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    Global Investing: A Practical Guide to the World's Best Financial Opportunities
    Global Investing: A Practical Guide to the World's Best Financial Opportunities
    Global Investing: A Practical Guide to the World's Best Financial Opportunities
    Ebook568 pages4 hours

    Global Investing: A Practical Guide to the World's Best Financial Opportunities

    By Darrin Erickson

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    About this ebook

    Identify and invest in the world’s best performing companies

    In Global Investing: A Practical Guide to the World’s Best Financial Opportunities, veteran portfolio manager Darrin Erickson walks readers through how to best analyze, understand, and invest in leading global businesses. In the book, you’ll discover how you can improve the performance of your investment portfolio by taking advantage of opportunities that exist outside of the borders of the country you happen to inhabit.

    The author discusses how to identify and make investments around the world in effective and efficient ways, and how to successfully manage the risks associated with investing in a foreign country. You’ll also find:

    • Relevant information about key stock markets around the world
    • Insights into the underlying dynamics of the world’s major global industries
    • Fulsome discussions on how to evaluate companies within each global industry
    • Advice on how to construct a portfolio of global stocks that will help you to build wealth and protect it during times of stock market weakness
    • Descriptions of free and paid tools that belong on the radar of every successful global investor

    An indispensable and accessible resource for investors with a desire to engage with the world’s financial markets, Global Investing is a must-read handbook for any investor seeking to expand their horizons beyond their own country’s borders.

    LanguageEnglish
    PublisherWiley
    Release dateNov 29, 2022
    ISBN9781119856672
    Global Investing: A Practical Guide to the World's Best Financial Opportunities

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      Book preview

      Global Investing - Darrin Erickson

      GLOBAL INVESTING

      A Practical Guide to the World’s Best Financial Opportunities

      Darrin Erickson

      Wiley Logo

      Copyright © 2023 by John Wiley & Sons, Inc. All rights reserved.

      Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

      Published simultaneously in Canada.

      No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.

      Trademarks: Wiley and the Wiley logo are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc. is not associated with any product or vendor mentioned in this book.

      Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

      For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.

      Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com.

      Library of Congress Cataloging-in-Publication Data

      Names: Erickson, Darrin, author.

      Title: Global investing : a practical guide to the world’s best financial opportunities / Darrin Erickson.

      Description: Hoboken, New Jersey : Wiley, [2023] | Includes bibliographical references and index.

      Identifiers: LCCN 2022040333 (print) | LCCN 2022040334 (ebook) | ISBN 9781119856665 (hardback) | ISBN 9781119856689 (adobe pdf) | ISBN 9781119856672 (epub)

      Subjects: LCSH: Investments, Foreign. | International finance. | International trade.

      Classification: LCC HG4538 .E74 2023 (print) | LCC HG4538 (ebook) | DDC 332.67/3—dc23/eng/20220909

      LC record available at https://lccn.loc.gov/2022040333

      LC ebook record available at https://lccn.loc.gov/2022040334

      Cover Design: Wiley

      Cover Image: © Yuichiro Chino/Getty Images

      For Dawn

      She walks in starlight

      PREFACE

      For those of us who have traveled extensively or lived abroad, we know how remarkable and expansive the world is in which we live. In the early days of 1977, not long before my eleventh birthday, my father took a job in Iran, where he helped design and construct a pulp and paper mill. As difficult as it was to leave my friends behind, I would not trade that experience for anything. My family lived there among the Iranian people, as well as other ex-pats from around the world, for a little over a year. Looking back, I realize now how this incredible adventure shaped the way I view the world as well as my views on investing. By the time I returned home at the age of 12 I had lived in a foreign country, circumvented the globe, and visited Great Britain, Thailand, the Philippines, Hong Kong, and Japan. By the spring of 1978 I was back home in British Columbia, but my curiosity about the world around me was ignited.

      These early life experiences initially inspired me to pursue bachelor and master's degrees in international politics at the University of British Columbia. Diplomacy, arms control, and the reunification of Germany were central political events at the time, so in June 1990, I naturally jumped at the opportunity to join an academic tour of the European Community, NATO, and SHAPE headquarters along with stops in Berlin and Warsaw. The energy at the time was palpable as the Berlin Wall fell and visitors from East Germany flocked to the West. Merely one week before Checkpoint Charlie was dismantled, I was able to travel through the infamous crossing, chipping off pieces of the Berlin Wall along the way for my souvenir collection. As a visitor I could sense the excitement for the possibility of a new and brighter future. Tremendous changes were on the horizon.

