Here’s a global question.
Imagine you’re travelling to Thailand. It’s the 1990s. Following some recent terrorist activity in the country.
I’ve got two questions for you:
- How much would you pay for a travel insurance policy paying $100,000 in case of death for any reason?
- How much would you pay for a travel insurance policy paying $100,000 for death in a terrorist act?
This was an experiment covered in Daniel Kahneman’s Thinking, Fast and Slow. And in case you’re wondering, turns out most people will pay more for the second policy.
Which makes no sense at all, since Policy 1 is clearly the better policy giving you more options.
Local or global?
Blindness creeps in due to localisation. We’re blind to our blindness because we’re focused on our immediate environment. The best thing you can do is read, travel and go beyond. Because we tend to exaggerate how knowable the world is.
People buy homes in areas they know, often not far from their old home. When it comes to the stock market, they favour shares on their local exchange. And the comment I often get is this: ‘Aren’t global shares at the risky end of things?’
The reality is that great businesses exist all over the world
As an example, insurance is an industry that offers growth and income.
From my New Zealand base, I am a customer and investor in Tower Insurance [NZX:TWR]. They’ve recently conducted a rights issue to buy Youi Insurance, which has about 34,000 policies. We estimate this acquisition may take the business toward 500,000 policies — or customers.
Could it be an opportunity to enter or top up on Tower now? Enjoy some growth if and when the dividend gets restored?
A better investing option
Well, compare this to the global insurer we recently added to our Lifetime Wealth Investor portfolio. This business has 33 million customers, pays a current dividend of over 7% per annum, and shows capital growth of 12% since we added it last month.
While Tower may be a straightforward choice for local punters, the larger global insurer also presents an opportunity to diversify.
Of course, there is also currency risk — and currency opportunity to consider.
‘Top-down investing’ leads us to global investing
With top-down, you first look at the macro-picture of an economy.
As an investor, you’re looking to find an economy that can offer solid growth for the businesses operating within it.
The ideal situation is an economy in transition. Or facing some sort of temporary uncertainty. The Brexit situation in the UK has been one example. A lot of economic and share-price growth went into ‘pause mode’ or backwards while investors waited for the situation to clarify.
Most investors cannot stand uncertainty. A patient, top-down investor can consider the growth opportunity.
Of course, there is some risk too. We don’t yet know how ‘New Year’s Leave’ is going to go for Britain.
Following macroeconomic analysis, you look into sectors and trends that could outperform. Pharmaceuticals for an ageing population. Infrastructure for a growing one.
Then you find some specific companies that could capture the macro and sector benefits. And provide business and income opportunities of their own. At this point, you can undertake more detailed analysis on those businesses.
Avoid local bias
Your top-down analysis helps you avoid being blindsided by local bias. It helps you see the whole picture. And hopefully make better investments.
So next time you’re attracted to something just because it’s familiar or local, don’t forget the world is a big place. There could be even better opportunities out there.
With Brexit at least on the way to a deal — and the currency and our stock picks all nicely up — we’re now running that top-down analysis over other economies.
Stay tuned. I’ll be visiting Singapore and Japan early next year. And keeping abreast of developments in ever-volatile Europe.
The Australian economy will also be one to watch.
Of course, when investing there is also opportunity cost to consider. I looked at this in my last article: The Money Deck — Could You Stack It to Your Advantage?
Want a big life? Gotta think big. So live local but look global.
PS: If you’re considering our Lifetime Wealth Investor program, test-drive it for a month or so here and see what you think of the opportunity.