I’ve argued this point before and often investors intuitively get the point better than money managers. For example, the other day I was talking to my cardiologist, and after the examination we were chatting in the hallway and he asked me for a stock tip. I don’t give stock tips, but I did explain what my research had found: that one of the most important things to look at when one is compiling a portfolio is the country in which a company is domiciled.
Almost all of the discussion on TV and the internet is about which American stock to buy and once in a while, about whether to buy some American bonds. What is ignored is the extremely important question of the environment, does the home country honor wealth creation or not. “…and right now our country does not,” he said finishing my sentence for me. He got it – instantly – partly because he’s smart, but partly because he doesn’t have his mind cluttered with the normal detritus of modern financial-speak.
On the other hand, I hear a lot of objections to the idea of looking at country characteristics from money managers and financial advisors (though thankfully, not from any that I’m working with right now), and the objection which I hear most often is something like this:
“Most companies have operations all over the world. What is an ‘American Company’ today? Apple and Microsoft may be based here in the U.S. but the majority of their operations are in other countries.”
In other words, since we have a global economy, the country of domicile doesn’t matter. The problems with this point of view are numerous. First, it confuses revenues with profits. As a shareholder I don’t own a fractional share of revenues, I own a fractional share of profits. Companies sell goods and services at a price, and all those sales together go into an aggregate number called revenues. Various costs are subtracted from the revenues to calculate various progressively smaller measures of profit and loss: gross income, net income, EBITDA (earnings before interest, taxes, depreciation and amortization), taxable income, etc. Profits are much more important than revenues, and the regulations under which a company must operate can severely impair profits.