Is Home Bias Hurting Your Portfolio?

Johnny HopkinsStudy2 Comments

One of the things that stops some investors from using The Acquirer’s Multiple investment strategy is that they’re based outside of the United States and are unsure about investment in the US shares provided by the ‘screens’ on this website.

Like you, I’m not based in the United States. I’m based in Melbourne, Australia, but I do use The Acquirer’s Multiple investment strategy. The reason why a lot of investors don’t invest outside of their own country has a lot to do with ‘home bias’.

According to Investopedia, the term ‘home bias’ means:

“Home bias is the tendency for investors to invest in a large amount of domestic equities, despite the purported benefits of diversifying into foreign equities. This bias is believed to have arisen as a result of the extra difficulties associated with investing in foreign equities, such as legal restrictions and additional transaction costs.”

In my own country Australia, according to a recent report by Vanguard, Australian investors have a stronger home country bias than many other developed countries. This bias equates to an overweighting of around 70% relative to Australia’s market capitalisation, which only represents around 3.5% of the global equity market.

So, as an Australian investor outside of the United States, why do I invest in international shares, rather that focus on Australian shares? The answer is quite simple:

(Source: World Federation of Exchange, May 2015)

Accrording to the graph above, the Australian share market has a total market capitalisation of AUD$1.7 trillion, (as of May 2015). While The New York Stock Exchange has a total market capitalisation of AUD$25 Trillion, and the NASDAQ has a total market capilatisation of AUD$9 Trillion. When you compare the Australian share market to the world’s largest share markets, the Australian Stock Exchange ranks #15, with around 3.5% of the global equity market.

The Australian share market is also heavily weighted toward the financial and mining sectors, which account for 60% of the ASX All Ordinaries index.

Therefore, investing in shares listed on The New York Stock Exchange and NASDAQ provides many more opportunities for finding undervalued shares than I can find in my domestic market, Australia.

Exposure to Big Names

Investing in international shares gives Australian investors exposure to large companies like Apple, Microsoft and Google. Opportunities to invest in companies, industries and asset classes that are not represented, or are underrepresented, in the Australian share market.


International shares provide investors with geographic as well as asset class diversification. This means a slowdown in one market will have less of an impact on your portfolio.


Investing in international shares is the same as investing in Australian shares in that you need to research the overseas markets and individual companies that you’re considering investing in. There’s loads more information on international shares, particularly shares listed on The New York Stock Exchange and the NASDAQ.

Understanding 10K Annual Reports

I do agree that reading a 10K (A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC), that gives a comprehensive summary of a company’s financial performance) may be more difficult to start with than your local country’s annual reports but, its a matter of knowing where to look in a 10K to find the relative information that you need before you invest in a company. Once you’ve read a dozen or so 10K’s they all pretty much look the same.

International Trading Accounts

People will tell you that it’s difficult to set up a trading account to trade overseas shares. This is simply not the case. I have a US Dollar trading account with Commsec, one of our largest brokers. CommSec has a partnership with Pershing LLC, a subsidiary of the Bank of New York Mellon, that provides access to trade on US and non-US markets, as well as access to Exchange-Traded Options (ETOs) and Exchange-Traded Funds (ETFs). All you need to do is open a CommSec International Trading Account, and start trading directly, without a broker!

Tax Implications

Others will tell you about the tax implications of trading in overseas shares. They’ll use terms like dividend imputation system, foreign withholding tax, and capital gains tax.

According to Vanguard, in Australia, dividend imputation credits can provide a significant boost to performance for Australian investors. Franking credits currently add around 1.4% to Australian share yields, based on the current dividend yield of 4.4% for the S&P/ASX 300, which rises to 5.8% when grossed up.

For an long term investor like myself, I’m more interested in the capital appreciation that I expect to gain from finding undervalued companies in these much larger international markets than I am about the 1.4% boost to my dividend yield.

Moreover, there are thousands of investors all over the world investing in overseas markets that have tax treaties with Australia that ensure that you’re not being ‘double taxed’, and if you’re a long term buy and hold investor like myself you will minimise the tax that comes with short term trading in international markets.

Exchange Rates

Exchange rates are often used as a reason not to buy international shares. This reminds me of those investors that try to pick the top or the bottom in their share investments. Stop trying to pick the right time to buy or sell US dollars! Each month I buy US dollars to invest in shares, sometimes I get a favourable rate and sometimes I don’t but, at the end of the day, its pretty much swings and roundabouts, sometimes you win, sometimes you lose, but it all pretty much evens itself out over time!

The other thing I do to minimise exchange rate losses is to leave my US Dollar share investments in US Dollars when I sell shares, and not convert them back into Australian Dollars.

Time Differences

Time differences are not an issue for me, because I’m not trading shares daily. I’m buying and holding my international shares for the long term.

Proven Investment Strategy

Finally, regardless of where you buy and sell shares you need a solid proven investment strategy. I use The Acquirer’s Multiple® investment strategy and the ‘screens’ provided here at The Acquirer’s Multiple.

The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.

It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization.

The Acquirer’s Multiple® is calculated as follows:

Enterprise Value / Operating Earnings*

It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by the founder of this website, Tobias Carlisle.

The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up.

All metrics provided in the screens use trailing twelve month or most recent quarter data.

* The screens use the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

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2 Comments on “Is Home Bias Hurting Your Portfolio?”

  1. Thanks for that.
    Do you have numbers ?
    Have you checked the A.Multiple in the last 2 5 7 years ? Did it beat the spy benchmark?
    I checked 5 stocks (random ones) from the aqu screener.
    All 5 stocks “crashed” about 50% in 2015 and half 2016.

  2. Hey Ami.

    Thanks for your comment.

    Returns will vary from year to year. Some years will be good, some years will be bad, some years you will beat the market, some years you won’t, and some years you’ll even lose money.

    We backtested the returns to a portfolio of stocks selected by The Acquirer’s Multiple® from the All Investable stock screen. The backtest assumed the portfolio bought and held for a year 30 stocks selected from the All Investable universe (the largest two-thirds of stocks by market capitalization). The portfolios were rebalanced on the first day of the year using the most recent fundamental data. The backtest ran from January 2, 1999 to December 31, 2014.

    Over the full sixteen-year period, the portfolios generated a total return of 3,140 percent, or a compound growth rate (CAGR) of 24.3 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 145 percent, or 5.8 percent compound.

    You can find the backtest results on this site here:

    At present, I’m still scaling into my portfolio, as such I only have 8 stocks. So, if I get one stock that drops say 50%, that’s going to significantly impact my small portfolio. It’s not until I hold 24-30 stocks that I can overcome the volatility of one or two picks.

    Can I ask what investing strategy you use?


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