Home Country Bias...makes sense?

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simplesauce
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Home Country Bias...makes sense?

Post by simplesauce » Sat May 13, 2017 7:55 am

Hi all. When Taylor Larimore (much respect) was asked "why not market weights?" by someone trying to pick their US vs International allocation, Taylor replied with this list of concerns:

Several reasons:

* Higher costs

* Approximately half the sales of our 500 largest companies are to foreigners

* Americans buy and sell in U.S. dollars

* The U.S is the world's largest economy

* The greatest innovations have originated in the U.S.

* No currency risk

* Greater tax-efficiency

* Less inflation risk

* Less political risk

* Better accounting

* Less fraud and stock manipulation in the U.S.

* U.S. legal environment

* The most stable political environment

My portfolio has been built around VT (Vanguard World Stock Fund) as advised by Burton Malkiel and Charlie Ellis. This fund holds roughly 55% US, 45% Int'l.

But Taylor is in the same mindset as Jack Bogle, who advise to limit one's international stock holdings to only 20% of the portfolio.

I know many of you will say "it makes no difference" or "nobody knows the future," But I do think a discussion is warranted because of Taylor's concerns above. We always talk about the best allocation based on many factors. But not often enough do we address the above. Thank you.

alex_686
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Re: Home Country Bias...makes sense?

Post by alex_686 » Sat May 13, 2017 8:44 am

I will point out that Home Country Bias is the irrational emotion to favor things that are familiar.

Now lets take a look at some of the contradictions in your list, in particular developed markets.

We can measure these. The effect is pretty low - a fraction of a percentage point. The benefits strongly outweigh the costs here.
* Higher costs
* Greater tax-efficiency

We can scratch off:
* Better accounting
* Less fraud and stock manipulation in the U.S.
* U.S. legal environment

In the developed markets the accounting and legal standards are in the same league as US standards. For every defect in European standards I can find a defect in US standards. What closes the gap even further is that most foreign companies have issued sponsored ADRs which puts them explicitly under SEC's regulation.

First you list
* Americans buy and sell in U.S. dollars
* No currency risk
* Less inflation risk

Then you list
* Approximately half the sales of our 500 largest companies are to foreigners

You can have it one way - favor the US economy, or the other, favor the international economy. But you can have both. This argument breaks down further when you look at the revenue from international companies, where the largest country by revenue is to foreign America.

I would debate the impact of the following 2:
* The U.S is the world's largest economy
* The greatest innovations have originated in the U.S.

The world is becoming more international, boarders are becoming more open. Ideas are spreading faster. Question - when China becomes the biggest economy would you shift a majority of your investment there? Should we underweight small countries like Switzerland and Singapore? US has lots of innovations? O.K. - so what? That is a growth verse value debate. Value can outperform growth. This only has meaning if we start talking about relative measures of stock value.

On the "maybe but I personally don't think so" list:
* Less political risk
* The most stable political environment

Overall I think it is pretty thin.

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reriodan
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Re: Home Country Bias...makes sense?

Post by reriodan » Sat May 13, 2017 8:56 am

The reasons against market weight sound like a lot of speculation to me, and I am not a speculator.

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Re: Home Country Bias...makes sense?

Post by AlohaJoe » Sat May 13, 2017 9:02 am

simplesauce wrote:But not often enough do we address the above. Thank you.


Are you kidding? It gets discussed literally every single week on Bogleheads. Someone posts "Bogle said this on CNBC" or "Buffet said that in his shareholder letter" or "What should my international allocation be" or "Why bother with international" every single day. Those points come up in every single thread about international.

simplesauce
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Re: Home Country Bias...makes sense?

Post by simplesauce » Sat May 13, 2017 11:50 am

AlohaJoe wrote:
simplesauce wrote:But not often enough do we address the above. Thank you.


Are you kidding? It gets discussed literally every single week on Bogleheads. Someone posts "Bogle said this on CNBC" or "Buffet said that in his shareholder letter" or "What should my international allocation be" or "Why bother with international" every single day. Those points come up in every single thread about international.


I think half of the points above are not addressed often enough. It's more about "valuations" and things of that nature.

letsgobobby
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Re: Home Country Bias...makes sense?

Post by letsgobobby » Sat May 13, 2017 12:28 pm

I feel like most of the above concerns are typically reflected in market prices of assets. that is, everyone knows accounting standards in Pakistan and Ecuador and Algeria and the US may be different, and asset prices already reflect that knowledge.

the few issues that are not addressed by asset pricing in an efficient market have to do with an individual's idiosyncratic risk exposure, such as location of human capital, the currency of current and future obligations, the location of non-equity assets, etc. whether an American investor should have a home country bias in stocks therefore boils down to weighing these idiosyncratic risks.

I judged that while the great majority of my obligations will be in US dollars, I already have the entirety of my other assets (real estate, bonds, human capital) in US dollars. therefore I decided to tilt stocks 60% to international. this works for me. it protects me best from the unlikely event of the loss of US hegemony, which for a US based investor is the ultimate black swan.

S17C
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Re: Home Country Bias...makes sense?

Post by S17C » Sat May 13, 2017 1:26 pm

Equities in my portfolio are 50% USA (all TSM shares) and 50% Total International Index.

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willthrill81
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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 1:38 pm

I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

avalpert
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Re: Home Country Bias...makes sense?

Post by avalpert » Sat May 13, 2017 1:53 pm

willthrill81 wrote:I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.

This is really the worst justification I could imagine. The 'historical data' you are using is of such a short specific time frame that happens to align with US overall economic dominance - the notion that it will inevitably look like that even in the near future is silly. In my opinion, the narrowly construed 'historical data' pales in comparison to arguments rooted in meaningful attempts to forecast the future (whether that is based in valuations or diversification simply cause no-one knows).

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celia
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Re: Home Country Bias...makes sense?

Post by celia » Sat May 13, 2017 1:56 pm

As long as you want to talk about "Home Country Bias", you should also look at it as if your home country is NOT the U.S.

