In this special episode of Industry Focus Wildcard Wednesday, Emily Flippen chats with Motley Fool analyst and seasoned international investor Bill Mann about investing in foreign markets. Discover different ways you can invest globally and screen companies that you are interested in. Learn what you should consider while investing abroad and much more.
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This video was recorded on April 22, 2020.
Emily Flippen: It's Wednesday, April 22, and I'm your host, Emily Flippen. For this Wildcard Wednesday, we have a really special guest and all-around amazing investor with us, Bill Mann, who is going to break down what it means to be an international investor. Bill, thank you so much for joining.
Bill Mann: Emily, how are you doing?
Flippen: I am hanging in there amid this crisis. How about yourself?
Mann: Well, you know, the 15 hours that I spent a week at my home today is a lot like the 15 hours I spent a week at my home yesterday. But really, nothing to complain about. I mean, absolutely nothing.
Flippen: I think for a lot of our listeners, this might be the first day in a while that they've realized what day of the week it was: It's Wildcard Wednesday. So for everybody who's unaware, only knows their days by what Industry Focus episode it is, I'm right there along with you.
Mann: A friend of mine has started calling the days all "Blursday", and I think that I'm going to adopt that. So it's Blursday, the 22nd of, I guess, this is April still, right?
Flippen: [laughs] I guess so. Well, Bill, I know from plenty of Motley Fool marketing materials that you are our most seasoned international investor, so I guess that would mean that the perspective we're going to provide on the show is maybe a little bit biased toward international investing. But as Chris Hill likes to say, this is a free show.
So I'd like to just kick it to you with the broad question, which is, really, what does it mean to be an international investor?
Mann: It really doesn't mean much, and in some ways, every investor is an international investor, even if you own stocks that are only domiciled in the United States. There are a lot of companies -- Coca-Cola, for example, has more than half of its revenues that come from overseas. Aflac has more than 90% of its revenues come from overseas, even though it is based in Columbus, Georgia.
But to be an international investor means that you are specifically looking outside of the United States for investing opportunities. Now, why would one do that? The United States is, of course, the largest economy in the world, it is the most diversified, broadly, in the world.
There are a couple of reasons why I would suggest that one would want to become an international investor. The first of which is that growth rates in the United States, even before the COVID-19, are almost guaranteed to be low because we are a developed economy. There are amazing economies that are growing at 9%, 10%, 12% per year and will do so for decades. In Indonesia, for example, they went from 30 million people in the middle class in 2000 to 200 million people in the middle class today. So those are some of the areas where you feel like you could get exposure to opportunities that are simply different from the ones that are available in the U.S.
Flippen: So personal finance is a little bit of my enjoyable side hobby here; although, if you can call it a side hobby, it really is related to my day job which is, obviously, investing here at The Motley Fool. But the argument I hear a lot with people who are deep into the personal finance space is that, buying a total stock market index fund or a U.S.-based index fund that tracks the major U.S. companies provides enough international exposure for exactly that reason you mentioned earlier, which is to say, companies like Aflac, like Google [Alphabet] like Amazon. They are big companies and based here in the U.S. that have a lot of international exposure. Do you think that investors need to be going out of their way to get international exposure to tap on some of these growing economies?
Mann: Yes, I think that they do, for one primary reason. Yes, you can get plenty of exposure investing in U.S. companies. But you are still only singularly exposed to the U.S. stock market, the best-performing market over the last 10 years in the world -- OK, let's say the best, so maybe, you know, Venezuela has done better -- of the major markets in the world, and you can get pretty far down and still call the major, it is the S&P 500, it has outperformed everything else.
And before the COVID-19 crisis hit this country, we were trading, in the U.S., on an historical high multiple to at almost any point in the past. One of the reasons why the market has come down so sharply is that it was literally discounting almost no risks going forward.
Foreign markets have not performed in the same way. They had not, over the last decade, risen as quickly as U.S. markets had done. They were not at as high multiples. And it means that the other part of that coin, that I think tends to be missed by the more academic thoughts about investing, is that your long-term returns are based on the price you pay for equities or whatever instrument that you're owning, along with those qualities, right? In aggregate, it's just those qualities, but I'm not investing in aggregate and you're not investing in aggregate. You are actually choosing companies in countries.
