Stick to your circle of competence. Buy what you know. Let's get this out of the way right up front. Both Warren Buffett and Peter Lynch have advised investors to carry some knowledge of a stock before investing.
And while these words have always served me right in my own portfolio, investors can and do take this message one step too far. So often, we select potential investments based on a false circle of competence -- one focused too much on global location, whether a company is American or whether it is "international," the latter often viewed as the hinterlands of the stock market.
It's time we take the blinders off. In an age where an email from a computer in Pensacola can find its way to Paris in less than five seconds, in a time where soldiers on the front lines in Iraq can pick up a telephone and call home in a matter of minutes, we investors need to rethink our position on global ownership. It's not "their country" versus "my country" anymore. Instead, the global market is a collective "ours" -- and we're foolish (with a lowercase "f") if we don't sit up and take notice of what the world is doing.
And it's not as intimidating as it looks.The companies you know ...
It's important to note that many "foreign" companies aren't foreign to American investors at all. Oil magnates such as BP and Total have been operating within the United States for years. Automakers Toyota and Honda
But that doesn't mean you can't gain power from investing in the likes of these. Even though some of these companies may be old friends to your portfolio, they also provide a solid way to diversify. Just as you diversify within your holdings in other ways -- by sector, market cap, and the like -- it's smart to diversify your global positions as well. If you've got one foot firmly planted on American soil and one in the world at large, you'll be better off should a downturn strike -- in either arena.
... and the ones you may not
Meanwhile, a plethora of international companies aren't so well-known within the States, and that's OK. As with any other facet of investing, the lesser-known companies often have strong upside potential.
Return vs. S&P*
Companhia de Saneamento Basico do Estado de Sao Paulo
New Oriental Education and Technology Group
To be sure, this list isn't representative of international stocks as a whole. As with any sector or grouping of companies, laggards and legends are likely to be peppered throughout. But consider this: Over the last three years, the iShares MSCI EAFE Index, which tracks the international large-cap index, has beaten the S&P by nine percentage points annually.
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Hope Nelson-Pope is online coordinating editor at The Motley Fool. She owns none of the companies mentioned. Total is a Motley Fool Income Investor recommendation. Vodafone is an Inside Value pick. GigaMedia is a Global Gains pick. Baidu.com is a Rule Breakers recommendation. Sina is a Stock Advisor selection. The Motley Fool's disclosure policy wears only real pearls -- never costume jewelry.