Investing in US-listed Businesses

The following is a guest post by Chong Ser Jing. He is a blogger at Motley Fool and his posts can be accessed at http://beta.fool.com/serjing/. Investing in stocks in a foreign country often brings about some fear due to geographical and cultural unfamiliarity with the companies. There is a common behavioural bias for people to invest predominantly in their home countries because they feel more familiar with it. However, great investment opportunities should not be limited by geography. As an example, would you say you are more familiar with the products and services of Keppel Corp or Olam International as compared to Apple’s iPhone/iPad and Google’s search engine? Followers of Warren Buffett would know the importance of economic moats to his investment process and unfortunately, our local economy has so far been unable to produce as many companies with powerful economic moats and franchises as in the USA. Hence, looking abroad can broaden our chances of finding companies with great economic moats selling at reasonable prices. The internet brings encyclopaedic volumes of knowledge to you at the click of a mouse and so, getting to know foreign companies is not as difficult as you might imagine. Of course, there are still key issues with regard to foreign investments such as portals for information gathering, tax implications, brokerage issues etc. I will try my best to answer them but please bear in mind the fact that I am only using my own personal experience and am in no way connected financially or professionally with any of the organisations I will mention below (except for The Motley Fool, which I will explain in more detail later). Information Publicly traded companies in USA are governed by the Securities and Exchange Commission (SEC) in the USA. The SEC is a regulatory body that acts as a police-man of sorts against publicly listed companies that engages in frauds. You can find out more about the SEC at http://www.sec.gov/ . The SEC runs a website called EDGAR that collates all the filings that publicly listed companies have to make. You can find out more about EDGAR at http://www.sec.gov/edgar.shtml . In addition to the annual reports that you can find at a company’s website, each publicly listed company in the USA have to file other forms as well and the important ones are the 10K, 10Q and 8K. 10K: Annual filing that contains a write-up on the business and the business condition over the past fiscal year. Management would discuss all the figures pertaining to the business as well as the risk factors and future plans in the 10K. It differs slightly from the Annual Report that most people are familiar with but is still worth a visit as it sometimes contains more information about a business than the Annual Report. 10Q: A quarterly report that details the company’s business performance over the past quarter. It is much shorter than the 10K and is a quick way to get up to speed with understanding a company’s operations and accounting. 8K: An annual filing detailing the compensation and incentives of the company’s key executives. Look at how management is being incentivised for a gauge on the alignment of shareholder and management interests. Besides the EDGAR website, most companies also keep a comprehensive online catalog of past filings in their own investor relations websites, which are much easier to navigate as compared to EDGAR, which is funky to navigate, to put it mildly. Other websites like Wikinvest (www.wikinvest.com), Thomson-Reuters (thomsonreuters.com) , Morningstar (www.morningstar.com) and Ycharts (http://ycharts.com/) all provide excellent summaries of 5-10 years’ worth of financial data for most publicly listed companies in the USA. They are all free to use with the option of premium subscriptions that offer more even more information. The Motley Fool (http://www.fool.com/) provides excellent coverage on companies in the USA as well as commentary on some of the economic issues facing America today. They have integrity and honesty embedded in their writing and is a wonderful platform for understanding publicly listed companies in USA. They also have a wonderful stock-picking game called CAPS which I’ll leave you to explore further at http://caps.fool.com/index.aspx?source=ifltnvpnv0000001. For people who are interested in British or Australian stocks, they also have websites for companies listed there. You can find them at http://www.fool.co.uk/ and http://www.fool.com.au/ . I mentioned earlier about my link to The Motley Fool and for disclosure purposes, I am writing blog posts hosted on the Motley Fool Blogging Network at which I am paid a fixed amount per syndicated post. Taxes For investors who are neither residents nor citizens/Permanent Residents of USA (classified as non-resident aliens, in government lingo), they are mostly exempted from any capital gains tax from the governments of USA. However, they are still subjected to a 30% dividend tax. When you open an account with a brokerage firm to trade in USA, you will be required to fill up a form to testify your non-resident alien status. Brokerage Most local brokerages like UOB Kay Hian or DBS Vickers allow local residents to open an account with them to trade in stocks listed in the NYSE and NASDAQ. There are certain restrictions on the kinds of stocks we are allowed to trade in terms of market capitalisation. The local authorities do not allow stocks that are at a market cap of below $1 billion USD to be bought and sold by retail investors as a form of protection (archaic rules, in my opinion). There are also other USA-based discount brokerage firms that have operations in Singapore such as Etrade and OptionsXpress. This list is by no means exhaustive and I am sure you will discover more through Google. Forex Fluctuations This should be a key concern for anyone investing in the USA or any other foreign country. My own personal view would be to engage in currency hedging once my portfolio becomes significant enough. It is currently too small to enable cost-effective hedging. For more on how currency fluctuations can affect your investment holdings, please visit http://www.tweedy.com/resources/library_docs/papers/How%20Hedging%20Can%20FUND%20Version.pdf for some good research done on how Forex can affect your investment returns. It is done by Tweedy Browne, one of the best value investing firms out there and their conclusion was: 1) Over the short-term (1-3 years), currency fluctuations can greatly affect investment returns, 2) Over the long run (5-45 years), portfolios that engage in currency hedging generated very similar returns with portfolios that do not engage in currency hedging, 3) The cost of currency hedging is roughly approximated by the difference between the interest rates in the currencies of 2 countries of interest (in this case, Singapore and USA). That’s all I have. I hope this has been of some help to you in getting started in investing in foreign stocks.

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