And so having opportunities to invest in some unbelievable countries, unbelievable companies at a lower multiple, I mean, that is a margin of safety that in a lot of ways has not existed in the U.S. for a while.
Flippen: So maybe buy the U.S. aggregate funds, so, like, index funds, but diversify your portfolio with some smaller international companies that you wouldn't otherwise get exposure to.
Mann: Yeah, I think that's exactly right. And some of these things are opportunities. Although the U.S. is the most diverse, there are opportunities that are in other markets that just don't exist here. So like, for example, a company that we have in the Global Partners portfolio is a company called Bakkafrost, they're based in the Faroe Islands which is an island country of about 100,000 people but it is literally the Saudi Arabia of salmon. They have the absolute perfect environment to farm salmon. They have fjords, they have an incredibly well-structured ecology, well-regulated, they have the highest price points for salmon in the world. You can't get it in the U.S. You have to get exposure to something like that through Bakkafrost, which is a Faroese company that trades in Norway.
It's not that hard to do, I mean, there are some steps involved, but this is not something that is available in the U.S. markets at all. And I don't mean just necessarily the company is not available, but that type of opportunity is not available.
Flippen: But, Bill, aren't you worried about a salmon pullback in the same way we saw the oil pullback over the past few months?
Flippen: When is the salmon crisis coming?
Mann: Well, the salmon crisis actually happened.
Flippen: Oh, really?
Mann: Yeah, yeah. Anytime you're dealing with something that has commodity pricing attached to it, you have to know that ultimately, the commodity is going to drive the short term, but over the long term -- I'll talk about -- so, there was an algae bloom that destroyed huge amounts of the salmon crop -- Do you call them a crop? You call that a harvest. Yeah, you don't plant salmon -- harvest in a year.
But here's the thing, so salmon is the most dense -- do you like how we've transitioned straight to salmon?! [...] now we're talking about salmon. It is the densest calorie protein available by far of all of the meats, it is in salmon, because of the oils, things of that nature. Farmed salmon's biggest competition is wild-caught salmon. And wild-caught salmon, the market is absolutely positively fixed. If you fish any more than is being fished now, you are overfishing, and you are destroying future harvest. So you have a crop, you have a harvest, you have a commodity that is increasing in demand, and the largest competitor is absolutely fixed. So yes, on a year-to-year basis, there are things that happen, but in the long term you're just talking about something that is going to be more valuable next year, the year after that, and the year after that, and it is not available for trade in the United States.
Flippen: I love how I tried to pull your leg there a little bit with the salmon crisis and, man! You put me in my place with your response.
Mann: [laughs] Sorry. [laughs]
Flippen: No, I absolutely love it. It's really great. And you mentioned there at the very end, it's not available for trade in U.S. markets. So let's say I am convinced about your salmon proposal, Bill. How do I go about buying a company like Bakkafrost in international markets?
Mann: So it trades in Norway. And this is where it gets a little dicey for people. And by the way, when we talk about international investing, and we'll talk about the vehicles in just a few minutes, there are hundreds of companies that are really easy to buy in the United States that are international. Some, like Shopify, for example, you might not even know are international. But in this case what you want to do, the primary way that you would do it, is you would buy it through your broker on the Norwegian exchange. Some brokers have this capability, E*Trade does. No, excuse me, it's Schwab. Yeah, Schwab, Fidelity, E*Trade, Interactive Brokers. TD Ameritrade doesn't have it. So there you go, it's just another impediment. It's another place that if you go through the steps to get set up, you suddenly go from the U.S. market that has 6,000 companies available to international markets with 100,000 companies available for purchase. So that's the type of breadth that is available to you outside of the United States.
Flippen: And then you said you want to talk a little bit about the avenues through which you could purchase companies. Let's say I have all of my assets with TD Ameritrade, I want to get international exposure, but I'm not willing to switch my broker. Am I giving up any international exposure or do I still have options?
Mann: You're giving up a lot, you're giving up certain amounts of flexibility. And I'm not saying anything about TD Ameritrade. It's actually, it's funny, because if you talk to people who are outside of the United States in some of the more multicultural, international societies, like, people in London, for example, or people in Australia or people in Dubai, they can buy things anywhere in the world. I mean, their brokers are built for giving people exposure to anywhere.
