Fund consultants like to require style boxes such as ‘long-short,’ ‘macro,’ ‘international equities.’ At Berkshire our only style box is ‘smart’.” – Warren Buffett
Stock markets in Canada and the United States, our traditional hunting ground, continue to trade near all-time highs. We have found compelling new investment opportunities to be scarce in this environment. Instead of scraping the barrel for marginal investments, we have allowed our cash position to rise to 35% and spent time searching abroad for investments. The Partnership now owns three non-North American companies that combined represent 13% of assets. We think it is important that our partners understand our approach to international investing which is based on four principles:
1. Head office address is secondary
If we were considering an investment in General Motors (we aren’t) our first step would be to study the auto industry. Then, if we were comfortable in our ability to understand the industry and its future, we would analyze GM’s competitive position relative to other large global manufacturers like Volkswagen and Toyota. Suppose we reached the conclusion that the industry outlook was positive, but Toyota had the most compelling investment prospects. It seems completely irrational that we would still invest in GM, a second-rate opportunity, strictly because we are required to only invest in North American-listed companies.
While cultures and language are variable, economics is universal. If you have the expertise to understand a global business it would be foolish to restrict your investment options based on an arbitrary factor like head office location.
2. Invest in what you know
We have limited our search to industries we understand well from previous investment in North America. Our first three investments include a software company, a distributor and a car dealership – all industries that we have experience investing in. However, we have looked carefully for subtle differences between countries that might be important. For example, the average North American car travels over 17,000 kilometers annually compared to just 13,000 kilometers in the U.K. This means that cars in the U.K. require maintenance less often giving U.K. car dealerships fewer opportunities to generate lucrative parts & service business.
3. Stay humble
Despite careful research, we recognize the risk of overlooking subtle differences is higher when investing abroad. These can be political, local or macroeconomic factors that may have an impact on our international holdings. Consequently, we have made smaller investments than we would have in an otherwise identical company based in North America.
4. Don’t invest in countries you’re scared to visit
Our international focus has been limited to English-speaking, Commonwealth countries with established rule of law and effective market regulation.
At Ewing Morris we focus on smaller North American companies because we know the space well and because these companies are more likely to be overlooked and/or misunderstood. However, you have empowered us with the flexibility to invest in larger companies, short companies, hold cash and invest in other geographies when we think these decisions will contribute to our ultimate goal of protecting and growing your capital. This flexibility is a tremendous advantage not available to most investors who must usually operate in narrow silos within a larger, multi-fund investment firm.