Author: Vivian Lewis
Covestor model: International Yield
In this series, we ask Covestor managers: “What is the single most important lesson you’ve learned about being a successful investor, and how do you try to apply that today?”
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The key lesson I have learned about investing is that you have to work at it. Anyone saying that you can insure your retirement and your children’s education by spending only fifteen minutes a day is lying. It is not simple. It is not automated. It is not quick. There are no easy ways to invest a modest amount of money with limited risk for high potential returns. You need research that you can trust. But you have to check things out, which takes more than a quarter hour.
I’ve found it helpful to focus on smaller companies than the main brokerages cover. (They spread their resources to get investment banking business from issuers of stocks and bonds, and tend to avoid smallcap stocks.)
Be prepared to pay for research. Free research sounds lovely, but I’ve found it often turns out to be untrustworthy: someone (unknown and deliberately hidden) could be paying to get it produced for free distribution. The Internet is full of scams offering tendentious information from shorts who want you to help them bring a stock down, from pump-and-dump “writers” who are paid in stock to promote a company, and need to sell it before anyone notices the paper is worthless, to lazy reporters taking up a planted article, to fund managers talking up their own book.
Be skeptical of easy answers like exchange-traded funds with ever more restricted mandates. These are proxies for “hot” bits of the stock exchange the ETF companies think they can peddle. New ETFs are created because the managing companies make money from them, not because investors necessarily gain from this plethora or even need it.
We had a bunch of U.S. major companies caught cooking their books early this century, including Worldcom and Enron, and European cases like Lernhout & Hauspie in Belgium and Parmalat in Italy. I’ve found one way to protect against accounting cheats is diversification. Owning a non-concentrated basket of stocks can help soften the blow if one of the companies goes south unexpectedly.
All this is true when you invest domestically, but even more compelling in global market investing. You cannot predict earthquakes and cyclones. You probably cannot predict huge political changes like the fall in the Berlin Wall or the Arab liberation movements. It is certainly rare for anyone to have called these changes beforehand.
So your should not invest in only one stock exchange, even the NYSE. Or only one currency, even if it is the US Dollar. Or only one industry, even if it is the internet. Or only one city, even if it is Detroit or Palo Alto.
How do you apply that lesson in your current investing? What do you find are the challenges to applying it?
You cannot rely on sure things or easy answers because the odds are they will not work to make you money. While I am an American and hold the bulk of my investments in U.S. blue chips and small caps I am optimistic about, the rest of my portfolio is global in orientation. I am always on the lookout for an undiscovered accessible foreign market with good companies having good prospects.
Right now (June 2011), I think international is becoming over-simplified, with too much focus on the so-called BRIC nations (Brazil, Russia, India, China – and often South Africa). These are a group of large countries which are otherwise very dissimilar. India is a rickety democracy with a free press and the rule of law. China is a combo of an entrenched Communist boss class and somewhat free markets for large caps. Brazil is an emerging market with huge poverty and an activist government which sometimes exceeds its bounds. Russia is a kleptocracy but an old industrial country rather than an emerging market. And South Africa is a newly hatched African-ruled country with huge social and educational problems. There is no logic in grouping them all into a category.
Meanwhile other exciting fast-growing markets have interesting companies we can invest in. They range from Colombia to Mexico, from Indonesia to Thailand, from Turkey to Egypt among emerging markets. And by the way, there are good stocks in developed foreign countries too – from Japan to Australia, from Norway to the Netherlands.
Unfortunately these countries are not benefiting from a simple slogan. But they too are worthy of investors’ attention.
So here is a message for the world. Invest in countries not benefiting from a simple slogan. Look for the undiscovered gems rather than the easy answers.
