| Paul Melton edits The Outside Analyst , the only monthly newsletter that actually compares stocks globally. Since its inception in 1986, this wholly independent publication has earned a reputation for sound research. Melton specialises in sourcing the world's bargain equities, screening earnings estimates each month for more than 15,000 companies in over 40 countries . Books Investor's Guide to Going Global with Equities , FT Prentice Hall, 1996 Navigating the world's markets -
Chart a course. Lucius Annaeus Seneca (4BC-AD65) left you this warning: "When a man does not know what harbor he is making for, no wind is the right wind." There are investment strategies to suit all tastes and pocketbooks. The key is to decide which approach best suits your circumstances, special skills, unique sources and, above all, your character. Then stick to your plan. -
Leave your home port. Antoine Marin Lemierre (1723-1793) wrote: "It is a profound mistake to think the horizon the boundary of the world." Not everyone can beat the averages. But sailing out of your home port decidedly improves your odds. First of all, going global gives you more opportunity to find bargains. If no equities meet your criteria in a particular market, move on to another. There's always a bull market somewhere. Secondly, going global makes your portfolio more stable. The risk of your home market remains the same, whether you own two stocks or twenty. That's because stocks in a single market tend to move up or down together. However, just as you can diversify away the specific individual risk of each stock, you can reduce the market risk of your total portfolio by going into uncorrelated markets. For optimal global equity diversification, select some twenty-five stocks, or their equivalents, from different countries and industries, placing more emphasis on country diversification than on industry diversification. Diversify to hedge your ignorance. (John Maynard Keynes, Warren Buffett, and William J. O'Neil would all disagree , saying it's better to own few stocks about which you know a great deal. If you're a full-time investor and truly in their league, you can afford to ignore diversification.) -
Remember that one port can be as good as another. To the global navigator, all countries are equal. Yet, to paraphrase Orwell, some countries are more equal than others. So weight countries as equally as possible. Though equal weighting , as typified by the MEGA benchmark in Going Global with Equities, is clearly the best point of departure , it by no means rules out further adjustments. Quite the contrary. Each country's part of the total score should be further attuned to risk and reward. The two steps to doing this: first, adjust your weightings to minimize the chance of correlated market movements, then tilt that mix towards the most promising markets and shares. -
Fish where they're biting. The bumblebee's philosophy was neatly expressed by Publilius Syrus in the 1st century BC: "It is better to have a little than nothing." Bees ignore rare events and pay attention to common events. A U.S. researcher set out an artificial meadow of reliable blue flowers, each containing a small amount of nectar, and chancy yellow flowers, some containing nothing, some a jackpot of nectar. The bees - in this universe of specific risk - quickly learned to avoid the chancy flower and home in on the known quantity. They clearly preferred steady small rewards to the chance of hitting it big. Humans, on the other hand, are optimists who believe rare events will happen more frequently than they actually do. So don't chase the giant marlin by paying too much for the prospects of huge profits from a new industry, the potential of a big minerals find, or the current fast growth of a technology firm. Go for earnings stability and settle for smaller fish that are easier to catch. -
Tack into the wind. As Henry Wadsworth Longfellow noted: "Things are not what they seem." Perceived risk and actual risk do not coincide. If markets were perfectly rational and efficient, returns would relate to market risk: the risk you cannot diversify away within a single market. But markets are people, and people are not perfectly rational. People expect greater return for greater perceived risk, and price an equity accordingly . Share prices fluctuate much more widely than values. Popular equities are often overvalued and unpopular ones undervalued Hence, one way to create steady profits is to follow strategies that exploit these recurring discrepancies between the risk the crowd sees in an equity and its expected market risk. So buy shares perceived as risky. Market cycles are like the seasons. When the winter winds blow, blue and yellow flowers wilt alike. But if you've gone global, you have a portfolio for all seasons. In choosing your holdings, this diversity gives you the opportunity to seek market risk for more potential reward. For individual stocks, the best proxy for market risk is the dispersion of analyst estimates. The wider such estimates are scattered , the higher the return you can expect. Typically the strategy will produce some spectacular flops more than offset by spectacular gains. Though this may seem the antithesis of the bumblebee's approach, your global portfolio of apparently 'risky' wallflowers will have a much higher probability of success. The bumblebee would envy you. -
