At almost every investment conference I attend, the literature and speakers discuss the advantages of investing internationally. In theory, it looks like a good diversification and potentially an improvement to a portfolio’s performance. However, I believe there are some significant risks involved beyond the scope of analysis.
In 2001, Jim O’Neill, chairman of Goldman Sachs Asset Management (GSAM), identified the exceptional growth prospects of Brazil, Russia, India, and China. This term was coined BRIC.
He believed the economic growth of BRIC countries would be greater than in the United States and other developing nations. By taking advantage of investment opportunities in BRIC nations, O’Neill believed you would receive a higher return.
The problem with this thesis is it’s based on limited information. O’Neill had just 10 years of data from Brazil and Mexico. In reality, studies using longer periods of time in other countries has shown there does not seem to be a strong correlation between stock market returns and GDP.
Furthermore, when investing internationally, there are cultural differences which consistently go unrecognized and cannot be numerically qualified. For instance, I started my professional life working for an aluminum smelter. It was a dual owned company (half owned by an American company, American Metal Climax, and a French company, Pechiney Aluminum).
When I began, both companies were privately owned. In 1980, the French government decided to nationalize Pechiney Aluminum. Can you imagine if this happened in the United States? People would be up in arms. In France, there was essentially no opposition.
Why? The French educational system is extremely different than in the United States. Children start school at roughly the same age they do here. However beginning at age 12, they take tests which determine if they continue a scholastic education or begin a trade apprenticeship. With only a few top colleges, those in power, both in the government and private sector, all socialized together. They’d gone to school together or were alums of the same alma mater. So, there was no press back against nationalizing a private company.
Who lost when Pechiney was nationalized? The investors. As an American investor, the cultural differences wouldn’t have been apparent to you. Nor would you have been able to qualify them numerically. This is one of the major advantages to investing in an American based company.
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