Saturday, October 27, 2007

Investing Here and Abroad

Recently I was reviewing the performance of the (small) trusts that I manage for my nieces and nephews. The site www.trustfundsforkids.com contains the performance and stock selections for each of the three portfolios if you are interested (not plugging it for cash... no advertisements there).

A friend of mine said that I had beaten the relative benchmarks in my fund performance and I was feeling pretty good about myself. However, I realized that the benchmarks that we are commonly using, the NASDAQ and NYSE, didn't really apply because so many of the stocks that I selected were foreign companies - thus the relative benchmarks would be the high-flying international indexes where my performance would be comparatively... retarded, to use a politically-incorrect term.

You'd have to be blind to miss the explosion of economic activity occurring around the world right now. I realize that there have been booms & busts in the past overseas such as the 1989 Japan stock crash and it is easy to jump on a climbing bandwagon but it does seem that, this time, the relative shift of economic activity overseas is significant and permanent.

The general uptick in economic success is the liberalization of the economies around the world and implementation of (relatively) sound economic policies. India, a country that was closed off from the world and practically invented the word "autarky" where an economy is closed off to the outside world and attempts to do everything within its own borders, is now linked to the world and seeing an explosion of activity. China is also booming, even though their economic success hasn't been associated with democracy, unlike India.

Brazil and South America are also exploding - Brazil is in the midst of an IPO and equity boom and Argentina is benefiting from finally getting out from under the bad economic medicine of the IMF (through welshing on their debt, unfortunately). England and Europe are also seeing lower unemployment and benefiting from the stronger Euro. Asia is tied to China and the middle east is awash in oil money as the price / barrell approaches $100.

This can be seen in the decline of the dollar; we hit an all-time low against the Euro and are falling compared to virtually every other currency; this provides overseas stocks with a boost because they rise as the dollar falls against them.

Even on tax policy, sadly, the US is bringing up the rear. The US has almost the worst corporate tax regime in the world, and the likely ascent of the Democrats into high office will obviously only make the US even less competitive through a dog's breakfast of horrible policy and tax inititiatives. Don't forget that the former Eastern block countries mainly moved to a low flat tax while the US hasn't done any meaningful tax reform... itis particularly painful to consider that we are falling behind on economic policy to countries that were run by Socialists / Communists less than 2 decades ago.

If you look at the high-flying selections in the trust funds, some of the best performers are the ADR's of foreign companies (ADR's allow you to buy foreign stocks in US markets without paying high commissions or having to register overseas). These include:

- China Mobile (CHL) - this stock has gone from the 30's to over 100 in the last year or so; while China Mobile is a great franchise with huge growth, at some point it just smells like a bubble
- Broken Hill Proprietary (BHP) - this Australian stock has also gone from the 40's up to near 90 in the last year or so as mining and natural resource stocks soared; they also rise due to the collapse of the US dollar compared to the Australian dollar
- ICICI Bank (IBN) - this Indian bank has also soared, benefiting from a booming local market and appreciating currency, as well as its long term potential

Other foreign stocks in the portfolio include Nokia (NOK), Diageo (DEO), and Toyota (TM).

This isn't some "Lou Dobbs" post about buy American or the hollowing out of US companies; it is simply the fact that as the trustee of the funds I need to look for the best risk / return ratio and, to date, these have been (mostly) overseas when compared vs. US firms.

I am not advising anyone to take these stocks or any others; do your own diligence. But you can see what I've done and how those stocks have performed; they have done pretty well and I hope to keep performing at a decent level into the future - I need to do this because as new kids get started (will be 8 all told) they don't care about how good we did in the past funds - they want to do well NOW for themselves...

I think that it is prudent to put a point in your mind when you'd sell these stocks and take some of the gains; past bubbles or eras of significant expansion have often ended up badly. I don't know WHEN that will occur, but it seems likely to do so at some point in the future. As it was famously put "The markets can stay irrational for longer than you can stay solvent" - so I am not recommending shorting anything, but I wouldn't be a dedicated long if stocks start pushing off their highs.

Within the US the stock market seems very highly valued (i.e. expensive). There is a lot of downside risk; if the Democrats take power they are likely to cut / eliminate the lower rate for capital gains which will hurt equities. The Democrats could also impose protectionist policies that will help a couple companies and hurt everyone else since they need to do something to reward their union base.

As a patriot it is sad to instinctively look first to overseas investments. But as a trustee, you aren't doing your fiduciary duties unless this is the case.

Cross posted at Chicago Boyz

4 comments:

gerry from valpo said...

Carl, What do you know about "structured securities"?

Carl from Chicago said...

Only what I read in the newspaper and in financial magazines. Maybe I should do a post on them. I assume you are talking about CDO's or other securitized assets?

gerry from valpo said...

I bought a SS from my finance guy last April. He's very good. It was a deal where I bought NASDAQ stock for a three month term. I made 8.5%. Not bad for a three month deal.

I would like to see you post your take on them. You have a very good understanding of investments and explain them quite well.

Carl from Chicago said...

I'm not sure that I fully understand what you are talking about. Send it to my personal email and I will look at it.