Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

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msk
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by msk » Sun Jan 13, 2019 2:53 am

LoL Fear and Greed. That's all there is to it. I am terrified of the ridiculously high P/E ratio of the SP500, with its puny dividends. My own very tiny local market (so small it does not even qualify for Frontier) has the following stats for its index stocks, local currency pegged to the USD:
P/E 10.2, Price to Book 0.77, Dividend Yield 5.3%
Yet the local index fell by 11% over the last year. Obviously there is a lack of confidence somewhere :shock: Is it cheap compared to the SP500? Only the future can tell. I am heavily invested in both this local market and in the SP500. In decades past I have made many more millions in this tiny market than in the US market, despite having held Berkshire Hathaway for decades (better long term than the SP500). Fear: divest from my local market (somebody somewhere must have a reason for the lack of confidence). Greed: sell off my worldwide holdings and pile in more locally. It worked for decades :greedy

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by fennewaldaj » Sun Jan 13, 2019 2:59 am

msk wrote:
Sun Jan 13, 2019 2:53 am
LoL Fear and Greed. That's all there is to it. I am terrified of the ridiculously high P/E ratio of the SP500, with its puny dividends. My own very tiny local market (so small it does not even qualify for Frontier) has the following stats for its index stocks, local currency pegged to the USD:
P/E 10.2, Price to Book 0.77, Dividend Yield 5.3%
Yet the local index fell by 11% over the last year. Obviously there is a lack of confidence somewhere :shock: Is it cheap compared to the SP500? Only the future can tell. I am heavily invested in both this local market and in the SP500. In decades past I have made many more millions in this tiny market than in the US market, despite having held Berkshire Hathaway for decades (better long term than the SP500). Fear: divest from my local market (somebody somewhere must have a reason for the lack of confidence). Greed: sell off my worldwide holdings and pile in more locally. It worked for decades :greedy
I curious what country is this?

msk
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by msk » Sun Jan 13, 2019 3:09 am

I'd rather not say. It's too tiny a country and any local BHs might instantly identify me. No longer anonymous. I am just quoting it as an example of how undervalued an EM can be, or appear to be. I have a friend who floated his business in an IPO last year. He chose to float it on the Nasdaq specifically because he felt he will get a much better valuation there than in our local market. Right decision. He did. He made at least an extra 8 figures by that choice. Paid more for lawyers and accountants to satisfy Nasdaq but well worth the extra upfront cost.

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Nicolas Perrault
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by Nicolas Perrault » Sun Jan 13, 2019 5:05 am

AlohaJoe wrote:
Sat Jan 12, 2019 8:59 pm
Nicolas Perrault wrote:
Sat Jan 12, 2019 2:46 pm
I had the chance to visit Fiji about ten years ago.
What does Fiji have to do with emerging markets? Fiji isn't an emerging market.

I'm confused about the relevance of your anecdote.
Fiji has nothing to do with it, it could have been on the moon or in any developed country. I love Fijians, they're the kindest people I've ever met. The point of the anecdote is in the title of the thread: "don't buy something if you don't know the price of it". And I'm not sure you can know the price (relative to earnings) of emerging market stocks, because I'm not sure you can trust the earnings reported in company balance sheets in those markets. I would definitely have said the same of the US in the 1800s, but the US has proven itself to yield very long term positive returns.

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Nicolas Perrault
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by Nicolas Perrault » Sun Jan 13, 2019 5:08 am

reformed.trader wrote:
Sun Jan 13, 2019 12:49 am
If you suspect the financial statement numbers, you can also look at dividend yields(cold hard cash) as a gauge of value or cheapness. Here are some large EM countries...

Russia - 6.3%
China - 4.7%
Taiwan - 4.7%
South Africa - 4.4%
Turkey - 4.2%


For comparison the US is at 2.1%
This is good if the record for the dividends is very long. If it's just for a few years, you may be getting paid with your capital à la Ponzi.

