One of the benefits of buying stocks online is that you can acquire an ownership stake in a promising company without ever having to leave your home. I'm not just talking about a stock that's three states and a time zone away. I'm talking about the many international stocks that one can also acquire through the major stateside exchanges.
Yes, you can be a globetrotter while still wearing your morning slippers. With that in mind, I decided to sit down and chat with Stephen D. Simpson, editor of the brand-new publication The Motley Fool International Stock Report: Around the World in 80 Minutes.
Birth of an international report
Rick:
The Fool has been around for a dozen years, and this month it published its first research publication devoted exclusively to international investing. How did this project come to be, and why now?
Stephen: Lots and lots of hounding, hectoring, and generally making of a pain of myself to the folks in charge. Seriously, though, it was high time to start shedding a little light on what is often an underappreciated, underfollowed, and under-understood area of investing.
Rick:Now, I lobbied for this puppy to be named Passport 2006. That would have branded it perfectly for years to come. I'm just ribbing you there, Stephen. The report is titled The Motley Fool International Stock Report: Around the World in 80 Minutes. With 14 international investing ideas, can I really soak it all in that quickly?
Stephen: Yes and no. You should be able to read the piece pretty comfortably in 80 minutes or so, but I can't imagine doing less than some solid hours of due diligence before making the leap from, "That's an interesting idea" to, "Buy!!!"
Fear of flying ... in your portfolio
Rick:
International investing may be, um, "foreign" to many stateside investors. Is there any kind of learning curve for investors to get up to speed before buying their first international stock?
Stephen: Well, there's a learning curve to anything that's new, different, or out of the norm. It's important to understand what an ADR is, what the difference between sponsored and unsponsored is, and what some of the tax ramifications of certain choices can be. But we include a nice little primer in our report that deals with a lot of that.
Rick:
I'm excited to see that two of the 14 reports are for international mutual funds. The only mutual fund I own at the moment is an international stock fund because I like having someone else dig into the skinny of emerging markets to dig up winners that don't trade on American exchanges. Is this report limiting because it focuses only on stocks that trade on one of our country's exchanges?
Stephen: In some sense, I guess it is, but in a more practical way, it really isn't. It's true that the stocks that trade on our exchanges as ADRs and direct listings are only a fraction of the total stocks out there in the international universe. But it's also true that it can be VERY difficult to find a broker who'll deal in foreign stocks for you and do so affordably. And then you have all manner of unusual tax, information, and transactional hassles to deal with.
Rick:
Some of the hottest markets over the past few years -- lapping the United States a few times over -- have been countries like Russia and China. The International Stock Report actually singled out potential winners in both of those regions. Is it dangerous to chase performance in those areas, or do you think it's only the beginning in some of those developing markets?
Stephen: Chasing performance is always a bad idea, period, whether it's Russian growth stocks, Australian gold stocks, or U.S. Internet stocks. Separate the buy decision from the fundamentals too much, and you're asking for trouble.
Overall, though, I believe we're just seeing the tip of the iceberg in many emerging markets. There absolutely will be ups and downs, panics and bubbles, but that's part of the process. In fact, I would be very careful with many Indian and Korean stocks these days -- many of them have been pushed to very frothy levels -- but if you can wait for the inevitable declines, disappointments, and momentary panics, I think you'll be pleased with what you see out of many of these countries over the long haul.
Rick:A lot of investors claim that you don't need to buy foreign stocks. They say that you can diversify globally by buying companies like McDonald's
Stephen: I'd tell them you also don't need to go to the dentist, but it's a pretty good idea.
Risk is more than just a board game of global conquests
Rick:
Can you go over some of the risks involved in buying international stocks?
Stephen: Many of the risks are the same as the risks of buying a U.S. stock -- the risk that the company will underperform and/or that the larger investing world will be slow to catch on to the great story you've uncovered.
More specific to international investing, though, you have the risks inherent with currency movements -- adverse currency moves can wipe away what might otherwise be solid gains. You also have risks from government behavior that we in the U.S. might view as corrupt, questionable, or simply incompetent.
China might be a good case in point -- the Chinese government has many issues to tackle, including environmental degradation, imbalance between urban rich and rural poor, human rights, and intellectual freedoms -- not to mention running a huge economy to boot. Should it stumble notably on one of those, that could create havoc in the markets and with Chinese stocks that might otherwise be doing all right.
Climbing the Great Wall of worry
Rick:
One of my top-performing recommendations in the
Rule Breakers
newsletter service is a Chinese company by the name of NetEase.com
Stephen: Both are important. You can succeed with a mediocre stock in a hot market. Likewise, picking a great company in a terrible market is not a winning formula for the short term. More often than not, I find that the process of evaluating the company guides me toward the interesting countries.
Rick:
I'm going to heave a softball your way and then follow it up with a curve. What do you consider riskier -- buying international stocks or avoiding them entirely?
Stephen: I don't consider buying international stocks to be much different from buying domestic stocks, so I'd have to go with "avoiding them entirely."
Rick:OK, I'm going to go for the jugular this time. Two portfolios. One consists exclusively of United States stocks. The other balances domestic holdings with international investments. In five years, who took on the most risk, and which one is likely to have the greater rewards?
Stephen: Without knowing which companies, countries, or markets are represented in the second portfolio, it's hard to say. On balance, I believe the more diversified portfolio will be the better performer over the years to come, and while there could be periods of volatility, I think there's more risk in not being involved in global investing.
Rick:Now, you and I both happen to have international stocks in our portfolios, but I still get the feeling that we're in the minority here. What do you tell people who can go dizzy by scouring through thousands of domestic stock listings that they should open up their universe even wider?
Stephen: Well, I'd say first of all that unless you're born into wealth or inherit it, just about any measure of financial success takes hard work. But I think that once you get past the fear and misconceptions of international investing, the process of assessing a company like GlaxoSmithKline
Rick: Thanks for your time, Stephen.
You can check out all 14 overseas investing ideas by picking up a copy of the brand-new The Motley Fool Stock Report: Around the World in 80 Minutes premium research publication.
GlaxoSmithKline is a Motley Fool Income Investor recommendation. Pfizer and Coca-Cola are Motley Fool Inside Value picks. Starbucks is a Motley Fool Stock Advisor selection, and NetEase has been singled out in Motley Fool Rule Breakers . Check out our family of investing services, and try out the one that fits your investing style free for 30 days .
Longtime Fool contributor Rick Munarriz loves to see the world, even if it's from the comfort of his computer screen. He does not own shares in any of the individual companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.