One of the fortunate things, if you can call it that, about the Cyprus banking crisis is that it has reminded investors to think about risk again. The absolutely heart-breaking and punitive effects for those with over $100,000 in Cyprus banks has hopefully encouraged Americans with more than the FDIC limits in their banking accounts to revise their approach to wealth storage so they do not have to take a needless risk. And for stock investors, this event might be a useful trigger to re-evaluate the real risk of direct international investing. Although the financial class has chosen to relabel "Third World Countries" with the euphemistic "Emerging Markets", we should keep in mind the dangers of making meaningful investments in countries with financial infrastructures much weaker than the United States. It can be a hard lesson to learn when times get tough.
Personally, I stick with the large-cap American multinationals. I make a couple of exceptions for countries such as Switzerland (think Nestle (OTCPK:NSRGY) or Great Britain (think BP (BP) and GlaxoSmithKline (GSK)), and I am fine with that limitation. During WWII, American investors did not have their British investments compromised. China, meanwhile, nationalized many of the businesses to make the government the controller. I don't like that precedent. For me, it's a comfort zone thing. I'm fortunate to live in a country with a trillion dollar stock market and a strong financial infrastructure, so I'm perfectly content to take advantage of that blessing and make most of my investments in mega-cap companies that are headquartered here.
The advantage of dealing with large American companies is that they are able to handle adverse news without missing a beat. For instance, Procter & Gamble (PG) has had to deal with the Venezuela government's intention to devalue its currency (the bolivar fuerte). This will cost P&G about $200-$275 million, meaning that this year's earnings will be impaired by about a dime per share. This is what makes it fun to be the part owner of a company with over two dozen $1 billion brands. When you own a company that is making millions of dollars per week in dozens of currencies throughout the world, it can take some hits and roll with the punches. Some bad news coming out of one country has a limited effect on the company's overall success potential.
In the case of McDonalds (MCD), the company is able to eke out growth from its stores in the United Kingdom and Russia while the same-store sales in the United States are stagnating. When you have a strong brand that is doing business in dozens of countries, you can rely on the strength from certain countries to offset the relative weakness of others. In some regards, this is what makes investing fun. If you are a McDonalds shareholder, you can go to bed tonight knowing that you're making money in dollars, yens, pounds, euros, and francs. There is incredible strength and stability inherent in that kind of diversified business model. For McDonalds to go bankrupt, a lot of things would have to go wrong all at once.
Take a look at this picture. It's a sample size of some of Pepsi's (PEP) leading brands:
If the world falls apart, it is going to be hard to bankrupt a company that is selling soft drinks, bottled water, chips, salsa, pancakes, oatmeal, and other snacks in just about every country throughout the world. Sure, Pepsi has some periods of sluggish earnings growth and dividend growth, but the underlying business itself is incredibly strong. It stands to benefit from the growth of different developing countries, but it also has the strength to withstand a severe downturn in a particular country.
There is a reason why I think that companies like Coca-Cola (KO) and General Electric (GE) should be the kinds of companies that are the backbones of defensive portfolios. The predictable dividend and earnings growth is nice. But they also offer an important way to benefit from the "globalization story" without taking on the accompanying wipeout risk that can follow bad news in the developing world. Obviously, many American investors are not directly affected by the terrible developments for bankholders in Cyprus. But this can be a useful time to reassess the risks to your portfolio and consider how well your portfolio could withstand some serious bad news.
Warren Buffett had the gumption to buy his first stock during the Battle of Midway. That takes audacity. The past twenty to thirty years have been a remarkably stable time for American investors, especially when compared to the first half of the 20th century. It can be easy to be lulled into a sense of complacency that this good fortune will continue for decades. I certainly hope it does. But in the event that it does not, I want to make sure that I am acquiring ownership stakes every year in the kinds of companies that span the globe generating profits from dozens of products in dozens of different currencies. Should something far worse happen, these are the kinds of companies that will be the last to fall.