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Nicolas Perrault
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by Nicolas Perrault » Sun Jan 13, 2019 5:13 am

dialecticalinvestor wrote:
Sat Jan 12, 2019 9:43 pm
Nicolas Perrault wrote:
Sat Jan 12, 2019 2:46 pm

Am I claiming I know something that the market doesn't? Certainly not, but in terms of emerging markets --- in a way that would parallel cryptocurrency --- I wonder whether the market knows enough to estimate the worth of emerging market stocks to the closest order of magnitude.
Since the market doesn't even know enough to estimate accurately the worth of stocks in developed countries like the United States, I wouldn't worry too much about what the market does or does not know about emerging markets.
That's fair enough, but the US has a very long track record of positive returns. I would have asked the same question about the US in the 1800s.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by columbia » Sun Jan 13, 2019 6:32 am

Can someone point to an assessment of home country bias within the BRICs and other EM countries?

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by nisiprius » Sun Jan 13, 2019 7:16 am

Here's what I honestly believe.

(I assume that you are talking about the choice of holding emerging markets at cap weight, or excluding them; not overweighting them or shorting them or anything bold like that).

1) I don't believe it can make much difference, for reasons I explained above. If emerging markets grew to be 40% of international markets that might need to be revisited--but I don't think it will, because the markets that get big will "emerge" and get reclassified as developed.

2) You clearly do not want to invest in emerging markets.

3) So, don't invest in them. Make a decision and then stick to it, and stay the course.

4) But don't kid yourself by pretending that there is some sound, rational basis. Say to yourself "I have decided not to do it because Just... Don't... Want to" and leave it at that. Admit your irrationality, accept it, embrace it. It doesn't matter whether it is hunch, intuition, or unconscious deep insight. The reason is that reaching a poorer outcome by backing your own judgement is unpleasant, but it is nowhere near as bad reaching a poorer outcome because you followed advice that went against your judgement.

Within the range that can be "all but proven" go with rational analysis; within the range where "everybody argues about it because nobody can be sure," go with your personal preferences and call it that.
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columbia
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by columbia » Sun Jan 13, 2019 7:33 am

nisiprius wrote:
Sun Jan 13, 2019 7:16 am
Here's what I honestly believe.

(I assume that you are talking about the choice of holding emerging markets at cap weight, or excluding them; not overweighting them or shorting them or anything bold like that).

1) I don't believe it can make much difference, for reasons I explained above. If emerging markets grew to be 40% of international markets that might need to be revisited--but I don't think it will, because the markets that get big will "emerge" and get reclassified as developed.

2) You clearly do not want to invest in emerging markets.

3) So, don't invest in them. Make a decision and then stick to it, and stay the course.

4) But don't kid yourself by pretending that there is some sound, rational basis. Say to yourself "I have decided not to do it because Just... Don't... Want to" and leave it at that. Admit your irrationality, accept it, embrace it. It doesn't matter whether it is hunch, intuition, or unconscious deep insight. The reason is that reaching a poorer outcome by backing your own judgement is unpleasant, but it is nowhere near as bad reaching a poorer outcome because you followed advice that went against your judgement.

Within the range that can be "all but proven" go with rational analysis; within the range where "everybody argues about it because nobody can be sure," go with your personal preferences and call it that.
I think it’s perfectly sound and rational for someone to choose to avoid investing in countries run by dictators.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by ignition » Sun Jan 13, 2019 7:48 am

Nicolas Perrault wrote:
Sat Jan 12, 2019 5:49 pm
ignition wrote:
Sat Jan 12, 2019 5:33 pm
Aren't most of the firms in emerging markets audited by the Big Four? The same Big Four that audits firms in developed markets?
What's the Big Four?
The four biggest firms that audit the financial statements of companies. If they do their job correctly, numbers should be more or less correct.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by Valuethinker » Sun Jan 13, 2019 8:04 am

columbia wrote:
Sun Jan 13, 2019 6:32 am
Can someone point to an assessment of home country bias within the BRICs and other EM countries?
No but most of those countries have some form of exchange controls and/or other cost and tax restrictions on foreign investing. Much like our own countries in the 1950s & 60s.