What would you then say? Would your answer be different if you were in another developed country or an emerging economy country? I suspect that would even change your answer more. Maybe we should look at it as if you lived on another planet. Seriously. If you took yourself out of what you know locally, how would you analyze this? Would you favor the U.S. economy?
Last edited by celia on Sat May 13, 2017 1:58 pm, edited 1 time in total.

letsgobobby
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Re: Home Country Bias...makes sense?

Post by letsgobobby » Sat May 13, 2017 1:57 pm

avalpert wrote:
willthrill81 wrote:I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.

This is really the worst justification I could imagine.

correct. I'm not interested in knowing what happened in the past. I'm interested in knowing what's going to happen in the future. 125 years ago the US was an emerging market, and grew over 4 generations to the dominant global superpower. That is not going to happen again. I want to invest in 2100's dominant global superpower.

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willthrill81
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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 2:10 pm

avalpert wrote:
willthrill81 wrote:I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.

This is really the worst justification I could imagine. The 'historical data' you are using is of such a short specific time frame that happens to align with US overall economic dominance - the notion that it will inevitably look like that even in the near future is silly. In my opinion, the narrowly construed 'historical data' pales in comparison to arguments rooted in meaningful attempts to forecast the future (whether that is based in valuations or diversification simply cause no-one knows).


45 years is a short time frame? Wow, just wow.

I never said "inevitable."

Arguments vs. historical data. Some opt for the former, some for the latter. Saying that the latter is the "worst justification" is overly harsh.

I suppose a lot of active mutual fund managers still believe in their own arguments in lieu of the historical data showing that their methods don't work.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 2:11 pm

letsgobobby wrote:
avalpert wrote:
willthrill81 wrote:I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.

This is really the worst justification I could imagine.

correct. I'm not interested in knowing what happened in the past. I'm interested in knowing what's going to happen in the future. 125 years ago the US was an emerging market, and grew over 4 generations to the dominant global superpower. That is not going to happen again. I want to invest in 2100's dominant global superpower.


Trying to predict the future? Good luck with that.

I don't know what the future will look like, and I don't know what the U.S. will look like over the next 50 years. No one does. But the not too distant data are clear IMHO.

Do what you want. Argue with Bogle and Buffett.
Last edited by willthrill81 on Sat May 13, 2017 2:12 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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celia
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Re: Home Country Bias...makes sense?

Post by celia » Sat May 13, 2017 2:12 pm

letsgobobby wrote:I'm not interested in knowing what happened in the past. I'm interested in knowing what's going to happen in the future. 125 years ago the US was an emerging market, and grew over 4 generations to the dominant global superpower. That is not going to happen again. I want to invest in 2100's dominant global superpower.

I like this thought. :beer (closest thing to the "like" symbol we have available)

I "invest" in individuals in emerging markets using kiva loans. So far they have an excellent pay-back record, but that is not relevant to this topic.

The individuals who have the knowledge and resources there have the ability to move their country forward. I am happy to help in my small way. I won't be around in 2100 but my future grandkids might be. So some of my investments will need to be strong enough to be there during my lifetime, while some will need to be strong enough to help out my kids and grandkids, should I not need it all.

Taylor Larimore, Bogle, and Buffet are a lot older than I am. Their investing horizon, both for themselves and their investors, is different than mine.
Last edited by celia on Sat May 13, 2017 2:17 pm, edited 1 time in total.

avalpert
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Re: Home Country Bias...makes sense?

Post by avalpert » Sat May 13, 2017 2:17 pm

willthrill81 wrote:
avalpert wrote:
willthrill81 wrote:I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.

This is really the worst justification I could imagine. The 'historical data' you are using is of such a short specific time frame that happens to align with US overall economic dominance - the notion that it will inevitably look like that even in the near future is silly. In my opinion, the narrowly construed 'historical data' pales in comparison to arguments rooted in meaningful attempts to forecast the future (whether that is based in valuations or diversification simply cause no-one knows).


45 years is a short time frame? Wow, just wow.


In the course of determining likely future equity returns - yes it is extremely short. You are talking about the relative fortunes of global economies - the last 45 years represents one specific run that is unlikely to be replicated (including the ascendance of a single super power, the end of gold-backed currencies, the IT-boom etc.) it has almost zero relevant information for assessing likely fortunes going forward.

The wow, just wow, is that someone would propose otherwise - it is incredibly myopic.

Arguments vs. historical data. Some opt for the former, some for the latter. Saying that the latter is the "worst justification" is overly harsh.

I really don't think it is and I think it is important enough a point to repeat it - it is the worst justification. Now an argument on its own doesn't make it a good argument, but at least it is attempting to focus on the right goal - predicting how the future will play out not the past. Grounding your justification in the past gives you nothing to evaluate its worth and leads you to make the decisions that happened to be right then without regard for what they imply about the future.

I suppose a lot of active mutual fund managers still believe in their own arguments in lieu of the historical data showing that their methods don't work.

Testing ones hypothesis is a good way to overturn your argument - that is why even bad arguments are preferable to historical data alone which gives no method for identifying where it is in error as a predictor of the future.

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Re: Home Country Bias...makes sense?

Post by munemaker » Sat May 13, 2017 2:19 pm

The one thing that concerns me the most about investing outside the US and Europe is insider trading and the like.

Enough shenanigans go on in the US where we have really good watchdogs. How good is enforcement in Asia and developing countries? They are very lax on intellectual property rights, and I don't expect they have much more respect for shareholder protections. I doubt the playing field is very level.

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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 2:21 pm

avalpert wrote:
willthrill81 wrote:
avalpert wrote:
willthrill81 wrote:I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.

This is really the worst justification I could imagine. The 'historical data' you are using is of such a short specific time frame that happens to align with US overall economic dominance - the notion that it will inevitably look like that even in the near future is silly. In my opinion, the narrowly construed 'historical data' pales in comparison to arguments rooted in meaningful attempts to forecast the future (whether that is based in valuations or diversification simply cause no-one knows).


45 years is a short time frame? Wow, just wow.


In the course of determining likely future equity returns - yes it is extremely short. You are talking about the relative fortunes of global economies - the last 45 years represents one specific run that is unlikely to be replicated (including the ascendance of a single super power, the end of gold-backed currencies, the IT-boom etc.) it has almost zero relevant information for assessing likely fortunes going forward.

