Recently, two things came across my desk regarding using fundamental analysis to value overseas companies. One was a client request to help them with a valuation of China Gerui (CHOP) and another was a posting regarding value investing in foreign markets on a LinkedIn value investing discussion group to which I belong.
Having worked in Japan for five years, invested professionally both in Japan and Europe, and done a great deal of reading and thought regarding behavioral finance, I have come to realize the very large effect culture plays in making investing choices.
An economic system is an outgrowth of cultural mores just in the way a governmental system is. To the extent that a system of government as well-understood as “democracy” can have such vast differences in implementation from one country to another (e.g., Russia, Iraq, Japan, and the U.S. are all representative democracies, but a “common sense” political move in one country might be an indictable felony in another), is it so strange that a system of economic risk and reward like the stock market might manifest itself very differently from one market to another?
Following is my response to another board member’s question regarding the most important factors in successfully value investing in overseas markets.
I’ll bring a little different perspective to the conversation. I have invested professionally in Japan and Europe, lived and worked in Japan, and have consulted with the World Bank regarding valuation of their emerging market equity portfolios. The more I have seen throughout the world, the more I have realized that Anglo-American conceptions of “value” and corporate ownership are just that–Anglo-American. Basically, the tenant of “find a security trading for less than its intrinsic value, buy it, and hold it until the market realizes its true worth” is contingent upon such concepts as the sanctity of the rule of law, corporate control in proportion to ownership stake, and the primacy of the rights of the owners (vis-a-vis management, the government, and society at large).
Anglo-American investors treat these issues as if they were matters of common sense, but in fact, in other countries (OECD countries with highly developed securities markets), Anglo-American “common sense” notions are sometimes regarded with antipathy and fear. Look to the experience of activest investors in Japan (Osaka Stock Exchange, Bulldog Sauce, etc.) for examples. Look to Germany’s corporate structure that includes worker and societal representatives as well as directors chosen by shareholders. Look to the Byzantine complexity in the ownership structures of some French and Italian concerns (all of which are designed to enrich one person or family…if you could only figure out which person it is and get on the same side of the trade as him / them!).
From my perspective, forex hedging and the rest of the bookkeeping details are secondary and of much less importance to understanding the cultural rules that operate in a market in which one is looking to invest. Believing that everyone in the world approaches business and valuation in the same way as those educated or otherwise brought up in the Anglo-American tradition is ethnocentric and bound for eventual failure, in my experience and opinion.