One of the more talked about sectors in investing
is international stocks and bonds. Like many investment advisors, I am a
strong proponent of carrying at least some exposure to the international
markets. The trick, however, is how to go about it. Like the domestic market,
international companies run the gamut of large and small, growth and value.
Unlike the domestic market, the countries where these companies are located
and do most of their business varies. In some ways I think a good argument can
be made to group all the developed countries, including the U.S., into one
basket, and the remaining lesser developed and emerging markets countries into
another basket.
In my view, this developed countries "market" can
be treated pretty much as one market. As an investor, if I’m looking to invest
in a major oil company I’m going to want to buy the stock of the most
attractive company I can find whether it be Chevron, BP, Shell Oil or
whatever. The fact that those three companies are all headquartered in
different countries should be secondary to my making the most advantageous
choice of investment. In other words, in the developed market as I refer to
it, the investment should be made in regard more to the company than the
country. This philosophy is appealing because it allows the investor to reach
far beyond the limited domestic choices and search for the best global choice
within the developed countries. By virtue of the fact that the vast majority
of the world’s major publicly traded companies are located in the developed
countries, this basket captures the bulk of potential investment choices.
By definition then, the lesser developed and
emerging markets for the most part represent riskier investments. However,
there can be tremendous differences in both economic and political risk levels
within this basket which will require a much more substantial amount of
analysis. As an example, a potential investment in an established company like
Taiwan Semiconductor may be relatively easy to analyze but researching a
Chinese based electronics company may not. Investing in the emerging markets
sector especially takes a far greater depth of analysis than most any other
sector. In addition, issues of sudden political change, limited liquidity and
currency risks must also be weighed not only into the basic risk reward
analysis but also your personal risk tolerance.
So where does this leave us as we decide how to add
global investments? My suggestion is that if you are trying to build a
portfolio of stocks you stick with the developed countries and focus on the
companies as opposed to the countries in which they are located. In the lesser
developed countries, I would strongly recommend that you only consider
investment through professional money managers who specialize in those markets
and you do so only with full regard to your own personal risk tolerance. The
level of analysis required to be an effective investor in these markets, in my
opinion, is well beyond the capabilities of anyone other than the full time
professional with the proper staff to do the necessary analysis.
Next month we’ll look at some of the important
factors to consider when looking at investments in the less developed and
emerging markets.
Randy Gridley
May, 2006