The wow, just wow, is that someone would propose otherwise - it is incredibly myopic.

Arguments vs. historical data. Some opt for the former, some for the latter. Saying that the latter is the "worst justification" is overly harsh.

I really don't think it is and I think it is important enough a point to repeat it - it is the worst justification. Now an argument on its own doesn't make it a good argument, but at least it is attempting to focus on the right goal - predicting how the future will play out not the past. Grounding your justification in the past gives you nothing to evaluate its worth and leads you to make the decisions that happened to be right then without regard for what they imply about the future.

I suppose a lot of active mutual fund managers still believe in their own arguments in lieu of the historical data showing that their methods don't work.

Testing ones hypothesis is a good way to overturn your argument - that is why even bad arguments are preferable to historical data alone which gives no method for identifying where it is in error as a predictor of the future.


Historical returns are not the only reason I invest almost exclusively in the U.S., but I find them to be very valuable and telling. That being said, I think Bogle and Buffet's arguments in favor of investing heavily, if not exclusively, in the U.S. make a lot of sense.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 2:24 pm

munemaker wrote:The one thing that concerns me the most about investing outside the US and Europe is insider trading and the like.

Enough shenanigans go on in the US where we have really good watchdogs. How good is enforcement in Asia and developing countries? They are very lax on intellectual property rights, and I don't expect they have much more respect for shareholder protections. I doubt the playing field is very level.


+1

Few Americans really grasp how light to non-existent enforcement of intellectual property rights is in the developing world, particularly in most of Asia. I've worked with several in business people who have had their patents stolen right out from under them by their 'partners' in Asia.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Home Country Bias...makes sense?

Post by letsgobobby » Sat May 13, 2017 3:00 pm

willthrill81 wrote:
munemaker wrote:The one thing that concerns me the most about investing outside the US and Europe is insider trading and the like.

Enough shenanigans go on in the US where we have really good watchdogs. How good is enforcement in Asia and developing countries? They are very lax on intellectual property rights, and I don't expect they have much more respect for shareholder protections. I doubt the playing field is very level.


+1

Few Americans really grasp how light to non-existent enforcement of intellectual property rights is in the developing world, particularly in most of Asia. I've worked with several in business people who have had their patents stolen right out from under them by their 'partners' in Asia.

and in an efficient market, these realities are priced in. that is one of many reasons valuations are lower outside the US.

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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 3:06 pm

letsgobobby wrote:
willthrill81 wrote:
munemaker wrote:The one thing that concerns me the most about investing outside the US and Europe is insider trading and the like.

Enough shenanigans go on in the US where we have really good watchdogs. How good is enforcement in Asia and developing countries? They are very lax on intellectual property rights, and I don't expect they have much more respect for shareholder protections. I doubt the playing field is very level.


+1

Few Americans really grasp how light to non-existent enforcement of intellectual property rights is in the developing world, particularly in most of Asia. I've worked with several in business people who have had their patents stolen right out from under them by their 'partners' in Asia.

and in an efficient market, these realities are priced in. that is one of many reasons valuations are lower outside the US.


And unless something changes substantially, those valuations seem likely to stay low.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Home Country Bias...makes sense?

Post by letsgobobby » Sat May 13, 2017 3:21 pm

some people believe they can predict the future and they should invest accordingly. I don't know why those folks buy anything other than the next Apple; why waste their time with S&P500 indexes and all the 499 stocks that won't be the best performer over the next 50 years? Internally consistent logic may not be the strong suit of this approach.

I've learned I can't predict the future, so I just buy everything. I've also learned that about the only thing that can hurt me is the unknown unknowns, so I do my best to protect against those. Umbrella insurance, earthquake insurance, minimizing home country bias, stuff like that.

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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 3:28 pm

"Investment legends Jack Bogle and Warren Buffet have a few things in common: They embrace low fees and index investing, and millions of people look to them for investing wisdom. One other thing: When it comes to investing, both are homebodies.

Bogle dismisses international diversification. Buffett, meanwhile, says an index fund portfolio of 90 percent S&P 500 and 10 percent Treasurys is probably good enough for most investors — that's how he is recommending his wife invest."


http://www.cnbc.com/2017/04/17/a-stubbo ... ffett.html
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Home Country Bias...makes sense?

Post by Waba » Sat May 13, 2017 4:03 pm

willthrill81 wrote:
letsgobobby wrote:
willthrill81 wrote:Few Americans really grasp how light to non-existent enforcement of intellectual property rights is in the developing world, particularly in most of Asia. I've worked with several in business people who have had their patents stolen right out from under them by their 'partners' in Asia.

and in an efficient market, these realities are priced in. that is one of many reasons valuations are lower outside the US.


And unless something changes substantially, those valuations seem likely to stay low.


I dont think its a stretch to think that China for example will tighten its rules and enforcement of intellectual property rights in the next 20 years. That would be an excellent reason for valuations to be adjusted upwards.

its hard to see a similar shift happening in the US, because we are already there.

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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 4:14 pm

Waba wrote:
willthrill81 wrote:
letsgobobby wrote:
willthrill81 wrote:Few Americans really grasp how light to non-existent enforcement of intellectual property rights is in the developing world, particularly in most of Asia. I've worked with several in business people who have had their patents stolen right out from under them by their 'partners' in Asia.

and in an efficient market, these realities are priced in. that is one of many reasons valuations are lower outside the US.


And unless something changes substantially, those valuations seem likely to stay low.


I dont think its a stretch to think that China for example will tighten its rules and enforcement of intellectual property rights in the next 20 years. That would be an excellent reason for valuations to be adjusted upwards.

its hard to see a similar shift happening in the US, because we are already there.


A big part of it is cultural, and that's hard to change. But who knows...
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Home Country Bias...makes sense?

Post by knpstr » Sat May 13, 2017 4:22 pm

Munger is investing in China now. He said he "fishes there because that's where the fish are." He stated in an interview that he finds it easier to find mispriced securities there vs the US, but he also has someone that is Chinese and flys back and forth from China helping him identify businesses to invest in.
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Re: Home Country Bias...makes sense?