These countries are nascent in their stock market cultures, generally. And most people don't have a lot of surplus cash to invest. If you are on $12k a year, an upper middle class or rich salary in an EM, then investing $1k pa is a triumph - people tend to invest in government bonds or in property.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by Valuethinker » Sun Jan 13, 2019 8:09 am

reformed.trader wrote:
Sun Jan 13, 2019 12:49 am
If you suspect the financial statement numbers, you can also look at dividend yields(cold hard cash) as a gauge of value or cheapness. Here are some large EM countries...

Russia - 6.3%
China - 4.7%
Taiwan - 4.7%
South Africa - 4.4%
Turkey - 4.2%


For comparison the US is at 2.1%
This is the key although you'd have to adjust the US upwards for buybacks (perhaps add another 1.0%) which are much more prevalent there.

It's an agency cost in the economic literature. Greater uncertainty by external investors about the underlying business means the business needs to signal its quality by paying out more in dividends, since you cannot really lie about those.

Since in the long run, Ibbotson and others have shown equity returns are really about dividends and dividend growth, the EM are starting in a good place.

What's obviously happening is US execs are incentivized by share price and EPS, and buying back shares increases both, paying dividends does not. Thus US companies buy back a lot more shares.

They are doing so using cheap debt - non financial corporate debt has soared, I believe. That's not (only) to make new investments but to buy back shares, and to do takeovers (which is really a share buyback of the equity of the target company).

This is cyclical. In 2009 it dropped to zero. It will again, come the recession and the next credit cycle.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by samsdad » Sun Jan 13, 2019 8:10 am

columbia wrote:
Sun Jan 13, 2019 7:33 am
nisiprius wrote:
Sun Jan 13, 2019 7:16 am
...
4) But don't kid yourself by pretending that there is some sound, rational basis. Say to yourself "I have decided not to do it because Just... Don't... Want to" and leave it at that. Admit your irrationality, accept it, embrace it. It doesn't matter whether it is hunch, intuition, or unconscious deep insight. The reason is that reaching a poorer outcome by backing your own judgement is unpleasant, but it is nowhere near as bad reaching a poorer outcome because you followed advice that went against your judgement.

Within the range that can be "all but proven" go with rational analysis; within the range where "everybody argues about it because nobody can be sure," go with your personal preferences and call it that.
I think it’s perfectly sound and rational for someone to choose to avoid investing in countries run by dictators.
With all due respect for nisiprius, whom I admire for how much time and effort he/she puts in here at least in part as service to the community, and having made many decisions based at least in part what he/she has said, I think nisi is wrong here.

I agree with you. Not wanting to invest in countries run by dictators is a completely rational decision. Ignoring what you’re actually investing in because it’s going to “diversify your portfolio” is turning a blind eye to the risk involved. History is replete with examples of how dictators behave and what that means for free enterprise in their country. Ignoring that because it’s gonna give you a different kettle of fish is frankly short-sighted imho. Would investing in Saddam’s Iraq sound like a great plan? Gaddafi’s Libya? Maduro’s Venezuela? Xi’s China, where gulags have reappeared?

Despite protestations otherwise, all diversity, no matter what it entails, is not good imho. There are bad investments. I don’t have to have them because they’ll occasionally zig when my good ones zag. Country risk is real.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by Valuethinker » Sun Jan 13, 2019 8:10 am

nisiprius wrote:
Sun Jan 13, 2019 7:16 am


4) But don't kid yourself by pretending that there is some sound, rational basis. Say to yourself "I have decided not to do it because Just... Don't... Want to" and leave it at that. Admit your irrationality, accept it, embrace it. It doesn't matter whether it is hunch, intuition, or unconscious deep insight. The reason is that reaching a poorer outcome by backing your own judgement is unpleasant, but it is nowhere near as bad reaching a poorer outcome because you followed advice that went against your judgement.

