By Sam Eder. Get updates of new posts here.
I don’t really watch the world news.
I don’t even know much about the stocks I buy.
I mean I know their value compared to their price, what the charts tell me and what industry each stock is in, but I don’t know what’s said about them in the news each day.
And I know the big picture. I have a mental model of the market that provides a framework for my investment decisions, which I monitor each month.
I check the market everyday too, even if only for five minutes, in case the price of the stock has changed dramatically and I need to sell it.
I also know the market type (bull or bear, volatile or quiet) for all the stocks I am invested in.
Why do I point this out?
So you know that you don’t need to be a specialist in each global stock you buy to make money.
You just need to know the important stuff.
But first, let’s start with why you should be investing in global stocks.
Why global stocks make you a better investor
There are plenty of reasons to learn how to invest in global stocks, but here are my favourite three.
1. Global stocks broaden your opportunity pool and allow you to be more selective
I don’t think I could run my investing business right now without global stocks.
I have pretty strict criteria for the value stocks I buy and if I had to stick to Australian stocks then my returns would suffer.
More stocks means more choice. And if you are going to own only 20 stocks in your portfolio, you don’t want to compromise on choice.
Investing in global stocks also means that you can invest in the best performing economies, and avoid the laggards.
Choice is a powerful thing.
2. Global stocks help you to win the “Currency War”
I don’t believe in “diversification” as a mantra, nor as a useful investing tool (not in the way the media goes on about it anyway).
But I do believe in not having all your eggs in one basket.
When it comes to currency that is what most people are doing. I probably know this better than most because my background is in currency trading.
Australians have seen a dramatic increase in their relative net worth since 2008. With the rise in the Australian Dollar (AUD) from 60 cents at its lowest to 110 cents at its peak, our relative net worth compared to our American cousins has shot up by close to 100%. Now that the AUD is starting to fall, you don’t want to give it all back if you can help it.
By investing in global stocks denominated in foreign currencies, you can protect against the impact of a descending AUD on your net worth.
3. Global stocks reduce your dependence on the Australian economy.
Your house is most likely your largest investment, worth hundreds of thousands or perhaps even millions of Australian dollars.
You may have a large loan compared to your deposit, and your house comprises a large chunk of your overall net worth.
Houses are hard to sell. You cannot log-in to your online “house trading account” and sell a house like you can sell a stock.
These factors tend to mean that to a large degree your financial future is relying on the performance of one investment intrinsically tied to the performance of your local economy.
I am not asking anyone to sell rush out and sell their house.
But what I do want you to consider is with such a large bet on the performance of the Australian economy, is it perhaps wise to consider investing outside of Australia when you can?
By learning how to invest in global stocks, you can be more discerning in your investment choices, protect your net worth from a fall in the AUD and reduce your reliance on the performance of the Australian economy.
The state of play in developed markets
Investing in the 2010s is not as easy as it was.
It’s not like the “roaring 90s” or the resources boom of the first decade of this century when things were the markets kept on heading up. You could buy, hold, hope, and make money (until you lost it in the crash, of course).
Today, we are faced with:
- Excessive levels of debt across governments, companies and households;
- Low interest rates that penalise savers and reward spenders (we are lucky here in Australia, to a degree);
- Central banks that print money for short-term gain, neglecting the long-term consequences; and
- Central banks that are reducing the stimulus they are providing their respective economies, a recent development that has a whole raft of unforseen (and seen!) consequences.
These problems are common across all developed counties.
But it’s not all doom and gloom. Let’s look at some of the considerations for investing in developed countries.
(It’s important to understand this is background information and these problems are not new. If you have stayed out for the market because of these challenges, then you would have missed out on a 100% rise in US stocks since 2008. While it’s good to know this information, it’s best to invest in what is in front of you. See the market for what it truly is, free of the filter of beliefs).
United States will muddle through its problems
Despite its problems, the United States has a number of things going for it – mostly to do with new technology – and is likely, as John Mauldin puts it, “to muddle through”.
I like investing in the US at the moment.
Automation: The rise of the robots
“The easiest way to create an artificial form of life is to program a robot to repair & regenerate itself by buying spare parts off the internet.” ― Leslie Dean Brown
Sorry China, but manufacturing (although not necessarily jobs) could be returning to US shores. Companies such as Apple have already shifted a small part of their production back closer to home thanks to robotics and automation.
This trend will continue: it makes sense to have supply chains close to home. And it will be a big boon for the US economy.
Sadly, it won’t help employment as much as you might think. One highly skilled factory worker operating a bunch of robots will replace hundreds of low-skilled employees.