U.S. brokers, almost all of their business is on the U.S. exchanges. So they don't really have the same motivation, but you can get exposure with certain brokers, but if those are not available to you or not attractive to you, because there are a couple of hoops and it can be -- the trading costs can be a little bit higher, because you have to pay the foreign brokers trading cost -- there are things called ADRs, it's an American Depositary Receipt, and hundreds of companies are available through ADR.
A lot of the Chinese companies that we talk about, a lot of European companies, even South American companies, like MercadoLibre based in Argentina, are available on the New York Stock Exchange, through the major exchanges here in the U.S. because they have something called ADR. And buying those is the exact same as buying an American stock.
Flippen: Yeah. So if I were to go out and buy an American Depository Receipt, an ADR, of a company like MercadoLibre, would I expect for that value to move in flux with the value of MercadoLibre? Is it essentially the same thing as buying a share of a company?
Mann: It's essentially the same thing as buying a share of a company. So when you call it an ADR, you know, if you look at your brokerage account, you will notice exactly nothing different, or if you do see anything different, it'll say "ADR" and then some little code after it. It is almost exactly the same thing as buying stock on the home exchange.
There are small fees that you have to pay to hold ADRs. You almost don't notice them, though, they are real. Yeah, but it is in every way pretty much the same, if you are buying ones that are on the major exchanges.
There are also, and we can go down the rabbit hole a little bit, things called unsponsored ADRs, which you tend to see on the pink sheets. So Volkswagen, for example, has an unsponsored ADR, which means that the company doesn't really have anything to do with this security. It's literally, someone has gone to Germany, bought 50,000 shares and then deposited them in a bank in the U.S., and you are buying and trading those shares. And those can detach a little bit from the underlying value of the shares of the home company. It's not a huge risk, like, that sounds a little shady the way I described it, like, "Psst! Hey, want to buy a stock?"
Flippen: This sounds like a great business opportunity. I should head over to Germany. [laughs]
Mann: Yeah, for sure, right, just put a bunch of certificates, if we could get to Germany anymore, and bring them back. But, yeah, that's literally how it happens. Those are a little bit different, but we're talking about ones that are on the major exchanges. But you do have access to a bunch of companies that way.
Flippen: And moving on to what you think about when you choose to invest in international companies. Let's say, I'm sold here, I think I should have some international exposure, I'm going to switch my accounts, if I don't already have them set up with a company that will allow me to buy some of these international companies, but then I'm stuck. Like, how do I analyze an international company? What do you look for when you're making decisions about investing in international companies? Is it different than investing in U.S. ones?
Mann: Not really. I mean, actually, not really. There are certain things that are different. A lot of international companies have something called currency risk, and a lot of people build the currency risk into their models when they are evaluating a company. I don't happen to do that because I assume that a currency -- if you've got a profitable company that they are going to be able to withstand, they are among the best hedges against currency risk that there are. But people do build those in, it does add a little bit of volatility for a company that conducts its business in yen or renminbi or rupees or pounds or euros, whatever it may be, pesos. I'll just see how many currencies I can name in 10 seconds.
So that is one element that you might want to build in. I don't happen to. The thing that I do build in is, I assume that -- as an international investor -- that I am investing in a country that has a lower level of protection for outside shareholders, in particular, foreign outside shareholders. And so I just build in a little bit larger of a margin of safety. So if I had the exact same company doing the exact same thing in the United States, I might let it have a little bit of a valuation premium over most international companies. But literally that's it. I mean, they're doing the same thing, they're trying to make money, they're taking assets and trying to turn them into more assets, they are trying to grow their businesses, they're just doing it in places like Jakarta instead of Cleveland.
Flippen: And maybe just more broadly, how do you even get to know a company that you may not see or use everyday? So you talk about Bakkafrost, but, you know, I likely never went and caught salmon. I've never seen Bakkafrost in action the same way that I see Amazon in action or Starbucks in action. So how do you get to know international companies the same way you get to know U.S. companies?
Mann: Yeah, it's a little bit harder, actually, because if you think about Jason Zweig, who's a famous author, he did a book called Your Money and Your Brain, he said that they did a study of investors and what banks they owned, and by and large individual investors who had a portfolio that had a bank in it. The bank had a branch within 60 miles of the investor's house 80% of the time. So if you live in Virginia, like we do, it's much harder to do a comparison for a bank that's in Oregon. So foreign companies are not so different. So getting to know them is a little bit more of a challenge, particularly ones that don't have huge presences in the United States. If you don't feel comfortable doing that, don't worry about ones that don't have presences in the United States. You know, it's not necessary that you go out and invest in things that you have no ability to analyze. You don't have to do it.
