International Stocks

International Stocks (also known as 'Foreign Stocks' or 'Global Equities') are simply shares of companies that are incorporated or have their primary business operations outside of your home country. For an American investor, stock in Siemens AG (a German company) is an international stock; for a French investor, shares of Apple Inc. (an American company) fit the bill. Venturing into international stocks is like adding new, exotic ingredients to your investment kitchen. It's a powerful way to achieve diversification, as it spreads your investment capital across different economies, currencies, and political environments. This can protect your portfolio from a downturn in your home market. Furthermore, the global marketplace is vast, offering access to world-leading companies and rapidly growing industries that might not have a counterpart in your own country. For the diligent value investor, the world is a giant flea market, with potential bargains often hiding in plain sight in less-hyped corners of the globe.

Exploring international stocks is not just about being adventurous; it's a strategic move that can significantly enhance a portfolio. It's about expanding your opportunity set beyond your backyard.

The single biggest argument for investing internationally is diversification. Different countries' economies don't always move in perfect sync. While the U.S. market might be stagnating, markets in Southeast Asia could be booming, or vice versa. By owning businesses in different regions, you smooth out your overall returns and reduce your dependence on the health of a single economy. Beyond this, many of the world's most dominant companies are not listed on American or even European exchanges. If you want to invest in the leading semiconductor manufacturer (TSMC, from Taiwan) or a global luxury powerhouse (LVMH, from France), you have to look abroad. Limiting yourself to domestic stocks means missing out on a huge portion of the world's best businesses.

For a value investor, the world is their oyster. The principles of value investing—finding great companies at fair prices—are universal. However, investor sentiment and market valuations can vary wildly from one country to another.

• Finding Mispriced Markets: Sometimes, an entire country's stock market can become irrationally cheap due to temporary economic woes or negative headlines. A patient investor who does their homework can pick up excellent companies at deep discounts during these periods of pessimism.
• A Wider Selection: Expanding your search globally multiplies the number of potential investments by a factor of ten. This increases the odds of finding that one-in-a-million bargain or a company with a formidable moat that is being overlooked by the local investment crowd.

Getting your money to work in foreign companies has become much easier over the years. You have several paths to choose from, ranging from direct and hands-on to simple and indirect.

Perhaps the most popular way for individuals to own foreign stocks is through depositary receipts. American Depositary Receipts (ADRs) are certificates issued by a U.S. bank that represent a specific number of shares in a foreign company. They trade on U.S. exchanges, like the NYSE or NASDAQ, are priced in U.S. dollars, and pay dividends in U.S. dollars. Think of an ADR as a claim check for foreign shares, making it as easy to buy a piece of Sony (a Japanese company) as it is to buy a piece of Ford. Global Depositary Receipts (GDRs) are similar but trade on exchanges outside the U.S., such as the London Stock Exchange.

For maximum simplicity and instant diversification, you can buy an Exchange-Traded Fund (ETF) or a mutual fund that specializes in international stocks. These funds hold a basket of dozens or even hundreds of foreign stocks. You can choose from:

• Broad Market Funds: These funds track a global index, excluding your home country (e.g., the MSCI EAFE Index for developed markets in Europe, Australasia, and the Far East).
• Regional or Country-Specific Funds: Want to bet on a recovery in Europe or the growth of India? There's a fund for that.
• Emerging Markets Funds: These funds focus on the higher-risk, higher-potential-reward economies of countries like Brazil, China, and South Africa.

The most direct method is to open an account with a brokerage firm that offers access to foreign exchanges and buy shares right from the source (e.g., buying a German stock on the Frankfurt Stock Exchange). This gives you the widest selection of companies but comes with challenges like currency conversion, higher fees, and navigating different market rules. This route is typically for more experienced and committed investors.

While the opportunities are exciting, investing abroad introduces unique risks that you don't typically face with domestic stocks. A wise investor understands them.

This is a big one. It's also known as exchange-rate risk. The value of your investment is not just tied to the company's performance, but also to the exchange rate between the foreign currency and your home currency. Example: You, an American, invest in a French company. Your $10,000 buys you €9,200 worth of shares when the exchange rate is $1.09 per euro. A year later, the stock has gone up 10% in euro terms, so your stake is now worth €10,120. Great! However, the euro has weakened against the dollar, and the exchange rate is now $1.03 per euro. When you convert your €10,120 back to dollars, you get $10,423. Your actual return is only 4.23%, not the 10% the stock gained. The weak euro “ate” a chunk of your profit. Of course, this can also work in your favor if the foreign currency strengthens.

Companies operating abroad are subject to the laws, regulations, and stability of their home country. Political risk is the danger that a new government, civil unrest, or sudden policy changes (like nationalization or new taxes) could harm the business. This risk is generally higher in emerging markets than in stable, developed economies.

Finding reliable, in-depth information on foreign companies can be harder. Annual reports might not be in English, and media coverage can be sparse. Furthermore, accounting standards differ. U.S. companies use GAAP (Generally Accepted Accounting Principles), while much of the world uses IFRS (International Financial Reporting Standards). The rules are different, which can make it difficult to compare a foreign company's financial statements directly with an American peer's.

International stocks are not a separate, exotic asset class to be feared; they are simply stocks. They represent ownership in real businesses, just like domestic ones. For the value investor, this is fantastic news. It means the same timeless principles apply. Look for businesses you can understand, with durable competitive advantages and honest management. Be disciplined about the price you pay, always demanding a margin of safety to protect your principal. The key difference is that you must add another layer to your analysis: be mindful of the currency, political, and information risks that come with crossing borders. By expanding your search globally but sticking to your core value principles, you dramatically increase your chances of finding wonderful businesses at attractive prices.