I’ve argued this point before, and often investors intuitively get the point better than money managers. For example, the other day I was talking to my cardiologist, and after the examination we were chatting in the hallway and he asked me for a stock tip. I don’t give stock tips, but I did explain what my research had found: that one of the most important things to look at when one is compiling a portfolio is the country in which a company is domiciled.
Almost all of the discussion on TV and the internet is about which American stock to buy and once in a while, about whether to buy some American bonds. What is ignored is the extremely important question of the environment, does the home country honor wealth creation or not. “and right now our country does not,” he said finishing my sentence for me. He got it — instantly — partly because he’s smart, but partly because he doesn’t have his mind cluttered with the normal detritus of modern financial-speak.
On the other hand, I hear a lot of objections to the idea of looking at country characteristics from money managers and financial advisers (though thankfully, not from any that I’m working with right now), and the objection which I hear most often is something like this:
“Most companies have operations all over the world. What is an ‘American Company’ today? Apple and Microsoft may be based here in the U.S. but the majority of their operations are in other countries.”
In other words, since we have a global economy, the country of domicile doesn’t matter. The problems with this point of view are numerous. First, it confuses revenues with profits. As a shareholder I don’t own a fractional share of revenues, I own a fractional share of profits. Companies sell goods and services at a price, and all those sales together go into an aggregate number called revenues.
Various costs are subtracted from the revenues to calculate various progressively smaller measures of profit and loss: gross income, net income, EBITDA (earnings before interest, taxes, depreciation and amortization), taxable income, etc. Profits are much more important than revenues, and the regulations under which a company must operate can severely impair profits.
Some legal environments leave companies with a great deal more room for agility than others. Some countries, on the other hand, mandate ‘stakeholder capitalism’ which is really not capitalism at all, but a form of guided economy, in which boards of directors are force-fed members whom the shareholders would never have chosen, who represent various special interest groups such as labor or greens.
Boards are prevented from setting executive compensation at levels which will promote the greatest profitability and are instead hamstrung in their salary-setting by government edict or convoluted voting processes. Regulations discourage many restructuring and updating actions that might be taken by good management. Anti-takeover laws forbid the dreaded ‘hostile takeover,’ imposed on management by outside investors who purchase controlling shares in order to make companies more lean and profitable. In general, some countries have environments which are conducive to innovation and some do not.
Of the top 500 Multinational Companies as ranked by Fortune Magazine, 133 are headquartered in the United States.
How about China? China houses 61 of the top 500. It housed only 16 of them in 2005. We are 4% of global population with a civilization which started only 300 years ago. They are 19% of global population with a civilization which started 3000 years ago, and yet we have 26% of multi-nation companies and they have only 16%.
India is even worse with 8 multinationals, in a country with 1.1 billion people, almost four times our size.
Britain has only 30 of the top 500 multinationals: that’s down from 35 eight years ago, but they once led the world. In fact, they invented the multinational corporation with the East India Corporation.
When people say it doesn’t matter what country a company is in because multinationals do business everywhere, the answer is “Then why does America have more than twice as many multinational corporations as China does when it has only a fourth of its population? Why does Britain have only 26 multinational corporations among the top 500 (1/6th as many as the U.S.), when once they had all of them?”
But this process works both ways.
Those numbers were even more disparate 8 years ago when the Fortune data started: in 2005 the U.S. had 176, China only 16, India a mere 5 of the top 500 multinationals. In other words, as they have nudged towards more market-oriented societies and we have drifted away, they are gaining and we are losing market share of large successful companies. America’s historic emphasis on property rights, sound money and limited government fostered a corporate culture of innovation and growth. We leapfrogged over civilizations vastly older and larger. But we have drifted away from those foundational principles which create the risk that we will be the leepee rather than the leaper.
Because some growth mediums are better than others, our companies pushed past (or absorbed) theirs as the UK lapsed into imperial decline and socialistic stagnation. Are we the new Britain of this pattern? Will somebody else’s companies start pushing past ours? Seems as though they already have begun to.