Warren Buffett has been called a sage, an oracle, and a genius. So when he says something as startling as the following, your ears should perk up: "In the future, I would predict that the U.S. dollar will decline. ... Force-feeding the rest of the world $2 billion a day is inconsistent with a stable dollar."

This is scary stuff. Except one thing: Buffett made that statement at the beginning of 2008, before (1) the U.S. dollar went on to have a pretty good year versus most other currencies, (2) the U.S. government announced the $800 billion bailout and $789 billion stimulus that will force-feed the world billions of additional dollars of U.S. debt, and (3) China's central government proposed replacing the U.S. dollar as the world's reserve currency.

Passing on the buck
Now, we're not policy wonks, Ph.D. economists, or long-winded talk-radio hosts, so we'll leave the politics aside and focus on the implications for your bank account instead. By adding to our massive federal deficit, the TARP and the American Recovery and Reinvestment Act of 2009 could have a devastating effect on the dollar ... a side effect that should scare the dickens out of you.

Similar to inflation, a declining dollar acts like a time bomb in your portfolio. When the dollar is weak, goods purchased from foreign countries -- like, you know, almost everything we buy -- become more expensive.

The good news is that we haven't seen this yet. After last year's volatility, investors around the globe got spooked and flocked en masse to the safety and stability of Uncle Sam. Thus, the dollar strengthened and American investors who owned dollars fared quite well relative to Americans who were invested abroad, even though many foreign markets had returns better than our own as measured in their local currencies. Take a look:


2008 Return (in U.S. Dollars)

2008 Return (in Local Currency)

United States









New Zealand









Returns based on Dow Jones Global Indexes. Source: The Wall Street Journal.

A couple of conclusions
You got hit hard no matter where you invested last year, but you were hit particularly hard if you'd used your dollars to buy stakes in companies that earned Chilean pesos, Canadian dollars, or Brazilian reals.

Now, we know this may be an abstract point, but it's important. Even more important is the realization that while the dollar had a pretty good 2008, things won't always be this way. When the current calamity subsides, the same investors who bought the dollar this year for its "safety" will remember that:

  1. The United States has a massive and growing deficit.
  2. The United States continues to generate significant trade deficits.
  3. The United States has become oh-so-willing to print money out of thin air to meet its obligations.

When that happens, the tables will turn ... and investors who use their strong dollars today to buy stocks that earn Chilean pesos, Canadian dollars, and Brazilian reals will be rewarded as those currencies strengthen against the dollar in the future. In fact, this is already starting to happen. While emerging markets have put up solid returns thus far in 2009 in local currency, their returns in U.S. dollars have been spectacular.

Smart investors like the aforementioned Warren Buffett saw this coming, and they're taking one step -- a simple step you can take yourself -- to take advantage.

Get ready for action
In fact, Buffett has been doing this for years: simply purchasing shares of businesses that do significant and/or growing amounts of business in other currencies. Current holdings Johnson & Johnson and Nike (NYSE:NKE) are two examples.

As Buffett wrote in his 2005 letter to shareholders, "We ... [purchase] equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally."

Combine this currency diversification with businesses offering superior returns on capital, and you have a very compelling addition to your portfolio. The simplest ways you can do this are to look for companies that generate a substantial amount of their sales outside the United States, or to look for companies headquartered abroad:


Percentage of Non-U.S. Revenue

Return on Capital





South Korea

Nokia (NYSE:NOK)




Millicom International Cellular (NASDAQ:MICC)




Tenaris (NYSE:TS)




Tim Hortons (NYSE:THI)




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

Your next move
Putting aside policies and politics, you needn't be a George Soros-like currency trader to see that the dollar may be in for a rough patch. Instead of being caught off guard, you'd do well to think about positioning your portfolio now. Regarding buying equities with substantial sales in foreign currencies, Buffett wrote that "Charlie [Munger] and I prefer this method of acquiring non-dollar exposure."

If you're looking for additional international exposure, our Motley Fool Global Gains service is 100% dedicated to finding superior international investments. We deliver two stock picks each month, a list of our top five buys for new money, and comprehensive asset-allocation advice to help you fine-tune your foreign exposure. You can tour the entire service for 30 days -- on our dime -- by clicking here for a free trial.

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This article was originally published on March 25, 2009. It has been updated.

In four years of writing columns together, this is the first time Tim Hanson and Brian Richards have used the phrase "scare the dickens out of you." Neither Tim nor Brian owns shares of any company mentioned. Millicom and Tim Hortons are Motley Fool Global Gains recommendations. Nokia is an Inside Value selection. J&J and POSCO are Income Investor picks. The Fool has a very stable disclosure policy.