Look everywhere

One of the basic tenets of Warren Buffet’s much copied investing philosophy is the simple “Invest within one’s circle of competence”. Much like the rest of Mr Buffet’s advice, this one reeks of common sense. As such it would be foolish to ignore, and in essence, few wise investors do.

There is, however an aspect of this simple concept of “competence” and “know-how” that is sometimes misunderstood. Investors all over tend to assume that competence equates familiarity and ultimately can only be obtained in conjunction with physical or geographical proximity. Put simply, few players in the capital markets derive any comfort from investing in distant places.

Given the enormous breadth of investment options available to most western investors on a local basis, in the form of thousands of quoted stocks, corporate and government bonds, commodities, options, currencies and other more sophisticated derivatives, it is fair to ask why one would bother to look beyond one’s home country / market.

Undeniably familiarity helps as it brings comfort and security. Notables such as Peter Lynch of the Magellan Fund, claimed that their best ideas came from daily interactions with local companies which would later make it into his portfolio. Moreover, It is often said that every thousand miles travelled from home in investing terms add an additional layer of complexity; thus requiring further due diligence before clarity can be reached.

No doubt there is substance to this approach of keeping close to home. After all, investing requires a thorough business owner-like mentality and some would argue that this level of knowledge can best be achieved via close interaction with the corporation whose security being analysed.

Personally, I agree on the merits of thorough familiarity with the subject of one’s investment, but I hasten to see geographic proximity or even domestic familiarity (also known as patriotism) as the only way to develop the confidence required to pull the investment trigger.

Consciously investing only in one’s home market leads to a world of opportunity, pun very much intended, being ignored. These days, the vast majority of the information required to make sound investment operations is widely available in a format (electronic) which replaces the need to travel and in fact, to interact with management.

Further concerns regarding accounting treatment differences, currency exposure, or even political risks are for the most part, quite simply overstated. The fact remains that, barring a certain number nations whose record of corporate governance remains questionable, most modern states with liquid capital markets operate under the same rules as those of the USA.

Currency concerns can easily be hedged away (if one desires) and political risk is so far off the table in the majority of northern hemisphere nations as to not warrant anything but a passing reference.

In addition, smaller, less “developed” markets such as those of South Korea and certain European states, tend to be less liquid and more prone to provide significant value discrepancies as a result of their limited following. On the other hand finding simple arbitrage opportunities these days in the NYSE strikes me as an unlikely occurrence.

Given the choice between fishing in large, but overcrowded and mostly depleted lakes versus smaller, relatively unpopular but unspoilt locations, I know which ones I’d draw my attention to...