How to Invest in International Stocks

International investing offers both opportunity and complexity that domestic investing does not. The question of whether and how to invest globally has nuanced answers that depend on your home country, your existing holdings, and your willingness to navigate additional risks.

Warren Buffett has a well-known preference for American businesses, but his reasoning is more nuanced than simple patriotism. Buffett argues that the United States offers the best combination of strong legal protections for shareholders, transparent financial reporting, deep capital markets, and a business-friendly culture. However, he has invested internationally when the opportunity was compelling -- his investments in BYD (China), Itochu and other Japanese trading houses, and various international consumer brands demonstrate that value can be found anywhere.

Charlie Munger was actually the driving force behind Berkshire's international investments. He identified BYD as a compelling investment in 2008 and convinced Buffett to buy. Munger has consistently argued that limiting yourself to a single country's stock market is an unnecessary restriction. The best businesses in the world are not all headquartered in one country, and artificial geographic limitations reduce your opportunity set.

The primary argument for international diversification is risk reduction. Different economies move through cycles at different times, so international diversification provides genuine protection against country-specific risks -- political instability, regulatory changes, currency crises, or economic recessions that affect one country more than others. Research shows that a globally diversified portfolio has historically produced similar returns to a US-only portfolio with lower volatility.

However, international investing introduces risks that domestic investors rarely consider. Currency risk means that your returns depend not just on how the foreign stocks perform but also on how the exchange rate between your home currency and the foreign currency moves. A stock that rises 10% in local currency terms could actually lose you money if your home currency strengthens significantly. Political and regulatory risk varies enormously by country -- shareholder protections that are taken for granted in developed markets may be weak or nonexistent in emerging markets.

Howard Marks points out that many investors already have significant international exposure through domestic companies. Large multinational corporations like Apple, Microsoft, Nestle, and Toyota generate substantial revenue from global operations. Owning these companies provides indirect international diversification without the currency risk and complexity of directly investing in foreign markets.

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The Bottom Line

The balanced approach is to maintain a core of domestic investments you understand deeply, supplemented by international diversification that reduces your overall portfolio risk.