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The best way to build wealth is through business ownership, and for most people buying the publicly traded shares of great businesses from around the world is the most efficient means of achieving business ownership. While bonds can provide stable income and reduce the volatility of portfolio returns (a good idea when investors reach retirement age and need to begin withdrawing money), owning great businesses over a long period of time could be all that is needed to achieve financial success. By taking a global approach to investing, investors expand the number of investment opportunities available to them, enhance their knowledge of the global financial markets, and reach a better comprehension of the risks they face. Investors also gain considerable benefits from currency diversification. Searching the globe for businesses that are consistently able to create wealth and then weighing that against the price you pay for the business is the best way to allocate your capital.

The reality is that investing successfully is a complex and time-consuming task. Understanding the myriad factors that can impact the performance of an investment requires great effort and constant vigilance on the part of the investor. At a minimum, investors are required to assimilate vast amounts of information. To be successful, investors must also quickly understand the context and implications of new information. For the global investor who must monitor the entire world, the job of gathering and analyzing market data is even more challenging. Investors who are keen to take advantage of all the world's financial markets have to offer will find the effort to be both intellectually stimulating and financially rewarding. Whether we recognize it or not, we live in a global financial system. Many businesses that we consider domestic or local are affected by developments that take place around the world. Therefore, whether investing globally or not, any investor will benefit by thinking globally. Investors who take a global perspective will be better equipped to understand and mitigate investment risks.

The most essential element of investment success is to buy good businesses and own them for a long period. Own companies that you believe will continue to generate strong earnings and cash flows regardless of the economic environment. These are businesses that operate in growing industries with predictable pricing and have a dominant and defensible industry position, a strong balance sheet, an astute management team whose interests are aligned with investors, and a positive image in society. Businesses with these attributes are best able to withstand and perhaps even take advantage of periods of economic weakness. Not overpaying for the business is vitally important when you invest. Valuation is often overlooked by investors, who tend to think of share prices more in absolute terms than in relation to the earnings or cash flow of a business. Remember, common shares of a company priced at $20 may be more expensive than a company whose shares are trading at $100 when you consider the earnings and cash flow of each business. Own businesses that you think have sustainable earnings growth and that are priced attractively. If a company becomes overvalued relative to its historical range, its sector, and the market, reassess why you own it and consider selling it and investing the proceeds in another stock.

Most businesses participate to some degree on the global economic stage, competing for resources and customers with both domestic and foreign competitors. Furthermore, the global economy is infinitely complex, resulting from the interactions of nearly 7.8 billion people who inhabit the earth as well as the multitude of businesses they operate. It is critical for investors to understand how the businesses they invest in generate profits as well as the risks associated with those earnings. The global economy is constantly evolving, with cycles created by the normal ebb and flow of the economic environment that can last many months or years.

Understanding how the global economy affects the businesses we invest in requires knowledge of global trade and the risks inherent in the global trade system. Global trade has evolved tremendously in the past several decades, propelled by trade agreements and transformed by advancements in shipping and logistics. When investing in a company it is crucial to understand its business relationships, including its supply chain and the risks they pose to earnings. We noted the majority of global trade is conducted by sea, and that geographical constraints force strict adherence to specific shipping routes that often contain bottlenecks or “chokepoints.” These shipping routes often represent the shortest distance between two points, but in some cases, they may be deemed the safest passage. These chokepoints are therefore of strategic importance and represent significant risks to global trade due to their vulnerability to accidents and acts of aggression. The interconnectedness of the global economy and business supply chains has made globalization inexorable. Globalization has led to widespread prosperity around the world, but also gives rise to new business risks.

Developments in the global economy manifest themselves in the global financial markets. Global financial markets are the engine that powers the global economy. Companies use both local and global markets to access the capital required to fund and grow their businesses, while investors provide needed capital in the form of loans (debt) or in exchange for business ownership (equity). Financial markets employ security exchanges to facilitate transactions including trading in currencies and commodities and the issuance and trading of debt and equity securities. Financial markets are also where companies go to complete the vast number of transactions that drive corporate earnings and comprise global trade. Efficient financial markets are therefore a vital part of a country's continuing economic development and serve as a conduit to global markets. To be effective, these markets should be structured and governed in a way that allows capital to flow easily to its most productive use. Regulations must exist and be enforced to protect investor rights and ensure that investor capital is adequately rewarded. Should foreign capital be needed to fund domestic businesses, the rights of foreign investors must be protected on par with domestic investors. Trust in a country's financial system, the rule of law, and the way business is carried out is essential for sustainable, long-term economic growth. Investors should remember that the global capital markets are closely connected and can impact one another in the form of a financial contagion.

