Ari wrote: ↑
Mon Sep 03, 2018 1:37 am
TomCat96 wrote: ↑
Sat Sep 01, 2018 2:30 pm
So perhaps the better argument is to say when WOULD I invest in international.
I would invest in international when those internal barriers are gone, when the international zone is a monolithic entity, and when International starts posting 10% a year CAGR nominal.
This is an incredibly odd way of looking at things. By this logic, it would be ok to invest in any single country, but not in multiple countries at the same time. And the same logic can be applied to individual companies, too, of course. There are a lot fewer barriers within the same company, compared to different companies, so why would you invest in "Market ex Apple", rather than just investing in Apple? Do you really think capital can flow as freely between companies as within the same company? You are basically saying "diversification is bad; it's better to invest in one thing than many different things".
Why would barriers between France and Australia affect the growth of France and Australia, but barriers between France and the US not affect the growth of the US?
And as another poster mentioned, "International" (also known as "the entire stock market minus one (albeit large) subsection") has been posting a CAGR of 10% since 1950. Not long enough a time frame for you? It's all cherry-picking dates.
You raise a good point. I think your inquiry against my logic is really, what does this trade barrier issue really mean?
I'm not saying diversification is bad. I'm not saying that it's better to invest in one thing than many other things.
I'm saying that the foundation of market efficiency depends on the free flow of capital. Capital that is impeded by legal barriers, trade barriers, is capital that is hampered from doing its job of efficiently allocating the best price to the company that can product the best products for the cheapest amount.
Let's suppose you are invested in two companies, A and B, by virtue of their inclusion in stock market indices.
Company A should be the winner, but Company B is protected lets say by large protectionist tariffs. Suppose also they have equal market cap, and both are traded on public markets.
If you really are balanced with the world market cap, you would hold equal dollar amounts of both companies A and B.
The problem is however that A and B aren't equal companies. A should be the winner. At the best least, you should hold more stock of company A than B. Yet you hold both equally, the latter being propped up. Company B, being protected has less incentive to outcompete company A.
Once the trade barrier is erected, capital is impeded from properly allocating company B the market cap it really deserves.
Now for the counter argument. But Tomcat96, the market will see the Company B is being protected and will properly allocate to company B, its proper share.
My counter to that is will it?
Remember adherents of investing internationally, on this website at least, invest by world cap. If a company is being propped up, as long as it is being traded on the public markets, it cannot possibly have a market cap of zero. Let's say company B really ought to be eliminated by Company A in an efficient market. It should go bankrupt. It's proper market cap should be zero. But is it?
Even if every trader sold their stock, as long as the company exists propped up by protectionist policies, and is traded on the public markets, it will be able to attract at least some
measure of passive stock investment by virtue of having a market cap. It does not matter that it's market cap exists by virtue of its host sovereign government propping it up. Having a market cap = having passive investments relative to its position in the weighted market.
It's actually a theoretically wonderful way of exploiting passive investors. The higher a market cap that can be engineered by the sovereign nation, the greater the amount of passive investment it will attract. As I said, the state itself is preventing the company from having zero market cap. That means you passive international investors don't have your usual degree of protection by active traders to price bad companies out--if your policy is global market cap.
So let's get back to your contention. Does my argument mean I hate diversification? No.
What it means is that restrictions to the flow of capital, restricts the ability to the market to properly price, and price out companies. If there are trade barriers between countries, the ability of the market to correct is impeded. I'm all for diversification. But a good diversification strategy to me doesn't mean buying up everything with a market cap (following passive market weights)
At the very least, I think its important to use a judgment call on what markets are sufficiently free enough that it can do its work. *
The United States has a large global weight, approximately half. Within that market, the internal trade barriers are small when compared to the internal trade barriers of the similarly sized international market. The allocative efficiency within the US is such that outdated companies within the market are eliminated. I think Blockbuster, Kodak, GE, and Sears are all examples of declines where the internal allocative efficiency of the US market is properly pricing these companies.
On the other hand, you have to think that if you were a smaller nation that had GE for instance as one of its few globally recognized corporations, you would do what you could to keep it afloat if it ran into trouble, instead of letting the market price it into bankruptcy. At the very least, the incentive is there.
*We make those same judgment calls when regulating the free market here. For example:
-over concentration in markets leads to monopolistic practices, hence our antitrust laws.
-we pass laws encouraging the free flow of information about publicly traded companies, heavily punishing companies that fake their financial
-we pass laws against insider trading, because we make a judgment call that this behavior is not good for the free market.