It is often said that, in military affairs, leaders are trained to fight the â€œlast war,â€ meaning the war previously won. I often think that investors employ that same kind of â€œlast warâ€ thinking.
When confronted with a complex task, most of us prefer doing the easiest things first. Therefore, we take mental shortcuts that help us feel we are doing something positive — without all the tedious work of preparing for the â€œnext warâ€ — or the next market cycle.
One example of investing the â€œeasy wayâ€ is following awful free advice, which has become the staple of pundits in the financial media. On such advice, many investors are now rushing to buy the most familiar stocks of the past, since these prices are lower than theyâ€™ve been in the recent past. â€˜â€™Buy the dipsâ€™â€™ often passes for analytical advice, inferring that the advice-giver actually made an effort to identify the recommended stock as one of the best current opportunities.
Letâ€™s look at how strategy this works. Find your most recent brokerage statement, and check to see how many winners from the last market cycle — the bull market that ended in early 2000 — you are still holding,.
Does your list include shares of Microsoft? Since it is one of the most widely held and most widely traded stocks on any domestic exchange, Iâ€™m betting that many of you still have it. If not in single stock form, you may hold shares of Microsoft in a mutual fund.
How about Pfizer, Citigroup or Intel? Again, based on popularity, those stocks are found in many accounts. In fact, many investors hold these shares simply because they are well known — and considered â€˜â€™blue chip stocks.â€™â€™
â€œShouldnâ€™t we all have some shares of those companies in our accounts,â€ you ask? â€œItâ€™s so easy to choose them without doing any real analysis, and donâ€™t analysts on television always recommend them?â€
Those are frequent questions. When visiting a small shop earlier this week, I overheard two men talking about stocks. One said to the other, â€œSun Micro looks good, and theyâ€™re doing a reverse stock splitâ€¦â€™â€™
And what, I ask, is it that looks so good about a technology company selling nearly $4 billion worth of equipment every quarter but still struggles to make any money? This quarter, estimates indicate that Sun Microsystems will earn three cents per share! Would you consider buying all shares of this company and taking it private? And have all potential share buyers delved into the current stock option scandal that seems to involve many technology companies? Or did they simply hear someone say something positive about it?
I often talk with non-client investors about their investments and the markets. Invariably, many lament still holding yesterdayâ€™s favorites while other opportunities have passed them by. Letâ€™s look at the performance charts for those commonly held shares to see how theyâ€™ve done over the past five years, while stock markets were rebounding from the 2002-2003 lows.
Now compare those charts with some for international stocks youâ€™ve seen recommended in this column in the past. Check shares such as HDB Bank, Petrobras, Industrias Bachoco or closed-end funds like the Latin America Discovery Fund or the Templeton Dragon Fund.
Of course, the choices I like most seem too unconventional for most other investors. They find more comfort in owning shares of what is most familiar, like those considered to be of â€œblue chipâ€ caliber. But if your portfolio is full of shares that make you feel comfortable, can there be much profit opportunity in what you hold?
Investors holding on to those more commonly known shares are still re-living the days when America was the most viable economy in the world. In fact, our capitalistic society and stock markets have been the haven for investors around the world, having the most established track record for well over 100 years. No other market can claim such a long-term record!
But like fighting the â€œlast war,â€ the days of having no real competition have gone for good. Too many investors seem reluctant to go in search of tomorrowâ€™s winners. But investors must endure a certain amount of hard work and, of course, a lot of discomfort to allocate hard earned savings into far away companies whose past is all but unknown to them.
But while the U.S. was once the biggest creditor nation on the planet, it is now the biggest debtor nation. Shouldnâ€™t that fact influence todayâ€™s investors? Once, in the days following World War II, America was also the greatest manufacturing base in the world, with other countries like Japan, Germany, Great Britain and France in no condition to ramp up production.
At that time, India was newly independent and not much of a competitor, And China was struggling under dreadful economic policies. But hasnâ€™t that all changed in the past 20 or so years? And those changes have brought about opportunities that most U.S. investors would have considered unthinkable then.
In mid-September, Treasury Secretary Paulson said that, while our economy is no longer the main driver of global economic growth, we are certainly benefiting from strong economic conditions around the world. His statement seems to agree with my conviction that the economic epicenter of the world has moved to Asia, where it will undoubtedly remain for decades to come.
And when we consider investing internationally as opposed to only in domestic markets, as so many investors continue to do, we are talking about myriad possibilities. We find several markets and hundreds of stocks available for purchase, and they are currently enjoying far better economic conditions,
While too many here are planning how theyâ€™ll win the â€œlast war,â€ by loading up on what worked well in the last decade, I remain focused on what will do well in the coming decade. Therefore, I invest internationally –almost exclusively
Sure, we still find winners in our domestic markets, and I hold shares of Conoco, Newmont Mining, Encana, Valero Energy and Alexander & Baldwin in my accounts. But that list includes the sum total of my domestic holdings.
U.S. fiscal and economic polices appear to focus on the short-term, while international markets and economies are benefiting from long-range planning. While we bury ourselves in debt, other countries like Brazil, Russia and Canada enjoy trade and budget surpluses and continue to pay down their debt.
The American economy is now walking a very fine high wire — with no safety net beneath it. We are at the mercy of strangers who lend us $2 billion/day, every day, to keep our government running. We must import energy from places like Venezuela, Nigeria and Saudi Arabia, which are not the stable places we would hope for, nor are they our best friends, either. In addition, most of our manufactured goods are imported from places like China, which are not always appreciative of our foreign policies.
Investors fighting the â€œlast warâ€ are simply taking the easy way out, preferring not to work too hard for their profits. But plenty of profit opportunities are available to astute investors who see how the world is changing and are willing to change their investing methods along with it.
If you are still holding shares of yesterdayâ€™s winners, consider selling them and aligning yourself with the stronger, structural, secular changes happening right before our eyes. Look around the world for opportunities that most others donâ€™t feel comfortable holding. Then load up and ride along with the tide. Not only is it more profitable, but this approach is actually easier, too. You will be able to hold most international shares for many years to come, thus reducing the need for trading in and out. Adding that measure of patience could be your best investing change of all.
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.