When you hear the phrase “investing overseas”, what is the first thought that comes into your mind?
If you’re like many Americans, you might respond by saying:
“Isn’t investing overseas risky?”, or
“Why would anyone want to invest overseas? Isn’t Europe’s ‘economy’ struggling?”
There is a lot of confusion over the issue of international (or global) investing so I’d like to clarify a few misconceptions so you can be the most educated investor.
Let’s begin by taking a big step back for a moment and clarifying why we all invest in the first place. We all choose to invest in order to accomplish multiple goals, but in the big picture, they all fall under two main goals:
- Build our Retirement Bucket™ large enough to achieve complete financial independence so we don’t have to depend on the income from work in order to support our desired lifestyles.
- Maintain our purchasing power into the future in a world which has witnessed staggering levels of price increases throughout history.
In order to accomplish these goals, we all must own assets (investing) which have the potential to grow fast enough to keep pace with our rising lifestyle costs.
The $64,000 question is then always, “what should we invest in”?
A better way of stating that is “what companies should we own” since owning is what investing is all about?
One way of distinguishing one company from another is where the company is headquartered, i.e. in the United States vs. anywhere else around the world.
International investing simply means owning pieces of a company (or companies) who has their headquarters located outside the United States.
An example of this would be owing companies like Toyota (automobile manufacturer headquartered in Japan), Novartis (pharmaceuticals company headquartered in Switzerland), or Burberry (luxury apparel headquartered in the United Kingdom).
Companies vs. Countries
One big misconception is that international investing equals investing in the economy of a certain country.
If that was true, owning shares of Toyota would mean investing in Japan.
Owning shares of Novartis would mean investing in Switzerland, or Switzerland’s economy.
Clearly, this is off base given that each company is a truly global doing business all over the world.
Toyota derives a very large percentage of their revenue from buyers located outside of Japan, predominantly in North America. I’m one of them!
In contrast, McDonalds, which is based in the United States, has locations in more than 100 countries around the world.
When we all invest, we’re investing in companies, not countries.
Headquarter Location vs. Revenue Location
Before the liberalization of trade policies throughout the world, companies did the overwhelming majority of their business in their home region.
Today, this is no longer true. Large multinational companies now earn the majority of their revenue outside of their original geographic boundaries.
For this reason, where a company’s headquarters is located has become much less relevant when evaluating their potential success, and thus the trajectory of their stock price.
A more accurate method of evaluating a company’s opportunities is through a “revenue lens”.
Companies now report where their revenue comes from so we can get a much more accurate picture of where their business is generated.
This critical piece of information tells you so much more about a company’s prospects than where it is headquartered.
When you hear the term “international investing”, always keep these points in mind.
Stay tuned as we now delve into why we want to invest in companies located outside the United States. This is a very important issue.