Wednesday Roundup

First up is a quote from Stephen Roach who said "Investment in fixed assets such as factories and the rail network accounted for more than 95 percent of China’s 7.7 percent growth in the first three quarters of 2009 and made up 45 percent of gross domestic product, which is higher than any major economy in history."

This supports the idea that I have subscribed to about where in China to invest which is in the build up of the country and certain segments of the consumer sectors. The sectors to avoid, IMO, are financials and the exporters.

Next up is an interesting thread I think I've observed on the Seeking Alpha version of my last few posts. What I think I have observed is a sort of over-reliance on the extent to which things are linear. A few days ago I mentioned that I think the SPX and EAFE will be down a little in 2010 but that the emerging markets, collectively, will be up a little. One reader laid out a well reasoned argument about emerging markets needing developed markets to do well; a sort of A causes B which causes C.

Recently Bespoke posted a table with decade-to-date returns for various global markets. The US was down about 25%, similar to the UK, a little better than France and Switzerland and a little worse than Germany and Sweden. Some countries on there had great nominal returns and others had great relative returns. Norway was up 120%, Chile up 194%, Brazil up 301% as some examples. I don't know if the reader would have made the same A causes B which causes C argument ten years ago or not but the dispersion from country to country has been huge and that is likely to happen again.

To the point of avoiding the right the things, according to the iShares website the decade to date number for the MSCI EAFE Index is +2.55% which I find shocking given the results from the UK, France and Germany (mentioned above) and Japan which was down 49% but assuming it is correct the examples of Norway, Chile and Brazil are from from obscure. China was up 136% and India was up 243%, neither of those are obscure either. Avoiding the right countries was very important. Simply put I do not believe the endeavor of investing is always and everywhere linear.

Another reader, perhaps he was heckling me, congratulated me for market beating stock picking in the article about the ETF portfolio from Hedgeables that allocated 27% to a total stock market fund. I had noted that depending on the account size 27% into equities could be enough for a fully developed portfolio. This reader said that VTI holders could swap into individual stocks but the track record for active managers is not good. The line does not have to go from VTI to individual stocks. There are plenty of country funds and sector funds that allow for constructing a portfolio targeting very narrow segments.

The other point here again is that avoiding certain things can be more important than what is included. The two most important domestic sector trades for this decade obviously would have been avoiding tech nine years ago and avoiding financials three years ago (both provided pretty good warnings of trouble even if they did not warn of the magnitude).

To repeat I do not believe the endeavor of investing is always and everywhere linear.