Fracking (what the frack is that?)
“Formula for success: rise early, work hard, strike oil.” –J. Paul Getty
There’s a revolution underway in the US oil industry. A technology called fracking is allowing previously uneconomically viable oil reserves to be tapped. In the future, the US is likely to become a net exporter of oil rather than an importer.
This could mean the balance of payments shifts to favour the US. (Apparently this is important to financial types)
Biotech: The distant future is here now
“I want American Dream growth – lots of new businesses, well-paying jobs, and American leadership in new industries, like clean energy and biotechnology.” – Bill Clinton
Biotechnology will create far-reaching effects that transform human existence on this planet. And it’s happening now. A number of incredible new technologies are being developed (or have come onto the market) that will cure disease, raise the standard of living and prolong human life.
How debt destruction could see the United States Dollar resume its global supremacy
I apologise for the technical nature of this section, but it is useful to understand if you are learning how to invest in global stocks.
The impact of debt destruction on global economies is not well understood.
What is debt destruction?
Since the 1970s individuals, companies and governments have been able to borrow money almost at will. The most famous example of this being the “subprime” mortgages in the United States, where loans were made to people with no income, assets or jobs.
But there comes a time when instead of taking on more debt, it needs to be repaid. This is debt destruction. Instead of creating more debt and adding money to the economy, debt is destroyed and money removed from the economy. And this debt that is being destroyed is mostly in USD – the global reserve currency.
What is the impact of debt destruction?
It’s a simple supply and demand equation. When money is added to the economy, it increases supply. Conversely, when money is removed from the economy, it reduces the supply. When there is less supply, the price should go up. So as the global economy deleverages debt, then the value of the USD should go up.
This is what has happened to the value of the Yen since Japan began deleveraging following its downturn in 1989.
But there is a catch.
Central banks are messing up the supply and demand equation with their printing presses (quantitative easing). But again the impact of this is not so simple. Money supply is not going up as much as anticipated, because the money that is being created is not being lent, and so not making its way into the economy.
The USD should over the long-term strengthen in value, but with central banks playing games the outcome is not so clear.
But I do think that the strengthening scenario is the most likely outcome. After all the Japanese central bank was printing too and it did not help…until now.
The Japanese experiment
Japan is currently conducting one of the largest economic experiments in history: Abenomics.
Japan is challenged by an aging population and a combined public and private debt of over 500% of Gross Domestic Product (GDP).
To understand the magnitude of the Japanese debt problem, imagine you had a debt five times your salary and the repayments on that debt took up half your salary. Then imagine that you need to borrow more each month just to live, and that each year your pay was going down not up. Finally, imagine that your cost of power had increased considerably due to an earthquake shutting down local power plants, with power being imported to your area at great expense, further adding to your costs.
Not a pleasant scenario to be in. As an individual you would probably move cities, declare bankruptcy, take the hit to your credit rating and start over.
For Japan, it’s not that simple, so they have decided to take a different path…the path of inflation.
Abenomics is money printing on an unprecedented scale.
Money printing causes the value of the Yen to decrease, and with luck, an increase in inflation (which reduces the value of Japans debt)
A weaker Yen makes Japanese exporters more competitive, and inflation reduces the value of debt (monetises it). You never actually need to go bankrupt if you have a printing press in the basement.
So far Abenomics has seen a large rise in the Japanese stock market and a slide in the value of the Japanese Yen.
But will it be enough to save Japan?
Probably not. It’s likely to end in disaster one day.
In the meantime, investors need to trade what is in front of them. There will be opportunities on the Japanese stock exchange, particularly amongst exporters and robotics stocks.
A United Europe: Geopolitics is more important than stock markets
It’s easy for us financial types to think we are the centre of the world.
There is no doubting that money matters, but it is not (and should not be) always the number one consideration.
There are more important things.
Such as peace between the nations that tore the world asunder twice in the last century, in order to break the cycle of tragedy.
The Euro project is designed to unite Europe by creating economic ties amongst the constituent nations so that we don’t get a repeat of the conflicts of the last century.
When assessing the success of the Euro project, it is easy to make the case that it has been economically flawed. But as a geopolitical movement, the jury is still out.
Don’t underestimate the political will to see this through to the end. Particularly when economic reasons were not the primary goal of the experiment in the first place. There are still World War II veterans alive today. That disaster was not so long ago when you look at human history from a distance, and European leaders know that.
Meanwhile, financially, Europe is on shaky ground.
A well-documented imbalance exists between the more hard-working north (read: Germany and Scandinavia) and the more ‘relaxed’ south and periphery. What is becoming apparent is that socialist France is now in danger of letting down the team.
