In early January, we divested our portfolio of its remaining exposure to international stocks. It was actually a mutual fund with a diversified portfolio of international stocks. We sold it, and our exposure to international stocks is now zero. This raised eyebrows among our clients as well as outside observers who ascribe to the conventional wisdom that a sound portfolio strategy should include international exposure – somewhere between 10% to 20% at a minimum. That without it, a portfolio is not properly diversified. That, as an investment manager, it’s irresponsible to neglect the international markets.
We don’t say they’re wrong. International stocks are an appropriate way to diversify a portfolio. We would even agree that it would be irresponsible to neglect the international markets, but only if we didn’t have a specific process proven to be successful without them. We’ve always said the most important thing an investor could have is a thoughtful process and the conviction to follow it.
If that process, through exhaustive research and analysis, leads you down the road to international exposure, so be it. Our process has led us away from it. But, because we do have a process, we can provide a clear explanation for the reasons why we chose another path.
We Go Where Our Process Takes Us
As I mentioned at the top, at one time, we did have exposure to international stocks, in large part because we were following the conventional wisdom. However, we bought the funds at a time when we didn’t have a clear process with the critical framework for guiding our investment decisions – as we do now.
I’ve written in the past how a lack of a real process has led to very costly mistakes. I’ve also explained why investing without a process is pure randomness and a recipe for disaster. I also said that, with our process, we don’t invest in the markets (international included), but instead, we invest in individual, high-quality companies. And it’s not a theoretical investment. When we invest in a company, we view it as an ownership stake, which means we plan on holding that investment for a while.
With a criteria-based decision framework, we can be free of any biases that might influence our decision-making. The companies we evaluate have been screened through a rigorous set of criteria. Out of the thousands of publicly traded companies, including global companies, only a handful might meet those criteria. Then, using a bottom-up fundamental analysis model, we might choose one great company that we feel would be an upgrade to our portfolio. But, a great company would not be a great investment unless we can buy it at the right price. So we sometimes have to wait for months or even years to buy a great company at the right price. If it never sells at that price, we’ll pass on it.
Nothing Against International Companies – They Just Don’t Measure Up
At one time we owned several international funds. But, as we came across more great companies, we would compare them as investments against those funds. As it became clear that these companies would produce better results for our clients, we began selling our international funds with the final sale occurring in January of this year. Even now, when we follow our process, we find no compelling reasons for investing in international stocks. Are there any great international companies? Absolutely. But we find no significant discounts in their stock prices right now as compared with their U.S. counterparts, which means they wouldn’t be great investments.
We do not suggest that international stocks or funds are not appropriate for a portfolio or a 401(k) plan. They do provide diversification, which is a sufficient reason to own them. However, for investors looking to upgrade the quality of their portfolio, we are suggesting that they be more critical of the conventional wisdom. Investors should be asking whether it makes sense to take the additional risks of investing in international stocks in return for what those risks can actually produce.
