Invest With an Ally

So you're flipping through the business news channels on the ol' TV one day, and you come across a station -- let's just call it the "See and Be Seen" network -- where three famous talking heads are debating the merits of "portfolio diversification."

Talking Head No. 1: "Individual investors need to diversify their portfolios -- and not just across industries. International diversification is essential, too. That's why my investment bank recommends you buy shares of Consolidated Jamaican Organic Bananas (Ticker: CONJOB). We like it so much, we own 95% of the shares ourselves."

Talking Head No. 2: "CONJOB seems too expensive to me. But I agree -- investors need to grab a piece of the hot, hot, superhot emerging markets. The smart money is all over Federated Inter-Asian Software Co. (Ticker: FIASCO)."

Talking Head No. 3: "I've got nothing against your CONJOB, and I've been in and out of FIASCO since I first started in this business. But if you really want to make money internationally, there's a great little Trinidadian oil tanker firm that pays a 117% dividend, and I think it's just right for Ma and Pa Individual Investor. It's called Trinidad and TobagoAmalgamated Nickel (Ticker: TTANIC) -- they used to ship nickel ore but switched to the oil business right after Katrina."

Come to think of it, your broker's been telling you to "add some international diversification," too. And did you read the Wall Street Journal piece on big dividend-paying stocks over in Europe a few months back? Maybe there's something to this international investing idea after all -- everyone seems to be doing it.

Here there be dragons
Of course, we all know that investing internationally isn't the same as investing at home. For one thing, you're usually going to be buying "American Depositary Receipts (ADRs)" -- an investing animal that looks, walks, and quacks like a stock but isn't entirely the same.

The reason for its difference may be obvious, but its significance can still be hard to fully grasp. An ADR represents stock that trades in another country, issued by a company that may conduct business in ways far different from what we expect here in the U.S. Think of cultures where bribery is endemic, where controlling shareholders may not give a fig for the interests of minority shareholders, where a host government may even expropriate a company to its own ends.

It can be hard -- bordering on impossible -- for an individual investor to anticipate all of the risks she or he may face when investing in a business in a foreign land. It can be even harder to differentiate fact from fiction in a foreign prospectus, especially when the company that writes the pretty words may be actively working to deceive. And it can be harder still to protest a foreign government's illegal acts if they impair or even destroy the value of the investor's company.

But isn't there some way to get the benefits of investing internationally without having to sink your money into the kinds of shady companies named above? To profit from foreign markets while minimizing their risks?

As a matter of fact, there is.

Invest with an ally
In our recent series on International Superstar Stocks, we highlighted the benefits and explored the risks of investing directly and individually overseas. But there's another way to capture your fair share of foreign emerging markets' explosive growth and to exploit the cheaper valuations of stocks in more developed foreign markets. I call it "investing with an ally."

When investing internationally, there's no particular need for you to go it alone. There are plenty of U.S. companies that do the bulk of their business abroad -- big, respected names, adhering to the fullest disclosure requirements of the Securities and Exchange Commission, and bound to protect minority shareholder rights by the full force of U.S. law. To name a few:

When you think about it, there's precious little difference between owning profits that a foreign company earns from a foreign market and owning an equal amount of profits collected by a U.S. company that does business overseas. Yen are yen, whether it's Sony or Corning earning them for you. And pounds sterling are just as beautiful whether you acquire them through an equity interest in PepsiCo or Cadbury Schweppes.

If you can get all the benefits of owning a foreign company just by buying a domestic company that does business internationally, why even bother with riskier methods?

Big Brother has your back
Speaking of risk, there's an added benefit to investing in a great U.S. company that does business abroad -- it's like venturing onto a hostile playground with your hulking big brother at your back. The other kids (or in this case, government regulators, or local businesses) might not think twice about abusing the rights of an individual foreign shareholder. But they'll think three times before crossing the likes of Coca-Cola or Intel. When a foreign company or government tramples on the rights of an individual shareholder, it may frighten away a few thousand dollars' worth of future investments -- no great loss. But abusing the rights of one of the U.S. multinationals can put tens of millions of dollars' worth of investment at risk.

International investing is one of the many places where there truly is safety in numbers. If you're determined to invest internationally but concerned about the risks of doing so directly, investing in a household name seems a reasonable way to get the best of both worlds.

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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy has no rivals.