Post by lostdog » Sat May 13, 2017 4:22 pm

My goal was to simplify with Vanguard Total World Index and Vanguard Total Bond Index. I don't know what the future holds and the total world funds stops me from tinkering with the international allocation. There are so many opinions on here about international and this fund helps we tune out the noise. Now if Vanguard came out with a total world bond index I would exchange my bond fund to that.


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Re: Home Country Bias...makes sense?

Post by selters » Sat May 13, 2017 4:32 pm

Lower costs and better tax efficiency are the only two points there that are really, indubitably good arguments for home country bias.

The other ones have all kinds of details that Bogleheads disagree about. There are several topics about each of them on the forum.

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Re: Home Country Bias...makes sense?

Post by Valuethinker » Sat May 13, 2017 4:43 pm

simplesauce wrote:Hi all. When Taylor Larimore (much respect) was asked "why not market weights?" by someone trying to pick their US vs International allocation, Taylor replied with this list of concerns:

Several reasons:

* Higher costs


Good reason if true. Is it true?

* Approximately half the sales of our 500 largest companies are to foreigners


No, the way you mean that is that about 25-35% of sales of internationally listed companies are to Americans ;-).

In other words, that's not a strong argument.

* Americans buy and sell in U.S. dollars


Yes, but unless the companies themselves hedge themselves fully against exchange rate moves (they don't) you are not hedged against exchange rate moves. BTW the US does import a lot-- it's not all paid for in dollars.

Currency risk is real, but one could simply invest in a global equity index fund, globally weighted, that hedged back into USD. Problem solved.

* The U.S is the world's largest economy


No longer the case.

* The greatest innovations have originated in the U.S.


That would be the World Wide Web? The steam engine? The steam turbine? Nitrogen fertilizer? Organized agriculture? Penicillin? Insulin? The X Ray? The printing press? The telephone? The radio? the mobile phone?
[b]
Of course none of those were invented in the USA.
There's a stronger ground that more recently the US has been the major centre of innovation. But conversely that doesn't mean American companies are the best at exploiting it.

* No currency risk


You can't have it both ways. Either US companies trade abroad and import and export (the US is actually a surprisingly bad exporter vs. say the Germans or the Japanese, as opposed to being a very good country for spawning multinationals) and take currency risk (your point above) or they don't (your point here).

Which way do you want it?
* Greater tax-efficiency


Even here there does not seem to be total agreement about that?

* Less inflation risk


Switzerland? Germany? Japan? Check US inflation in the 70s & 80s against those countries?

* Less political risk


You don't read US newspapers, do you?

* Better accounting


Maybe. There have been some big scandals under US GAAP. Generally I think IFRS is looser, so yes, probably.

* Less fraud and stock manipulation in the U.S.


Whoosh. Than where?

* U.S. legal environment


GKN would disagree with you! US litigation environment is irrational. The rest of us don't have no fault tort, and generally lawyers don't work on contingency. The US has, apparently, more practicing lawyers than the *rest of the world* (that number is old, it's certainly true "per anything").

* The most stable political environment


Newspapers. Again. This week.

My portfolio has been built around VT (Vanguard World Stock Fund) as advised by Burton Malkiel and Charlie Ellis. This fund holds roughly 55% US, 45% Int'l.

But Taylor is in the same mindset as Jack Bogle, who advise to limit one's international stock holdings to only 20% of the portfolio.

I know many of you will say "it makes no difference" or "nobody knows the future," But I do think a discussion is warranted because of Taylor's concerns above. We always talk about the best allocation based on many factors. But not often enough do we address the above. Thank you.


You are really stretching to prove a point to yourself. Which implies you don't really believe it?

Good reasons (i.e. ones underpinned by a plausible intellectual argument) not to internationally diversify (for a US investor):

- higher costs
- costs of foreign exchange hedging a fund
- higher taxation

Reasons which are sometimes made not to internationally diversify which are incorrect because they assume this information is not priced into securities by an efficient market :

- past performance
- differences in corporate governance, legal environment, government policy etc.
- superiority of US companies along some axis (shareholder value creation, innovation, competitive strength, etc.)

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Re: Home Country Bias...makes sense?

Post by garlandwhizzer » Sat May 13, 2017 4:46 pm

I believe it's a matter of personal preference, home county bias. Clearly US valuations are generous relative to INTL and especially EM. There are, as some have pointed out, reasons why US valuations should be higher. A cap weighted US dominated portfolio has outperformed a cap weighted INTL portfolio over most time frames on backtesting. US rule of law, innovation, better intellectual property rights, depth of markets, relatively less political risk, corruption, etc., are real but in my view fully reflected, perhaps over-reflected in current valuation disparities.

Personally I believe the best chance for investing outperformance going forward is not in the US, whether it be US beta or US factor approaches, but rather in INTL DM and especially EM. I believe an enormous amount of good news is already baked into US equity prices at present and an enormous amount of bad news is already baked into INTL equity prices. I don't mind paying up for real profits but I don't like paying excessively for future positive expectations especially when I believe clouds are on the horizon.

As for our wonderful markets and legal system, let us keep in mind a few facts before we get too haughty on our virtues. The US financial system all by itself created the world wide Great Recession of 2008-9. Our well regulated banks and mortgage lenders offered no down payment loans to borrowers with no documentation of income whatsoever. A quarter million dollars for just a signature. Huge amounts of money, don't know the exact amount but likely many hundreds of billions lent out in this way. This is an absurd totally ridiculous practice that had never ever been tried anywhere else in the world. Meantime financial firm analysts were totally oblivious to this risk but kept screaming about a bubble in shadow banking in China that would entirely collapse the EM banks and currencies, something which now 9 years later has not occurred. Our financial markets also created another profit generating tool, credit default swaps where huge volumes of money could be bet in a way that massively increased the leverage in the system. There was no real regulation in this Vegas type market. In addition the banks who made these loans, knowing that they were likely toxic, sold them to oblivious Uncle Sam or others who bundled sub-prime loans into tranches and got the rating agencies who were also complicit in this charade to declare that a bundle of high risk loans was actually very low risk, even prime. Then they could sell them to the world. So the rating agencies were likewise either massively ignorant or (more likely) complicit for a fee in this charade, similar to how large accounting firms painted lipstick on the Enron pig and Bernie Madoff's Ponzi scheme. These manipulations actually achieved their true goals, to generate profits for those who created and marketed them. They did a fabulous job of that as intended. The only problem was the rest of the world had to pick up the tab and the world wide financial system almost completely collapsed. Our wonderful government financial oversight agencies also saw nothing wrong with any this until the clock struck midnight and the disaster was actually upon us.

