Investing in International Markets

Investing internationally can be a scary thing. This is especially true if as an investor you’ve spent most of your life avoiding complex international markets and haven’t gotten the opportunity to learn about them. The fact of the matter is, as domestic markets hit peaks, it becomes more and more difficult to find great domestic investments that are reasonably priced for a purchase. I mean, you can’t simply double up on a great investment that you made months ago because the company is still doing well – your ACB (adjusted cost base) can be obliterated. You’ve got to ensure that it is still a good time to buy. So what other options do you have? Holding your money in cash with a weakening dollar? Putting it into government bonds or short-term notes with interest rates at 0.5%? These hardly sound like good ideas. And so, we have to look overseas for opportunities. But as focused and disciplined value investors we have to ensure that we still follow our guidelines.

The first thing that all value investors putting money into international markets must remember is that it is still primarily about the company. Value investing has a bottom-up approach, which means first we focus on the business and then we look at the macro market around it. We ensure that the business has great economics, a competitive advantage, and a variety of other checkmarks before we even look at the externalities that affect it.

Following the selection of a great company, or sometimes in congruency to, is when an investor has to look at the impact of the international markets. Here are a few questions that we must ask ourselves:

• Where are their head office and secondary offices located? – This will provide a great starting point for research.
• What is the political environment of where their offices and business is located? – This will provide insight into whether there is risk of the company encountering repercussions from elections, legislative change, or even potential sovereignty and freedom impacts, as well as import/export agreements.
• What is the functional and local currency of operations? – It’s important to know whether there will be any exchange rate risk that could lead to losses on FX or whether there is any currency risk and devaluation of investment.
• How influential is the underground market? – Some countries have to deal with a variety of criminal organizations and influential families/entities.
• What are the legal parameters around the business? – Navigating legalities can be confusing to begin with but knowing legislature, export/import laws, independent and government review committees, licenses, and approvals, are all very necessary to forecast an international runway.
• What are the cultural, language, and religious barriers?

This isn’t an exhaustive list, but it is definitely one that each investor to consider. But again, I can’t reiterate that before you spend your time learning about the country; first learn about the company and the industry. If it so happens that your best investment choice in the industry happens to be domestic, so be it – business economics transcends much more than just borders (despite what the Canadian electorate seems say). Stay prudent, focused, and disciplined.