But there are a lot of really, really credible international companies that are doing big things in the United States. And they don't necessarily have to be consumer facing. I mean, Siemens is a German company and Fanuc is a robot company from Japan. I mean, they are big parts of our economy now.
Flippen: Yeah, I actually came on, before I was hosting Industry Focus, I came on with Jason Moser, I think it was during consumer goods last year to talk about a Chinese company, it's called HaiDiLao Hot Pot, and they run a chain of very, very expensive and popular hot pot restaurants in the U.S. And I did a lot of research, and then I discovered that they actually have some here in the U.S., in addition to those in China. So I found that interesting, that there are in fact a lot of foreign companies that are -- it was listed in Hong Kong, you can really only buy it over the Hong Kong stock exchange, but they still have some consumer-facing presences here in the U.S., so ...
Again, if you're not comfortable investing in a company that you can't see, there are options out there for companies that you can see the impact of. Alibaba serves the U.S., and HaiDiLao, quite literally, can serve you food here in the U.S.
Mann: Yeah, though it's a Hong Kong-listed company.
Flippen: Yeah, exactly. And I know that we're going to be doing an episode on fraud and trust, especially as it relates to international companies, later on. But broadly, I know the question we get from a lot of people when investing in international companies is, how do you trust them? And if you don't trust them completely, how do you reconcile that with investing money in them?
Mann: So a lot of this comes up because, in particular, there was one company that's well known to a lot of Motley Fool members called Luckin Coffee, and a couple of weeks ago -- oh, gosh! A couple of weeks, a couple of years -- it was early April.
Flippen: But it feels like a couple of years. [laughs]
Mann: I know, eleventysix years ago. You know, what day is it? It's Blursday, April 963rd.
So on April 2, Luckin Coffee came out, and they disclosed that about 60% of their revenues from 2019 had been fabricated, and the stock immediately dropped 84%. This was terrible, this was an absolutely terrible thing that happened. And immediately, because Chinese companies a decade ago had come public in the U.S. through something called a reverse merger and basically had ripped off U.S. investors, people were like, "Oh, China is not to be trusted."
The thing that was interesting to me about Luckin Coffee is that they came and made a filing that disclosed the fraud. They talked about what they were doing. So obviously, the fraud was terrible. But this didn't exist 10 years ago. Ten years ago, the companies just said "No, no, no, no," and then they just delisted from the U.S. and disappeared. There is a great level of improvement, I think, in Chinese companies, but people are still rightly asking the question. I actually think that the fact that we are seeing frauds come up through an official channel is meaningful in an oddly positive way.
You know, a lot of people say, "Well, I don't trust foreign companies, I don't trust foreign frauds." If you look at a lot of countries, things like stock options are not used in the same way that they are here in the United States. And some companies, that we like and admire, dilute their shareholders 3%, 4% and 5% every single year. Now, that's not fraud --
Flippen: Oh, I invest in the cannabis space, so I know that well.
Mann: You know exactly what I'm talking about, yeah, that's not fraud, that is part of their business model, it is to pay their employees and their management with new equity. So you're being diluted year-in and year-out. Almost no foreign countries have a dilution table, a dilution speed, the same speed that happens in the United States. And that dilution is guaranteed. So I ask you, you know, don't trust foreign companies, don't necessarily trust the regulations. There are things about investing in foreign countries where there are risks that are lower than in the United States.
Flippen: Well, Bill, I really appreciate the time that you've taken to talk with us through international investing. And I know that fraud is such a bigger topic, and right after we finish recording this, I am now going to go ahead and roll into recording another Wildcard Wednesday episode that's going to be released next month in May, digging into that fraud more. But thank you for the time that you've given me today. It really has been educational.
Mann: Emily, it's so fun to spend this time with you. Be safe.
Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions, just shoot us an email at [email protected] or feel free to tweet us @MFIndustryFocus.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.
Thanks to Austin Morgan for his work behind the screen today, to Bill Mann. I'm Emily Flippen. Thanks for listening, and Fool on!