How to approach international stocks?

The examination of these stocks for your international investing are the same.  Follow the QMV approach.

1.  Look at the QUALITY of the company (the existence of competitive advantages)
2.  Its MANAGEMENT must be of integrity and smart (and not suspicious management)
3.  The VALUATION of the company (and not an outrageously high valuation)

However, you need to add other risks to your due diligence process too.

1,  Country risk 
What's the political environment?
Is corruption a problem?
How is the country's debt structured?
What are its plans for economic development?

2.  Political risk
This is a subset of country risk.
Is there a real threat of nationalization?
Is there a real threat of rebellion or military action?

3.  Currency risk
This is a risk unique to foreign investing.
Pay attention to the level of exposure a company has to weak currencies.
Be reminded, Zimbabwe's insane inflation rate hit 66,000% in the early months of 2008.

4.  Investability risk
Are you able to buy shares of a company.
Do you have access to one of the exchanges it trades on?


So, to summarise, look for countries with:
1.  Respect for rule of law, strong rights of appeal, and low levels of corruption.
2.  Political stability and a government that doesn't dominate the local economy.
3.  A stable currency
4   Investability

Also, apply the bottom up search for the best companies with the brightest prospects.  

Be reminded once again.
-  Your top priority is to invest in your best ideas - ignoring country, sector, or number of vowels in the ticker.
-  Your secondary concern should be ensuing that you're not overexposed to any specific geographic region or industry sector.

With the U.S. market moving in lockstep with overseas markets (high correlation) - a trend that certainly doesn't seem to be reversing itself- diversification is no longer the reason to consider foreign equities for your portfolio.  

The reason to look overseas is much simpler:  opportunity.   

There are incredible opportunities in International Investing.

1. There are 16,000 public companies based in the United States.
2. There are 49,000 public companies listed outside of the United States.  
3. The American economy is the largest, most diverse on earth.  
4. The American legal and regulatory regimes offer the most protection for minority shareholders.  
5. Also, the U.S. market is less prone to wild swings than most foreign markets.
6. The refusal to consider international companies makes about as much sense today as investing only in companies with two syllables in their names. 
7. There are incredible opportunities in international investing.
8. Many overseas markets, including the growing monsters of China and India, have improved their regulatory oversight by leaps and bounds.
9. There are also markets with all the legal framework that are out dated, to be sure too.  Those tend to be obvious and better avoided.
10. Besides, the increasing globalization of markets, and the explosion in individual company cross-listings and exchange-traded funds (ETFs), have made buying foreign shares easier than ever before.
11. In fact, international investing can be as easy as picking a foreign country and buying an index fund based on the performance of its market.  Indonesia?  Check.  Brazil? Check.  Japanese small caps? Check.  European bonds?  You get the idea.
12. To buy foreign equities, you have to understand some additional considerations and challenges.
13. In the six months after October 2007, the Shanghai Composite Index lost nearly 50% of its value, wiping away $2 trillion in wealth for investors.
14. This wasn't suppose to happen - the ascendancy of China is considered inevitable.  
15. Only investors extremely familiar with the Chinese economy had a hope of knowing the right answer. 
16. Point being, an investing thesis constructed on a skin-deep understanding of a country is likely to end with a suboptimal outcome.  And we try to avoid suboptimal outcomes.
17. Investing overseas is not just a means of diversification.
18. The one and only purpose to invest in companies overseas is far less complicated:  the opportunities beyond our borders are too good to pass up.
19. You want your long-term savings tied to the best companies with the best prospects.  
20. You would miss out on many great stocks by imposing an arbitrary geographical limitation on your investments.
21. It's unlikely that the best investments are all going to be just in your own country.  
22. The U.S. has the potential to do quite well.
23. The U.S. represents 5% of the population of the world and 24% of its gross product.
24. The U.S. had her days as the greatest growth economy in the world.
25. In 2007, the U.S. economy grew at a rate of 2.2%.  
26. But, many other countries outside the U.S. have economies that grew at higher rates, and when these are measured in depreciating dollars, these economies are growing even faster.
27. Your approach to international investing remains the same:  bottoms-up, business-focused.
28. The only key difference is not the how, it's the where.
29. The approach encompasses small caps and fast growers and dividend payers and value stocks.
30. When we disregard borders in our search, there is almost no difference between international and domestic stocks.  
31. The scorecard for foreign stocks is still based on their ability to turn profits.  
32. Economies around the world are growing quickly.
33. That's why international investing works.
34. You have an opportunity to examine mature industries domestically and find those same industries in their high-growth phases elsewhere.
35. Diversification, while important, is not the goal of investing.  
36. The goal is you want 100% of your money invested in companies that don't suck, and 0% in companies that do - and that's regardless of where the company is located.  
37. International investing is not about exposure to a particular sector or style.
38. International investing is about opening up all the doors available for your portfolio: it broadens frontiers.

