Country Selection

Happy July 4th!

A reader asked for my two cents on foreign country selection.

This may be difficult to articulate into something that usable because there is an element of gut feel at times and also a lot of my groundwork was laid quite a few years ago and so now it is more about following developments.

The way I view things the best type of country is one that offers the best chance for diversification and that means countries that are at different points in their economic cycles and by extension different stock market cycles.

This doesn't always hold up (Oz down a lot this year, Norway down slightly, Canada (EWC) up a hair and Brazil (EWZ) up a little) but over time it works often.

Another category of country would be developed countries that right or wrong I think have a chance to outperform the US over the course of the stock market cycle. For me this only means Europe. Latin America is all emerging. Asia ex-Japan is all emerging (eh, maybe I'm wrong about Singapore). Oceania I think of more in the commodity-based economy segment.

Here selecting countries is about following many countries and choosing a few. Where developed Europe ex-Norway is concerned I have preferred to avoid Germany as the stats have generally stunk for most of the decade. This has been wrong a fair bit over the last five years but there have been other developed countries that have done as well or better with better stats.

I follow economic trends, currencies (the ones in Europe that have their own), interest rates and hopefully the story on the ground. This is not that difficult as there is plenty to read about this. Most of my learning about these countries like what makes the economy tick, what they make (if anything) or quirky things like Finland having a lot of forest land happened awhile ago and as mentioned above there is more monitoring of these places than new learning about them (but still some learning obviously).

Emerging markets are a little different. I have tried to learn about a lot of places but I find myself researching new (to me) places all the time--and I've mentioned them on the blog from time to time as well. In here I would include frontier markets too.

Having CNBC Asia on every day until my wife screams uncle makes following Asia much easier to do. Generally their programming has a lot of meat on the bone.

One thing about all of this is that just about every foreign country has fewer moving parts than the US so they are easier to understand (this comment is not meant to imply low volatility). Chances are you understand Turkey a lot better than you think.

Emerging markets tend to be more purposeful like using a mining stock for Brazil but also can be gut feeling like with preferring a bank for Chile. A couple of folks have Taiwan but there I capture it with an ETF because I get what I need without single stock risk; that is a lot of tech and quite a bit of yield.

Now despite the obvious need, I am not aware of any Bolivian toll road ETFs in the works anywhere.

One thing to remember here is that in the last few years foreign markets have dramatically outperformed US markets which creates the opportunity for confusing genius with a bull market. This is something not to lose sight of if foreign markets have been kind to you in the last few years.

The last thing to point out here is that foreign investing is like any other part of the portfolio. There will be some things that you get right and some you get wrong. I spend a lot of time on this but I have been criticized before for not knowing anything and some have implied that it seems like I know a lot. Well compared to some folks I'm sure don't know much but to others I probably do know a lot. That doesn't matter for me and more importantly the amount you know should not matter to you either. Learn as much as you can and proceed in a manner that allows you to sleep.