"Why do you consider the U.S. the 'least worst' place to invest today?"
I recently posed that question to Chuck Akre, manager of the Akre Focus Fund, referring to his statement in his most recent shareholder letter.
"It's the territory that I know," he responded. Despite its problems, he said, the U.S. "will prosper and overcome adversity as we always have."
Let freedom ring!
I happen to share Akre's opinion, and my personal portfolio reflects this view. It's stocked with dividend-paying U.S.-based multinationals and mid-caps that I know backward and forward.
Many folks share this "home bias," consciously or subconsciously -- perhaps for good reason. A 2001 study by Joshua Coval and Tobias Moskowitz found that fund managers earn 2.7% more per year on local investments versus non-local ones.
Makes sense, right? First, we have an informational advantage with local companies, compared to, say, a newly public firm in India. I've been a long-time customer of Home Depot
In contrast, I have little insight into what makes Hong Kong-based casino operator Melco Crown Entertainment
On the other hand, we need to recognize that we may be "too confident" in local companies. In Your Money and Your Brain, Jason Zweig notes:
A study run jointly in the U.S. and Germany found that German investors expected their stock market to outperform the U.S. by two to four percentage points per year. Meanwhile, U.S. investors expected the Dow to beat the German market by almost exactly the same margin.
So while we may be confident that our local investments will outperform foreign counterparts, that isn't reason enough to buy a stock. We still need a well-rounded investment thesis.
Broaden your horizons
Even though our perceived competence and confidence level is higher with local stocks, that shouldn't excuse us from learning about foreign stocks, which could offer some truly great opportunities.
Owning U.S.-based multinationals that do at least half of their business abroad, like Caterpillar
For that matter, owning a large-cap laden emerging-market ETF like iShares FTSE/Xinhua China 25
To find true successes, you'll need to look into smaller and undercovered stocks in high-growth economies like China and India, where markets remain inefficient. In such unknown territory, proper insight can yield tremendous returns.
About that insight ...
It's time-consuming enough for domestic investors to get a grip on large international companies, let alone all the cultural nuances and economic catalysts of say, a small Chinese company that does most of its business in rural, tradition-steeped backwaters.
To get this sort of information, you really need to learn all these things firsthand. That's not easy for most investors, who are busy juggling work and family life, with a little time for stock research squeezed in between.
Still, the benefits of this extensive research can be quite rewarding. When the Motley Fool Global Gains team made their first trip to China in June 2008, they met management and toured the facilities of the then-$53 million China Green Agriculture (CGA). Blown away by the upside potential, they recommended the stock to members upon their return.
I'm not sure even they expected the company to subsequently return 410% so quickly. But China Green Agriculture's success demonstrates the powerful combination of local information advantage and inefficient markets.
Think local and global
The U.S. economy will continue to improve, and American investors shouldn't discount our collective informational advantages in local stocks. Still, if you're looking to add some high growth potential to your portfolio (in moderation, of course), along with greater international exposure, go with small, undercovered emerging-market stocks. In short, they're the stocks you need to know.
Our Global Gains team can help you get started. The team's frequent trips abroad will provide you with on-the-ground information you won't find in mainstream media. Last year, for instance, they made their third trip to China and another to India, making plenty of good finds on the way. If you'd like to learn more about undercovered opportunities in emerging markets, start a free 30-day trial to Global Gains. Just click here to begin -- there's no obligation to subscribe.
This article was originally published on April 5, 2010. It has been updated.
Fool analyst Todd Wenning's random fact of the day is that "bookkeeper" is the only word in the English language with three consecutive double letters. He owns shares of Akre Focus and Home Depot. The Home Depot is a Motley Fool Inside Value recommendation. eBay is a Motley Fool Stock Advisor pick. Melco Crown Entertainment is a Motley Fool Global Gains choice. Motley Fool Options has recommended a bull call spread position on eBay and a bull call spread position on Yum! Brands.The Fool owns shares of China Green Agriculture and has a rockin' disclosure policy.