
In our daily conversations, we talk a lot about planting multiple flags– this is the practice of diversifying sovereign risk in order to protect or asses and our assets.
After all, sovereign risk is the greatest risk we face today as investors, entrepreneurs, professionals, and free individuals. Governments have absolute authority to seize, commandeer, or otherwise control any asset of their choosing, including ourselves, and they can back it up at the point of a gun.
If you have all of your eggs in one basket– i.e. you live, work, invest, own property, run a business, bank, etc. in the country of your citizenship, then you’re risking everything. If you want to do something about it, then you only really have two options:
First, you could go dark… and I mean completely black. There is some merit in this approach, but it’s incredibly tricky to pull off in the long-term. Going off the grid in 2010, at least in a developed country, requires intense discipline and adaptive creativity.
The second option (my favored approach) is to use the system to your advantage. Play governments against each other by diversifying different aspects of your life across different geographies– plant multiple flags.
As an example, this means structuring your business in one country, banking in another, having official residency in another, having citizenship in another, and investing in another. It might sound complicated on paper, but I assure you in practice, once you get the hang of it, it’s quite simple.
When I write this daily letter, I normally stick to the major areas of planting flags– banking, brokerages, citizenship, residency, property, etc., but when you really sit down and think about it, there are literally innumerable ways of diversifying yourself geographically.
Some people may choose certain jurisdictions for shopping, for example (a country with no VAT, or a state with no sales tax). Others may choose certain countries for dental care (due to the value for price), others for hiring outsourced labor (due to high skills and cheap wages), and others for acquiring pharmaceuticals (due to price and legal differences).
The possibilities are nearly endless, and just about every country has something it can offer. As I find myself in the UK this week, I thought I would raise this point again by taking you through my own analysis of the country:
Would I establish tax residency here? No. I wouldn’t want to get involved in this country’s slippery slope of a tax net.
Would I store gold here? No. Scotland Yard has already established a trend of raiding private vault facilities and confiscating the contents.
Would I establish electronic assets here? No. The UK has little regard for privacy, and this is one of the most critical elements for electronic assets like an email or web server. Digital property should be located in a country that respects privacy and won’t bow to a foreign court to lift this veil.
Would I intentionally seek medical or dental treatment here? No. Public hospitals in the UK are substandard, and the private facilities are too expensive compared to Asia and Latin America.
Would I invest here? Yes. But with my eyes wide open and protective measures in place. There are significant risks to investing here, including rising taxes and a depreciating pound. Foreign exchange losses can be mitigated with options and forward contracts.
I’ll have a deeper analysis about British investments in a future letter because it’s an important topic.
Would I spend time here? Yes, definitely. To me, the greatest value of the UK is for planting a flag that I seldom talk about– countries that you go to just because you like to have fun there. After all, what’s the point of life if it’s all about business, investing, asset protection, and sovereign diversification?
I, for one, derive great pleasure in experiencing the finer things in life, particularly in the course of travel… and there are certain places that I simply just like to be.
For all of its faults, southern England is one of these places for me– specifically London and Oxford. And right now, it’s on sale. Given all the deep retail discounts, and with the Queen’s pound sterling under $1.50, England is cheap for US tourists and “ridiculously cheap” for Canadians and Aussies.
Call this a ‘fun flag’ or a ‘pleasure flag’ or ‘vacation flag’ or whatever floats your boat… but think about these places where you can get away and do nothing but enjoy life for a little bit.
Lastly– would I bank here? No. There are too many quasi-state owned zombie banks in this country. There is, however, an interesting alternative that I’ve investigated a bit in my time here.
The UK’s famed Lloyds Banking Group has a subsidiary in the Channel Islands called Lloyds TSB Offshore, Ltd. Lloyds wouldn’t be my first choice– there are better banks out there… but if you’re really looking to open a foreign bank account and are constrained by travel limitations, consider Lloyds TSB Offshore.
I say this because you can apply to open an account online and denominate funds in either US dollars, euro, or British pounds. They’ll even send you a Visa debit card that can be used worldwide to access funds… no need to show up in person.