Zweig again does not cite any time frame. We know that emerging markets dramatically outperformed the US in the decade just ended. We also know that in the middle of the tech bubble (1997) Asian markets got hit hard as did Russia in 1998. From 1995 to year end 1999 the Brazil Bovespa had a more volatile ride to a much larger gain that the S&P 500 (350% to 200%), the data on Yahoo goes back to 1993 but it shows Brazil going up so much in '93 and '94 that I do not think it is right but if it is then all the more to my point. Data on Yahoo Finance goes back to late 1991 for Mexico which was up 400% versus about 275% for the US and there is also data for the Hang Seng index for the entire decade and that market was up 450% versus 300% for the US.
I looked for data for other markets on Yahoo Finance but did not find any. While I do not know the time frame Zweig had in mind but I do know that while my little bit of looking at the 1990s is not comprehensive it might make me second guess the relevance of Zweig's comments about emerging market stock prices. Is he drawing these conclusions from a period that includes the 1960s? If so, is that relevant today?
He goes on to say that "to be overweight something that is so obvious that virtually every investor in America knows about it is a very risky thing to do." Asking the question about emerging markets being crowded is the right question. While that is the correct question I would ask how overcrowded were emerging markets in 2009 when iShares Emerging Markets ETF (EEM) went up 60% versus twenty something percent for the S&P 500.
Missing from the Zweig's comments were any notion of fundamental assessment or forward looking analysis for a particular country. Countries not choking on their debt, having something that other countries need (even if it is just labor) that appear to be getting richer are probably good places to look at closer. There will be risks of course like China and overcapacity and Thailand and political stability but some reasonable tailwinds and a little bit of properly conducted research and you probably will add value to a portfolio versus one without emerging market exposure (it is not clear he is advocating zero exposure but he might be).
On the other side of the argument is Marc Faber who says investors should have 50% in emerging markets because that is where the growth will be (Zweig says this is not a good reason). This is where the growth will be but moderate portfolio exposure is still a good idea as the downside volatility, when it occurs, can be extreme and a 50% weighting could be an emotional deathblow.
Rob Arnott has an article up at IndexUniverse where he lays out the case that "sizable real returns will prove to be difficult for the second 10-year stretch in a row." If this turns out to be correct there will still most assuredly be countries that thrive both economically and stock market-wise. It is likely there will be several countries that are not on anyone's radar now but will become must own destinations later; candidates for this might include Cambodia and Kazakhstan.
I am not sure if Zweig does not believe in doing research (not a shot, it seems like indexers don't do fundamental research) but if there is anything to the notion that investing started morphing into something a little different ten years ago in terms of expected return as has happened a few times before we clearly saw that success in the last decade was about country selection and sector avoidance and this left a lot of people behind. If we see something similar in the new decade then indexers will have been left behind for 20 years which intuitively means that a lot of financial plans (again talking broad indexers) will fail.I was saddened to hear that long time New England Patriot Mosi Tatupu passed away yesterday at age 54. I remember him being very popular. I used to get a real kick out of how Howard Cosell would say his name; almost as good as the way he said Manu Tuiasosopo.
17 comments:
"(not a shot, it seems like indexers don't do fundamental research"
I think you have a point here and it is one of the (potential) problems with using ETFs. They can lead to a mentality that one does not have to worry about too much research or thought. Just grab something that's close and the fact that there are multiple companies will not only prevent as much as a loss as if one went single company but also adds in "diversification". Work done!
I think I had Mosi Tatupu's card. They sure didnt get very flattering pictures. I recall seeing this card and thinking how I got jipped out of not seeing him in an action pose lol.
Some people believe they can pick winners and losers. I am not saying they can not. They probably think the rest of us do not understand how to do fundamental analysis.
But theses same people think others can not identify bull and bear markets. They go as far to say you should not try as you will lose. I think they simply do not understand how to analyze bull and bear markets.
Still others think you can not pick winners or losers and you can not identify bull or bear markets. These people believe you should just index and be happy.
