Getting Started in US Shares
Why…consider the US at all?
A typical day for so many in the UK is filled with moments spent with famous American brands. Apple, Colgate, Gillette, Starbucks, Google. British household names like Tesco and Barclays consistently fail to penetrate the USA, yet the Americans seem to have no such trouble coming the other way.
Why are so many extraordinarily successful businesses born in the USA? The answer lies in a remarkable set of qualities that make America the perfect environment for incubating, nurturing and growing outstanding corporations — scale, stability and dynamism.
1. The US has scale
The US is the world’s biggest marketplace, where companies are free to grow across all 52 states with very few limitations. A population of 320 million consumers under a common legal and regulatory framework provides an ideal platform for companies to scale their operations. Meanwhile the wealth of those citizens — with the fourth highest median household income in the world — offers a substantial profit opportunity.
Investors that have read growth investing classics like Peter Lynch’s ‘One up on Wall Street’ or Jim Slater’s ‘Zulu Principle’ will understand the power of business models that can be ‘cloned’. When a company hits on a repeatable formula — whether through e-commerce, retail store formats or franchised operations — it can expand quickly, benefiting from centralised distribution and production costs. And of course, the bigger and wealthier the nation, the better.
In the UK, we’ve seen chains like Majestic Wine and Restaurant Group grow successfully through cloning. But with a population six times larger than the UK, US franchises can take this model to another level. The three dots on the logo of Domino’s Pizza (NYSE:DPZ) represent the three stores that were open in the US in 1969. Over the next 14 years the company opened 1,000 more stores, laying the foundation for further international growth. 10,000 owned and franchised Domino’s stores worldwide show the power of such a platform.
A more recent example is the stunning rise of Chipotle Mexican Grill (NYSE:CMG). Since listing in 2006, Chipotle has seen its net income grow from $41.4 million to $327.4 million. Peter Lynch would have smiled as this ten-bagged from a list price of $46 to $599. Keen eyed Brits may have noticed that Chipotle is now land grabbing in London too…
With great scale comes great returns
For investors, there is a read-across between the great scale opportunity enjoyed by US firms and the scale of stock market returns over time. Compare the UK and US markets and the difference in performance is staggering: the American stock market has produced a return that is more than three times greater than in the UK:
The two charts above show that over the last 114 years the real value of equities, with income reinvested, grew by a factor of 372.4 in the UK and 1247.6 in the US.
Source: Credit Suisse Global Investment Returns Yearbook 2014
2. The US has stability
The cornerstones of economic and market stability in the US are the country’s regulators — the Federal Reserve and the Securities and Exchanges Commission. Between them, these bodies promote an environment where businesses can thrive and investors can feel safe. According to the World Bank, the US ranks as one of the top six economies (out of 189) not only for its ease of doing business but also for protecting investors.
For 101 years, the US economic system has been overseen by the Federal Reserve, the country’s central bank. Apart from setting monetary policy, the Fed oversees American banks and has a remit to maintain stability throughout the financial system. Its Chairman is the most influential person in the global markets. If he or she cuts or hikes interest rates, or announces increases or decreases in ‘quantitative easing’ don’t bet against them! “Don’t fight the Fed” is a mandatory tactic in US markets.
Responsibility for overseeing US stock markets and financial services lies with the Securities and Exchange Commission (SEC). Created in the wake of the 1929 stock market crash, the SEC is heavily focused on protecting investors. Apart from providing investment education through its website, it also publishes the financial reports and information updates that US quoted companies are required to issue.
Beyond the SEC is the Financial Industry Regulatory Authority (FINRA), which is a non-governmental body that oversees the activities of more than 4,140 securities firms. FINRA writes and enforces the rules governing brokers, takes action against wrongdoing and runs investor education services.
While the credit crunch may have put America’s economy to the test, doubting the resilience of the USA and its policy-makers is a foolhardy venture. Warren Buffett put it like this:
“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Legal and financial stability
In his famous book “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else”, Hernando de Soto showed how the success of nations is rooted in their legal structures and the enforcement of property rights. America’s pro-business legal frameworks can be seen in its rigorous regime of physical and intellectual property rights. Not only is the US a world leader in research and development expenditure, it’s the prime destination for foreign firms seeking safety from intellectual property theft. Of the 303,000 patents granted by the US Patent and Trademark Office in 2013, 51% originated from outside the US.
Meanwhile, US tax rules are growth-oriented, with many US states and cities offering tax credits and other incentives to attract global investment. More generally, US businesses have greater freedom to operate at their own discretion compared to their counterparts in Western Europe and Japan. This gives them more flexibility in decisions to expand capital expenditures, dispose of unprofitable operations and develop new products.
3. The US has dynamism
“The dynamism embedded in our US market economy will continue to work its magic”. Warren Buffett
Only in America could a startup with just a handful of staff help to destroy a Dow Jones Industrial Average giant. Yep, in America even a Kodak can get Instagrammed.
Nowhere is the power of creative destruction or the cult of the entrepreneur stronger than it is in the USA. With the most lenient bankruptcy laws in the world, there is little fear of failure, while cheap technology, strong education and a nurturing startup environment fire up the creative spirits of the young.
According to the Global Entrepreneurship Monitor, an annual survey conducted by Babson College, an estimated 25 million Americans were starting or running new businesses in 2013, and 7.7 million of them projected they would employ six or more people in the next five years.
America’s scale and stability support deeply networked entrepreneurial hubs for a wide range of industries in different regions. Silicon Valley — the global sweet spot for technology innovation — is a melting pot of university campuses, venture capital firms and migrant technology pioneers that together have helped companies like Apple, Facebook, EBay and Google grow and dramatically change the way we live our lives. Just 2,500 miles away on the east coast, New York City is home to global financial institutions and exchanges that propel businesses onto the international stage. Through innovative financial platforms, they unleash capital from those who own it to those who can use it best.
This is an extract from Getting Started in US Shares, a free e-book written by Edward Croft (CEO), Ben Hobson (Strategies Editor), and Alex Naamani (Financial Analyst) at Stockopedia.
Originally published at www.stockopedia.com.
Disclaimer: This content should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.