Perhaps the most pervasive risk faced by investors comes in the form of market cyclicality. Market cycles stem from fluctuations in economic growth, that flow through and cause variability on corporate earnings. For this reason, all investors are subject to market cycle risk, whether they invest globally or not. Market cycle risk may be heightened for global investors at times due to the interconnectedness of the world's capital markets. This is especially true for investments held in regions experiencing economic weakness, or when there is an increased risk of financial contagion. The benefits afforded global investors are improved diversification and enhanced flexibility, allowing them to access economies that are growing and avoid economies that are weak.

Having an approximate idea of where we are in the market cycle can provide an investor with a tremendous advantage. Different asset classes and businesses perform well or poorly depending on where we are in the market cycle. Having this knowledge can be a powerful tool when it comes to managing risk in a portfolio and seizing opportunities when they arise. It is impossible to know exactly when stocks will switch between bull and bear markets, and therefore “timing the market" is never perfect. As a result, wholesale changes to portfolios are not recommended. Instead, it is best to stay fully invested and remain vigilant for signs indicating which stage of the market cycle we are currently in. Doing so will allow us to prepare ourselves mentally for what is likely to come and deploy available cash in times of market weakness. For investors who are more engaged with the markets and able to devote the necessary time and resources, identifying market cycle stages may allow them to shift weights modestly between defensive and cyclical holdings to generate incrementally higher returns. Always thinking about events in context (why something is happening) will provide investors with better insights into the market cycle and enable them to make more informed investment decisions. This simple step can help investors understand how market participants are viewing a particular situation or help gauge the amount of risk appetite that exists in the market.

Exposure to foreign currencies poses risks and provides significant benefits for global investors. Owning securities that are based in a variety of currencies helps lower the volatility of portfolio returns. Safe haven currencies, such as the US dollar, Japanese yen, and Swiss franc, tend to strengthen during periods of market weakness, helping to offset the corresponding but temporary losses in stocks. Conversely, some currencies, such as the Canadian and Australian dollars, act as risk assets, boosting portfolio returns during bull markets. However, exposure to foreign currencies creates risk for the global investor, especially over shorter time periods. Capital gains generated by foreign stock holdings could be offset by foreign currency losses when the investment returns are translated into your home currency.

Most currency exchange rate fluctuations are modest and reverse over time, as they contain a self-correcting mechanism. The primary concern for investors is to avoid exposing themselves to currencies that are vulnerable to significant depreciation. Currency crises often occur because of a banking crisis. Since banking crises are often preceded by a large, unsustainable increase in home prices, monitoring the housing market and housing affordability around the world is an easy step to protect your portfolio. An economic crisis or decrease in economic activity may negatively impact people's ability to pay their mortgage. If house prices are artificially high and then subject to a downward correction, the underlying collateral for the mortgages may not be sufficient and the banks could suffer losses. This can reverberate through the entire economy, causing widespread financial losses that lead to a strong rotation out of risk assets.

Of course, not all housing booms lead to a banking crisis. As an investor you must determine whether home price increases are based on sound and sustainable lending standards and what effect a deteriorating economic environment might have on the ability of homeowners to continue to make their mortgage payments. Low housing affordability combined with elevated levels of consumer debt and rising mortgage rates stands out as a high-risk scenario. Countries with extremely high debt levels and a history of high inflation are more likely to weaken their currency deliberately to deal with an unmanageable debt load, and should be avoided.

All investors face some degree of geopolitical risk, but this risk is especially relevant for global investors. Geopolitical risk can be broadly separated into two types: internal and external risks. Internal geopolitical risk refers to events occurring within an individual country while external geopolitical risk refers to events involving two or more countries. Internal risks include regulation, changes to restrictions on foreign ownership, changes to tax regimes, or other laws that can affect the profitability of a given business or industry. External risks include civil strife, diplomatic and economic sanctions, trade wars, and, in extreme situations, military conflicts. Shocks to global supply chains also pose a risk. To stay abreast of internal risks, investors must continuously observe social and political developments in the countries in which they are invested. Government policy can change quickly, requiring investors to be aware of statements made by government authorities that could foreshadow upcoming tax or regulatory changes. Perhaps the most dramatic events result from an outright change in political leadership, where a political party comes to power with radically different policy agendas. Social unrest is a potential precursor to significant political change. While many such changes may have only a modest impact on the businesses you own, it is important for investors to monitor these developments closely.