Well it will give us a lot to talk about over the years.
Roger,
countries can be a good proxy for commodities, perhaps better than commodities, and also good proxy for labor. However from my study I am convinced that timing makes a difference for a successfull trade/investment. So like SEG was saying that company stocks can be a good proxy for commodities, country stocks can also capture that trade. In terms of journalist, zweig is one of the better one, but journalist's do not make money trading or investing.
Like to thank SEG for mentioning what indicators he follows, I did not ask such question, but we all benefit from sharing info with each other.
Best,
Jeff from Milasn, Italy
Roger,
Zweig may be right that the markets don't always jive with economic growth, but it comes back to your point about valuation. The economy could be growing substantially, but if the market is overvalued then returns could be muted.
If there was no such thing as P/E expansion/contraction then the markets probably would correlate very strongly to economic growth. Of course, that means all investors would be completely rational at all times. What fun would that be? :)
Roger,
I wonder if you have ever read Graham's "The Intelligent Investor" updated and commentary by Jason Zweig? In that book, Zweig clearly demonstrates he has a firm grasp of fundamental analysis. The question really becomes how to apply that analysis with some of the brightest minds in the country (world for that matter) digesting the same information. How is it possible for the average investor to have any sort of advantage or ability to analyze fundamental data in a manner that outperforms the pros? For every buyer, there's a seller, and that seller is likely to be a professional.
I would have to say that Kirk really hit the nail on the head with his comment. This is a point that has been made time and again. Equity valuations have two components; fundamental value (dividends plus growth) and speculative value (how much one is willing to pay for a dollar of earnings). Perhaps what Zweig is saying is that the speculative component of emerging markets is high in anticipation of strong growth.
One last thought, with so much of the accounting data from U.S. corporations shown to be faulty even with strict regulatory oversight, how reliable is the data that the public (Roger) has access to regarding emerging markets with which to perform fundamental analysis? I don't know, but I judge the risk of being wrong with poor data greater than having exposure to a low correlated asset class though index funds.
WH bringing some serious game to the court (hoops analogy) two days in a row, thank you.
I've not read that book. Question; why do you need to "outperforms the pros?"
To reorient the paradigum (joke) don't investors need to have enough money to correspond with some goal they have set out (usually having enough for retirement)? How does outperforming anyone else at any point play into that end result?
To your other point, how often is there out and out fraud? And how often in EM? I suppose it was possible for investors to have had two at the same time ten years ago with WCOM and ENE, other than that the odds of owning more than one fraud have to be close to zero and if positions are properly sized a fraud should never be ruinous, only frustrating.
Roger,
It is not just the total frauds that make picking individual stocks difficult for the average investor. For every WCOM there are a 100 firms fudging data to various degrees.
How did GE consistently make their numbers year after year? This is a highly respected company.
It is not just a few companies that I do not trust, it is most companies that I do not trust data from. Call me cynical if you wish, but the flip side is maybe others are being rather naive.
ETFs seem like the best way for individual investors to protect themselves from lots of fudging by many accountants and companies.
SEG
there clearly things that are not realistically analyzable with GE as a good example. I've said before I will not be the one to uncover an accounting scandal be it Parmalat-like fraud or a simple mistake. However some companies are best avoided because of their complexity, GE has been one of those for me.
I am all for people gnerally staying on their own mats but some exploration to learning new things is also important (I realize here I may be drifting from your point).
"I ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so" - Mark Twain
I guess in a nutshell this summarizes my investment philophy.
My personal experience with fraud in international business comes from agricultural markets. Two of the major crops I produce are 100% exported. Almnost all the cotton I grow is sold to emerging market countries (through a farmer owned marketing co-operative). The durum wheat I grow is 100% exported to developed european markets by a grain mechant. I know first hand that once cotton bales are placed on a ship for transport, payment must be made in full. Letters of credit can be very dangerous if from non-U.S. institutions. There is much corruption, lack of transparency, and limited legal recourse in some of these countries. How do you repossess 5000 bales of cotton in some remote port in Banladesh? It seems like every year we seem to get chumped on a cotton sale somewhere, but obviously on the whole trading with these countries is satisfactory. I like to think of it as sales diversification... similar to stock portfolio diversification. On the other hand wheat shipments to Europe are less worrisome. I get paid as soon as my grain is delivered to the elevator, even though the merchant has not been paid. I get paid for my cotton when funds are available in my cotton co-op's bank account.