      Prompted by the immense economic and business implications of these events, I entered an MBA program, where I was introduced to the wonderful world of finance. My first job in the investment industry was as a currency trader, which, as you can imagine, is heavily influenced by global factors. It was at this time that my fascination with the global financial markets became an obsession. I came to view the financial markets as a mathematical version of the world around us and the engine that keeps our modern economy running. Powered by the interactions of nearly 7.8 billion people and a multitude of businesses, the infinitely complex workings of the world economy create tremendous wealth and a massive pool of investment opportunities.

      Economic growth is a primary driver of new wealth creation. Over time, greater amounts of wealth should result in an increasingly developed equity market, since a portion of newly created wealth is invested in productive financial assets, such as stocks. It seems logical then that our views on where to invest our capital should consider expected long-term economic growth as a source of wealth creation and increasing stock market capitalizations. As the value of the equity market increases in size, it gains in importance to the local economy and greater efforts are made to help protect shareholder rights and maintain the integrity of the market. It should come as no surprise then that wealthier countries tend to have more developed financial markets and greater total stock market capitalizations.

      By using wealth creation as our basis for investing, we are attempting to follow the money. While the economies of developed countries are expected to grow their GDP by an average of 13% from 2022 through 2027, emerging and developing economies are expected to grow GDP by more than twice that amount at approximately 29%.¹ Viewing economic growth forecasts across the globe shows that the highest growth rates are expected in developing Asia, Europe, Africa, and Latin America. While developed market economies are not growing as quickly, they are home to a large number of leading global businesses, some of which derive a significant portion of their revenues from these same high-growth regions. Although the highest economic growth rates exist in emerging and developing economies, it is important to remember that the vast amount of wealth already accumulated in developed economies means that a significant percentage of new wealth will continue to come from these regions. Furthermore, even developed economies with slower long-term growth rates can experience short-term bursts of rapid economic growth.

      Over any given time period the best-performing stocks will be spread across every region of the world. Although the relative performance of different regions fluctuates over time, the free flow of investor capital within and between geographic regions will ensure that money will move to wherever the best investment opportunities exist. Furthermore, with more than 55,000 companies listed on public stock exchanges worldwide, there are plenty of investment opportunities available to the global investor. In addition to this vast pool of investable businesses, there are new businesses coming to the market every day. There was a total of 1,388 companies newly listed on an exchange worldwide in 2020, with a total market value of $236.1 billion USD, and a majority of these businesses were located in emerging markets.²

      Whether we acknowledge it or not, we live in a global economy, and we are subject to the forces that drive it. As an investor, do you need to own businesses from around the world to become wealthy? The answer is no. As you will see throughout this book, however, there are numerous benefits to investing globally. In response to the question, Should you consider companies from around the globe in your investment process?, the answer is a resounding yes. Investing globally gives you access to a greater number of attractive businesses and the flexibility to take advantage of varying rates of growth around the world, and may also allow you to reduce the risk in your portfolio. The price you pay is hard work. Successful global investing requires you to be a voracious reader and to train yourself to see the big picture.

      Building a great global equity portfolio requires you to think globally. To do this we have to shake off our natural tendencies and, in the words of Howard Marks, employ second-level thinking in our investment approach.³ Frankly, this is much easier said than done. To accomplish such thinking, we have to overcome instincts developed over centuries that were needed to survive in hostile environments. The same instincts that helped us survive as a species often work against us as investors.

      My goal as an author has been to produce a book that provides anyone who reads it with the ability to navigate the global equity markets successfully, regardless of where they reside. While many books have been written on investing, relatively few have taken a global perspective. I have tried to make this book truly global in nature by being politically neutral and avoiding any form of regional bias. I have also attempted to bring together two distinct disciplines in my writing, the study of international relations as well as the study of finance. The two are inextricably connected and I hope you find this somewhat unique perspective helpful. Additionally, my intention was to produce a book that all investors might find helpful in some way, especially those individuals who are new to investing. I have therefore tried to avoid industry jargon and overly complex financial concepts.

      While there may be uncontrollable factors that prevent one from investing in a foreign country, perhaps the biggest obstacle to global investing is a lack of familiarity. Global investing may be unfamiliar territory, but it does not have to be scary. The same sound investment methods applied to investing in your home country can be applied to other regions as well, albeit with some additional work required on the part of the investor. If I am able to accomplish one thing with this book, it would be to help investors overcome their natural tendency to stick with what is familiar, and instead think globally when making investment decisions to take advantage of the best opportunities, wherever they may be.