France is suffering from an economic malaise brought on by waning productivity and an incredibly burdensome socialist government that is doing anything but face the reality of its ever-worsening situation.
And the core is not free from problems of its own. While economically Germany has been a major beneficiary of the Euro experiment, its banks are at the mercy of the debt of periphery. German banks are major leveraged holders of European government debt, so if there is any type of disorderly default from any indebted European nation, then it will wreak havoc with the German banking system.
In saying that, Germany is becoming more and more productive, and individual stocks continue to benefit from the changing global landscape. The Germans work hard and they adapt well.
The United Kingdom is doing OK
While I like investing in the US, I like investing in the UK too.
Like the US, the UK is likely to muddle through.
It has a strong financial system and while its housing market is overvalued by some measures, it is coping with the deleveraging OK.
Over the last year or so, growth has been quite strong comparatively.
One bump in the road may be a loosening of ties with the European Union. There is a separatist movement in the UK that is growing in momentum and Britain does not have the same incentive to remain involved as the mainland countries.
The UK is far from perfect, but it is a good economy to be involved in, and there are a number of stocks showing value for the discerning investor.
Australia is at risk of two bubbles bursting
We are a small country and we have done well over the past twenty years or so, but our success has led to a few problems:
- We are intrinsically linked to China and are at risk of a slowdown in China’s economic expansion (more on this below);
- Our property market is one of the most overvalued in the world and could fall dramatically. Our banks are at risk here, because they have been the lenders of choice to this market.
In addition, we face the same challenges as other developed nations in terms of demographics with baby boomers retiring and smaller subsequent generations, but our immigration policies could help us significantly (versus say Japan).
We probably haven’t taken advantage of the extraordinary commodity exports of the last two decades and consequently current account balance is not in the best position.
None of these things should stop us from investing, but it does pay for us to invest internationally as well as locally in case either of these bubbles bursts.
Emerging markets: The hunt for profit (and don’t chase hot money)
The money printing of developed countries’ central banks has had tremendous consequences on emerging markets.
By propagating an environment of ultra-low interest rates in order to shore up their rich-world economies, central banks have created a series of imbalances that are playing havoc with their less-developed brethren.
It has to do with the hunt for profit.
When interest rates are low, instead of investing in government bonds, investors are forced into chasing returns in the stock market and in emerging markets. These “hot money” flows have led to overinvestment (roughly four trillion) in emerging market economies, creating a raft of problems, including:
- Property bubbles (in countries like our neighbour Indonesia);
- Government debt bubble (you get a yield of only 5.77 on South African government bonds while their debt has nearly doubled in last five years); and
- Appreciating exchange rates.
When interest rates return to normal in developed markets or problems become apparent in emerging markets, this large global trade will unwind.
Money will be withdrawn from emerging markets, and the cracks that exist in their infrastructure (they have shaky infrastructure which is why they are developing and not developed) will lead to a bust and a whole lot of pain.
Unless you are a specialist or have access to specialist information, you should stay away from emerging markets. Don’t make the classic mistake of chasing the hot money when the story is almost done.
China: A dance with dragons
Special mention needs to go to China, particularly considering our close ties.
China is an enigma.
Let’s not forget they are a centralised economy that uses economic data as a propaganda tool.
This means that you cannot trust economic statistics to be entirely accurate (they are most likely overinflated).
There is no denying that China has been the beneficiary of a big chunk of the “hot money” supplied to emerging markets.
This has led to overinvestment on an unprecedented scale, and a property market boom that is at dangerously high levels (some in-the-know commentators say it dwarfs the subprime crisis that caused the 2008 financial meltdown).
It is safe to say that China is unlikely to be the saviour some hope it will be.
Buy stocks in these sectors for an extra boost
I like to follow Gary Shilling. As an economic forecaster he’s right up there.
When you learn how to invest in global stocks, it can be good to understand what sectors are benefiting from the trends on global consumption. Shilling is an excellent resource for this.
Based on his work, my own research and common sense, I particularly like the following stock sectors:
- Small luxuries like designer handbags
- Health care
- Business productivity enhancers such as software
- Adult education (as a contrarian play)
- Robotics
- American oil companies
- Biotechnology.
At the start of each year, in his INSIGHT newsletter, Shilling releases a list of sectors he sees as benefiting. It’s definitely worth taking note.
How to stay up-to-date with the big picture
To stay up-to-date with the global big picture, turn off the news.
Instead, follow some of the analysts on this list. It’s essential if you want to learn how to invest in global stocks.
Global market types: Buy and hold in a bear market is the definition of investing insanity
If you have been following me for a while, you will have heard me ask this question before.
