The Global-Investor Book of Investing Rules: Invaluable Advice from 150 Master Investors

Ralph Wanger is Founding Partner of Chicago's Liberty Wanger Asset Management. Wanger is responsible for $8 billion in five mutual funds: Liberty Acorn, Liberty Acorn International, Liberty Acorn USA, Liberty Acorn Twenty and Liberty Acorn Foreign Forty. A graduate of the Massachusetts Institute of Technology with a Masters degree from the same university, Ralph Wanger lives in Chicago.

Books

A Zebra in Lion Country , Simon & Schuster

Reasons to invest beyond the USA

Adapted with the permission of Simon & Schuster from A ZEBRA IN LION COUNTRY by Ralph Wanger with Everitt Mattlin. Copyright 1997 by Ralph Wanger.

1. Bet on good companies, regardless of what country they're in.

   In about 1985, I realized that many of the U.S. companies I owned were getting their asses kicked. I started hearing all kinds of stories from my companies: "We had to close down our factory in Kentucky because somebody's bringing up stuff from Guatemala that we can't compete with." I figured we had better start looking at some of these foreign companies. I told my staff that we would find winners wherever domiciled, and bet on them. In investment, if you want the best returns, you have to ignore patriotism and sentiment.

2. Locals always have the edge.

   Some investors insist that it is best to stick to U.S. companies where you can count on full disclosure, protective regulation, and plenty of Wall Street research. By owning multinational companies, they argue, you can still reap the harvest of growing economies abroad. In answer I would say that where U.S. companies do business abroad they are always going to be treated as outsiders. U.S. money is welcome, but there is a common tendency to take care of your own and freeze out foreigners, whether by legal or illegal means.

3. Don't keep all your assets in one currency.

   You wouldn't put all your money in one stock or in one industry, and you shouldn't keep it all in one currency either. Owning foreign stocks and diversifying away from the U.S. dollar is probably valuable in itself, given the U.S.'s massive federal deficit and balance-of-trade deficit, both of which work against the dollar. With such a prospect, I want to own foreign as well as U.S. securities.

4. Look for industries where the U.S. has no equivalent.

   Another reason why sticking to American multinationals isn't the same as directly investing abroad is that some foreign industries don't have counterparts in the United States. For instance, in Singapore you can invest in shipyard stocks. There aren't any shipyard stocks in the U.S. In Britain, you can buy an airport management company. There's no such thing in the U.S. Many of these stocks are very good investments.

5. Take advantage of less efficient markets.

   Investing overseas nowadays is like investing in the U.S. twenty-five years ago. It's tough to find small companies in the U.S. that aren't followed by at least a regional firm of brokers , and the companies themselves are accustomed to media releases and conference calls. Everyone hears the news within seconds, so it is extremely difficult to gain an information edge. Overseas markets, in contrast, are far less efficient. You can still find businesses that others know little about - businesses growing at very fast rates. For several years at least, I see enormous potential.

6. Invest for the long term .

   In many foreign markets, the dominant mentality is a trading one. Insider trading is permissible and rife, turnover is very high, stories abound, and the locals are mainly interested in running a stock up 25 percent and dumping it. There's no way you can outtrade the locals, so the secret is to become a long-term investor, to adopt a different time scale. Then, their edge washes out over time. If you can be in for the long haul - sometimes buying the stocks the nationals are dumping - and just sit with those stocks, you can realize the high growth available without being nailed by the short-term stories.

7. Consider mutual funds.

   It's getting easier to be a direct investor overseas, but there are still difficulties in tracking companies, assessing economies, worrying about currencies, and dealing with local regulations, accounting differences and indifference to stock manipulation. For all these reasons, consider getting exposure to overseas stocks thrugh a mutual fund. But the chief argument for going the mutual route is that professional fund managers traversing the globe to develop corporate and analyst relationships are able to dig up investments that a private investor by himself could not hope to find.

8. Spread your bets.

   At Acorn our emphasis is on picking companies rather than countries, but it's important to make top-down judgements as well. You don't want too much exposure in unstable countries . Too many people assume that their money will be safe in places where they wouldn't drink the water. In assessing how comfortable we feel about investing in a country, we consider the usual factors of political risk, inflation and interest rates, balance of payments, and the like. We want to feel the country is on the right track. And because it's impossible to eliminate all risk, we diversify.

9. Remember why you're there.

   Sometimes you will get fed up with the smaller, developing markets - their illiquidity and volatility, the insiders' edge, the struggle to find out what's really going on. You have to remind yourself that with countries growing at 6 to 10 percent and companies growing at 25 to 30 percent, it's worth putting up with such inconveniences. A recent study conducted by Morgan Stanley Capital International for the years 1985-1993 showed that a combination of U.S. and non-U.S. stocks produced a higher return with less risk than a 100 percent U.S. portfolio. The allocation that promised the highest return with least risk was 60 percent U.S. and 40 percent non-U.S. combination. If you went to 80 percent non-U.S. stocks, your risk would rise to about the same level as if you had a 100 percent U.S. portfolio - but your return would also rise, by a couple of percentage points.

10. Final word.

    The issue really isn't whether or not you should invest in non-U.S. stocks. The issue is whether or not you should be in stocks altogether. If you are in pain when a stock or stock mutual fund drops 5 percent, the answer is negative. But if you are a stock investor, you should be country-blind.

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