I'm not saying that US standards aren't better than EM. I'm saying that it's not a black and white issue, instead shades of gray. Currently IMHO INTL and especially EM is a bargain relative to US, the better valuations more than compensating the investor for its increased risk. I could be wrong but I'm sitting on 50%US 25%DM 25%EM. I think it's a good time to be widely diversified in equities.

Garland Whizzer

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Re: Home Country Bias...makes sense?

Post by JoMoney » Sat May 13, 2017 6:06 pm

If you're a U.S. investor, I think it can make a lot of sense for the reasons you mentioned.

The 'Efficient Market' proponents (like Ken French) seem to think a home country bias is irrational, but acknowledge it's pervasive everywhere. My question has been, if you believe the market is efficient, why would you believe it's in-efficient for an individual to have a home country bias since that's the way the market weights it?
The 'broad average' would imply every individual has one testicle and one ovary, but that doesn't make sense for anybody.
There may be very good reasons, including taxes, currency, and various political risks that could make for good reasons to have more of your money in home country assets.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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"How Much International Stock?"

Post by Taylor Larimore » Sat May 13, 2017 6:29 pm

Taylor is in the same mindset as Jack Bogle, who advise to limit one's international stock holdings to only 20% of the portfolio.

simpleset:

You started a good thread but my "mindset" is actually a compromise between Jack Bogle (20% maximum) and Vanguard Research (20% minimum). Bogleheads can read more here:

How Much International Stock? A Suggestion
When I disagree with Jack Bogle I am usually wrong. -- Bill Bernstein

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Home Country Bias...makes sense?

Post by AlohaJoe » Sat May 13, 2017 9:13 pm

willthrill81 wrote:over the last 45 years, the U.S. market has earned over 3% more than the rest of the world


From 1967-2016 -- a 50 year period -- World ex-US equities had a real return of 5.5%.

Over that same period, US equities had a real return of 5.8%. That's 0.3% more, not 3% more.

Over that same period these are the countries that outperformed the US:

the UK (6.9%)
Switzerland (6.0%)
Sweden (9.4%)
South Africa (7.5%)
Norway (6.8%)
the Netherlands (7.0%)
Ireland (6.5%)
France (6.0%)
Finland (9.1%)
Denmark (7.4%)
Belgium (6.2%)
Australia (5.9%)

The US only outperformed the world by 0.3%. But Sweden outperformed the world by 2.9%.

If one is going to invest based on past performance, Sweden is clearly the place to do it. What's more, it beats the US on most of the metrics the OP listed.

- Less inflation risk than the US
- Less political risk than the US
- Better accounting than the US
- Less fraud and stock manipulation than the US
- Better legal environment than the US
- More stable political environment than the US
- The US-Sweden tax treaty makes investing there tax efficient

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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 9:18 pm

AlohaJoe wrote:
willthrill81 wrote:over the last 45 years, the U.S. market has earned over 3% more than the rest of the world


From 1967-2016 -- a 50 year period -- World ex-US equities had a real return of 5.5%.

Over that same period, US equities had a real return of 5.8%. That's 0.3% more, not 3% more.


Portfolio Visualizer, where I was checking out returns, only has data back to 1986; I thought it was back to 1970. Thanks for the clarification.
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Re: Home Country Bias...makes sense?

Post by reriodan » Sat May 13, 2017 9:21 pm

willthrill81 wrote:
avalpert wrote:
willthrill81 wrote:I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.

This is really the worst justification I could imagine. The 'historical data' you are using is of such a short specific time frame that happens to align with US overall economic dominance - the notion that it will inevitably look like that even in the near future is silly. In my opinion, the narrowly construed 'historical data' pales in comparison to arguments rooted in meaningful attempts to forecast the future (whether that is based in valuations or diversification simply cause no-one knows).


45 years is a short time frame? Wow, just wow.

I never said "inevitable."

Arguments vs. historical data. Some opt for the former, some for the latter. Saying that the latter is the "worst justification" is overly harsh.


Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

willthrill81 wrote:I suppose a lot of active mutual fund managers still believe in their own arguments in lieu of the historical data showing that their methods don't work.


In fact, they do the opposite. They do what you are doing by cherry picking some timeframe where they outperform to justify the reason to use their product in the future.

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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sat May 13, 2017 10:03 pm

reriodan wrote:
willthrill81 wrote:
avalpert wrote:
willthrill81 wrote:I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.

This is really the worst justification I could imagine. The 'historical data' you are using is of such a short specific time frame that happens to align with US overall economic dominance - the notion that it will inevitably look like that even in the near future is silly. In my opinion, the narrowly construed 'historical data' pales in comparison to arguments rooted in meaningful attempts to forecast the future (whether that is based in valuations or diversification simply cause no-one knows).


45 years is a short time frame? Wow, just wow.

I never said "inevitable."

Arguments vs. historical data. Some opt for the former, some for the latter. Saying that the latter is the "worst justification" is overly harsh.


Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."


Find a portfolio that was created with no reference to past performance.

reriodan wrote:
willthrill81 wrote:I suppose a lot of active mutual fund managers still believe in their own arguments in lieu of the historical data showing that their methods don't work.


In fact, they do the opposite. They do what you are doing by cherry picking some timeframe where they outperform to justify the reason to use their product in the future.


According to Credit Suisse, from 1900-2016, 117 years, the U.S. market had an annual real return of 6.4%, while the rest of the world's equities had a real return of 4.3%. Still think I'm cherry picking?

