There are several warnings you will hear about investing overseas. I will examine a few of them with the intent of asking “Why invest overseas?” The first concern I’ll address with offshore investment is the lack of transparency, the second is political risk, and the third is currency fluctuations.
Transparency has improved throughout the second and third worlds. This alone is not a reason to embrace the risks. However if you choose to invest at all you will find there has been a regression to the mean. Investment opportunities in first world countries have become less transparent, in many instances opaque. Lack of transparency is now a world wide phenomenon.
We are not talking about complex derivatives where no one, not even the creators, are aware of hidden risks. “The safe counter party was Lehman Brothers? Oops.” A simple investment in a large financial institution carries unknown risks, even to bureaucrats that arrange bailouts. “Let’s have Bear Stearns bought out by our friends at pennies on the dollar. That will hurt current securities holders? Sorry.” Local and regional banks are told to keep real estate on their books at a stated value, no mark-to-market at the end of the month. No one knows how many banks are as bankrupt as the nation they reside in. “Oh, and don’t sell that real estate till after the election, it will depress the market. We will give you zero interest loans that you can invest in government bonds to generate enough income to stay in business. You scratch our back, we’ll scratch yours – and we’ll both pretend we’re solvent.”
That brings us to the misnamed political risk, it should really be referred to as politician risk. Let’s look at an imaginary scenario:
Place yourself in a big room with a large conference table and a podium. You represent a large state retirement fund that has a significant investment in General Motor’s bonds. A top level administration spokesman is addressing you, he has the volume turned up on the speaker system to just below feedback so he doesn’t have to listen to the grumbling. “This is not negotiable. Yes you have a legal first right as bond holders to take over GM. Legal doesn’t matter. We have the bully pulpit, and the approval rating to use it. If you refuse our compromise you will be painted before the whole nation as evil business people intent on destroying jobs and the economy. If by some chance you were arrested for something like insider trading or tax evasion everyone in the country would cheer.” He stops and smiles so that his point is clear. ” You will give half of General Motors to the union employees (they helped elect this government), and you will do it with a smile on your face praising your fellow stakeholders. For those of you that held GM bonds for government institutions your organizations will be bailed out with federal tax receipts. You will have to resign, but the bailout will contain generous golden parachutes so you can live in the Hamptons or buy a private island. You have until noon tomorrow to make your announcements. For you few private investors, as our president said, ‘There should be a limit on how wealthy a person can become” You just ran into one limit, there will be others.” In this totally fictional account he then leaves the room. Half of GM has been nationalized, and then given to political supporters. That my fellow stakeholders is what one form of politician risk would look like if it existed.
Finally we get to the currency risks of investing overseas. This is easy: stay, move, have your investments in one currency or a dozen, you are at risk. Currency is based on a promise by politicians to control themselves. To become a political leader you have to desire power, this is not a useful ingredient for crafting civil good. Currencies therefor serve an intended purpose of amplifying political power.
Currencies are not wealth, but are only a brief reflection of wealth. Money then should be the goal, real wealth. Gold, factories, farmlands, mines; these are the things that will endure long after all current currencies have joined their cousins in the valueless dunes of over-hyped historical artifacts. Wealth is to be found throughout the world. Avoiding risk is impossible. Risk has to be managed if you wish to be or stay wealthy.
We can accept as mostly valid the proposition that wealth is built through concentration and preserved through diversification. So — “Why not invest overseas?” Why not indeed, overseas investing is but one more part of the diversifications that will preserve your wealth. You will be diversifying your lack of transparency, politician, and currency risks.
I’ve covered some risks here, they can be excuses for not acting. Instead, find reasons to act overseas for your own benefit. Consider the rewards of investing offshore. One of these reasons is to not lose everything if something goes wrong in one location. Another reason is to uncover profits that are hidden in the myopia of a single country.
What opportunities will you have once you leave the restricted cow pen of your current government’s allowed investment vehicles?
This is why we became Permanent Travelers. As a PT we have taken on personally managed risks as opposed to massive and unavoidable systemic risks. We have made our lives safer. By doing this we have magnified our opportunities. We have delightful options, in more beautiful places, available at our own discretion. We have made our lives more enjoyable.
Why not send some of your money and spend some of your time offshore? Do it for your family and for yourself.
Josh Morph