If you are reading this, I am very sure you have dreams of becoming rich and successful, with investments scattered all over the world. However, dreams are free, and reality is a different ball game.
International investing is something I encourage everyone to get involved in. The reason is because it offers two major advantages – diversification and growth. However, investing is tough and to survive the game, you need to be knowledgeable about a wide range of things. Having a beginner’s mindset is equally important.
I have studied successful investors all around the world and noticed a trend. Below are the things you should know in order to become a successful international investor.
1. Basic Math
If you can do addition, multiplication, subtraction, and division, then you’ll be fine. Also, a good grasp of probability will be needed to weigh your options when making educated investment decisions about the future, without complete information.
2. Economic Indices
Understanding key economic indicators is important to help you assess the investment opportunities and risks inherent in any country you may like to invest in. Some key economic indices to be aware of include:
Let’s assume that as a Nigerian investor, you are interested in buying the shares of a [fictitious] Chinese healthcare company called Zenjen. You conduct your research and discover that the company is about to release a groundbreaking technology that will cure cancer. The shares of Zenjen trade at 50 Yuan and the current exchange rate is 10 Yuan to a Naira.
To determine how much a share of Zenjen is worth in Naira, you will divide the price in local currency (50 Yuan) by the exchange rate (10 Yuan): 50 Yuan/10Yuan =5Yuan. A Zengen share, therefore, costs 5 Naira.
You call your broker in China and place an order for 10,000 shares at a total cost of 50,000 Naira. One year later, Zenjen was successful in discovering the cure for cancer and its product is in hot demand by patients all over the world. This development has a positive impact on the shares which subsequently rise by 20% to 60 Yuan.
Your thinking is that you have made a profit of 10,000 Naira return on your investment. So, you advice your broker to sell immediately. By the time you check your brokerage statement you still see a balance of 50,000 Naira and wonder why the 20% rise in share price does not reflect in your statement. You then call your broker to explain.
What went wrong?
As the value of Zenjen rose by 20%, the value of Yuan to the Naira also changed within a year to 12 Yuan to a Naira. If you divide 60 Yuan by 12 Yuan to a Naira, you get 5 Naira (5 x 10,000 = 50,000) – which was your initial investment outlay.
Within one year, this would have been a profitable investment for a Chinese. But as a Nigerian who needs to convert Yuan back to Naira, this would have been unprofitable.
In reality, if you factor transaction costs and brokerage commissions, you end up losing money even though your research on Zenjen was correct.
In the same vein, currency changes can make it possible to make money even if your research on Zenjen stock was wrong. But that is if the Yuan depreciates against the Naira within that period.
Gross Domestic Product (GDP)
The GDP is defined as the market value of all final goods and services produced within a country during a given period. What constitutes a country’s GDP and its level of contribution is a pointer to help determine if the companies operating within that country are likely to perform well.
Understanding inflation is important because it can affect you, depending on the type of assets you are carrying in your portfolio. For example, stocks are traditionally known to outperform inflation over a long run while fixed income securities are susceptible to inflation risks.
If you invest CAD $10,000 in Canadian Treasury Bills with a 5% yield 1 year ago and will receive 10,500 at maturity, the 500 (5%) return may not be the same as the previous year if inflation rose within that period.
If the inflation rate is 3%, it means your net return is 2% (5%-3%). The consequence of this is that your purchasing power will have fallen and the borrower (issue of Treasury Bills) will benefit at the expense of the lender (you); just as is the case in inflationary periods.
3. Analyze Annual Reports
It will be foolhardy to invest in a public company without reading its annual reports. The annual report is the most important document to help you understand the performance of a company.
You don’t have to be an accounting genius to understand annual reports. What you can do is start by studying key sections to give you an overview of how the company has performed over a particular period.
Key sections to read in an annual report are:
This includes a summary of the initiatives and performance by the Chairperson of the Board of Directors. Reading this letter will enable you decipher specific and plans for the company’s future.
Management Discussion and Analysis
This section shows the analysis of a company’s performance by its executives. It can also include a discussion of risks, and future plans, such as goals and new projects.
Board of Directors and Management Team
This is necessary for evaluating the experience and competency of the people managing the company you want to invest in. You can also compare the current year’s list of directors to those of previous years to look for signs of company problems.
This explains what the company does – its products and services, sources of raw materials, and the status of new products.
Profit and Loss Statement: To determine the profitability of a company.
Balance Sheet: To have a view of assets and liabilities.
Cashflow Statement: To see the sources and uses of a company’s cash.
5/10 Year Financial Summary
To help you determine trends in profitability, growth, and payment of dividends.
Share Price History
To show you upward or downward trends in the company’s share price.
4. Read & Research
International markets have a much more diverse number of financial assets. The traditional asset classes are: Stocks, Bonds, and Marketable securities. Alternative classes, on the other hand, include: Real Estate, Exchange Traded Funds, Commodities, Hedge funds, Venture capital, Crowdsourcing, and Cryptocurrency, etc.
All these asset classes have subs and various strategies to make money. You will need to have an inquisitive mind and the ability to read about and research companies and their products, industries, tax laws and how geopolitics affects a country will be very valuable.
You don’t have to be an expert in all the asset classes. What you can do is just pick one or a few that interest you and study it religiously.
Understanding how trends in demographics (such as people’s movement, ages, death and buying patterns) affect business cycles, will make you a good international investor.
Demographics can be defined as the study of a population based on factors such as age, race, and sex. The population trends in the countries you want to invest in will have to be monitored to determine what type of asset classes should constitute your portfolio.
Japan is seen to be up against a demographic wall. The population is aging – much faster than that of European countries – partly because of a low birth rate. The country’s resistance to immigration is yet another factor.
An aging population, for instance, may cause low productivity which will impact negatively on the value of investments. It may not be favourable to invest in equities in a country with an aging population, while the reverse may be the case if a population is rising and youthful.
6. A Firm Grasp of Financial History
“Those who do not remember the past are condemned to repeat it” – George Santayana.
Every disaster or boom that is happening now has happened before and will occur again. So, it is wise to study significant events in the history of any country you are interested in investing in.
Key questions you can ask yourself:
• What caused market crashes in this country?
• What caused recessions to occur?
• What reforms spurred the periods of growth and development?
Human beings are the major operators of any market. Therefore, reviewing history will show you that humans, no matter how smart, have a tendency to do dumb things.
7. Emotional Discipline
All the above-listed will be a waste of time, if you do not have the emotional discipline to make decisions regarding the market and your money.
The ability to control your fears and greed when the volatility of the market occurs will be invaluable when others act irrationally.
Additional things to know include monetary policy and tax laws of individual countries you are investing in.
In summary, the truth is that this list is not exhaustive. There are probably a thousand more things that will make you successful in investing beyond what I write here. I am willing to earn and would love to see some of your comments.