Table of Contents

Depositary Receipts

The 30-Second Summary

What is a Depositary Receipt? A Plain English Definition

Imagine you're a passionate reader, but some of the world's greatest novels are written in languages you don't speak. You can't just walk into your local bookstore and pick up a copy of “Don Quixote” in its original Spanish and understand it. What you need is a good translation. A publisher finds the original Spanish book, translates it into English, prints it, and puts it on the shelf of your local bookstore. Now you can easily buy, read, and enjoy this masterpiece. A Depositary Receipt (DR) works in almost the exact same way for stocks. Let's say a fantastic German car company, “AutoBahn Motors,” trades only on the Frankfurt Stock Exchange in Euros. As a US investor, buying it directly is a bureaucratic nightmare. You'd need a special brokerage account, you'd have to convert your dollars to Euros (paying fees), and you'd have to navigate German regulations. Instead, a major bank (like JPMorgan Chase or BNY Mellon), acting as the “publisher,” steps in.

  1. The bank goes to Germany and buys a large block of AutoBahn Motors shares.
  2. It holds these shares in a vault, in what's called a “custodian” account.
  3. The bank then issues “receipts” or certificates in the United States. These are called American Depositary Receipts (ADRs).
  4. Each ADR represents a certain number of the underlying German shares (e.g., one ADR might equal two AutoBahn shares).
  5. These ADRs are then listed on a U.S. exchange like the NYSE or NASDAQ, where they trade in U.S. dollars, just like shares of Apple or Coca-Cola.

You, the investor, simply buy the ADR. You get all the benefits of ownership—like dividends (conveniently paid to you in dollars) and capital gains—without any of the cross-border complexity. The DR is your translated, easy-to-access version of the foreign stock. The most common type you'll encounter in the U.S. is the ADR. If the receipt is designed to be traded in multiple countries simultaneously (e.g., on both the London and Hong Kong stock exchanges), it's called a Global Depositary Receipt (GDR). The principle is exactly the same.

“The first rule of compounding: Never interrupt it unnecessarily.” - Charlie Munger
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Why It Matters to a Value Investor

For a value investor, the goal is simple: to buy wonderful businesses at fair prices. The problem is that wonderful businesses don't pay attention to national borders. They can be headquartered in Switzerland, Japan, Brazil, or Taiwan. Refusing to look beyond your own country is like fishing in a barrel when there's an entire ocean of opportunities available. Depositary Receipts are a vital tool for the value investor precisely because they tear down these borders. Here's why they are so important:

In short, DRs transform value investing from a local pursuit into a global one, allowing you to apply the principles of Graham and Buffett to the best businesses the world has to offer.

How to Apply It in Practice

Using Depositary Receipts effectively is not just about finding a foreign company you like and clicking “buy.” It requires an extra layer of diligence. Here is a practical framework for the value investor.

The Method: A 4-Step Diligence Process

  1. Step 1: Identify the Great Foreign Business First.

Your process starts just as it would for a domestic stock: by searching for a company with a durable competitive advantage, honest management, and a healthy balance sheet. The fact that it's foreign is secondary. The quality of the business is paramount.

  1. Step 2: Find the Receipt and Understand Its Structure.

Once you've found your target—say, a Taiwanese semiconductor giant—you need to see if it has an ADR trading in the U.S. A quick search on financial websites will tell you. If it does, you must investigate two key things:

^ Levels of American Depositary Receipts (ADRs) ^

Level Where it Trades Reporting Requirements (to SEC) Investor Takeaway
Level I Over-the-Counter (OTC) Minimal; exempt from full SEC reporting. Easiest for foreign companies, but riskiest for investors due to lack of transparency. Proceed with extreme caution.
Level II Major Exchange (NYSE, NASDAQ) Full SEC reporting (Form 20-F, similar to a 10-K). Much more transparent and reliable. Information is readily available. Preferred for most value investors.
Level III Major Exchange (NYSE, NASDAQ) Full SEC reporting (Form 20-F). The highest level. The company has actually raised new capital in the U.S. The gold standard for transparency and commitment.

- Step 3: Analyze the “Extra” Risks. 

  This is where you must apply a wider [[margin_of_safety]]. A great German company is not the same as a great American company from a U.S. investor's perspective.
    * **Currency Risk:** The German company earns revenue in Euros. Its stock price is in Euros. But your ADR is priced in Dollars. If the Euro weakens against the Dollar, your ADR's value will fall //even if the company's stock price in Germany doesn't change.// You must have a view on the long-term stability of the foreign currency.
    * **Political & Regulatory Risk:** How stable is the company's home country? Are there risks of expropriation, sudden tax changes, or geopolitical tensions? The recent threat of delisting for many Chinese ADRs is a perfect example of this risk in action.
    * **Accounting Differences:** While often similar, international accounting standards (IFRS) are not identical to U.S. standards (GAAP). Be aware that certain metrics might not be perfectly comparable.
- **Step 4: Value the Business and Apply Your Margin of Safety.**
  Value the business in its local currency first to get a pure sense of its worth. Then, convert that valuation to your home currency. Finally, due to the extra risks outlined in Step 3, demand a larger discount to your estimate of [[intrinsic_value]] than you would for a comparable domestic company. If you'd normally require a 30% margin of safety, you might demand a 40% or 50% margin for an investment made via a DR.

A Practical Example

Let's follow Jane, a U.S.-based value investor. She's a fan of high-quality consumer brands with global appeal.

  1. Step 1 (The Business): Through her research, Jane discovers “Swiss Chocolate Masters SA,” a fictional Swiss company known for its premium chocolate. It has a century-long history, a debt-free balance sheet, and a beloved brand that gives it pricing power—a classic “wonderful business.” It trades on the SIX Swiss Exchange in Swiss Francs (CHF).
  2. Step 2 (The Receipt): Buying it directly is daunting. Jane does a quick search and finds that Swiss Chocolate Masters has a sponsored Level II ADR that trades on the NYSE under the ticker “SWM.” She checks the depositary bank's website (e.g., BNY Mellon) and finds the ADR ratio is 1:4 (one ADR represents four ordinary Swiss shares). She also finds the company's Form 20-F on the SEC website, giving her reliable financial data in English.
  3. Step 3 (The Risks):
    • Valuation Check: The Swiss share price is 25 CHF. The ADR price is $110. The current exchange rate is 1 CHF = $1.10 USD. Jane does the math: 4 Swiss shares * 25 CHF/share = 100 CHF. 100 CHF * $1.10/CHF = $110. The prices match perfectly; there is no arbitrage opportunity, which is what she expects.
    • Currency Risk: Jane analyzes the long-term history of the Swiss Franc. It's a famously strong and stable “safe haven” currency. She feels comfortable that the CHF is unlikely to collapse against the USD, and may even strengthen over time, which would be a tailwind for her investment.
    • Political Risk: Switzerland is one of the most politically and economically stable countries in the world. Jane assesses this risk as extremely low.
  4. Step 4 (The Decision): Jane has valued the underlying business at 35 CHF per share. At the current price of 25 CHF, that's a 28.5% discount in its local currency. Given the low political risk and stable currency, she feels this provides an adequate margin_of_safety. She decides to buy the SWM ADR, confident that she is owning a piece of a world-class business through a simple, transparent, and efficient vehicle.

Advantages and Limitations

Strengths

Weaknesses & Common Pitfalls

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Munger's wisdom reminds us that great businesses are worth owning for the long term, and Depositary Receipts give us a practical way to find and own those compounders, no matter where they are domiciled.