By the time you read this, I’ll be on my way to the airport. My destination: Las Vegas, where I’ll be attending The Money Show. I’m looking forward to meeting many of our subscribers in person and talking to other investment professionals.
But it won’t be all business. I’m going a few days early so I can meet up with an old friend and enjoy some of the city’s top-notch restaurants, nightlife, and of course, its casinos.
When it comes to casinos, I approach ‘em differently than most people. Rather than just throwing away money on long-shots, I like to stick to blackjack.
Why? For one thing, it’s fun. For another, it’s pretty much the best game the house has to offer — it gives you the best odds.
If you follow what’s called “basic strategy” — playing your cards and betting based on a predetermined system — you can narrow the house advantage to less than 1%. Put another way, the odds are almost 50-50 that you’ll make money. That beats the pants off of most slot machines and other table games like roulette!
Now, gambling and investing aren’t the same thing. However, when it comes to investing, you can also increase your chances of winning. Today, I’d like to tell you how …
Investing in Foreign Markets Gives
You a Clear House Advantage!
In my opinion, if you focus your attention on markets where the fundamental outlook is the best, you’re greatly increasing your chances of walking away with a profit. I’d say you can do much better than 50-50. And right now, the strongest fundamentals can be found in international markets …
1. Foreign economies are vastly outperforming that of the U.S. The U.S. economy expanded at an annualized pace of 1.3% in the first quarter of this year. That’s a lousy number … almost half the pace of a quarter earlier … and the slowest in four years.
Measured from a year ago, U.S. Gross Domestic Product climbed a bit faster — 2.1%. But that’s still pretty pathetic. It’s less than other major industrialized economies that have already reported first-quarter figures, like the U.K. (2.8%). It’s much lower than we’re seeing in smaller Asian economies, like Singapore (6%). And it pales in comparison to the whopping 11.1% growth in China.
2. Foreign housing markets aren’t suffering like ours. Falling home sales and slumping home prices are acting like a lead anchor for the U.S. economy. Even the perennially optimistic National Association of Realtors now expects median prices to drop 1% in 2007. That would be the first full-year decline the group has seen since it started tracking the numbers in 1968.
Meanwhile, conditions couldn’t be more different in many foreign countries. Their markets are booming:
- U.K. home prices rose at a 6.8% annual rate in April, the fastest in four years.
- New Zealand’s home sales surged 9.5% from a year earlier in March, while median prices jumped 14% to a record.
- In Beijing, the heart of China, prices are up 9.9%.
- In Canada, new homes cost 10% more in February than they did a year earlier.
3. Foreign currencies are trouncing the dollar. I’ve said it before, but it bears repeating — the dollar has been on a slippery slope for the past several years. At the same time, foreign currencies have been rising steadily.
When you invest in countries with falling currencies, it’s like flying into a headwind. When you invest in countries with rising currencies, it’s like flying with a powerful tailwind.
You benefit from the favorable currency translations. The value of your foreign shares and bonds increases in dollar terms as the greenback declines. Plus, international investors are attracted to countries with rising currencies like moths to a flame. Their buying helps drive the value of your holdings higher.
Bottom line: If you’re looking for capital gains, there are plenty of high-flying foreign stocks. Or if you’re looking for income, you can invest in short-term foreign debt or more conservative, higher-yielding, foreign companies in stable businesses.
But Don’t Forget the Risks Involved!
Here Are Three Rules to Follow …
Again, investing is not the same thing as gambling. But I think some of the same principles that apply to gaming apply to the markets, especially when it comes to limiting your risk.
First, you shouldn’t put all your chips down on one bet. You wouldn’t walk into a casino with $1,000 and put it all on “red” at the roulette wheel, right? Well, by the same token, you shouldn’t put all your money in one investment or category of investments, either.
As much as I believe the dollar will continue to fall, I don’t think it makes sense to put 100% of your money into contra-dollar positions. Reason: A surprise rally in the greenback, however unlikely, could really wreak havoc on that kind of portfolio.
Make sure you don’t have all your money exposed to any one foreign market, any one foreign stock, or any one foreign currency. Instead, spread your investments around.
Second, bet with your head, not over it! You don’t go to Vegas and put your mortgage money down on the blackjack felt. You play with money you can afford to lose if things move against you.
Similarly, the money you need to live on … that you can’t afford to risk under any circumstances … should remain in the safest possible investments. Martin and I like Treasury-only money funds such as American Century Capital Preservation Fund (CPFXX) and the Weiss Treasury Only Money Market Fund (WEOXX). The latter is managed by Weiss Research’s separate affiliate, Weiss Capital Management.
Alternatively, you can consider some of the exchange-traded funds that hold short-term Treasuries. They include the iShares Lehman Short Treasury Bond Fund (SHV) and iShares Lehman 1-3 Year Treasury Bond Fund (SHY).
Third, know when to walk away. Sometimes the cards go cold, and your luck runs out. That’s when you have to just walk away … hit the buffet, catch a show, whatever.
The same thing goes for investing. If the fundamentals take a turn for the worse … the charts start breaking down … or any other major shift takes place, you don’t want to just dig in your heels. You should accept that circumstances have changed and move on, even if it means taking a loss.
Keep these principles in mind, and your portfolio will thank you. And I’ll do my best to follow these same rules while I’m in Vegas!
Until next time,
Mike
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Kristen Adams, Jennifer Moran, Red Morgan, Adam Shafer, Jennifer Newman-Amos, and Julie Trudeau.
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