Would you invest the same way in a steadily rising (bull) market as you would in a rapidly falling (bear) market?
I wouldn’t.
If you want to learn how to invest in global stocks, you need to understand market types.
Each global market moves though phases, from bull to bear, quiet to volatile. Each different phase can be defined as a specific market type and requires a different approach.
For example:
In a bull market, you can buy and hold with a wide trailing stop-loss.
In a rapidly rising bull market, you need to tighten your stop-loss and be careful about taking new positions.
In a bear market, you want to either stay out or sell short.
When a bear market bottoms, you want to have a plan in place to capture the spectacular profits that this opportunity represents.
In a sideways market, you want to take a more active approach – or if the market is quiet, to wait for a breakout.
When you are learning how to invest in global stocks, check the market type first before taking a position.
There are many ways to track the market type; for investing, I find that using indices is the most useful way.
Here are the current market types for nine indices and gold.
- Australia 200 – Normal Bull
- United States S&P 500 – Normal Bull
- United States Dow 30 – Normal Bull
- United States NASDAQ – Normal Bull
- United Kingdom FTSE 100 – Normal Bull
- Euro Stoxx 50 – Normal Bull
- German Dax – Normal Bull
- Japan Nikki 225 – Volatile Bull
- Hong Kong Hang Seng – Normal Bull
- Gold – Normal Bear
If the market is a normal bull, a good approach is to buy stocks in that country with a stop-loss.
What online share-broking accounts to use for buying global stocks
Pennies matter to your future.
Your first job as an investor is to make sure you make the easy money.
So if you can pay $2 or $10 instead of $20 for exactly the same thing, then you should do it.
That way you can compound every cent of your investment capital over twenty, thirty or even fifty years.
The best online broker to use for your global stock investing is Interactive Brokers. They are the cheapest, they are financially secure, and you can earn interest on your account balance when it is not invested in shares.
In Australia, an alternative is E*Trade, though they are more expensive.
For a complete review of the different options you can go here.
Please note I am not compensated for my views.
Your #1 investing skill: Position sizing in global stocks
You achieve your goals through position sizing, not stock picking.
Position sizing is the “how much” part of the investing equation.
This is not to say that stock picking isn’t important – you need an edge over the markets – but it is not the key consideration when buying global stocks.
As you journey further down the investing rabbit hole, you will find that losing or winning on any one stock is not of much significance.
Some win. Some lose.
But what really matters is how much you lose or win.
Having small losses and big wins is much better than having big losses and small wins!
Position-sizing rules can be as simple as “I will invest 5% of my portfolio in each stock” or heavily detailed, depending on the objectives of the investor.
Perfecting your position size is a little more challenging on global stocks than on local stocks because of the aforementioned currency differences.
Buying 500 Great British Pounds (GBP) worth of stock is a different kettle of fish from buying 500 AUD of local stocks. Your position would be considerably bigger.
So you can avoid making a major position-sizing faux pas, I have created a global stock calculator. It will help you work out exactly how much of each stock you should buy depending on your account balance and where you choose to place your stop-loss. It automatically takes into consideration currencies.
Get the global stock calculator here. You can use it every time you place a trade – it’s free.
(By the way, position sizing is not asset allocation. I don’t really get the obsession with asset allocation in the financial community. Making major investing decisions based on historical correlations and returns really does work when you drill into the details. But I won’t go into that here.)
The simple way to get started
Make it easy on yourself mentally.
When you are learning how to invest in global stocks, keep it simple.
There is no need to rush. You have time.
Divide your investing capital into 20 parts and then each month buy one global stock per part. Over several years, you will end up with a complete portfolio of high quality global stocks.
(It will take a bit longer than 20 months to be fully invested as you will have closed out some losing stocks and taken some winners.)
By taking it slow, you:
- Can avoid the risk of a market crash right after you begin;
- Will have stocks with locked-in profit (by moving the stop-loss above the entry price), giving you confidence;
- Will minimise any mistakes you might make (as they will only be made on one twentieth of your portfolio);
- Can take the time to learn and perfect your investing strategy.
If you take this approach, you will find investing in global stocks no more difficult than investing in local stocks. It’s simple to do, provides you with new opportunities for profit, and helps to diversify your portfolio from reliance on the performance of the Australian economy and dollar. All in all, a winning formula.
About the Author
Sam Eder writes at spoonfedinvestor.com about how to master the art and science of investing. If you enjoyed this article, join his newsletter.
The post The Ultimate Cheat-Sheet for Investing in Global Stocks appeared first on www.forextell.com.