The Only 2 Reasons to Invest Overseas

There's a lot of hype these days about international investing.

Too much.

It's easy to understand why: Big banks like Barclays (NYSE: BCS  ) want to sell you their foreign ETFs. Investment firms (present company included) have international stock services to offer. And, let's face it, it feels exotic to invest overseas. Nothing kindles a cocktail-party conversation like the tale of how you bagged a cool 30% on that Brazilian sewage company you own.

But, as always, investors need to be careful they don't get bitten. There be dragons at the edge of the map. Let me help you slay a couple.

Don't fall for this
"Diversification" is the monster that needs stabbing, because world markets are actually becoming more closely correlated to our home markets, not less.

The common theme of "fast-growing" economic stories can be murder on your portfolio as well. Sure, it might sound like a great idea to buy popular companies in fast-growing economies, until you remember that there are always individual winners and losers. Bet on the wrong horse, and you'll eat plenty of dust.

You can learn this lesson here at home. The U.S. economy has gone great guns for the past half decade, but take a look at the fates of GM (NYSE: GM  ) , Micron (NYSE: MU  ) , or Coachmen Industries (NYSE: COA  ) over that period. They've all lost a ton of money for investors, despite the fact that Americans have been on a huge spending binge. That ought to be enough to convince you that a strong economy and strong consumer spending don't mean much if you put your money into businesses that aren't strong enough to turn that situation into growing profits for investors.

And while ETFs might seem to shield you from the dangers of underperforming individual stocks, they certainly don't insulate you from investor manias. Just ask the folks taking a periodic whipping from the fall of China's market this year.

That brings us back to my preferred vehicle for outperforming the market: carefully selected individual stocks. And, finally, we can get to the two reasons I believe you should be investing overseas.

Currency concerns
Let's start with the lesser. Investing overseas lets you buy a piece of future cash flows that are not denominated in the ever-shrinking dollar. If you're worried about the buck, as Warren Buffett is, you can approach the problem as he does. Forget foreign exchange derivatives and other time-sensitive bets. Simply buy great companies that are producing growing cash flows in stronger currencies. As they spin off more and more cash, which in turn becomes increasingly valuable in dollar terms, you could be getting two kinds of growth for the price of one.

The big sea
I saved the best for last. The No. 1 reason to invest overseas is simple: You're fishing in a bigger pond. There are hundreds of good companies in the U.S., but there are thousands of them across the world. At any given moment, only a small percentage of these are worth buying. Thus, by expanding your horizons, you've got hundreds more opportunities to find value that the market is ignoring.

Value casts a wide net
And that, of course, is the key. No investment is a sure thing, no matter where it's located, or how its home economy is performing. But markets everywhere are inefficient in the short term, providing us with opportunities to pick up underappreciated companies at bargain prices. At Motley Fool Global Gains, the team is well aware of the dangers of chasing hot stocks in hot economies. We've all been there, done that, and learned our lessons.

That's why we're selective, work hard, and tend not to follow the crowd. If everyone else is screaming about outsourcing in India, you're likely to see us recommending boring, cash-producing companies churning out soft drinks or building materials in Latin America. That's not to say we don't offer doses of excitement. We've got a couple of spicy Chinese companies in the mix, but rest assured, we don't recommend a steady diet of the flaming Szechuan.

Our No. 1 goal is to find good companies selling for good prices, no matter where they're located. Believe me, I'd rather recommend the next Altria (NYSE: MO  ) or ExxonMobil (NYSE: XOM  ) than get folks into the next Vonage (NYSE: VG  ) .

That means work, and it sometimes means taking a ribbing from the people who'd rather we threw the bones in the more popular casino. But I think we're up to the challenge.

To view the Global Gains recent recommendations, check out a free 30 day trial.

This article was originally published on June 8, 2007, and has been updated.

Kristin Graham updated this article, originally written by Seth Jayson; she does not own shares of any of the companies mentioned in this article. Fool rules are here.


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