Investing in a Global Economy Investing

Globalization is a widely used term that is used to describe the increased movement of people’s knowledge, ideas, goods and money across multi-national borders that leads to increased connectivity among the world’s populations, economically, politically, socially and culturally. With the advent of Globalization, an investor can now see that many of the world’s economies are tied together. Investing today has become more complex than at any other time.

In the past many people contributed to a 401K or invested in company stock not knowing what risk was involved. Most people would expect a 6-8% return on their investments and not think twice about where there funds were allocated or how to diversify their portfolio. The stock market crash of 2008 began to change the way most investors handled their finances. Many investors saw a 0% return on their investments from 2000-2010. This fact has many people interested to learn more about finances and how to properly invest in a dynamic, ever-changing, global marketplace.

The first step investors should take is to learn what strategy fits their long term goals. When initial research is begun on how to invest, one will find that many different strategies exist and some often contradict the other. The key is to know what risk levels you are comfortable with and the ultimate goal of your investing strategy. Some novices are very timid to invest now that most economies are interlinked, but one must also realize that there is a lot opportunity to be had as well.

On our MBA International trip to Austria and Germany we had the pleasure to visit Garmisch, Germany and attend a banking seminar with Mr. Leonhard Guntz. Mr. Guntz is Director and Head of Trade Finance Advisory of HypoVereinsBank, based in Nuremberg, and has almost 30 years of progressively responsible experience in international banking. Mr. Guntz helped us to understand how different economies are interlinked and how some have to rely on each other to function. This seminar broadened our exposure to the global economy and allowed us to take in new ideas in how to invest in emerging markets.

Once you begin to formulate what risk you are comfortable with and also your long term goals for investing, the next step is to identify a strategy that fits your needs. Here are some of the basic popular strategies some investors follow today. The majority of this list comes from the Motley Fool financial website. The Motley Fool is a financial investing website dedicated to helping all investors at every level.

* Large-Cap Investors seek the stability of established companies with proven track records. Stocks like Wal-Mart and Microsoft have some of their boom and fast growth years behind them, but shareholders don’t have to worry about them going out of business anytime soon.

* Value Investors look for stocks that trade at attractive prices. Like a Christmas shopper waking up at 4 a.m. on the day after Thanksgiving, value investors hope to snag bargains by buying out of favor stocks. While some beaten-down companies never recover, others, such as FairFax Financial, provide standout returns when they come back.

* Growth Investors focus more on companies with strong prospects for the future. Although they prefer not to pay too much, growth investors are willing to pay up for the most promising businesses. Google is a good example, with more than 75% annual earnings in the past five years.

* Dividend Investors value stocks that pay them back with generous income streams. Dividend-paying stocks like Duke Energy, with its 4.8% yield, won’t always show big price jumps. However, over time dividend investors hope to outpace their counterparts.

* Small-cap Investors look beyond the security of blue-chip stocks to find undiscovered companies, such as specialty chemical-maker Innophos, that have the potential to become household names tomorrow. While this strategy is riskier, small-cap investors rely on good speculation and expect profits from their successes to outweigh the losses from failures.

* International Investors recognize that great companies exist throughout the world. Most everyone in the United States has heard of Google, but a lot of people have not heard about Baidu, which is the Chinese search engine similar to Google which has had enormous growth in China over the last year (MotleyFool.com).

After reading through some of the different investor types one should be able to start to relate to what strategy should fit him or her best. If you are wary of risk and plan to retire soon, than you may find that dividend or large-cap stocks would fit more of your appetite. Generally, most investors feel the younger you are, the more risk you can afford to take. So those in their 20′s or 30′s may feel more inclined to look for growth stocks or small-cap stocks for their long term investing strategy.

As one begins to trade and understand more, then they may be able to see how different markets or stocks function. Once you are at this level than you can start to look at emerging markets and international investing. This is usually a little more challenging because there can be different disclosure rules and cultural differences that one may not be aware of. This was also mentioned by Mr. Guntz in his banking seminar. The more you begin to understand other cultures and economies, the more different happenings in the world will begin to make sense. He encouraged all of us to continue to travel and learn as much as we can about other cultures and economies to become more aware on a global level.

