What Makes for a Good International Investment? - 7investing 7investing
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What Makes for a Good International Investment?

Not every investment opportunity calls the United States home.

October 26, 2021

It’s not easy for American investors to clearly identify opportunities to invest internationally. Sometimes it’s about not understanding the operating environment and, in other cases, it’s the political climate that’s uncertain. It’s simply not as easy to evaluate companies when you don’t understand the conditions that they operate under.

It’s a problem, but that does not mean you should avoid international investment. Instead, it’s important to keep an open mind and do your homework. Yes, politics and operating conditions matter but what can be seen as a problem can also be seen as an opportunity. Challenging operating conditions creates problems that companies can solve. That has traditionally been a very good way to make money.

As an investor, you also have to realize that every investment has risks. Some stocks are safer than others but you’re not insulated from risk just because you stick to U.S.-based securities.

It’s also important to operate within your own comfort zone but not let what might go wrong stop you from investing in companies you believe in. That can be a challenging line to walk and it’s a very personal decision, but there are lots of investment opportunities around the world.

Anirban Mahanti joined the Oct. 22 edition of “7investing Now” to share his thoughts on how you evaluate companies that aren’t based in the U.S. He certainly covers the risks associated, but he also focuses on how you can find money-making long-term investment opportunities.

A full transcript follows the video.

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We’re talking about investing internationally. And so this is investing in companies that aren’t headquartered that aren’t based in the US. But why don’t you define that a little bit, because it’s not always super cut and dry.

Anirban Mahanti  3:01  You know, so like the couple of different things, right? So a company, for example, could be headquartered in Australia, maybe in Sydney, but actually could decide to list in the US, right? So you could find a company listed in the US or NASDAQ or New York Stock Exchange, which is actually a foreign company in the real way. So a great example is Atlassian like, you know, the greatest software export from Australia, it decided to list overseas.

So that’s an example of a foreign company. The other extreme of a foreign company would be a foreign company that is not listed in the US and is headquartered somewhere else. Another great example for that would be Afterpay, obviously using Australian examples, because you know, I’m from Sydney. So Afterpay, well, it’s now being acquired by square, but Afterpay is a company that is headquartered here in Australia listed on the ASX.

So a couple of different things to think about. Now, companies could be listed overseas, could be listed in the US, but their headquarters are overseas. That’s one thing to think about when you think about foreign companies. The other thing to think about is often this this is another thing that happens quite often is you have a foreign company. So think about Alibaba its primary listing is in Hong Kong, let’s say. It might have what’s known as American Depository Receipt. So these are basically you know, you quarantine some number of shares with the bank, hold them in trust.

And then that results in issuance of summer shares that then trade on the American market. So if you actually have physical stake in the business, through this depository receipt, it’s held in trust somewhere it has some bank vault or something like that, or in a electronic vault. And then you can trade on those ADR’s or you can buy those ADR’s. So Alibaba is a great example. Tencent is another great example. I believe Tata Motors from India for example, you can buy the ADR is in in the US at the New York Stock Exchange.

And then the final thing to keep in mind is when companies do ADR, some companies actually also look at that as an opportunity to raise money, right? So you might create a secondary listing of a company that has a primary listing, say in another market to the Indian market, Australian market, but you use the secondary listing as an opportunity, it’s a real listing in the US has an opportunity to raise funds. What this does do is creates basically the same stock being listed in two different places, and you’d expect them to trade relatively close to each other. And the reason they would trade close to each other is otherwise there’s arbitrage opportunity, one person manager, a fun magical buy here, sell it there, and, you know, basically mix and match the share. So you know, so that you would expect them to trade pretty close to each other. So that’s something to keep in mind.

Last point is, in this one, I don’t know the mechanics of how exactly it works. But I’ve seen many companies that don’t have ADR, they have over the counter trading via pink slips. They, you know, again, theoretically, they should, like so Afterpay, I think,  for example, had something that was trading over the counter in the US, theoretically, we should trade pretty close to the actual stock trading wherever it is happening. But what tends to happen, though, is that they do some of these OTC things. They can be illiquid. And then you might see actually quite quite a fair amount of gap. So there are different ways of doing that. Did I cover everything?

Dan Kline  6:27  Let me ask one more question. How do you define a company like Sony? So a company that I don’t think their headquarters is Japan, but they have a significant amount of business and presence in the United States? They are traded on the New York Stock Exchange, but they’re not an American company, right? Like Sony, you’d have to say is a Japanese company?