      There are numerous books from renowned investors that are worth their weight in gold, including writings from Warren Buffett, Ray Dalio, David Dodd, Charles Ellis, Benjamin Graham, Jeremy Grantham, Joel Greenblatt, Howard Marks, Charlie Munger, Jeremy Siegel, among others. Inspecting these volumes at the start of your investing career will greatly increase your odds for success. While I have not achieved the same financial success as these investing icons, I have persevered in an incredibly challenging career and have garnered a few gems of wisdom that I can pass along to the next generation of investors. My top recommendation to anyone who wants to invest on their own or better understand how their money is being invested is to read the works written by the authors noted above and heed their sage advice. Doing so will not prevent you from making mistakes, but it should protect you from disastrous investment decisions. My hope is that this book will build on what these authors have already shared with us by providing a complementary global perspective. I hope you enjoy the journey.

      Notes

      1.  International Monetary Fund, IMF DataMapper, https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD, as of April 2022, accessed April 28, 2022.

      2.  The Securities Industry and Financial Markets Association, Global Equity Markets Primer, https://www.sifma.org/resources/research/insights-global-equity-markets-primer/, accessed November 14, 2021.

      3.  Howard Marks, The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Harper, 2018).

      ACKNOWLEDGMENTS

      I would first like to extend my sincere thanks to Adam Duncan for his incredible support, as well as the tremendous effort he devoted to reviewing this manuscript. Producing the plethora of graphs, charts, and maps used throughout this book involved incredible effort and creativity, and for this I thank graphic designer Mackenzie Clarke, with an added thank-you to Nicole Gortemaker and Tyler Burtniak for graciously aiding in that regard.

      To my esteemed friends, Joseph Shaw, who generously took time from his busy schedule to co-author Chapter 18, and Joseph Zuiker, who in true form made a significant contribution through his efforts proofreading the manuscript, it was an honor to collaborate with you both.

      For providing invaluable insights, which were instrumental in developing the global industry primers found in Part V, my sincere thanks to Carol Yeh, Ryan Grube, Carl Hamann, and Scot Atkinson.

      For sharing their vast array of knowledge on select chapters, I wish to wholeheartedly thank my friends and colleagues: Robert Venable, Anil Tahiliani, Matthew Flynn, Finlay McKay, Steve Firman, Bill Sackley, Garry Steski, Dick Marshall, Phillip Sharkey, Geeta Kapadia, Deborah Kidd, Tim Skelly, and Lindsey Bauer.

      To my fellow authors and friends, Antonella Puca, Carl Bacon, and Shamez Kassam, thank you all for your encouragement and indispensable advice.

      I am eternally grateful for the people who took a chance and mentored me in the field of investing, including John Smith, Edward Ted Ransby, and Beverley Squair, as well as my thesis advisors and mentors back in my days studying international politics, namely professors Brian Job and Donald Munton. To the Value Partners Investments leadership team, Gregg Filmon, Steve Norton, Paul Lawton, Dean Bjarnarson and Jim Lawton, thank you for your continuing support.

      Thank you, Sheck Cho, Susan Cerra, and Samantha Wu, along with the production team at Wiley, for your guidance and support during the production of this book.

      This book is dedicated to my beautiful wife, Dawn, whose unparalleled kindness and compassion acts as a source of inspiration and wisdom to me every day. Finally, I would like to thank my dad, Jerry Erickson, and my mom, Patricia Erickson (Robinson), for their love and support. Without the three of them this book would not have been written.

      ABOUT THE AUTHOR

      Darrin Erickson, MA, MBA, CFA, is an accomplished equity portfolio manager with nearly three decades of investment industry experience. Over his career, Darrin has served as the lead portfolio manager for numerous equity mandates, including Global, North American, US large cap, US mid-cap, and Science & Technology, as well as long/short portfolios. Darrin holds a bachelor's degree in international relations and a master's degree in political science from the University of British Columbia, as well as an MBA from the University of Alberta. He holds the CFA charter and has served as a volunteer for CFA Institute in various capacities for more than 20 years. Darrin has made several television appearances, where he has shared his insights into the global financial markets.

      ABOUT THE CONTRIBUTORS

      Joseph Shaw, CFA, MSc RE, MBA, is a real estate investment expert with over 25 years of industry experience primarily focused on real estate transactions in the United States and Canada. Joseph also teaches at the Rotman School of Business and at Western University's Urban Development Program and has served as adjunct professor at both Johns Hopkins University and Ryerson University. He has lectured on real estate at Harvard University, for the Urban Land Institute, and for the Real Estate Property Association of Canada, consults as an expert witness, and is an active volunteer with CFA Institute.

