Sunday Morning Coffee

A reader, maybe a heckler actually, left the following comment.

Betting on any country that is not America and not in debt and has natural resources is an easy call.

This was a reply to some things I was writing about foreign country selection and the simple act of investing in countries with different economic attributes.

I can’t be certain he is heckling me but either way I agree with him, it was an was an easy call. I guess since I made that call (plenty of other people did too) I can say it was easy.

The reader’s comment brings up two points. First it is potentially a case of hindsight bias. Like “of course the Asian Contagion in 1997 was not the end of the world and stock market came right back after the decline.” Sticking with that example most people were really quite afraid of the Asian Contagion. The previous two sentences could also be said about the LTCM blowup in 1998. I have no idea about the reader who left the comment but all of these events are big and scary to many people (otherwise there would be no decline).

To the extent this is about hindsight bias the notion of realizing an event for what it is in terms of not mattering much in the big scheme and buying at a moment of general panic is going to be very difficult to do. Far less difficult is to realize an event for what it is in terms of not mattering much in the big scheme and just not panicking yourself is much easier to do.

Maybe the reason hindsight bias is even a term is because things are often obvious after the fact but then people don’t necessarily learn from these episodes and benefit on the next go around.

As for the specifics of the comment that picking commodity based countries was easy, again I think it was but I do not believe that the majority of people really did this. There was and is recognition by the masses that emerging markets is an asset class that should be owned but how many people own something narrower than iShares Emerging Market (EEM)? EEM has $30 billion in assets. While I don’t know I would venture to say that EEM is bigger than every other emerging market ETF combined (if anyone would care to double check that …) and while I do not know if that is correct or not it is pretty close to being right and it means that no the commodity based countries are not obvious to everyone. As an FYI South Korea and Taiwan combine to make up 25% of EEM and China (has resources but not a commodity based economy) is another 15% of the fund.

The reader’s comment notwithstanding very few people are willing to make sector decisions or single country decisions. That certain sector and country decisions have been important for returns in the last few years is obvious but my focus in writing about these things for so long been about how to reduce volatility for the portfolio– to avoid some of the drawdown that ended up happening.

The picture is from the Dakar 2010 fan page on FaceBook. For some odd reason the big trucks are my favorite vehicle class (as opposed to SUVs and motorcycles). Going to see the Dakar is on my “life list” and since they moved it to South America it is a little easier to get to.

10 Comments

  1. Hi Roger,
    FYI- You got a nice mention on Friday from Matt Hougan of Index Universe of sites that he turns to for information about the markets, exchange-traded funds and related topics. Nice to see you get the recognition for your efforts!
    Rob from WI

    Here is the link to the article in its entirety:
    http://www.indexuniverse.com/blog/5920-what-i-read-every-day.html?Itemid=3

    Reply
  2. Off topic. Roger. Everyone knows GM is going to fill for bankruptcy tomorrow and current shares will be worthless. However, GM closed Friday at $0.75. Any thoughts on what speculation gives GM shares any value at all? Thanks, JCarr

    Reply
  3. Ok, Chile has a stable government, currency and lots of natural resources; so does Australia though the monetary policy might be less firm. Why do you see Chile as an easy call but I don’t hear anything about the Aussies?

    An aside: this reflects my prejudice that South & Central American countries are all unstable which is probably totally wrong especially in terms of specific countries. That’s why I enjoy reading what you have to say; you challenge my prejudices!

    Reply
  4. thanks Rob

    re GM. if a stock is going to zero it still trades. there is still short covering and panic selling moving the stock in both directions.

    not that it is my trade but a stock in this circumstance can easily go from $0.50 to $1.00 a couple of times on the way to zero and some people try to game that.

    again, not my trade.

    Don, do a search in the box in the righthand sidebar for Australia

    Reply
  5. Roger, what about South Africa – that is also a good commodity based economy??

    Reply
  6. The market ALWAYS over reacts to world events, even those not even remotely connected to our individual countries. This may not be a bad thing as it gives more room for it to rebound after some sober, second thought.

    I guess this over reaction is the only thing about the market that is predictable. Now if we could only predict world events…

    Reply
  7. Jeff, don’t know it, opened it on a tab on my browser and will try to get to it but we had family in this WE and I am now hours behind in my friday an weekend reading.

    Reply
  8. Roger,

    With money market funds generally only yielding .7% or less, do you ever use STB bond funds as a money market proxy for the higher yield(s)?
    For example, I’m thinking about moving some money into PIASX.

    Reply
  9. Roger,

    I love and hate your blog, but mostly love. I love the rational approach and hate when you do not get aggressive enough.

    I think in the not to distant future we should all own 100% foreign equities. I can not figure out if not to distant is 1 year or 3 years, but the turn is coming. I still do not see an alternative to treasuries in times of stress any time soon however.

    Oddly enough I still think following the S&P is the way to go as market correlation will be rather high.

    Thanks for the blog and forgive the errors in this post as I am on vacation and enjoying happy hour.

    SEG

    Reply
  10. Regarding GM, GM now is into bankruptcy. Good thing government has an alternative resource on how to help company who are experiencing loss. Market is unpredictable so company must have an alternative if downtime comes.

    Reply

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Sunday Morning Coffee

A reader, maybe a heckler actually, left the following comment.

Betting on any country that is not America and not in debt and has natural resources is an easy call.

This was a reply to some things I was writing about foreign country selection and the simple act of investing in countries with different economic attributes.

I can’t be certain he is heckling me but either way I agree with him, it was an was an easy call. I guess since I made that call (plenty of other people did too) I can say it was easy.

The reader’s comment brings up two points. First it is potentially a case of hindsight bias. Like “of course the Asian Contagion in 1997 was not the end of the world and stock market came right back after the decline.” Sticking with that example most people were really quite afraid of the Asian Contagion. The previous two sentences could also be said about the LTCM blowup in 1998. I have no idea about the reader who left the comment but all of these events are big and scary to many people (otherwise there would be no decline).

To the extent this is about hindsight bias the notion of realizing an event for what it is in terms of not mattering much in the big scheme and buying at a moment of general panic is going to be very difficult to do. Far less difficult is to realize an event for what it is in terms of not mattering much in the big scheme and just not panicking yourself is much easier to do.

Maybe the reason hindsight bias is even a term is because things are often obvious after the fact but then people don’t necessarily learn from these episodes and benefit on the next go around.

As for the specifics of the comment that picking commodity based countries was easy, again I think it was but I do not believe that the majority of people really did this. There was and is recognition by the masses that emerging markets is an asset class that should be owned but how many people own something narrower than iShares Emerging Market (EEM)? EEM has $30 billion in assets. While I don’t know I would venture to say that EEM is bigger than every other emerging market ETF combined (if anyone would care to double check that …) and while I do not know if that is correct or not it is pretty close to being right and it means that no the commodity based countries are not obvious to everyone. As an FYI South Korea and Taiwan combine to make up 25% of EEM and China (has resources but not a commodity based economy) is another 15% of the fund.

The reader’s comment notwithstanding very few people are willing to make sector decisions or single country decisions. That certain sector and country decisions have been important for returns in the last few years is obvious but my focus in writing about these things for so long been about how to reduce volatility for the portfolio– to avoid some of the drawdown that ended up happening.

The picture is from the Dakar 2010 fan page on FaceBook. For some odd reason the big trucks are my favorite vehicle class (as opposed to SUVs and motorcycles). Going to see the Dakar is on my “life list” and since they moved it to South America it is a little easier to get to.

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