I suppose my experience biases my judgement when it comes to equity markets. Mind you, I'm not making these international deals, I'm just sharing what the executives who make the sales report back.
Seg, great point.
Jeff from Milan, Italy
Benjamin Graham - it ties with what SEG is saying. Fraud abound. Therefore, must buy .25-.30 to the dollar.
Actually, Parmalat has now become a good investment vehicle. I am not sure if you read, lately where he(TANZI) funneled the money that he stole from investors - He kept on saying there is no treasure. Well, he had purchased paitings worth millions. Van Gough, ect. hanging on his house walls. LOL.
Human nature has not changed at all. Actally I blame the law makers and special interest groups. Parmalat and Tanzi will allways happen in Italy. That is because of the laws. I cannot go into details.
Best,
Jeff From Milan, Italy
Fundamental and technical analysis are important only because that is what we have been taught. The market is now psychologically driven by a much greater extent today. Individual investors comprise a very small portion of daily trading. The big boys control the movement today. These large hedge funds could care less if the market goes up or down, just as long as they are positioned on the side that is moving. Why isn't the market trading at DOW 5000....it very could be within a few weeks....or it could hit 12,000. The market makes no fundamental sense any more.The market is extremely risky, but, you know what, we have no other place to go. We are all HOPING it doesn't explode
"The big boys control the movement today."
Do you care about today or having enough money when you need it?
I would submit that your comment has always been applicable in the short term but look at the last ten years on a country basis. Over that time how much would you say fundamentals sorted out the healthy countries versus the unhealthy?
Just think how fun and great this game is. Foreign, domestic, stocks, commodities, bonds etf, short, long, market neutral, options, warrents. Ups, downs, tecnical, fundamentals. This is better than chess. Take it slow, so you can understand the game, do not over reach. The worst enemy is yourself. You have no one to blame. Roger, this is a great blog. Thanks. I am having fun, I am sure, You, RW, MikeC, SEG and many others are having fun,
Best,
Jeff from Milan, Italy
"We are all HOPING it doesn't explode"
Looks like the wall of worry is there to carry this bull market higher.
GDP growth doesn't matter?
Japan was 40.8% of the global market capitalization in 1988 and is today below 9%. GDP growth was horrid over this time period.
Emerging markets had high GDP growth and have outperformed the world indexes.
While the future is not known -- I offer a quote from a recent MSCI-Barra research bulleting:
"GDP weighting assigns a higher weight to emerging markets and lower weight to developed markets and has led to the superior long-run performance of the MSCI ACWI, MSCI World, and MSCI EM GDP Weighted Indices in the past 40 years, compared to their market capitalization counterparts."
This bulletin analyzed market cap vs GDP weightings (not GDP growth) but it resulted in the same bias -- overweight low and growing GDP countries has worked over the past 40 years. Zweig is simply wrong.
Jason Zweig got his quote from research by Elroy Dimson. It's finally appeared in the "Credit Suisse Global Investment Returns Yearbook 2010" See the article starting on page 13.
http://tinyurl.com/DMS2010
the most useless economic statistic that comes out and reported by the media is what happened to GDP last quarter. the market is looking at GDP X quarters from now to discount and cares nothing about what has already occured, that data was baked in long ago.
the data in that report does show that forecasting correctly future growth is associated with the highest returns. they then seem to shrug shoulders and say 'but we are not fortune tellers so we have no idea.' well, this is all pretty earthshaking analysis by CSFB. surprise -- it takes forecasting to do well in the markets. if you don't forecast well, then just diversify across everything. very low barrier to get printed by CSFB research apparently
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