How to Get Started in International Value Investing
A reader sent me this email:
I am a student and am very interested in international value investing. I was wondering if you had any advice for me or if you knew of any people out there who are dedicated to this area (both gurus as well as bloggers). If you could recommend any resources I would highly appreciate it.
Start by limiting yourself. Pick which countries you will invest in and which countries you won’t. I recommend drawing your circle of competence around these 22 countries:
- New Zealand
- Hong Kong
- United Kingdom
Those are the 22 countries perceived to be less corrupt than the United States according to Transparency International’s yearly index. It’s not a perfect list. But it’s a good list. It’s pretty close to what I’d tell you myself. And it has the benefit of not being one guy’s biased opinion.
Chrome will translate websites from foreign languages into English for you. And the Factbook is the best guide to the world’s economies.
Make Bloomberg your financial portal. It has the best international ticker search.
Read Hidden Champions of the Twenty-First Century. It’s a good introduction to foreign companies. Mostly from German speaking countries.
American value investing shops that are heavily into foreign stocks include First Eagle, Third Avenue, and Wintergreen. Thomas Russo also likes foreign stocks. You can watch 3 lectures Russo gave to Professor Greenwald’s class here.
Some of my favorite value investing bloggers aren’t U.S. based. The author of the Interactive Investor Blog is in the U.K. The author of Greenbackd is in Australia. And the author of Variant Perceptions is in Mexico.
Richard Beddard of the Interactive Investor Blog isn’t just based in the U.K. He actually focuses on U.K. stocks. His blog is a must read.
A lot of blogs include lists of other blogs the author reads. Go through the list. Click on each blog’s name. Use a feed catcher like Netvibes to subscribe to any of them that interest you. I subscribe to about 50 blogs. You could easily manage several times more.
You can do the same with Twitter. Pick an investing blogger you like who invests outside the U.S. Then use him to find other value bloggers in the same country. Repeat.
Stock exchange sites are insanely difficult to navigate. Usually, you can use the sitemap to find a buried page that lists all the securities alphabetically. For small countries, this is ideal. If you’re looking at New Zealand or Ireland, you want to just go through the whole list the way Warren Buffett flipped through Moody’s Manuals in the 1950s. Frankly, there are fewer stocks in these countries than there were in those manuals.
Often, it’s easier to find companies if you think like a non-investor. Let’s say you’re interested in Japanese stocks. Do you like publishers? If the answer is yes, just Google “List of Manga Magazines”, the result will be a list of manga magazines which includes the publisher of each magazine. You can copy and paste their names into Bloomberg and see that some are public companies.
Obviously, we’re always looking for good businesses.
To make the search more efficient you want to focus on certain industries. You’re not likely to go looking for a Bancinsurance type company in Japan. Most property and casualty insurers earn low returns on capital. It’s too much work to hunt down the one that doesn’t in some country you’ve never been to.
Instead, you want to look at industries that have the potential for high returns on capital. The obvious way to do this is to find types of companies in the U.S. that earn high returns on capital but are still mostly domestic.
Because that means there have to be a lot of foreign versions of that company.
Obvious examples include sports, publishing, food, and drinks.
You’ll find the best investment opportunities are in smaller stocks that are completely unknown outside of their home country.
My list of 26 things I look for in a stock works just as well in other countries as in the U.S.:
- Market capitalization under $100 million
- Low float
- Foreign – especially from a small country
- Not listed in home country
- Controlling shareholder (maybe owns 30% – 70%) runs company
- Long history of free cash flow
- Share buybacks that reduce the share count – especially if done every year
- A Dutch auction to buy back a lot of stock at once
- Just spun-off
- Huge, one-time problem (think American Express Salad Oil scandal)
- Bankruptcy in past caused by legal trouble
- Hostile takeover attempt by someone who owns good chunk of company’s shares
- Mismatch between reported earnings and free cash flow – FCF is much higher
- Accounting quirk – amortization, carrying at cost, owns part of another public company
- Selling for less than cash and investments
- Selling for less than net current asset value
- No analyst coverage
- Niche business
- Lack of price competition – or the price leader
- One of a kind business
- Wrong time in cycle to buy this kind of stock: advertising, credit, homes, autos
- Goodwill write-downs and restructurings cause reported losses when making money
- “Too much uncertainty”
- Nowhere near a 52-week high
- Stock once traded at several times today’s price