Although globalization has led to greater integration and alignment of economic interests, incentivizing countries to favor diplomacy as a tool of foreign policy, it has also served to increase the frequency of contact between countries and increased competition for scarce goods, raising the possibility of disagreements and conflict. The geopolitical landscape is in a constant state of change and always marked by areas where conflict is more likely. These are today's geopolitical hotspots—regions where a significant disagreement between two or more countries exists and where tensions are already high. Among these are Eastern Europe, Iran and the Middle East, Taiwan and the South China Sea, the Kashmir regions of Pakistan and India, and North Korea. These areas require our attention, as an accident or misstep by one party could readily escalate into a military confrontation.

The first step to managing geopolitical risk is to stay vigilant. Investing globally requires investors to monitor world affairs, noting potential areas of concern as they arise and observing them. One simple step to manage geopolitical risk is to set a strict minimum sovereign credit rating for each country as a criteria for investing. Avoid buying companies located in countries with high levels of sovereign or consumer debt, or that are experiencing high or rapidly rising inflation (especially when combined with an overheated housing market). Also avoid investing in countries that are not business-friendly (do not protect shareholder rights), or where reliable financial statements are not readily available. Geopolitical risk may also be mitigated by ensuring your portfolio is properly diversified and that you own businesses whose revenues or supply chains are not excessively reliant on regions or countries whose economies are at risk of deteriorating due to severe fiscal mismanagement, economic coercion, or wars. Proper portfolio construction is a critical part of risk mitigation and successful investing.

There are many approaches to building and rebalancing a portfolio. Regardless of the method you choose, your investment decisions should be based on careful analysis of the businesses purchased, including how earnings are affected by different stages of the economic cycle and what factors pose a risk to those earnings streams. It is also crucial for investors to understand how the share prices of the companies they own correlate to one another and the broad market during the market cycle. Think of your portfolio as a single diversified business and focus on its underlying sales and earnings power. Rebalancing your portfolio to a target allocation at regular but infrequent intervals can add value to your portfolio over time and should help you avoid a buildup of excessive risk associated with large, single-stock positions. As investors gain experience and become more comfortable with the process of building and rebalancing their portfolio, a more active approach that allows one to capitalize on market cycles may be justified.

In my experience, the most common mistakes made by investors (professional or otherwise) include an underappreciation of business risks, overpaying for a business, focusing on short-term share price movements instead of long-term earnings fundamentals, and of course not considering the full set of global investment opportunities available to them. Last, a lack of preparation and failure to consider how companies perform in various stages of the economic and market cycles can lead investors to react emotionally and make poor investment decisions.

I hope that this book has provided its readers with the knowledge and tools necessary to construct and maintain a portfolio of great businesses to help them achieve their financial goals. For many people, the task of building and maintaining their own investment portfolio may require more time and resources than they can spare, or perhaps more time than they want to commit to the endeavor. In those cases, I hope that this book has provided you with an informative framework to engage with your financial advisor more effectively. Beware of advisors who cannot explain what you own or why you own it, as well as those who have invested your capital in so many companies that some of them must necessarily be inferior businesses. One final piece of advice: never be afraid to ask questions out of fear of appearing foolish or unknowledgeable. This is your hard-earned life savings, and you have every right to know how your money is being invested. If your financial advisor cannot or will not take the time to explain this to you, then you should find an advisor who will.

The availability of information and the sharing of ideas made possible by the digital age is both enabling and encouraging investors to shift their thinking and invest globally, a trend that is likely to persist well into the future. By analyzing and building ownership of foreign businesses, global investors serve to deepen economic and social ties between the people of different countries. In this way they help ensure more people around the world share in economic prosperity and thereby strengthen mankind's desire to choose economic and political cooperation over economic and military coercion. Aside from capitalizing on the world's best financial opportunities, by thinking and investing globally, we can hope to improve our understanding of the world we live in and gain a deeper appreciation of other people.

Thank you for reading my book. I hope you found it helpful, and I wish you amazing success in your investing journey.