Search the world to avoid Home Country Bias.

Investors should not hesitate to search the world in the hunt to find the best investment opportunities. Many investors tend to invest only in the companies and exchanges that are familiar to them. This is known as Home Bias Investing. Although there is nothing wrong with investing in the familiar, it does break one of the fundamental rules of investing, i.e., diversification. This can be especially problematic if investors are heavily invested in domestic stocks, which is known as Home Country Bias.

Large and mega-cap companies are typically globally diversified and serve customers worldwide. These companies are often cross-listed on different exchanges to raise capital. While investing in such companies, the Home Bias Investing may not be a significant issue. However, it can become a problem if investors are fearful of investing outside their comfort zone. You don’t want to invest in sub-par opportunities.

Nowadays, instant diversification can be achieved through index funds providing exposure without the need to search the world. However, active investors who prefer individual stock selection should be mindful of Home Bias Investing. It’s best to avoid it by looking for the best investment ideas around the world.

Why is it important to search the world for investment ideas?

As an active investor, your goal is to construct a portfolio consisting of the best companies that meet your criteria. It’s not necessarily about diversifying from an asset allocation perspective, but rather finding the best candidate that reflects the qualities you’re looking for.

Regardless of your investment style. If you’re searching for undervalued opportunities, wouldn’t you want the very best undervalued companies with a margin of safety? Perhaps the company is located across the world, would you pass up this opportunity? If you’re looking for a growth company in an emerging industry and you find a company with all the attributes to be a multi-bagger but listed on a different exchange, would you hesitate?

Personally, I want the best, period. The best compounders, the best in class, not second or third. If I come across a competitor from across the world with far greater prospects, then I want it. I’ve heard many stories of investors who invest with home bias. Some of the reasons are valid, while others relate to behaviour. For example, an investor investing in a company on the SGX would not invest in a better competitor on the ASX. All though this competitor was taking market share they wouldn’t look at it simply because it wasn’t listed in Singapore.

The search for the best always leads to companies listed all over the world. If you start following value chains, studying competitors, and the supply chain, you start revealing hidden companies abroad.

Active investing will always reveal hidden boring companies from around the globe, on exchanges you’ve never heard of. However, if your brokerage account has access to invest in these markets, then they can be investigated.

Still be vigilant when you search around the world.

There is a clause to all of this. When I say search around the world, it does not mean throw vigilance out the window. Well-established exchanges with strong listings in established countries are still a must.

Most private investors who are not prepared or able to enter certain exchanges would do best to stick to what is available on their brokerage account.

There are a lot of new exchanges in emerging countries that are great for local investors but not so much for those abroad. The requirements around reporting and lack thereof can make it hard for transparency. Access to information is available for the privileged few. Fraud runs dormant in a lot of these exchanges.

Other countries are challenging to invest in for foreigners such as India. You need a DEMAT account, and the markets are accessible to Indian citizens and funds. There are great opportunities on the (NSE) National Stock Exchange and the (BSE) Bombay Stock Exchange but it can be challenging to start an account.

There are a lot of risks investing in exchanges that are not well established or in emerging countries. So, I suggest most investors avoid them unless you know what you are doing.

However, for investors who are for example living in London and don’t want to invest in Australia or the US or Germany out of fear, this can be the cause of bias. These are very strong well known, regulated exchanges and should not deter investors simply because it is not their home country.

A few areas to be mindful of when you search the world for ideas.

When investing in an exchange or country for the first time understand the playing field beforehand. Familiarise yourself with the reporting in that country and what accounting standards do they use. Ensure the resources you use are credible.

One note on conducting valuation and interpreting financial statements. It is key to understand how these companies report. For example, the differences between GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards).

All the same rules apply, the same analysis, and the ideas of deep research should not be cut short. I’ve heard an investor say when he invests abroad his analysis “doubles”. I think that is an incorrect view. ALL investment opportunities should have the same rigorous due diligence process.

Just because a company lies within reach on your home exchange does not mean you should short-cut the research. Vigilance no matter where or what you are investing in is the best practice.

Understanding where the company’s target market is also important. Sometimes a company listed abroad targets your home country anyway. I’ve played many themes by understanding what country a certain listed business is targeting. For example, India, having lived and carried out business in India I am bullish on the country and the emergence of the rising middle class. So, I searched for companies listed on exchanges that I had access to and found companies that served the Indian market. Rather than trying to enter the market directly.

I encourage all Investors to search the world for ideas with curiosity and a pinch of scepticism. If you are doing your research, avoiding being blow away by stories, you will find the anomalies.

In Summary…

During the investment process as you start to refine your watchlist and hunting grounds, ensure you are finding the best in the field you are looking for. Whether it is an industry or an emerging sector. Who is the best? What company would make a better prospect? If you are investing in a certain theme and you find a company downstream of the value chain making all the profits but is listed elsewhere, what stops you from looking further?

When you search the world there are dozens of reputable exchanges in countries that are great to invest in. This brings me back to the point, finding the very best compounders is the goal. If you spend a few years turning over rocks on your home exchange the chances are after a while the opportunities may not be as strong compared to foreign companies.

You can still develop a very strong portfolio of companies on one exchange. At the end of the day owning a portfolio of quality, well-run companies compounding capital in double-digit teens will do just fine. However, if a better prospect presents itself from across the world, I’m interested. I have no home bias because it lies on foreign shores.