      Joseph Zuiker, CPA, CA, CFA, has extensive international experience in investments and fund services, banking, financial accounting, regulatory reporting, business leadership, and risk analysis. Joe joined the Bermuda Monetary Authority in 2019 as a senior member of the Regulatory Supervision team, which is responsible for the supervision, regulation, and inspection of Bermuda's banks, trust companies, investment businesses, investment funds, fund administrators, money service businesses, and corporate services providers, as well as the credit union and Bermuda Stock Exchange. Joe has served as a volunteer with CFA Institute.

      Adam Duncan is a research analyst with over six years of investment industry experience ranging from retail to institutional portfolio management. Adam has exposure to a multitude of asset classes, including equities, fixed income, real estate, infrastructure, and money market. He holds a Bachelor of Commerce (Honors) degree with a major in finance from the University of Manitoba and is a CFA Level III candidate.

      INTRODUCTION

      ________________

      The purpose of this book is to help investors better understand the global financial landscape and how to best take advantage of the multitude of investment opportunities it provides. Although I have tried to make this book truly global and avoid any form of regional bias, I have referenced most data in US dollars throughout the book as a base currency due to its continued prominence in world finance.

      Part One discusses why the most effective way to build wealth is through business ownership. In Chapter 1 we explore why actively selecting good, publicly traded businesses from around the world is the optimal way to obtain business ownership. We also touch on some of the greatest impediments to investment success and why thinking like a business owner can help you weather the toughest stock market environments. We conclude by sharing the characteristics that define a good business.

      Part Two focuses on the global investment opportunity, including what is driving those opportunities and the implications for investors. Chapter 2 provides a history of the global economy and how we came to live in the digital age. We look at areas of the world where economic wealth is most likely to be created in the future and some of the spin-off effects of that wealth. Chapter 3 discusses world trade patterns, how trade is conducted, and what risks exist within the global supply chain network. Chapter 4 provides an overview of the world's financial markets and why they are critical to the global economy and everyday life for each of us. A special emphasis is placed on the world's stock exchanges and equity markets.

      Part Three examines the key risks involved with investing globally, including market cycle risk, currency risk, and geopolitical risk, as well as how to manage those risks. Chapter 5 discusses how market cycles are driven by the economic cycle, the risks that market cycles pose for investors, and how to best manage these risks. We also examine bear markets and suggest some measures that may provide a warning sign to investors that a bull market is nearing its end. Of particular importance is how to prepare for the inevitable periods when share prices fall significantly. The reader will learn that for an investor who is prepared, these bear markets are beneficial because they provide an opportunity to build even more ownership in good businesses. Chapter 6 discusses the benefits and risks associated with investing in stocks denominated in a foreign currency. Chapter 7 reviews different forms of geopolitical risk, how those risks can impact your investments, and how to best mitigate those risks.

      Part Four discusses how to analyze companies and identify good businesses. Chapter 8 provides a detailed process for analyzing potential investment opportunities by assessing their earnings sustainability, growth prospects, valuation, investment risk, and balance sheet strength. We also review how a detailed analysis of a company's profitability can aid investors in making better investment decisions, how to assess acquisitions made by the companies you own, and the importance of returning capital to shareholders.

      Part Five provides the reader with a primer on each of the world's major sectors and industries. Chapters 9 through 19 provide an overview of 11 global sectors and 91 major global industries. Each chapter is focused on a single global market sector and its constituent industries, specifically communication services, consumer discretionary, consumer staples, energy, financials, healthcare, industrials, materials, technology, real estate, and utilities. Companies are grouped into sectors and industries based on common drivers of profitability and sales growth. We explore key trends affecting each sector and industry, provide examples of global companies operating in each industry, and describe how to evaluate and compare these businesses.

      The last section of the book, Part Six, brings all of the previous material together and reveals how to construct a portfolio of great businesses from around the world. It also provides some helpful tools and resources that every investor should keep on their radar screen. Chapter 20 reveals how to construct a portfolio of great businesses that will help you build wealth over time as well as protect that wealth during times of market weakness. The Conclusion provides a recap of the most important lessons I have learned in the course of my investing career with the hope that they will help you prosper in yours. Finally, at the end of the book you will find some indispensable tools and resources to help guide you on your global investing journey.

