Postcards from the Edge
Five Reasons to Go Global
Why go global?
When all is said and done, the answer defines this book.
Why, indeed, go to all the effort of putting money to work in places outside your home country when an abundance of opportunities to invest in some of the world's finest public companies exists right here in the fruited plains of the U.S. stock market? After all, in the world of 2007 more than 5,100 public companies carried the Made in America label, including some of the biggest, globally branded firms--McDonald's, Coca-Cola, General Motors, Wal-Mart, Exxon, and Boeing, to name but six. Own such companies and some portion of your money is at work in Asia, Europe, the Middle East, Africa, and elsewhere. A Pakistani buys lemon-and-spice-flavored fries for lunch at a Mickie D's in Karachi, and you profit. An Argentine buys the family's household supplies while shopping at the Wal-Mart Supercenter in Mendoza, and you profit. The United Arab Emirates' flag carrier, Etihad Airways, orders five Boeing 777 jets, as it did in September 2004, and you profit. Sure, such transactions are infinitesimal on your individual account. Yet spread across millions and millions of global transactions, those infinitesimal slivers of profit mass into real dollars over time.
And here in the states, you're not limited to just American companies with global tentacles. You also have access to a few thousand foreign companies whose stocks are listed in various American markets. Many of these foreigners carry names equally well regarded stateside: Honda, Vodafone, Air France, and Unilever, among them. Indeed, you can collect a vast assortment of so-called American depositary receipts, the U.S. traded shares of foreign firms, from dozens of nations (including Malawi, the Dominican Republic, and Sri Lanka) without ever leaving American shores. Moreover, you can trade these companies' shares through a U.S.-based brokerage account as quickly and easily as you do American icons such as Apple Computer and Microsoft.
Venturing abroad, then, would seem an entirely unnecessary, if not extravagant, exercise.
Only it's not.
The world has entered an age increasingly absent the financial barriers that once derailed the flow of investment dollars across borders. U.S. companies today buy competitors in Germany; British companies buy in America; those in Japan cross into South Korea. U.S mutual funds, hedge funds, and pensions routinely invest a large portion of the money they manage in stock markets all around the world. And today we individual investors--the mom-and-pop investors, as Wall Street calls us--can ship our money off to work in far more locales than we've ever had access to. Good reason exists for doing so: Those 5,100 companies that are Made in America represented just 10% of the roughly 50,000 publicly traded companies listed on the world's various stock exchanges in 2007. Ten percent. In that context the American market, despite its prominence globally, seems a fairly constrained investment universe.
Certainly, many of the world's publicly traded companies aren't worth the effort. They trade in countries racked by war or political corruption or both; they trade on stock exchanges so small that you assume unacceptable trading risks, particularly when stock prices are falling; they exist in countries where you face limitations or restrictions on repatriating your money whenever you want; their corporate governance, assuming it exists, is questionable at best, leaving your investment in great jeopardy. Some are still owned in large part by various government entities and have about the same profit-making incentive as did those old Soviet collective farms. Managers aren't running such businesses to benefit private shareholders so much as they're running a business to preserve their job by keeping some lethargic, bloated, bureaucratic government agency content.
Vast numbers of others, however, are strong, viable, entrepreneurial companies, or those with decades of profitability in their past, trading in long-established markets, in long-stable countries with a long history of sound securities regulation. They sell proven products and services, with immense and expanding prospects to continue growing their business at home and abroad. Their corporate governance is robust and their managers and executives awake each day trying to make the company a little bigger and a little better for themselves and their shareholders.
The only "not" on their list: a presence in the USA.
If you want to own these companies--and there are very good reasons why you should--you have to go to them, because they're not coming to you.
