There was a bit on the US market broken down to the sector level, well eight of the ten sectors, showing current PE ratios versus historical PE ratios to make the argument that they are cheap. If you do a little research you will see that PEs can stay low or high for quite a while without much in the way of predicative value.
The article then went on to make the case for some foreign markets. Unfortunately the focus was limited to the big three in Europe (UK, France and Germany), Japan and Hong Kong. Maybe 'unfortunately' is the wrong word. It would be unfortunate for people who have not done much with foreign investing and do not realize that Europe could be worse off fundamentally than the US. It would be difficult to not realize what a basket case Japan is and the Hang Seng is very heavy in real estate which could be problematic for people picking Hong Kong through the iShares Hong Kong Fund (EWH).
It is not unfortunate for people willing to some homework and seek out countries with much firmer fundamentals. Unfairly or not the Barron's article could be viewed as proxy for what most people think of when they set out to invest in foreign stocks. 2009 shows us that countries with poor fundamentals can go up a lot but countries with solid fundamentals went up a lot too. It should be obvious that you have more margin for error favoring solid fundamentals over lousy fundamentals. Some countries I favor are Norway, Israel, Canada, Brazil, Australia, Chile and China.The other item from Barron's was the interview with the two managers of the RS Global Natural Resources Fund (RSNRX). What was peculiar was that there were at least three different pokes at related ETFs. I found it odd, in a way, that the managers of this active fund would tell you why ETFs are inferior. In the lead in to the interview Barron's noted that their fund had out performed the S&P North American Natural Resources Sector Index which is nice the the fund is a global not a North America fund. In comparing RSNRX to the iShares Global Materials ETF (MXI), which I own for some clients, you see that the ETF outperformed for the trailing 12 months by almost 20%, for calendar year 2009 by about 5%, in calendar year 2008 the ETF lagged by 2-3% and calendar 2007 the ETF outperformed by 10%. The ETF debuted in late 2006 so that is about as far back as we can go.
It would not have occurred to me to even look had they not jabbed at ETFs they way that they did. Actively managed mutual funds are collectively in a tough spot. The managed funds are much more expensive and the track record for outperfomance is spotty at best. Plenty of funds end up adding value but there is no way to know whether a fund that has previously added value will do so again. How many times have you heard someone from Morningstar give an opinion on CNBC as to why they think some manager will have a good year? How is that anything but a guess?
For all I know RSNRX might go on a great run and crush MXI but it was a strange justification after have lagged so consistently of late.
The picture is from Juneau. It is probably my favorite picture of all the ones we have ever taken. It has been the wallpaper on my computer ever since we got back from that trip in 2004.
18 comments:
Roger,
I read your blog often, and I do enjoy your writing, but I have the following problem with your approach to country selection. You often mention that countries such as Norway, Israel, Canada, Brazil, Australia, Chile, and China have "strong fundamentals". I don't think anybody would argue that's that point, but there's a difference between a "favorable country" and a "favorable investment". The problem with automatically investing in "favorable countries" is that lots of other people have probably figured out that they're favorable as well, which means that their equity prices are probably elevated.
Return on investment is *not* solely a function of long-term economic growth rate, it's also a function of things like current dividend yield, current P/E ratio, and current P/B ratio. For instance, a country with an average long-term GDP growth rate but whose equities are very underpriced on the basis of dividend yield, P/E, and P/B, would be a better investment than a country that has an above-average GDP growth rate but whose equities are currently overpriced. You never seem to address the underpriced/overpriced aspect of investing, only the long-term growth rate aspect.
- aagold
aagold, I think you might be making an it is already priced in argument.
correlation between GDP growth and stock market performance might be low but the longer term results of these countries has mostly been much better as they have had better fundies. Looking forward the superior fundies create a tailwind not a guarantee.
Another big factor, actually bigger than the firm footing (although they are related IMO) is that many of these countries have different economic attributes than the US which means they often peak and trough at different times than the US which dampen volatility.
one other thing, the assets in the ETFs of some of the countries I mention pails compared to EFA and the other funds like that that I bash on. so i take that as meaning most people do not already know this.
Oy, that last argument you used is really bad... (no offense!)
Total ETF assets (aggregated over all similar ETF's) are proportional to the total market cap of the underlying stocks. So a Norway ETF, for example, would likely have a much smaller asset base than SPY. Does that mean people "haven't figured out" Norway? Obviously not, it just means that Norway's total market cap is much smaller than the US's.
The best way to figure out if people have or have not "figured out" the attractiveness of a country is to look at things like D/P (dividend yield), P/E, and P/B.
