Reader:
You said,
"...if some industry, for example semiconductors, collectively goes down 30% for some reason it is very unlikely that the typical investor will pick the one that somehow goes up."
So why doesn't that reasoning apply to countries? For example, there are 45 countries in the MSCI ACWI. If the market collectively goes down 30% for some reason, isn't it very unlikely that the typical investor will pick the one country that somehow goes up?
My reply:
I addressed that many times before and then during the crisis.
My belief going in was that countries with different fundamental attributes (like commodity based) might be on different economic cycles which might mean they are on different stock market cycles such that there is some zig when the US zags. Also a fundamentally healthier country than the US might also only have a more cyclical event as opposed to secular.
Whether it was by luck or otherwise this is what happened and it happened with the countries I talked about before the crisis.
Brazil and Norway kept going up until June 2008 and Chile only endured a normal cyclical decline dropping a little over 30% as the US was going down 56% and Chile has since gone on to a new high.
I also wrote often about not expecting much real diversification from countries most similar to the US like Big Western Europe.
The work that lead me to these conclusions was far from complicated and involves a fair bit of common sense.
A reader (maybe you, I don't remember) was critical of my taking too simple of an approach to financials but to the extent a lot of the top down stuff I do relies on common sense means that it is doable for the typical investor.
I would add that this does not guarantee any sort of success but there is logic to be applied that has worked before. A country that is fundamentally healthy stands a far better chance for offering "normal" equity returns over some reasonably long period of time with the previous decade as exhibit A.
There is a lot of discussion right now about the extent to which correlations have gone up recently (here and here) but these are very short term observations. A hedge fund manager or the like probably does need to worry about these issues but you managing your own portfolio who presumably cares most about having enough money when you need it do not need to worry about short term correlation issues.
4 comments:
There are the variables in overseas investing that you know, the ones you don't know, and the issues you don't know you don't know. For instance, in a country which can have political instability (much of South America) a socialist leaning political win can seriously alter the picture in a company's growth and profitability. That's my fly in the ointment with Southern Copper, Vale, and many of the SA equities. Brazil is fighting inflation again, big time. How will that effect exports and domestic development and consumption? Totalitarian regimes ( think China, Russia, and Ukraine) have totalitarian control of consumption, production, and export, as well as monetary policy, which allows them to "cook the books" which you and I try to examine. That leaves you with the Pacific rim, Eastern Europe, and a few other "healthy " economies like Canada and Norway. They depend heavily on the China or the US for markets.
Having said all that, I agree that the opportunities for safe investing are better in Norway, Canada, Switzerland, and Australia, then domestic equities. I have you to thank for thinking about the world from a different viewpoint, and I've positioned my portfolio accordingly.
MR nusbaum I find that the only proven method of picking stocks that can beat the indexes by a significant margain is buying stocks with low price to sales ratios. I heard about this from ken fisher on the dennis wholy show in 1984. Believe me their is no method and I mean no method other than buying decent companies with low price to sales ratios that can consistently beat the market by a huge margin. I will comment again and bring solid evidence to prove my case beyond a shadow of doubt next time I comment. When I Im finished you will say to yourself this guy can't be right but everything he saying does check out pretty impressive. By the way Mr nasbaum I don't mean to come accross as arrogant. Im really a very simple guy just average. I could not believe that stocks with low price to sales ratios could be so profitable but they are tremendously profitable and with far less risk than anybody could believe.
Many investors underestimate the risk of owning foreign securities because of past performance, which is always the money at the margin.
I am a big fan of the late John Templeton, and he always warned of the risks in owning shares of foreign companies. These risks are still prevelant today, although ignored by most. They include custodian issues and accounting standards, which are now finally coming to light in China in a big way. Does anybody think it stops with China?? Natural resource based economies also have risks that IMO are being ignored. True supply and demand I would argue, is not reflected in the current pricing of commodities, as the financial demand (exposure in ones portfolio) is the money at the margin dictating pricing. That is a risk underappreciated in current global portfolio construction. I doubt the "exposure" crowd will be so enamored with having commodities in the portfolio when the momentum fades.
Political and social risk are also underestimated, as the natural economic cycles have always tested the stability of government.
I have holdings in foreign securities, by I also appreciate the boom and bust cycles of the past, and what could go wrong.
can you help me find out what became of the galician standard oil mining company/ & the galician oil lands & royalties trust from around 1913/14 to 1919
regards
william
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