Sunday Morning Coffee

Fifteen or 16 years ago my wife and I were on vacation and the radio station that we listened to in the car there had a bit where listeners would vote on the most disliked song and whichever one was voted as the worst would get "sledge hammered" off the air forever. Obviously I got a kick out of it as I still remember it today.

The reason to mention that little nugget is that after reading this week's Barron's cover story I have decided to sledge hammer the term emerging markets off of this site in all future posts other than in the proper name of an investment product. The actual cover story was perhaps the weakest cover story I've ever read; I go back to the late 1980s with Barron's. I have a 16 year old nephew who twice has asked me about the stock market. If he ever asked me about emerging markets my answer would be a lot like this cover story. The total lack of depth was shocking. I actually saved the article until the end and could not believe it.

I believe the now sledge hammered term to be obsolete. I have explored this before but am now convinced the term has lost almost all of its usefulness in constructing a portfolio and navigating a market cycle. If you've been reading this site for a while you know my belief in country selection and sector weights for determining a lot of the portfolio's eventual return for whatever the time period in question (reasonably long time period of course).

A focus in country selection is trying to find countries with different attributes than the US and also different attributes from each other. For example Thailand is quite different than South Africa and both are different enough from the US that they probably could zig some when the US zags. Sticking with those two countries as the example, were some to add them to their portfolio they should expect that those two would increase the volatility of the mix. Conversely if someone added Switzerland, this would likely serve to dampen volatility some. If someone wanted to add volatility in the materials sector they could add Peru or if someone wanted materials exposure with a little less volatility then maybe Australia would do the trick.

This process can occur without even thinking about the now banned term. If you want a financial stock from a country that was not part of the financial crisis fundamentally; well there is Australia (although housing prices there are very high now), Canada (concerns that those banks are now over leveraged), Latin America and Asia. Oh and probably Israel and some in Africa. I'm over simplifying some but a country where banks have less leverage, where there is simply less real estate speculation and has some sort of visible growth dynamic that stands to benefit the banks sounds promising. If you then add a well covered and large dividend then where on the priority list are the words emerging or market?

If Japan and Western Europe continue to be poor investment destinations with relatively high correlations to the US market (more so Europe with the correlation) then how much exposure do you want to those places? If you answer that question little to none and are able to spend the time studying individual countries then you will buy into the ones that are both most promising and offer a good shot of real diversification--and again the now banned term becomes much less important.

I will do my best to never use the term again on this site. Seriously.