So let me ask you more directly: given your emphasis on foreign investment and country selection, why is it that, in all the blog postings I've ever read from you, I've never seen any mention of D/P, P/E, or P/B? I think if you take an honest look at your investment approach, you may realize that there's been something of a de-emphasis on these rather important valuation measured.
- aagold
something of a de-emphasis on these rather important valuation measured
yes they hold far less sway for me--i perceive these things to be further down the list is what I believe top down is all about. I said in today's post that PE ratios don't offer much in the way of predicative value. this is not new in terms of what i've covered over the years.
many different top down proponents have come to the same conclusion about stock selection only accounting for about 10% of the eventual return. no problem not to believe in that but I do and so it makes PE PS PB and the like less important.
I am more concerned with what I can glean about what is happening on the ground in these places, understanding whether there is any value to the world in what these places have, whether these countries stand to move up in the world order or other related factors I have mentioned in past posts. This tells me if I want to own these countries or not. From there it boils down to figuring the best way in.
Roger,
You wrote,
"many different top down proponents have come to the same conclusion about stock selection only accounting for about 10% of the eventual return. no problem not to believe in that but I do and so it makes PE PS PB and the like less important."
Please note: in my comments, I was discussing *country-level* D/P, P/E, and P/B, not individual stocks. Do you not agree that current *valuation* of a country's equity market has a very important effect on investment returns? That seems so obvious to me, it's hard for me to believe you don't consider it. A country that's growing rapidly and sells things that other countries want is very attractive, but an *investment* in that country is only attractive if people haven't already figured that out. How can you ignore valuation?
- aagold
ignore is the wrong word but valuation has never been my top priority. valuation can be a catalyst for tweaking exposure and I have blogged about trades done for exactly this reason but what i have read and traded first hand leads me to believe that much can be gleaned and acted upon by understanding the big picture first.
one more thing you earlier mentioned everyone knowing... well looking up the various stats takes about two minutes and everyone can do this. assessing the big picture takes more time, more study, more nuance and requires pulling together much information to make a forward looking conclusion.
Roger,
an interesting company is Sub.ol for its uniqueness.
Best,
jeff from Milan, Italy
Roger,
Interesting comments today. One argument you side stepped was D/P. I think this valuation measure has been ignored for decades and may become important again in the not to distant future, but not this year and likely not the next, but soon enough.
SEG
There is nothing wrong with picking the right country, then picking the sector, then trying to pick the right stock, based on your own metrics.
Sam
"well looking up the various stats takes about two minutes and everyone can do this. assessing the big picture takes more time, more study, more nuance and requires pulling together much information to make a forward looking conclusion."
Ok... it kinda feels like I'm beating a dead horse and that you're not getting what I'm trying to say, but I'll try one more time. I'm *not* denying that studying the big picture and pulling together information to make a forward conclusion is useful. And the point I'm making has nothing to do with the debate between stock picking and top-down investing. What I am saying is that, even if one fully buys into the top-down approach and recognizes the usefulness of the big picture, understanding a country's long-term growth rate is only half of the "true big picture". The other half is valuation. As Buffett likes to say, "price is what you pay, value is what you get". Your emphasis seems to be weighted very heavily towards figuring out which countries have the highest "value", while strongly de-emphasizing the analysis of what price you're paying to get that value. Long-term investment returns are determined by the gap between price and value, not by either price or value in isolation.
- aagold
asked and answered, the only thing i can add is that a diversified portfolio has holdings of various attrributes including different types of valuations.
how many times do i cite warren buffet and Graham and Dodd? that should tell you where I am coming from.
Sam, although that may work for you I would not be comfortable picking an individual stock in Norway, Chile, China, Israel or Brazil. This is because I don't believe I have sufficient knowledge of those countries and some of them are alleged to have less-than transparent practices. I'd rather buy a country ETF and rely on Roger's (and Buffett's) long-term stances.
To be clear, I'm not advocating holding forever just that in the longer term the stock market is a weighing machine.
Heh, between clicking on the site and slowly typing a reply there were two other replies. I hope mine (3:53PM) is not taken out of context.
If we all look at the same valuations than we all be in the hole. I have lots of respect for you, Roger, because in order to be successfull then must do something unique. You, Roger, from reading this blog for a while look at the investment formula differetly from others, in a unique way.
Best,
Jeff from Milan, Italy
Good post today.
Roger, you earned your stripes today by putting your responses into overdrive!
T
Jeff a big part of the motivation is to smooth out the ride for clients
thank you T
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