Limit ballast. William Wordsworth put his finger on the problem of information overload back in 1807: "The world is too much with us." We react consciously to only a fragment of the data being thrown at us. Research suggests we tend to become more confident and less accurate as we process increasing amounts of information. So avoid information overload. As most people can handle no more than seven pieces of information at once, it is wise to employ no more than seven criteria for choosing each stock. (Barry Ziskin uses only seven criteria to pick stocks for his Z-7 Fund. These include: earnings stability, good working capital ratios, acceptable cover of long- term debt obligations, a share price of less than 10 times estimated current earnings, and institutional ownership of less than 10%.) -
Check regularly for leaks "Beware of small expenses," said Benjamin Franklin: "A little leak will sink a great ship." For every euro, dollar, or yen, skimmed from your investment capital today, you lose far more as you sail on. Those funds are gone forever. They can no longer help increase your assets. Money spent on commissions and expenses is money that fails to grow. The key to evaluating investment fees is to perceive that such expenses represent capital that would otherwise have been invested. The hidden cost of investment fees is their future cost: cumulative curtailment of your return. So hold down turnover and fees. Expert tennis is a winners game because the ultimate outcome is determined by the actions of the winner. Conversely, amateur tennis is determined by the actions of the loser, making it a loser's game. The amateur seldom beats his opponent, but he beats himself all the time. The victor gets a higher score because his opponent loses even more points. Most investment managers fail to beat the market because due to the rising costs of trading they are playing a loser's game. The average spread on the Nasdaq rose from less than 3% in 1984 to almost 6% in 1992. Suppose we estimate that in most markets institutional investors incur spreads and commissions some 60% lower than those on Nasdaq, say 3.5% Now here's a key question: If equities return an average annual 9% return, turnover averages 30% a year, and dealer spreads and commissions on institutional transactions (one way) average 3.5% of the assets involved, how much does a professional manager have to outperform a market to deliver net returns 20% above its index? The answer boggles the mind: over 43%. And that ignores management and custody fees! Using the same estimates, the active manager must beat a market gross by 23% just to equal the market net. The moral? Think twice before doing anything, because chances are it is a mistake. -
Maintain the lifeboats. When asked what he had done during the Terror of the French Revolution, the Abb Sieyes replied, "I survived." Rule 8 will help you to do likewise: Limit your downside. Use stops, which, in the long run, limit losses to reasonable size and let profits run. A stop can be used not only to protect against loss, but also to lock in a profit. The idea is to place a "trailing stop" under a stock that's on the rise. You can think about raising that stop when your paper profit nears 20%. Your aim is to separate random and normal short-term sell-offs from really bad news. Bear markets are a fact of life, so ultimately a local index will turn down and trigger your trailing stop, often letting you realize substantial profits. When several stops are triggered in a single market, implying a major downturn, buying puts in that market is likely to produce gains. -
Sell your catch before it spoils. "Experience," wrote Oscar Wilde, "is the name everyone gives to their mistakes." So set strict rules on when to sell. You can ignore the history of any equity in your portfolio. Just ask yourself the simple question: "Would I be willing to buy it now at today's price?" If not, you should sell. Sell after a stock has gone up 50%, or after the first two years , whichever comes first. Sell if the dividend is omitted, or if earnings decline so sharply that the stock sells 50% above your target purchase price. Don't be afraid to take a loss; mistakes are part of the game. -
Don't give up the ship too soon. A song of the thirties embodies this investment axiom : "The fundamental things apply, as time goes by." Trust time rather than timing. Time is on your side. Currency-cost averaging, regularly investing the same amount of euros, yen or dollars, is a system that makes anyone an expert market timer. You may not get all your money in at the cheapest point, but you won't be committing your whole wad at the top either. By investing a fixed sum each month, the number of shares you acquire depends on the level of a market from month to month. If the market rises, the price of shares goes up and each investment buys fewer. But if the market falls , the price of shares goes down and each investment buys more of them. If you regularly invest a fixed amount over a number of market cycles, the larger number of low-cost shares in your portfolio will lower the average cost. This system is especially useful in purchasing volatile country funds, such as those in emerging markets. Time is your friend in another way. The wise investor diversifies not merely in space ( geographically ), but also in time. Patience is the key. You get the chicken by hatching an egg - not by smashing it. Long-term investors almost invariably come out winners. Obviously, many individual shares lose money in the long run. But a diversified equity portfolio, especially one mirroring various markets, will rise on the back of the long-term upward trend. You get most of the benefits of time diversification within ten years. Global and time diversification make an unbeatable combination for minimizing your chances of loss and meeting your long-term expectations of gain. www.global-investment.com | 'Never put yourself in a position where you were absolutely correct but didn't take enough of a bet to make a difference in your life.' ”Thom Calandra | |