"Capital goes where it is welcome and stays where it is well treated"
- retired Citibank Chairman Walter Wriston
In his fascinating book The World is Flat, Thomas Friedman says that in spite of all the upheavals related to manufacturing jobs, one of the continuing virtues of the US is the strength and openness of our capital markets. I agree – there is not another country whose markets have the combination of depth, openness and active regulation that ours do.
One of the fundamental truths of investing is that no one knows which way the markets will move other than "up" over long periods of time. That’s why Warren Ward Associates believes in the allocation of assets, taking care to have investments spread through multiple sectors of the markets. From the first dollars WWA managed for clients, we have suggested that some be invested outside the US, as those foreign markets tend not to move in synch with ours.
As Friedman’s book so clearly points out, the world has a way of changing and we must all do our best to keep up. He discusses how the US economy has been altered by outsourcing. Businesses have been forced to move jobs to lower cost areas of the world in order to remain competitive. Our Federal Reserve Chairman, Ben Bernanke, recently shared some concerns about our economy, especially related to our less well-educated citizens. He quoted reports stating that, in 2005, the median weekly income for a US citizen with a high school diploma was just over half (57%) of that of someone with a bachelor’s degree. Surely that observation reinforces the idea that our job market is not what it once was.
In some ways, it might be nice to return to simpler days when education was not as important and when access to lower-wage workers in other countries was not simply a mouse click away. On the other hand, the shift has helped keep US inflation under control and brought people from distant lands into contact with us as they manufacture more (or in some cases, all) of our TVs, furniture, cell phones and clothing.
For various technical reasons, including fluctuations in the value of currencies, WWA is now re-directing some additional capital towards overseas investments, including what are known as developing markets. These include such countries as Russia, China, Indonesia and Brazil. All of them are experiencing exceptional growth rates but none of them have the level of regulation and government-enforced business practices that the United States does. Enron notwithstanding, in the US, we have a pretty clear idea what the word "profit" actually means. Our markets are liquid and transparent enough to allow millions of shares to change hands every day. In some developing areas of the world, Generally Accepted Accounting Principles are not quite as clear and the additional requirements of Sarbanes-Oxley are completely unknown.
In increasing our clients’ exposure to these markets, we have sought out managers who study the world’s markets carefully, who have solid track records of making good stock selections and who focus on only the largest – hopefully, the most fully disclosed – of the available investments. At WWA, we are interested in having our clients participate in the additional growth which may be available elsewhere in our increasingly "flat" world but not at the expense of significantly increased volatility.
