This article on International value portfolio was written by Net Net Hunter member Bryan Shealy. Bryan worked in the inventory business for 5 years which gives him an edge in net net investing. Article image (CC0 Creative Commons) by TheDigitalArtist, edited by Broken Leg Investing.
International markets offer an amazing opportunity for the diligent value investor and can create a huge cash windfall for a diversified international value portfolio. Why then is it so difficult to take the step to invest internationally and what do you need to know to get started? Charles Brandes had a lot to say on this topic in my favorite chapter from his book Value Investing Today. One quote below emphasises how diversification is not only for those outside the U.S. but also important for those within:
“There are always good reasons for diversifying your holdings among nonlocal markets, and these reasons apply to both U.S. and non - U.S. investors.”
For the longest time I have feared investing in unprotected international markets. The fear of deception and inconsistent international accounting methods is always a concern. Brandes begins his chapter on international investing by boldly stating there are always benefits to investing internationally. There may be some negatives in unregulated markets, but overall, diversification will do a great job of reducing your risk and expanding your profits.
I have mainly been a U.S. investor, but thinking internationally has given me better insight into my local markets. Risk is unavoidable even in this business, as even regulated markets have the occasional scandal. Enron is an example of one from recent memory. Enron was even named by fortune magazine as “America’s most innovative company” for six years in a row!
This seemed like a solid company making huge profits. But, everything was not as rosy as it seemed. Enron was using nefarious techniques to push the energy market in various directions. Anyone remember the California brownouts? Enron was the cause of that. This company was able to keep huge debts off the balance sheet using tricky accounting methods. Ultimately it led to an incredible downfall and investors lost their retirement accounts.
Risk is often associated with any investment overseas, but considering the company highlighted above, the risk seems no higher than in the U.S. marketplace. To an international value portfolio, borders should not hold back the decision for investment.The fundamental quality of the investment should be the only thing to give a value investor pause. Brandes enthusiasm and emphasis on international investment continues with this second quote:
“Anyone who claims that its not worthwhile investing outside the United States is basically claiming that none of the 6 trillion in stocks represents the availability of a good investment opportunity.”
It's easy to think about stocks within your own circle of competence. News and ads on the daily affect your decision making and highlight all of the opportunities within your own country. However there are so many undiscovered opportunities if you know where to look.
I know I’ve had great difficulty investing in stocks overseas and even feared international investment for multiple reasons. Two of the biggest reasons include tax implications and finding the correct discount broker.
Finding a broker was far easier than I had previously imagined, I wish I had started much sooner! Simply google best international brokers and there you have it! There is not much advertising for international investing brokers or even much competition in the global marketplace. This creates a barrier to entry for retail investors that actually increases your ability to invest in quality businesses overseas.
The tax implications of an international value portfolio may be a bit more difficult but it's nothing a little bit of knowledge and a good accountant can’t take care of. In fact, in the past I’ve owned international ETFs and they actually had an international tax component to them. Using Turbotax and the correct forms from my broker I was able to take care of it without any problems.
With some of the fears of international investing resolved, let’s take a look at some of the great opportunities they present.The following sentence Brandes uses to explain international value investing opportunities makes you think you’ve stumbled upon a gold rush scenario.
“I believe that the majority of investors in non-U.S. markets still favor growth-investing strategies.”
The excitement this quote creates and the explanation Brandes gives are amazing. But let me explain why. Emerging markets have a kind of gold rush euphoria about them, but it's often characterized by growth. Since these markets are thought of as new and growing, there is a common perception that growth stocks are more numerous than value stocks. There are also many more growth mutual funds and ETF’s available.
Brandes explains that international markets are often starved for capital. This creates numerous opportunities where valuable companies fly under the radar. It also explains why many international companies are undervalued. There is more interest in international growth funds than there is in value funds. This pushes growth companies higher and leaves value stocks undervalued. A diversified international value portfolio offers great potential for capital appreciation and is probably the most undervalued area in global markets today. The low level of competition offers the opportunity to buy these companies at low valuations.
It's important to note that the lack of competition can also lead to lower liquidity. This can make it a little bit more difficult to move in and out of a position. But this is no different from investing in most small or nano cap stocks. In fact this low level of liquidity makes it much more important for young and long term investors to stake their claim, since time is on their side and major money managers won’t be able to easily purchase these stocks for such discount prices.
Maintaining an international value portfolio is a must in today's global economy. The markets around the world are far too large to ignore. In doing so you will miss out on some of the best opportunities available. Using Brandes’s bottom-up approach will allow you to take into account all companies no matter where they exist and analyze them in a vacuum, enabling you to spot the best opportunities regardless of location. This will also ensure you get the best prices possible.
Enter your email below because we’ll send you a free edition of our investment letter and information on 4 of the highest returning deep value strategies available today.