Deconstructing the All-American Portfolio

When you get down to brass tacks and crass facts, the stocks in our backyard tend to overpromise and under-deliver -- even now that the Panic of 2008 has cut the S&P 500 and Dow Jones benchmarks off at the kneecaps.

Not sure what I mean? Take a look at these numbers:

Market

Total Market Cap (trillions)

Average P/E

3-Year Earnings Growth

United States

$11.7

21.7

(16.5%)

Europe

$10.1

7.9

13.9%

Asia

$8.3

9.3

16.5%

Latin America/Caribbean

$1.5

8.3

20%

Canada

$1.3

13.3

16.8%

*Data from Capital IQ, a division of Standard & Poor's.

Every market has suffered lately, and the U.S. more than most. But it should be patently obvious that the market still gives undue credit to the Yankees and undervalues everyone else.

Is Mr. Market really George Steinbrenner in disguise?
Warren Buffett recently advised us in the New York Times to buy American -- he is. Why? Two reasons.

First, he's being fearful when others are greedy, and it's true that fear is widespread in the U.S. investment markets right now. Second, he believes in the power of American businesses to continue to produce long-term prosperity.

I have no argument with either of those reasons -- it's just that they apply even more so to the rest of the world.

Most American investors have been decidedly fearful about foreign markets. In fact, estimates of our average foreign exposure range from 2% to 20% -- and the recommendations for foreign exposure range from 35% to 66%, making a lack of international exposure the biggest threat to your portfolio today.

And just like the best of American businesses, the best of the rest of the world's businesses will continue to drive prosperity -- only they're enjoying more room to grow.

And all of that means international stocks have an important place in your portfolio.

The world's an awfully big place
It's easy to get overwhelmed by the global market, but just like they do in the U.S., the best companies have things in common: good management, a competitive advantage, and strong fundamentals.

In addition, the best stocks in the world usually come from politically stable nations with solid, business-friendly laws and regulations. Others are in countries that don't yet have that framework, but their local economies are growing fast enough to make up for it.

So what do some excellent overseas opportunities look like?

  • Swedish car-safety expert Autoliv (NYSE: ALV  ) dominates its market and saves lives worldwide.
  • Mobile communications giant America Movil (NYSE: AMX  ) connects more than 150 million chatty Latin Americans, whose local markets are on the rebound in a big way.
  • Oil giant Total (NYSE: TOT  ) is based in Paris, France -- not Paris, Texas -- but is just as big a cash cow as its Yankee counterparts … and has a svelte P/E ratio of 5.6.
  • Swedish/British drug titan AstraZeneca (NYSE: AZN  ) sells more medicine than Jersey boy Merck (NYSE: MRK  ) and is growing while the American alternative shrinks -- yet their market caps are running neck-and-neck these days.
  • Just when mighty Goldman Sachs (NYSE: GS  ) is running for the fire escape, HDFC Bank (NYSE: HDB  ) of India, a fiscally conservative bank that serves emerging markets, could give you all the cash-generating power of a major financial company without the exposure to dodgy American subprime borrowers.

The Foolish bottom line
Whatever else you do, don't let your portfolio stay entirely red, white, and blue. The opportunities abroad are far too bountiful to be ignored, and someday soon, the market will find its balance again. It is, after all, a weighing machine in the long run.

If you'd like some help finding excellent businesses serving a global market, take a free 30-day trial to our Motley Fool Global Gains investment service. The team looks for quality management, high growth, and solid balance sheets -- exactly what they'd look for in an American company. Just click here to get started -- there's no obligation to subscribe.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, but he does own six other non-U.S. stocks and ETFs. HDFC Bank, America Movil, and Autoliv are Global Gains selections. Total is a Motley Fool Income Investor pick. Our Foolish disclosure says that there's no flag-waving in investing.


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