A prime example of how international knowledge can help an investor is in the stock mentioned above, Baidu. Baidu is the Chinese search engine very similar to Google. If one knew some facts about China then they would know that China’s population is around 1.5 billion people. The US consists of only about 300 million people. Another important factor is that the government in China is communist. This means they can control to some extent what their citizens have access to. Therefore, if they chose not to let Google have access to their citizens and keep only Baidu as their internet search engine, one would have to conclude that Baidu should get significant growth and business here. This scenario would be just the tip of the iceberg on how to start researching an international stock.

Investment expert John W. Rogers, Jr, notes that it is of critical importance that investors at all levels get comfortable with the jargon of investing and the stock market. He goes on to say that short-term volatility can scare even the most sophisticated investor out of the markets, but the successful investor is one who can think long-term, because the stock market can go up and down. The main focus right now in terms of the 401K is that you’ve got to have a diversified portfolio; people who got burned were people who had too much of their money either in the company stock, one large growth fund option, or whatever the hottest fund was in that period of time instead of having a diversified portfolio (Rogers). Therefore, we can see that every investor needs to have a little bit of investing knowledge to navigate the waters of their financial future.

Many other complex strategies exist in investing today. For many financial analysts, macroeconomic indicators are used to judge where a stock, exchange or countries economy may go. Macroeconomic indicators are treated as statistical indicators which are used for assessment of the general state of the country’s economy during a certain period of time (Pilinkus). If you listen to CNBC or Bloomberg radio you may often hear some of the macroeconomics indicators mentioned to clue investors on an idea of how a market will turn. Some examples of macroeconomic indicators are gross domestic product, unemployment, interest rates, company inventory, home sales, etc. Depending on what industry your stock is located in you can often use macroeconomic indicators to judge the potential of a stock during a given time period.

As you begin to do research into stock trading and investing you may find information on the internet that relays the concept that a market is predictable and can be consistently beat. After a lot of research I found this to not be true. Nothing is certain and anything is possible is a strategy I have adopted in life as well as investing. If you look into the percentage of hedge fund managers that have consistently beaten the market you will find it is very low. However, most financial experts note that if you have a good sense of the market, learn to read indicators well and choose well run companies poised for growth you can do better than most. In the end you still have to continue doing research because variables in the market can change at anytime.

Investing today also has many more advantages than it had in the past. With the advance of technology and the internet, individual investors can research company statistics as well as macroeconomic indicators on their own. In the past, most of those who had access to company/financial figures were in financial occupations. Most analysts predict that with globalization the stock market will continue to be volatile. If you are cognizant of the events happening all around you and the globe than this can be used as a strategy in investing.

Janice Revell goes into great detail on different investment strategies in her article, “Navigating a High-Wire Market.” Janice feels that is always good to mix some of your stock bets globally. She urges that one has to be very educated on the stock and country similar to the lesson we received from Mr. Guntz in Germany. Janice goes on to note with most of Europe apparently falling apart at the seams and even economic powerhouses like China slowing down, there is still a lot of opportunity internationally for emerging markets.

Many emerging markets offer opportunities that you cannot get in the US anymore. China’s economy despite the slowdown, is still expected to expand 10% this year (Revell). When investors mention the term BRIC they are referring to investing in international emerging markets. This is an acronym for some of the top countries that are continuing to develop quickly. It stands for Brazil, Russia, India and China. Investors still have different opinions on which countries have more opportunity than others, but BRIC is still widely used to refer to international investing.

Mr. Guntz also made note of how China is working with Africa to continue to develop parts of this nation. Africa is also rich with a lot of the earth’s minerals. However, researching this further I found that an experienced investor such as Mr. Guntz who travels to a lot of these locations frequently may be better aligned to take advantage of some of those investing opportunities than an average investor who has not visited these locations. In hearing Mr. Guntz speak about some of these emerging markets it did begin to get my mind spinning about opportunities for investment.

