At International Living Investor we have a simple mission: to help you profit from the world outside of America’s borders. And to do that we look at three specific types of investments:
1) Stocks in fast-growing overseas markets
2) The currencies of these overseas powerhouses
3) The natural resources needed to fuel overseas growth (oil, farmland, food commodities, gas, copper, etc)
This week, I want to spend some time focusing on each type of investment. Some of you may already have an expert understanding of these three types of investments. But some of you will be relatively new to them. So, it’s no harm going through each of them one by one.
Today, I’m going to look at investing in overseas stocks – probably the most common way of profiting from the explosive growth underway in the world’s emerging markets.
The first thing you need to know is that investing in overseas growth markets is easy. Yes – EASY.
You don’t have to open up foreign brokerage accounts…deal with messy foreign-exchange transactions…register as a special type of investor…pass any exams…learn any secret handshakes…or pat your stomach and rub your head at the same time.
There are three simple ways to access overseas stocks through your regular U.S. or Canadian broker:
1) Buy American Depository Receipts (ADRs) – An ADR is a certificate issued by a U.S. bank and traded on a U.S. exchange (the NYSE, Amex or Nasdaq) that represents a number of shares in an overseas stock. Basically, ADRs “mirror” a stock that is listed on an exchange outside America. ADRs are denominated in dollars and pay out capital gains and dividends in dollars too. ADRs tend to be of the blue chip-style overseas stocks. So don’t expect to be able to play small cap or mid cap overseas stocks this way.
2) Buy an exchange-traded fund (ETF) – ETFs are a great, low-cost way of gaining exposure to a diversified portfolio of overseas stocks. ETFs hold a “basket” of stocks like a mutual fund, but trade exactly like regular stock on an exchange. This means you can trade in and out of ETFs at any point during the day, buy or sell options against them or sell them short. ETFs also have the advantage of having lower fees than mutual funds. Typically, they passively track an index. But there are a growing number of actively-managed ETFs available. (Watch out, though, because these tend to have higher fees.)
3) Buy a mutual fund or closed-end fund that specializes in overseas markets – Mutual funds or closed end funds also give investors exposure to overseas markets. A mutual fund is constantly issuing and buying back shares from investors, whereas a closed-end fund issues a fixed amount of shares and is then listed on an exchange (more like an ETF in other words).
A number of U.S. and Canadian brokers now also allow you to buy stocks listed on overseas exchanges.
Charles Schwab, Interactive Brokers, Fidelity Investments and E*Trade in the U.S. and TD Waterhouse and Interactive Brokers in Canada all allow you to buy stocks on overseas exchanges either over the phone or online. (Please bear in mind that these aren’t recommended brokers. They are just a sample of brokers that offer international markets.)
This comes in handy if you want to hunt down smaller stocks in less well-trafficked markets. Just contact your broker and ask them which overseas markets they give you access to.
This covers the nuts and bolts of investing overseas stocks. But what about picking the right stocks, ETFs and funds?
In an interview with Forbes magazine, the founder and CEO of FedEx, Fred Smith, recounted an interesting story.
It concerned Nobel prize-winning Hungarian doctor and researcher Hans Selye, who had a problem with one of his experiments when an ugly green mold ruined a culture he was working on.
Selye was an eminent researcher. And he went on to make breakthrough discoveries on the relationship between stress and disease in humans. But after watching his culture be destroyed by the mysterious green mold, he felt that a year of his life…and a lot of painstaking research…had been wasted.
Later, a young Scottish bacteriologist called Alexander Fleming came across the same ugly green mold. But observing how it consumed bacteria, he understood its potential to save lives…and invented penicillin.
This story shows how some people see gold where others see dirt.
And it’s something I always keep in mind when it comes to tracking down opportunity abroad. That’s because one of the most important characteristics of successful investing is being able to see the world differently from the crowd.
In fact, all successful investing comes down to this. Because, to beat the market, you have to first go against the market.
That is why we always seek out the overlooked angle here at International Living Investor…and why we avoid following the herd into overcrowded markets or sectors.
On Wednesday, I’ll talk about commodities…and how they open up a “second front” for investors seeking to gain exposure to the emerging world.