Anirban Mahanti  6:47  Yes. So So Sony is a perfect example of, of a company like Atlassian, in that sense, right? So it’s a company that is trading – I don’t know whether Sony actually has a listing primary listing in Japan – probably does. I’m not 100% Sure. So those are multinationals. Right? So I mean, that’s the other thing to keep in mind is that, you know, if you buy Procter and Gamble, that you’re not buying an American company, really, you’re buying a multinational. And that’s the reality for I think, a lot of consumer electronics, a lot of consumer discretionary, you know, even if you’re buying Ford, right, is it you know, yes, the seller vehicles in America, but they sell her vehicles elsewhere as well. So, I mean, that’s the other reality is that companies these days are global. Unless your company is very niche, you’re likely a global company. So you’re, you are a multinational company. So there’s a lot of different ways in which you can define foreign in that sense, right.

Dan Kline  7:46  When you look at a company that’s not primarily doing business in the United States, you brought up Mercado Libre in our in our notes, but obviously there’s, there’s lots of examples of companies that don’t base their business in the US. What do you look at? What’s your prime considerations for how you sort of judge whether that company is investable or not?

Anirban Mahanti  8:07  Yeah, so that’s a fantastic question.

Dan Kline  8:09  Well you wrote it.

Anirban Mahanti  8:13  I’m calling my own questions. Fantastic.

Dan Kline  8:15  Sorry. It’s a joint effort. But I think you did actually write that.

Anirban Mahanti  8:20  Yeah, so look, so a couple different things, right. So you know, the, as you rightly pointed out, right, so Sony is an interesting. It’s a, it’s an international company is a global company, global companies, in many ways easier to invest or understand, right? Because irrespective of where you are, as an investor, you probably have some exposure, especially if it’s a consumer facing company, right? People understand what Sony does people understand what Apple does people understand what Cochrane and gamble does, you probably understand what Heinz does, right?

But if you have a company like Mercado Libre, which is basically focused on Latin America, you know, it’s a marketplace business in large numbers, like an Amazon of Latin America is like an eBay of Latin America, it’s like a PayPal of Latin America, then you really don’t understand it. Because you if you’re not in Latin America, you don’t really see the business in action, you’re not really using it. So that makes it hard to invest. But I think some of the big opportunities also has tend to happen in those sort of scenarios, right?

So what do I look for? I try to think about the problem they’re solving and this this is like, it sounds like a big buzzword problem they’re solving you know, some big things they’re doing. The often the key there in my opinion is to, you know, think okay, we’re building a marketplace that is focused on international markets in like Latin America. But what is special about the marketplace in Latin America? I think that’s the question one needs to think about because marketplace business in the US is probably gonna look very different from the marketplace business in India, which is going to look very different from a marketplace business in Latin America.

So I try to think what the problem that they’re solving and what are the specific issues that they’re handling that are a very relevant in local environments? This is I’m talking about companies that are not global global in the real sense a global company you value it, I think, as you’d value it – but for specific emerging markets, or location specific markets, or the same thing would apply to a company like, you know, Alibaba or 10 cents, right? You really have to understand their local market, where they’re operating and the dynamics of the local markets are credited with that.

Then, of course, the all the other things come into play, right, I would look at you know, the management is, well, you know, management have skin in the game. You know, do the management continuously dilute their shareholders? Are the reporting standards, you know, don’t have good reporting standards? Do they actually report? Honestly, do they have a long term vision, all of those things, I think the standard things that we look for in investing, I think those come into play, but the problem that they’re solving and the opportunity to have long term staying power, right, can they build a moat? Can they you know, but can you build a mold? Can you have the, you know, if you’re building a mold, can you actually strengthen it over time, is what I’m trying to think about that sort of, you know, and, of course.

I guess the most important thing, think about is look at, you know, this is my way of investing, and not everybody will invest this way. But I look at market size, or market cap of the company versus the TAM, right? If the TAM is niche, it’s probably going to be subscale company not interesting. If the TAM is huge. And the company’s market cap relative to Tam is relatively small, then that’s a company that’s of interest to me, because otherwise, there’s so many different companies that one can invest in, right? You know, why? Why try to invest in something that’s hard, if the upside is not there? So that’s the, you know, I try to think of the upside really,


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