Investing in Foreign & Emerging Stock Markets

Subscriber R.G. asks:

“If emerging markets possess such a gambit due to their lack of similar history in the past how can we analyze the markets in order to capitalize on their surges of demand which quickly taper[s] off?”

Our general view on foreign and emerging markets is similar to that of Warren Buffett’s when he said:

“'If I can't make money in the $4 trillion US market, I shouldn't be in this business. I get $150 million earnings pass-through from the operations of Gillette and Coca-Cola. That's my international portfolio’ (source: Ellis, Charles D. Wall Street People. page 56. link here.)”

There seems to be little need to invest in foreign or emerging markets.  However, if there is a desire to invest in foreign markets then Dow Theory provides a reasonable template for how to approach investing in such a market.  In a section titled “Dow's Theory True of Any Stock Market,” William Peter Hamilton says the following:

“The law which governs the movement of the stock market, formulated here, would be equally true of the London Stock Exchange, the Paris Bourse or even the Berlin Boerse. But we may go further. The principles underlying that law would be true if those Stock Exchanges and ours were wiped out of existence. They would come into operation again, automatically and inevitably, with the re-establishment of a free market in securities in any great capital. So far as, I know, there has not been a record corresponding to the Dow-Jones averages kept by any of the London financial publications. But the stock market there would have the same quality of forecast which the New York market has if similar data were available. (source: Hamilton, William Peter. Stock Market Barometer. Harper & Brothers Publishers, New York. page 14. link here.)”

When we speak of Dow Theory, we are referring to the emphasis of values, fundamentals in relation to price as they pertain to individual stocks and the stock market.  We are putting less emphasis on the strict technical analysis of the equivalent industrial and transportation indexes. 

To be clear, because we live in the United States we emphasize investing in the U.S.  However, according to Hamilton, it does not matter which country that you’re in, investors should embrace the comparative advantage of living in a country other than the United States and should become experts of value opportunities in that region.