And actually, many mutual fund managers think that they have now found a way to "beat the market" based on "solid arguments" (i.e. investing in companies with social media 'buzz' or those with high customer satisfaction ratings). These are not based in historical returns at all.

I've heard the "arguments over historical data" bit too often. That sword has two edges.

Once again, Bogle and Buffet aren't impressed with international either.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Home Country Bias...makes sense?

Post by avalpert » Sat May 13, 2017 10:55 pm

willthrill81 wrote:
reriodan wrote:
willthrill81 wrote:
avalpert wrote:
willthrill81 wrote:I'm about 95% U.S., though I would like to own more international SC. It isn't in my 401k, so I only access it currently through my IRA.

Considering that over the last 45 years, the U.S. market has earned over 3% more than the rest of the world, I'm not interested in owning the global ex-U.S. market. People can argue about valuations and periods where international has outperformed, but IMHO this all pales in comparison to the historical data.

This is really the worst justification I could imagine. The 'historical data' you are using is of such a short specific time frame that happens to align with US overall economic dominance - the notion that it will inevitably look like that even in the near future is silly. In my opinion, the narrowly construed 'historical data' pales in comparison to arguments rooted in meaningful attempts to forecast the future (whether that is based in valuations or diversification simply cause no-one knows).


45 years is a short time frame? Wow, just wow.

I never said "inevitable."

Arguments vs. historical data. Some opt for the former, some for the latter. Saying that the latter is the "worst justification" is overly harsh.


Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."


Find a portfolio that was created with no reference to past performance.

reriodan wrote:
willthrill81 wrote:I suppose a lot of active mutual fund managers still believe in their own arguments in lieu of the historical data showing that their methods don't work.


In fact, they do the opposite. They do what you are doing by cherry picking some timeframe where they outperform to justify the reason to use their product in the future.


According to Credit Suisse, from 1900-2016, 117 years, the U.S. market had an annual real return of 6.4%, while the rest of the world's equities had a real return of 4.3%. Still think I'm cherry picking?


Yes, you are both cherry picking the time frame and applying your rationale selectively - I mean you should really be going all in on South Africa, not only does it beat the US over the entire period but it is killing US over the last 17 years. If anything, doesn't the history tell us that the US' period is past and going all in on it now is performance chasing after it is too late - time to position yourself for the ascension of Oceania.

By the way, while I find this approach to equity allocation mistaken for anyone it is particularly dangerous to the point of being reckless for someone who also chooses to go 100% equities.

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Re: Home Country Bias...makes sense?

Post by AlohaJoe » Sat May 13, 2017 11:21 pm

willthrill81 wrote:According to Credit Suisse, from 1900-2016, 117 years, the U.S. market had an annual real return of 6.4%, while the rest of the world's equities had a real return of 4.3%. Still think I'm cherry picking?


World equity returns over that time period basically mean "US + Europe", due to the market caps. European markets were devastated by WW1 and WW2, which is shows up in the returns you quoted. Markets that weren't the site of world war fighting -- South Africa, Canada, Australia, and so -- mirrored US returns.

This is one of the challenges of using historical data. In the same way that we almost always talk about US returns from 1871 but, as nisiprius always quickly & correctly points out, no SEC before the 1930s meant that was a very different market that it is today.

Moving away from the US for another example....Japanese returns from 1950-1990 were astounding. Like, mind-blowing numbers. Not a single bear market in 40 years. But a lot of that is because WW2 "cleared out the dead wood" from their financial system -- decades of pre-WW2 bad banking was wiped out and only the strongest balance sheets survived. Before WW2 you often had things like the banking collapse after the Great Kanto Earthquake when 127 banks shut down in just a few months. None of the weaker enterprises survived to the 1950s. But it now seems arguable that the innate system didn't change (or didn't change enough) and after a few decades the plaque built back up and sclerosis set back in.

Another example of the challenges of historical data that I like to use is this chart

Image

For over 50 years the Tsarist Russian stock market absolutely destroyed American equities. We're talking about returns that are 3x better on a total return basis. And it wasn't a niche back then...the Russian stock market was quite large. Yet....clearly American equities were the better bet over the next 50 years.

Even with context, it is hard to know exactly what lessons we should be drawing in many cases :?

For instance, it is a little concerning (to me, at least) that basically all of the ex-US foreign countries that have done well are in the Anglosphere. Ireland, Australia, New Zealand, South Africa. Is there some magic "Anglo-Saxon Investing Influence"? (Is there an ETF for that?) Maybe that's the real secret sauce and not "don't have a war destroy you". (After all, the UK was in WW2 and they came out of it...okay.) On the other hand, only the UK really had an empire to leave that kind of legacy. It's not like there's some collapsed Swedish empire to compare against.

Of course, there are definitely countries that just seem plain dysfunctional (Italy especially but also Spain) but for the most part, developed world returns have been basically the same as US returns other than the minor fact of wars that killed tens of millions. That "closeness" shows up by how sensitive things are to start/end dates. For instance, over the past 3-4 years, according to Credit Suisse, Australia went from "the best equities since 1900" to third or fourth place.
Last edited by AlohaJoe on Sun May 14, 2017 12:42 am, edited 1 time in total.

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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sun May 14, 2017 12:04 am

avalpert wrote:By the way, while I find this approach to equity allocation mistaken for anyone it is particularly dangerous to the point of being reckless for someone who also chooses to go 100% equities.


I find it interesting that you would say such a thing about the advice of both Bogle and Buffett. Are they also "performance chasing," "cherry picking the timeframe," "applying rationale selectively," "mistaken," and "reckless?"

Again, performance is not the only reason I shun most international equities, but I and many others on this forum find it compelling.
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Re: Home Country Bias...makes sense?

Post by TD2626 » Sun May 14, 2017 12:17 am

Having a portfolio that seriously underweights international (or is all domestic) involves making a bet that:

-Apple will outperform Samsung
-GM will outperform Toyota
-Exxon will outperform BP
-Kraft will outperform Nestle
etc, etc, etc.

