The Most Unnecessary Form Of Diversification

Includes: AFL, BP, CVX, KO, MCD, MO, PG, PM
by: The Conservative Income Investor

Out of all the pieces of conventional wisdom that seem to crop up throughout the financial industry, the notion that you need to diversify your wealth among countries not located in the United States is perhaps the most unnecessary piece of financial wisdom of all. Creating long-term wealth is all about finding favorable relationships between current profits, future profits, and the price you pay today on a risk-adjusted basis. Stylistically, it does not matter whether you accomplish your financial goals on the back of American domiciled companies or international stocks.

Considering that you should never make an investment that you do not understand, it could likely be advisable to stick with business models that you understand. If I buy BP (NYSE:BP) stock, it is not because I am thinking, "Gee, I need to show Britain some love in my portfolio." Rather, it is because I understand the company and find its future profit potential attractive relative to the prevailing market prices. But still, investing beyond the United States is not a necessary part of investing. The United States has a thirteen trillion dollar economy. Opportunity wise, it's not exactly Russia under the czar.

Charlie Munger was right. You only have to get rich once. If you accumulated $10,000 in 1965 and put it all into Chevron (NYSE:CVX), you would have a little over 42,000 shares today worth almost $5,000,000. You'd be generating $168,064 in annual dividend income. On a pre-tax basis, you'd be looking at about $14,000 coming in to your checking account each month, just because of an intelligent decision you made as a young man forty-eight years ago. That was the result of finding an excellent American company, and holding on to it for a long period of time. That $14,000 you have coming in each month isn't exactly penalized because Chevron is an American domiciled stock. It is not mandatory that you have to invest directly into China, Russia, Brazil, etc. to put together a good life for yourself.

If you want to generate profits overseas and create international exposure, you can easily do so by looking to where most American domiciled companies are actually making their profits.

Want Japanese exposure? Buy a block of Aflac (NYSE:AFL) stock because 80% of their profits come from Japan.

Want a company that generates strong profits in both the United States and all over the world? Take a good look at Coca-Cola (NYSE:KO), which generates about 40% of its profits here and 60% abroad.

Want a heavy Western European concentration? Take a chance to read where McDonald's (NYSE:MCD) is making a lot of their international profits.

Want to participate in the growth of South American countries? Check out where Procter & Gamble (NYSE:PG) is achieving their international growth.

Want to make money exclusively overseas with no exposure to the United States? Check out Philip Morris International (NYSE:PM). As part of its spinoff terms with Altria (NYSE:MO), it has to keep Marlboro and all of its other cigarette brands out of the United States, but is free to create profits in every other country in the world.

The notion of "home bias" investing might be problematic if your home country is Cuba or Ethiopia. But American investors are in an incredibly fortuitous position because it is the American multinational firms that have largely been taking over the world during the past three decades or so. This comes with tremendous advantages.

Right now, we are living in relatively peaceful times--it was only seven decades ago that the world was embrangled in a global war. What did China do? They nationalized the country's assets, cancelling the proverbial stock certificates of investors.

Coca-Cola, meanwhile, generated $9.2 billion in profits across 207 countries last year. If war breaks out during your investing lifetime and certain markets close off, you can lean on the remaining available countries to still generate profits. Owning companies that generate profits in 100+ countries is a great way to mitigate wipeout risk due to adverse socio-political events. Heck, Coca-Cola actually generated profits during WWII (and paid out a dividend during that period), and it is a much more diversified and resilient company today than it was then. Why not take advantage of becoming a part owner in a company with that kind of firepower while accomplishing the international diversification you desire?

To the extent that you find necessary, you can easily assemble an international portfolio using stocks with their corporate headquarters in America. Not only are these companies easier to understand, but you can take advantage of the preferable tax structure that often comes with the fact that the company is headquartered in America. Furthermore, all you have to do is find American companies you like, and then conduct a breakdown analysis of where they generate their profits. You can often find an American company that is generating a large chunk of its international profits in markets where you seek exposure.

Disclosure: I am long MCD, BP, PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.