How to screen overseas stocks

Wednesday August 12, 2009
How to screen overseas stocks
Personal Investing - By ooi Kok Hwa


Four criteria to look at when choosing counters that are suitable for long-term investment


LATELY, interest has grown in overseas stock investment. Given the foreign markets’ relatively high volatility of returns compared with the local market, a lot of retail investors find it more exciting to invest in overseas stocks.

However, a common problem most investors face is how to filter, from among all the listed companies in the respective markets, the right stocks that are suitable for long-term investment.

Market capitalisation

One of the most important selection criteria is buying stocks with big market capitalisation. The market cap of a listed company can be computed by multiplying the number of its outstanding shares with the current share price.

In general, we should buy stocks with big market cap because they are normally well-established blue-chip stocks with higher turnover and widely-accepted products and services.

Even though some academic research shows that buying into small market cap stocks can provide higher returns compared with big market cap companies, unless we are quite familiar with the stocks available in those overseas markets, it is safer to put our money into bigger market cap stocks.


It is not difficult to find out which companies have the largest market cap in any stock exchange.

Such information is available in most major newspapers in that particular country or the stock exchanges themselves.

For example, if we intend to buy some Singapore stocks, we should pay attention to companies that are ranked in the top 30 in terms of market cap. One can get the rankings by market cap for the Singapore Exchange in StarBiz monthly.

Price/earnings ratio

Once we have filtered out the blue-chip stocks, the next selection criteria is the price/earnings ratio (PER), which should be lower than the overall market PER. This is computed by dividing the current stock price by the earnings per share (EPS) of the company. It represents the number of years that we need to get back our money, assuming the company maintains identical earnings throughout the period.

Even though some published PER may use historical audited EPS compared with forecast EPS, given that our key objective is to do stock screening, the PER testing will provide us with a quick check on the top 30 companies – whether they are profitable and selling at reasonable PER compared with the overall market PER.

If we cannot get access to the overall market PER, we may want to consider Benjamin Graham’s suggestion of buying stocks with PER of lower than 15 times.

Dividend yield

A good company should pay dividends. We strongly believe that this is one of the most important ways for the investors to get any returns from the companies that they invest in.

Our rule of thumb is that a good company should have a dividend yield that at least equals or is higher than the risk-free return, which is usually based on the fixed deposit rates.

The dividend yield is computed by dividing the dividend per share by the current share price. In general, most blue-chip stocks do have a fixed dividend payout policy and reward investors with a consistent and growing dividend returns.

Based on our observation, most smaller companies may not be able to pay good dividends as they may need the capital for future expansion programmes.

Price-to-book ratio

Most investors would like to invest at a market price lower than the owners’ costs in the company. The book value of a company represents the owners’ costs invested in it.

In a normal business environment, unless the company has some problems that the general public may not be aware of, it is quite difficult to find stocks selling at a price lower than the book value of the company.

As a result, we may need to purchase at a market price higher than the book value. According to Graham, the maximum price one should pay for any stock is the price which gives a price-to-book ratio no greater than 1.5 times. This means that we should not pay more than 1.5 times the owners’ costs invested in the company.

Lastly, the above four selection criteria are merely a preliminary quick stock screening process. Even though investors may be able to find stocks that fit the criteria, we suggest investors check further the fundamentals of the company, such as the balance sheet strength, its gearing, future business prospects and the quality of the management before deciding to invest.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2009/8/12/business/4499990&sec=business