I think that people may do this for three reasons:
-They have carefully read the financial reports of all these companies and genuinely feel they are poised to outperform. I feel few here would have done this.
-They are investing in the familiar because it is familiar. There is little justification to this.
-They are knowingly making the listed bets (Apple vs Samsung, Ford vs Toyota, etc) but are only doing so in order to avoid things like currency risk and higher fees. This MAY be justifiable.

Citing long term data is great -- but it is important to remember that it is time-period dependent. In the last hundred years, the US went from emerging market to superpower. Of course it outperformed. Japan lost WWII and has had stagnation since their asset price bubble in the 1980s; Germany lost 2 world wars and experienced hyperinflation in the 1920s; countries such as China experienced communist takeovers. Britain is no longer has an imperialist empire - but their markets have done decently. All of these factors will not happen again. It is virtually impossible to predict where, over the 60 year period that a young investor today will stay in the market, the next wars/plagues/bubbles will be - and which of today's emerging markets will grow the fastest. This makes a strong case for not making any bets in any direction -- this is the Vanguard Total World route.

It is worth pointing out that most international investing (at least, the majority of the investment in Vanguard Total International) take place in countries that have regulatory structures of strength close to or even stronger than the US. Some of the regulatory structures in Europe are particularly strong, for example. Vanguard Total International puts the overwhelming majority of its money in these relatively safer countries.

Also - I think the decision on the US/International equity split should be influenced by whether or not the investor has a International bond fund. If they have no international bond fund, it may be a good idea to put a bit more than they otherwise would in international equities. Also, many people have significant foreign currency denominated expenses if they travel a lot. Finally, an investor's income is correlated to the local economy. International has much lower correlation to human capital.

There are definitely strong, valid reasons for favoring US - currency risk, for example... as well as potential tax benefits depending on your tax situation. Fees for US funds are lower, but I think that this day in age the difference is a minor technicality. I think that it is likely best to go with somewhere between 20% international and 65% - with the optimum being either cap weight or a bit below it (30-40% or so).

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Re: Home Country Bias...makes sense?

Post by simplesauce » Sun May 14, 2017 7:02 am

Great replies. As my original post states, I'm not too interested in discussing long term returns, our predictions, comparing charts, etc. Great posts discussing that. But I'm more interested in reviewing the concerns about political risk, inflationary risk, accounting concerns, currency risk, etc.

Those are the issues I'm concerned with. I don't think anybody knows who will outperform in the future. But regardless, if these other risks are real, then we should be cautious on how much international we invest in, no?

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Re: Home Country Bias...makes sense?

Post by AlohaJoe » Sun May 14, 2017 7:08 am

simplesauce wrote:But I'm more interested in reviewing the concerns about political risk, inflationary risk, accounting concerns, currency risk, etc.

Those are the issues I'm concerned with. I don't think anybody knows who will outperform in the future. But regardless, if these other risks are real, then we should be cautious on how much international we invest in, no?


All of those risks exist in the US.

Enron, Bear Sterns, WorldCom, 1970s stagflation, wildly fluctuating value of the US dollar, debt ceiling default, and so on.

So we should be cautious on how much US we invest in, no?

Can you name a single actual problem you've ever heard about with Australian or Swedish stocks?

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Re: Home Country Bias...makes sense?

Post by harvestbook » Sun May 14, 2017 7:20 am

Bogle and Buffet enjoyed the golden era of US dominance that could well have peaked. Confirmation bias.

Home country bias using historical data is confirmation bias (how rarely we see someone cite data that goes against the point they are trying to make.)

Even selecting the criteria for comparison is a form of confirmation bias. Currency risk? Like there's zero risk in the US dollar? Political risk? You could easily make the case the US is losing the ability to govern itself.

I don't know and can't afford to guess, but one thing I know is that I can't go back in a time machine and invest in 1950. I'll just stick with my globally diversified portfolio and sleep well at night while I can.
I'm not smart enough to know, and I can't afford to guess.

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Re: Home Country Bias...makes sense?

Post by NiceUnparticularMan » Sun May 14, 2017 8:35 am

I also find it hard to believe anyone who was not already biased could study the many different cases of certain countries having decades-long bull runs then dramatically underperforming, and come to the conclusion it was safe to invest everything in some one country that recently has had a decades-long bull run. Incidentally, the post-WWII Japan bull run happened to last right around 45 years:

Image

This is such an obvious point, and so consistent with normal Bogleheads philosophy, it seems to quickly force proponents into argument-by-guru: Bogle and Buffett said so, so it must be true.

I think there are pretty good theories about why U.S. investors who happened to do really well during this U.S. bull run, and who will be fine even in a Japan scenario, might have a blind spot on this issue. In any event if you can't translate their assertions into rational arguments, I personally don't think they can be relied on. And the stakes are potentially very high--Japanese investors who diversified globally did so, so much better than those who did not.

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Re: Home Country Bias...makes sense?

Post by Valuethinker » Sun May 14, 2017 8:35 am

garlandwhizzer wrote:I believe it's a matter of personal preference, home county bias. ...

As for our wonderful markets and legal system, let us keep in mind a few facts before we get too haughty on our virtues. The US financial system all by itself created the world wide Great Recession of 2008-9.


Much as I like stories that credit the world's problems to American malfeasance ;-) we have to qualify this. Iceland, UK, Ireland and a few other places (like Greece) had their own peculiar contributions to the ongoing financial and economic crisis. For example Royal Bank of Scotland was something like the world's 6th largest bank by assets when it acquired ABN Amro and it was days (or hours) away from declaring insolvency when the British government stepped in. That in and of itself would probably have given the world a financial crisis.

We could fault American investment banking practices, such as CDOs. However banks and bankers in other countries took to these like ducks to water.

And the Credit Default Swap (CDS)? Invented by a team of Brits at JP Morgan ;-).

Perfidious Albion rules, eh? ;-).


I'm not saying that US standards aren't better than EM. I'm saying that it's not a black and white issue, instead shades of gray. Currently IMHO INTL and especially EM is a bargain relative to US, the better valuations more than compensating the investor for its increased risk. I could be wrong but I'm sitting on 50%US 25%DM 25%EM. I think it's a good time to be widely diversified in equities.