Think about it in terms of, say, Japan's culinary staple, miso soup. You can shop your local hyper-super-megamart just around the corner from home and, though the store has thousands of items for sale, you're not likely to find two key ingredients: the miso paste itself and packets of bonito flakes, from which comes the soup's base. While the American hypermart will assuredly offer a few Asian selections along one-quarter of an aisle--if that much--it generally doesn't stock all that you need to cook up many of the truly authentic dishes. For that you'll need to shop at the Asian market on the other side of town, where the grocer stocks all the ingredients you need, commonly multiple selections in various quantities and quality grades, all the genuine brands sold back in the motherland. Plus, the Asian grocer's prices are frequently lower, since for the hypermart these are specialty items worthy of a marked-up price, whereas for the grocer's clientele, local Asians, these are everyday staples. And the locals are not about to overpay for everyday staples. Sure, the transaction across town takes more effort and more time, and you risk not being able to read the label and may even struggle to communicate with the shopkeeper. But the Asian grocer can answer your questions, point you toward a better product, and offer tips on how the locals really use the ingredients.
All in all, you're better off shopping where the locals do--despite the added sweat in doing so.
Grocery markets and stock markets aren't so dissimilar. For all the companies you can buy on the American hyper-megamart of stock exchanges, so many more that you might want to own are simply unavailable where U.S. investors typically shop. Though thousands of 7-Eleven convenience stores populate North America, for instance, you had better operate from a brokerage account with access to the Tokyo Stock Exchange if you want to own shares of the Japanese company controlling the chain--Seven & i Holdings Co. Want to profit from China's rapidly expanding market for home ownership? Better have an account in Hong Kong to trade China Vanke Co., a Shenzhen-based residential property developer in major Chinese cities. You'll need the ability to trade stocks in Milan if you want to own the leading tour operator--Gruppo Ventaglio S.p.A--that Italians call on when they're planning a holiday.
And why would you care to own the leading tour provider in Italy . . . or a Japanese convenience-store operator . . . or a Chinese property developer? That answer goes to the soul of this book--to what it means to be a global investor: People the world over do exactly the same things we Americans do, they just demand their services and products from local businesses that cater to and profit from local needs. So, just as we Americans like to vacation, so too do Europeans; in fact, each August it's as though the entire continent is on holiday. Whether it's Italians tanning on a Sri Lankan beach, Norwegians sunning on a ship trolling the Greek isles, or Brits jetting off to splash in the waters off the Balearic Islands, the cumulative billions of euros and pounds they're spending are pooling on the bottom line of publicly traded companies in their homeland, not American firms.
Tens of thousands of foreign companies simply have nothing to do with America. They don't sell their products here, they don't operate stores aimed at U.S. consumers, they don't run their factories here. They don't power American homes, they don't fly their planes, book their hotel rooms, or run their overnight-delivery operations here. They don't provide services that Americans in large numbers seek. And their shares don't trade on any of the stock markets in New York City. They are homegrown, purposefully built to prosper in their local economies, and they purposefully choose to list their shares in their home market, where local investors know the brand. To prosper alongside these companies--to participate in those economies that businesses and consumers just like you are propelling outside the United States--you must shop where the locals do.
As such, that initial question--Why go global?--might best be answered with a rhetorical question: Why limit your portfolio to the single lot of consumers and businesses that exists in America--to just 10% of what the world has to offer?
Of course, within that answer lies the problem--that whole "going global" thing.
For the most part, Americans reflexively balk at things foreign. Sure, we'll buy a German car, and a Japanese DVD player, and a bottle of Chilean cabernet, but those products are so ubiquitous throughout every strata of American society these days that they seem as much American as they are foreign. Likewise with the German and Japanese and Chilean stocks that list in American markets. Though foreign by birth, they're an acceptable American investment because they trade in New York--and in dollars--giving them an air of respectability. Plus, trading on the New York Stock Exchange, we know from experience, is easy. Trading in Tokyo, Frankfurt, and Santiago? Well, that seems not so easy. And besides, it's not America!
As a nation, we simply aren't given to looking too far beyond our own shores to satisfy our interests unless it fits some national frivolity at the moment--say, a U.S. World Cup soccer victory on foreign soil even though the world's game isn't really a game we pay much attention to on the whole. Statistics bear this out: The Pew Research Center, a nonpartisan organization in Washington, D.C., that studies the attitudes and trends shaping America and the world, reports that between 1997 and 2002, only 20% of Americans traveled abroad, while only a quarter telephoned or corresponded with people overseas . . . and you have to wonder how many of those folks were hyphenated-Americans visiting and communicating with relatives back in their home country. Outside of New York City, Miami, and a very small lot of uber-urban population centers in America, when is the last time you saw a currency-exchange booth around town? They're a common site across most of the world, even in some of the smallest, most remote towns and villages.
