Global Treasure Hunting

I just finished two new books about investing. One, written by a capable analyst, tackled global investing directly. The other, penned by a famed money manager, did so only indirectly. But the message behind both books was simply this – investors need to look abroad.

We’ll start with the indirect first. Christopher Browne of Tweedy, Browne fame just published a book called The Little Book of Value Investing. In it, he lays out some basic thoughts and ideas on how the aspiring investor may add to his financial breadbasket.

The book is in the Graham and Dodd tradition – espousing simple verities about the virtues of buying cheap stocks. It’s like a little country store. But instead of polished apples and sweet corn, the shelves hold bags of polished wisdom and sweet dollops of moneymaking advice.

But what struck me, buried among the homespun maxims, was his emphasis on global investing.

Browne gleefully tells readers of his exploits kicking around in faraway markets. Like an eager traveler returning from his first look at the pyramids of Egypt or gazing up at the Incan ruins of Machu Picchu, Browne talks about the glories of picking up cheap stocks in Japan, South Korea and Switzerland.

In the late 1990s, free-spirited investors could find Japanese homebuilders, media companies and textile mills selling for less than the cash on their books. In 2003, Browne uncovered a Swiss conglomerate loaded with valuable assets – real estate, a sheet metal business, a sporting goods division and more. The stock traded for only one-half of an understated book value. In two years, the stock doubled. He writes about Dae Han Flour Mills of South Korea, which he picked up for one-third of book value.

This is merely a small sample of Browne’s profit-laden travelogue. A globe-trotting treasure hunter, Browne spends considerable ink on the rationale behind global investing, understanding foreign accounting, what to make of foreign currencies and more.

But for all the convoluted reasons others often offer up for investing in foreign stocks, Browne offers one that’s crystal clear: “If you expand your horizons to all the developed countries of the world,” he writes, “you can double your chances of finding cheap stocks.”

To dispel any fears of putting one’s hard-earned dough in some flighty company glued together with matchsticks, Browne offers another basic, yet compelling, observation.

When you rank the top 20 companies in the world by sales, you find 12 of them maintain headquarters in Europe or Asia. “The world’s largest oil company is based in the United Kingdom [BP],” Browne writes. “And three of the five largest auto manufacturers are found in Germany and Japan.”

What holds true at the top also holds true in the middle and at the bottom. There are good mid-size and small companies tucked away in places other than the United States. Stateside investors ignoring these other opportunities are like wine drinkers who don’t want to try imported wines. They have restricted their choices unnecessarily – and they don’t know what they are missing.

Browne is a man who follows his own recipes. Today, his firm, Tweedy, Browne, is finding bargains overseas. Of the $14 billion in assets it manages, about 70% of the pile is in international stocks. And about a third of that is in small companies with market caps of $5 billion or less. Among his current favorites spots are South Korea, Japan and Mexico.

The second book tackles global investing directly. Finding the Hot Spots is the title of David Riedel’s new book. A former Salomon Smith Barney farmhand, Riedel now heads up his own independent research firm.

Riedel opens his book with several myth-slaying pages. To the charge that investing overseas is too risky, Riedel turns the microscope on U.S. markets. “Remember Enron and WorldCom?” Corporate mischief and thievery pepper American companies as well.

Investors also have a way of looking down at foreign firms because they believe the information they are getting is not reliable. Again, Riedel points out that unreliability is not unique to overseas markets. It’s not as if we are talking about malaria or polio. In my personal experience, the disclosures can sometimes be even more thorough overseas than at home. Foreign firms know they have an extra hurdle to clear.

Further, let’s not forget the basic idea of investing is to make some money. Riedel writes, “Nobody would tell ever tell you that you should not buy stocks from the beacon of American business like IBM, Coca-Cola, Disney, Time Warner, Blockbuster, Microsoft or Sears.” Yet a three-year investment in about half of these examples would have left investors with less money than they started with.

But the most interesting aspect of Riedel’s book is the numerous profiles of foreign firms. Many of these are companies you’ve never heard of before. And they trade on U.S. exchanges. Riedel discusses China Yuchai, for example, which makes diesel fuel engines. Another interesting China play is Bodisen Biotech. Despite its name, Bodisen is simply a producer of fertilizer in China. This one looks interesting. As I write, the stock is about $9 and trades for only 12 times trailing earnings. The company has no debt and nearly a dollar a share in cash. Riedel’s book gives plenty of interesting ideas like these.

Another good reason to invest abroad is to give you some exposure to a currency other than the frail and waning dollar. Riedel uses Brazil as an example of the good things that can happen when you get a rising market and a good currency. Last year, Brazil’s market rose about 30%. However, the Brazilian real also rose against the dollar by about 14%. So all told, U.S.-based investors in Brazilian stocks turned a 30% market gain into a 50% gain in dollar terms.

Not that you will always get that extra wind behind your back. But it shows you an unappreciated force in global investing.

In summary, plenty of options lay before investors these days. Consider the opening up of Eastern Europe or the booming economies of Asia. Or look at the brightening prospects in parts of Africa. Or easily overlooked South America. Both Browne and Riedel remind us of the potential in these markets. They nudge us on to take a look beyond the fringe of trees on the horizon and explore other lands under the big open sky.


Chris Mayer
for Markets and Money

Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Daily Article series to here in Markets and Money. He is the editor of Mayer’s Special Situations and Capital and Crisis – formerly the Fleet Street Letter.

Chris Mayer

Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Daily Article series to here in Markets and Money. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.

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