Protect Yourself From Emerging-Markets Woes

You may have heard the news about Compania Anonima Nacional Telefonos de Venezuela (VNT Quote). The short version is that Venezuelan President Hugo Chavez is threatening to nationalize the company.

As a result, shares of VNT dropped more than 10% on Monday and were off by more than 27% on Tuesday. This article will not be a dissection of Venezuelan politics, but is about the portfolio-construction aspect of this type of event, which is a death blow, or potential death blow, to a theme you thought would work.

First, I believe this episode helps to debunk one myth. Often, people who talk about foreign investing assign some measure of extra safety to a stock by virtue of its listing on the NYSE. It is true that there is more paperwork required to list there, but the notion that a company is somehow immune from disaster is not a good bet.

There are tens of thousands of foreign companies to invest in, and the chance that they will fail or get news like VNT is the same, regardless of where these stocks list. You no doubt recall the demise of Yukos and Mikhail Khodorkovsky. Yukos was not NYSE-listed, but I am quite certain that if Khodorkovsky was running OAO Tatneft, which was listed until recently, and had been for years, it and not Yukos would have been taken out. ...