Here's another point of reference: When a foreign company uses its foreign stock to acquire a U.S. competitor, meaning it pays American investors with its own foreign shares, we Americans generally sell the shares of the foreign firm quickly, a stock-market phenomenon known as "flow back," in which the foreign shares flow back to the acquiring company's home market.
Part of our foreign aversion is our isolated geography; aside from Canada, Mexico, and some all-inclusive beach resorts in the Caribbean, we Americans have no peripheral recognition that other countries exist as anything more than vacation playgrounds, threats to our apple-pie existence, or enemy combatants during Olympic moments.
Part of it is our history; for much of the past century, America has served as the world's dominant force culturally, politically, socially, militarily, and financially, characteristics that have imbued Americans with a wrongheaded superiority complex, perhaps best expressed by a BusinessWeek article in 2000 that made the case for owning U.S. multinational stocks instead of foreign shares by announcing that "American companies . . . aren't likely to be bested by foreign rivals."
Apparently, that little ray of sunshine never made it to Japan's Toyota Motor Corp., which has been besting Detroit's General Motors and Ford Motor Co. for years. And what of all those defunct makers of American electronics in an age when high-quality South Korean and Japanese brands fill store shelves and lead the sales rankings? Or all the long-dead and dying textile makers on the East Coast, losing ground to global players who produce the same or better quality at cheaper prices? Or what about the oceangoing shipping companies? Hang out around ports in Long Beach, California; Seattle, Washington; and Newark, New Jersey, and take note of the names stenciled on the cargo containers and ships' hulls: All the biggest players are based in northern Europe and Asia. Even cartoons have lost out to Asia, as any cursory amount of time in front of Cartoon Network will bear out. Cartoon production for America, meanwhile, is now big business in India, home to the world's second-largest entertainment industry, Bollywood. The upshot of our red, white, and blue mentality is that we mistakenly view the U.S. dollar as largely the only real currency, we mistakenly view U.S. companies as largely the only real innovators, and we mistakenly assume that U.S. markets represent the world's beacon of economic freedom (the reality: in 2006 we ranked ninth, behind leader Hong Kong and nations such as Singapore, Ireland, Denmark, the United Kingdom, and even Estonia).
Part of it is that we're not schooled in world affairs beyond noting our participation in certain wars, leaving us ignorant in a global context and out of step with much of the rest of the planet, since most countries are surrounded by various neighbors, some belligerent at certain points throughout time, and what happens just beyond the border has historically been relevant for any number of economic, military, and self-preservation reasons.
Basically, as Americans it comes down to this: Unless it affects us directly, we tend not to care what transpires over there.
That's unfortunate. Because what happens over there can be very profitable for your portfolio back here.
It just takes opening your eyes to the opportunities that exist beyond America. So, let's start this book by examining the five reasons you might want to go global with your greenbacks . . .
WHY GO GLOBAL, REASON 1: BECAUSE YOU CAN.
History is destined to record 1989 as a watershed year for freedom. Soviet citizens in early spring voted for the first time ever in parliamentary elections that unseated many Communist party officials, what the government newspaper Izvestia welcomed as a new era of "the dictatorship of democracy." In late spring, democratic-minded Chinese students occupied Beijing's Tiananmen Square, marking what has been described as the greatest challenge to the Communist state since China's 1949 revolution and spurring, in some part, today's expanding freedoms awarded to Chinese citizens and the country's economy. By late autumn, East and West Germans were hacking to pieces the famed Berlin Wall, marking the eventual end of Communist East Germany, the reunification of a divided nation, and the eventual fall of communism throughout the Soviet Bloc.
That year--1989--investors wanting to own stocks around the world had 56 markets to choose from. Combined, they offered intrepid globe-trotters access to fewer than 26,000 listed companies.From the Hardcover edition.
Excerpted from The World Is Your Oyster by Jeff D. Opdyke. Copyright © 2008 by Jeff D. Opdyke. Excerpted by permission of Crown Business, a division of Random House LLC. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.