      PART I

      BUILDING WEALTH THROUGH BUSINESS OWNERSHIP

      CHAPTER 1

      Own Good Businesses

      ________________

      Business Ownership

      The best way to build wealth is through business ownership. Think of some wealthy individuals. Most of them probably became wealthy by owning and operating a business. Even some of the most famous actors, singers, and athletes end up generating more wealth after their careers end by using their fame as a platform to start a business. Don't be concerned if you can't think of a lucrative business of your own to start. Become an owner of an already successful business that someone else founded! Owning shares in a company could potentially be as good as if you started the business yourself, but with significantly less effort. For anyone who has money to invest, share ownership (also referred to as stock or equity ownership) provides them with an opportunity to be a business owner. You may be surprised at how little money it takes to get started. This makes stock ownership the great equalizer when it comes to wealth creation. Accordingly, this book is focused on equity (stock) investing. If you start investing at an early age, owning good businesses for an extended period of time could be all you need to build significant wealth. Having a long time horizon makes wealth accumulation easier, but even if you only have a shorter time period the power of investing can still have a positive impact on your financial health. Financial securities that do not provide business ownership, such as bonds, are not addressed in this book, but it is important to note that these securities may have a place in your portfolio as well, depending on your personal situation.

      Active versus Passive Investing

      Even though they are popular among investors, we do not discuss index funds or exchange-traded funds (ETFs) in great detail. The reason for this is that index funds and ETFs are (primarily) passive investments that track the performance of a stock market index or sector with no consideration given to the quality of the underlying businesses. There are a number of actively managed ETFs available where the manager tries to own only good businesses, but I would urge investors to distinguish between active and passive investing and to fully understand the investment strategy being employed before investing.

      While an index fund is a form of mutual fund, an ETF is essentially a cross between a mutual fund and a stock. Like a mutual fund, ETFs usually represent ownership in a group of companies from a specific region, country, sector, industry, or broad stock market index (such as the S&P 500, Nikkei 225 or MSCI World Index). However, while mutual funds tend to have higher fees and are bought and sold directly through a broker or the fund's manager, ETFs usually have low fees and are bought and sold on an exchange in the same way a stock is traded, making it easier and faster to buy and sell them. Today, there is an ETF for almost every type of investment imaginable, including bond indices, market sectors, commodities, and investment styles (like value or growth), as well as more obscure financial concepts, such as volatility.

      The reason I exclude passive investments from this book is that they represent most or even all the companies in a specific group, which means you are buying the worst as well as the best businesses when you buy a passive ETF or index fund. Why would you want to invest any of your hard-earned money into substandard businesses if you do not have to? Active investment managers, on the other hand, try to separate stock market constituents into two baskets, the best opportunities and then everything else. In some cases, passive investments may be an investor's only option since investing in individual securities or an actively managed fund may not be possible or may be prohibitively expensive.

      Furthermore, many indices, like the S&P 500, Euro Stoxx 600, or Nikkei 225, are market-capitalization-weighted, which means that a stock's weight in the index is determined by its size. The larger the company, the bigger it is as a portion of the index. ETFs that track these indices are therefore subject to concentration risk. As investors pile into an ETF, they force additional buying of the constituent companies, with most of the money (on average) going to the stocks with the highest market values. A rapid increase in the price of a stock can cause the stock's weight in the ETF to become excessive. This is okay as long as the stock's price keeps rising, but when it falls, look out below.

      A prime example of concentration risk in an ETF involves GameStop Corp. During the global pandemic, GameStop reached a low of $2.57 on April 3, 2020, in part driven down by short sellers. A short seller is an investor who borrows shares in a company and sells them, with the intention of buying them back in the future at a lower price and returning the borrowed shares. The short seller thinks that the price of the stock is too high and that it will fall in the near future. However, GameStop became popular as a meme stock, and private investors aggressively bought the company's shares, driving up the price and forcing the short sellers to cover their short positions (buy back the shares they had borrowed) at higher and higher prices. Meme stocks are stocks that become popular on social media where investors share stories about stocks that are sometimes, but not always, based on fact. The combination of investors buying the shares to own them and short sellers buying to cover their positions can lead to a sudden surge in prices and trading volume, which is known as a short squeeze. In the case of GameStop, the short squeeze caused the share price to jump as high as $347.51 when the markets closed on January 27, 2021. GameStop represented just over 1% of a popular retail sector ETF on April 3, 2020, but this rapid jump in share price increased the company's weight in the ETF to nearly 20% on January 27, 2021. A careless investor buying this ETF on January 27 would not realize that close to 20% of their money was being used to buy shares of GameStop at

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