Garland Whizzer


The FT Column The Long View (John Auther) this weekend is about the consensus trades that make us long: EM, Europe, US tech. And how those could be wrong.

In my view it is *always* "a good time to be widely diversified in equities".

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Re: Home Country Bias...makes sense?

Post by Valuethinker » Sun May 14, 2017 8:40 am

NiceUnparticularMan wrote:
This is such an obvious point, and so consistent with normal Bogleheads philosophy, it seems to quickly force proponents into argument-by-guru: Bogle and Buffett said so, so it must be true.

I think there are pretty good theories about why U.S. investors who happened to do really well during this U.S. bull run, and who will be fine even in a Japan scenario, might have a blind spot on this issue. In any event if you can't translate their assertions into rational arguments, I personally don't think they can be relied on. And the stakes are potentially very high--Japanese investors who diversified globally did so, so much better than those who did not.


Perhaps it is the nature of human beings, but they tend to confuse their feelings about a country with their feelings about its financial markets.

In the 1980s we thought Japan would rule the world: see films Black Rain (Ridley Scott) or Blade Runner (same) or Rising Sun.

There's a spirit of triumphalism around which reflects very good US stock market performance, the success of US tech companies (we remember Apple, which was nearly out of business in 1994, a manufacturer of proprietary architecture PCs w 2% market share) and forget IBM (still one of the world's largest tech companies, but shrinking fast).

Reality is there is lots to worry about, both in the US and abroad, and so it's impossible to know.

None of us can invest like Warren Buffett (acquiring whole companies) and he does have large overseas operations. Bogle? I understand his logic, I think, but I think he is blind to the merits of international investing, which he should know. But then consider what Museum he has funded.

Even John Bogle is not immune to human biases.

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Re: Home Country Bias...makes sense?

Post by lostdog » Sun May 14, 2017 8:42 am

Is home country bias basically speculation?
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Re: Home Country Bias...makes sense?

Post by happyisland » Sun May 14, 2017 9:11 am

lostdog wrote:Is home country bias basically speculation?


I would say that a strong argument has been made in this thread that home country bias is irrational.

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reriodan
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Re: Home Country Bias...makes sense?

Post by reriodan » Sun May 14, 2017 9:24 am

willthrill81 wrote:According to Credit Suisse, from 1900-2016, 117 years, the U.S. market had an annual real return of 6.4%, while the rest of the world's equities had a real return of 4.3%. Still think I'm cherry picking?


Yes, as a matter of fact. Granted, you doubled your original number of data points. I could show you plenty of time frames where US underperformed other markets. With your investing rationale, you would have been devastated had you been born japanese.

willthrill81 wrote:And actually, many mutual fund managers think that they have now found a way to "beat the market" based on "solid arguments" (i.e. investing in companies with social media 'buzz' or those with high customer satisfaction ratings). These are not based in historical returns at all.

I've heard the "arguments over historical data" bit too often. That sword has two edges.

Once again, Bogle and Buffet aren't impressed with international either.


Bogle and Buffet come from a different era, and I think a lot of their motivation for US only is due to their deep-seated patriotism. I think they are wrong on this one. In fact, you can use Bogle's own logic to see the contradiction. They are speculating, though speculating at this scale probably won't be too devastating.

BTW, by "wrong" I don't mean I expect US+international to outperform US-only. I don't expect anything except market returns. That is what I am in the business of. I let the other people with crystal balls do the speculating.

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Re: Home Country Bias...makes sense?

Post by lostdog » Sun May 14, 2017 10:16 am

Vanguard holds 40% international in their life strategy and target date funds. I am guessing at some point it will be up to 50%.
"Our life is frittered away by detail. Simplify, simplify." -Thoreau | Vanguard Total World Index-buy the haystack.

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Re: Home Country Bias...makes sense?

Post by willthrill81 » Sun May 14, 2017 10:18 am

reriodan wrote:
willthrill81 wrote:According to Credit Suisse, from 1900-2016, 117 years, the U.S. market had an annual real return of 6.4%, while the rest of the world's equities had a real return of 4.3%. Still think I'm cherry picking?


Yes, as a matter of fact. Granted, you doubled your original number of data points. I could show you plenty of time frames where US underperformed other markets. With your investing rationale, you would have been devastated had you been born japanese.


That's simply false. "Cherry picking, suppressing evidence, or the fallacy of incomplete evidence is the act of pointing to individual cases or data that seem to confirm a particular position, while ignoring a significant portion of related cases or data that may contradict that position." I'm looking at all of the data that we have access to. If you have longer data than back to 1900, please share.

Someone will probably jump in and say that I'm ignoring the countries that outperformed the U.S. from 1900-2016 (i.e. Australia and South Africa). But in comparison to total market cap, they are tiny slivers of the market, whereas the U.S. is 53% of the global market. Just as we saw in 2008-2009, if the U.S. market suffers, so does the rest of the world's equities.

willthrill81 wrote:And actually, many mutual fund managers think that they have now found a way to "beat the market" based on "solid arguments" (i.e. investing in companies with social media 'buzz' or those with high customer satisfaction ratings). These are not based in historical returns at all.

I've heard the "arguments over historical data" bit too often. That sword has two edges.

Once again, Bogle and Buffet aren't impressed with international either.


Bogle and Buffet come from a different era, and I think a lot of their motivation for US only is due to their deep-seated patriotism. I think they are wrong on this one. In fact, you can use Bogle's own logic to see the contradiction. They are speculating, though speculating at this scale probably won't be too devastating.

BTW, by "wrong" I don't mean I expect US+international to outperform US-only. I don't expect anything except market returns. That is what I am in the business of. I let the other people with crystal balls do the speculating.[/quote]

When two investment legends both come to the same conclusion, albeit for slightly different reasons to my knowledge, with their own sound arguments plus strong and lengthy historical data on their side, I don't believe we should take that lightly. They both know full well about Japan, the rise of America as the world's only superpower during the 20th century, diversification, etc. They have both taught us so much about what we now treat as 'gospel', but so many completely disregard their advice on this topic. Maybe they are wrong, but so far, bets that they were wrong before haven't generally gone well I think.

Au revoir.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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