The Motley Fool notes in an article that if you believe emerging markets will remain commodity-based oligarchies, then that may limit the amount of international investing you may want to do. However, if you believe emerging markets are entering a new era of rising consumer spending power, infrastructure development, and more diverse, sustainable development, then there are many profitable ways to invest (MotleyFool.com). After traveling abroad in college and graduate school I tend to believe in the second notion. I just look at what America has accomplished in the last 200 years.

I believe it is wise to start investing globally because many people have a fear of the unknown. As we learned on our international trip, the more you travel and become aware of different cultures and trends the more you are able to process the effects it has on different societies. Having knowledge of an emerging or international economy can become much less of a risky stock investment. You can hypothetically be deductively reasoning some of the risk out from your knowledge base of the culture or country.

Megan McArdle talks about different strategies in investing in her article “The Great Stock Myth.” What she concludes after researching many different theories is that once everyone believes that the stock market or a stock offers high returns for relatively little risk, that notion stops being true. She goes on to say that financial markets have an interesting feature that has undone many a trading strategy. That is once everyone starts believing something, it often stops being true. If you discover an arbitrage opportunity-otherwise known as a “price anomaly” or “free money” it will be profitable only as long as few people knew about it. Once it is widely known, bidders will rush into the market until the discrepancy is traded away. After that happens, future returns will be lower (McArdle).

After learning how to navigate markets and discovering what investment strategy is right for you, then it is on to the last step before jumping in, which is timing. If you find a great stock, but jump in at the peak of the market you could find yourself starting off with a loss to come back from in the first couple months. The more time you have, the less you have to worry about the price you purchase the stock. If you feel the company is going to grow a lot over the next 10 to 20 years then your timing may not be as important. If you plan to swing trade a stock every several weeks, months or even years then you definitely have to take note of a good time to purchase the stock.

The last topic to review is when to sell your stocks. Many mutual fund investors are quick to withdraw their cash when returns turn south. However, several academic studies have proven that investors who jump from one fund to the next, chasing performance, tend to do vastly worse than those who stay put. If you have done your homework and look for a quality company in the appropriate emerging markets than you should be prepared to stick with a fund through good times and bad as a whole. Two major signs to sell a stock and not hold for the long term would be that the business’s fundamentals have changed or the stock has become highly overvalued (MotleyFool.com).

Some analysts get very in depth with all the topics I have mentioned above and books have been written for each specific topic. The whole idea with stock timing is to know how long you have until you will really need the money. Furthermore, you want to have an idea of how much time you are willing to spend researching investment opportunities. The market is volatile and will always change. You cannot fill your portfolio with a couple international companies from around the globe and expect to sell them in 20 years for a substantial profit. While that is the idea behind investing, you still need to follow the businesses and understand what is happening in the macroeconomic environment.

Mr. Guntz relayed the idea of researching and exploring many different cultures and places to truly get an understanding of how they function with other economies. The more you experience and travel the easier it will become for you to invest globally. Investing is a long journey similar to life. Both worlds are constantly changing and the more you learn along your journey, the easier it will become down the road. Investing in a global economy can be scary to those that do not have the knowledge to go with it. It is similar to those people that fear others because they do not try to understand them. Saint Augustine provides a quality quote that can encompass our MBA international experience as well as investing in a global economy. He notes that, “the world is a book, and those who do not travel, read only a page.”

Sources Cited

  • Gardner, Tom. Caplinger, Dan. “The First Investing Strategy You Should Learn.” 2008. June. http://www.MotleyFool.com
  • McArdle, Megan. “The Great Stock Myth.” Atlantic Monthly. Sep, 2010, Vol. 306 Issue 2, p46-48.
  • Pilinkus, Donatas. “Macroeconomic Indicators and their Impact on Stock Market Performance in the Short and Long Run: The Case of The Baltic States.” Technological and Economic Development of Economy. Baltic Journal of Sustainability. 2010. Vol 16, Issue 2, p291-304.
  • Revell, Janice. “Navigating a High-Wire Market.” Money. Aug, 2010, Vol. 39 Issue 7, p84-91.
  • Rogers, John W. “Knowledge of Stock Market Key to Investing and Preparing for Retirement.” Jet. Sept, 2002. Vol. 102, Issue 15, p56.