What Cervantes Could Teach Buffett About Investing

Eric Fry By Eric Fry, Co-Founder, Beyond The Dollar

Market Trends

Sancho Panza is right. Warren Buffett is wrong.

Today’s topics are “eggs” and “baskets.”

Sancho Panza, Don Quixote’s peasant squire in the classic novel by Cervantes, declared that a wise man should not “venture all his eggs in one basket.”

But Warren Buffett famously contradicted that advice.

Buffett says, “Put all your eggs in one basket, but watch that basket closely.”

Which guy should we trust – the American billionaire or the Spanish peasant?

I’d put my money on the peasant…

Buffett isn’t entirely wrong, of course. If he were, he wouldn’t have amassed an 11-figure net worth!

Buffett made his billions by doing exactly what he advises. He put all of his eggs in one basket and then watched that basket closely.

This strategy works brilliantly if your basket happens to be the United States stock market during one of the greatest economic booms the world has ever seen. But Buffett’s net worth would be a few zeros smaller if he had been born in some other country and placed all of his eggs in that country’s stock market.

As Buffett himself readily admits, he was born in the right place at the right time.

“I was born in 1930,” Buffett explained to a Fortune reporter a while back. “I won the ovarian lottery. I was born in the United States… I was born white… I was born male… I had all kinds of luck.”

Thanks to Buffett’s winning “lottery ticket,” he launched his investment career near the beginning of a decades-long economic boom… and the American basket treated his eggs very well.

But that was then. What about now?


Will the U.S. stock market reward investors as handsomely over the next few decades as it did during the sweet spot of Buffett’s career?

Probably not, would be my guess.

Don’t get me wrong – if you had to pick just one basket for your eggs, you’d probably do pretty well by picking the red, white and blue one.

But even so, there are two good reasons to consider tossing a few eggs into non-U.S., non-dollar baskets.

Give Your Portfolio a Dose of Diversity

First, America’s economic growth over the next three or four decades is unlikely to match its growth during the past three or four decades. Many of the world’s emerging markets are likely to post growth rates that tower above the U.S.

Second, the U.S. dollar recently hit a 13-year high. That means foreign stocks are “on sale” in U.S. dollar terms.

The dollar could become even stronger, of course. But weakness seems to be the path of least resistance, especially since the Trump administration has signaled its desire to see the dollar move lower.

Obviously, the president can’t simply boss the dollar around as if it were a contestant on The Celebrity Apprentice. But he can influence its direction – either higher or lower.

And since dollar weakness is much easier to achieve than strength, the new administration is likely to get the weakness it desires… and maybe even more than it desires.

But don’t panic, a weak dollar isn’t all bad.

While a European vacation would become more expensive, a falling dollar would “supercharge” the returns you could make from foreign stocks.

For example, if you bought $1,000 worth of Australian stocks today, and one year from now the Aussie dollar had advanced 20% against the dollar, your $1,000 investment would be worth $1,200, even if your Australian stocks had gone nowhere.

That’s the magic of a falling dollar.

But you don’t have to do anything “crazy” or exotic to benefit from dollar weakness. You don’t have to wire money to the Cayman Islands and then invest in some far-flung foreign market.

You could simply buy an exchange-traded fund like the iShares MSCI Canada ETF (NYSE: EWC). In fact, I would recommend doing exactly that.

Since the fund holds a basket of Canadian stocks, its share price would move higher if Canadian stocks move higher. A strengthening Canadian dollar would also boost its share price.

It’s a win-win.

A win-win is exactly what happened eight years ago when the Canadian dollar was just as depressed as it is today.

In the depths of the 2008-2009 global stock market collapse, the Canadian dollar’s value fell to a low of US$0.765, which is exactly where it sits today.

And over the ensuing 12 months, the Canadian dollar soared 25% against the U.S. dollar.

This huge currency gain, on top of a simultaneous rally in Canadian stocks, powered the fund to achieve total returns of more than 90% between March 2009 and March 2010.

Bottom line: A weakening dollar is nothing to fear. Instead, it’s an opportunity to supercharge your investment returns. When a foreign country’s stock market and currency rally simultaneously, profits can pile up quickly.

Good investing,

Eric