Investors often prefer to keep their investments within the borders of their home country, and in the U.S. that’s not difficult to do given the attractiveness of the U.S. stock market. It’s often viewed as a safe haven for the rest of the world, and U.S. companies are considered to be high-quality and stable. In fact, legendary investor Warren Buffett has often argued, why go anywhere else? But he himself has ventured outside of the U.S. for significant investments, something ordinary investors should make note of, contends an article in Bloomberg.
Using high profitability, return on equity, and return on capital as gauges, the S&P 500 has had a higher profitability than both the MSCI World ex USA Index and the MSCI Emerging Markets Index for more than 20 years. But by no means are the only profitable companies in the U.S. Ranking the 10,000 companies in the Bloomberg World Large, Mid & Small Cap Index, Bloomberg found that the U.S., while representing the most top 100 companies, only accounted for 15% of that segment. Measuring by return on equity and return on capital, the U.S. accounted for 36 and 14 of the top 100 companies, respectively, Bloomberg found.
There are many low-cost index funds that will weed through the thousands of stocks and select the most profitable ones for investors, generally grouped by region so that investors can choose where they want to put their money. And high-quality foreign stocks, as a group, are much more inexpensive than the S&P 500 almost across the board; the S&P 500 trades at 19 times last year’s earnings while the MSCI World ex USA Quality Index and the MSCI Emerging Markets Quality Index trade at 15 and 13 times, respectively. Meanwhile, Buffett got his start as a committed value investor, but has shifted to quality over the years, famously saying “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” And recently, he’s gone seeking outside of the U.S. for attractively-priced companies. Over the last 20 years, Buffett has purchased holdings in China, South Korea, the United Kingdom, France and elsewhere in the European Union, as well as his highly publicized investments in Japan’s five largest trading houses, the article reports. That last investment brought a 20% return on equity last year, trading at a mere 6 times last year’s earnings—a much better bargain that the 19% return on the S&P 500 trading at 19 times earnings. So while the U.S. is home to an abundance of high-quality companies, they are not the only home, and those companies could be found outside its borders, perhaps for much, much cheaper.