Within the range that can be "all but proven" go with rational analysis; within the range where "everybody argues about it because nobody can be sure," go with your personal preferences and call it that.
This is what the human mind does not want to accept.

That it is not rational in making its decisions.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by samsdad » Sun Jan 13, 2019 8:19 am

Valuethinker wrote:
Sun Jan 13, 2019 8:10 am
nisiprius wrote:
Sun Jan 13, 2019 7:16 am


4) But don't kid yourself by pretending that there is some sound, rational basis. Say to yourself "I have decided not to do it because Just... Don't... Want to" and leave it at that. Admit your irrationality, accept it, embrace it. It doesn't matter whether it is hunch, intuition, or unconscious deep insight. The reason is that reaching a poorer outcome by backing your own judgement is unpleasant, but it is nowhere near as bad reaching a poorer outcome because you followed advice that went against your judgement.

Within the range that can be "all but proven" go with rational analysis; within the range where "everybody argues about it because nobody can be sure," go with your personal preferences and call it that.
This is what the human mind does not want to accept.

That it is not rational in making its decisions.
So I have to eat the bad apples that come in the bag from the store too, only because they represent a more accurate picture of the various types of apples in the universe? It’s irrational to want to only eat the good ones?
Last edited by samsdad on Sun Jan 13, 2019 8:34 am, edited 2 times in total.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by fortyofforty » Sun Jan 13, 2019 8:20 am

Valuethinker wrote:
Sun Jan 13, 2019 8:10 am
nisiprius wrote:
Sun Jan 13, 2019 7:16 am


4) But don't kid yourself by pretending that there is some sound, rational basis. Say to yourself "I have decided not to do it because Just... Don't... Want to" and leave it at that. Admit your irrationality, accept it, embrace it. It doesn't matter whether it is hunch, intuition, or unconscious deep insight. The reason is that reaching a poorer outcome by backing your own judgement is unpleasant, but it is nowhere near as bad reaching a poorer outcome because you followed advice that went against your judgement.

Within the range that can be "all but proven" go with rational analysis; within the range where "everybody argues about it because nobody can be sure," go with your personal preferences and call it that.
This is what the human mind does not want to accept.

That it is not rational in making its decisions.
Or seemingly rational justifications are found to reinforce an irrational decision. In investing, it's always easy to find a reason why, since nobody knows the future and chooses the past he sees.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by dknightd » Sun Jan 13, 2019 8:33 am

I'm not going to try and change your mind. But here is my thinking, with no evidence to support it.
I believe in the concept of a global economy. Currently there is a lot of imbalance. I suspect this will mean parts of the worlds "quality of living" will have to increase (or the rich nations will have to decrease).
The accounting in emerging markets may or may not be accurate. But to discount China, India, and other emerging markets effects on the global economy would be a mistake IMO. If one or more of those emerging markets emerges, I want to be along for the ride ;)

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by quantAndHold » Sun Jan 13, 2019 11:07 am

AlohaJoe wrote:
Sat Jan 12, 2019 8:59 pm
Nicolas Perrault wrote:
Sat Jan 12, 2019 2:46 pm
I had the chance to visit Fiji about ten years ago.
What does Fiji have to do with emerging markets? Fiji isn't an emerging market.

I'm confused about the relevance of your anecdote.
It is more of a frontier market, but Fiji has had a stock market for awhile...

http://www.spse.com.fj

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by averagedude » Sun Jan 13, 2019 11:27 am

Just a couple of thoughts that i have.
1. As already mentioned heavily, hasn't the market already priced in this additional risk?
2. In a cap weighted index, isn't it in the best interest of these large emerging market companies to give honest accounting information to investors, knowing that their share price will be punished severely if the information proves to be false? Even US companies are extremely cautious with their guidance, knowing they will lose present and future credibility and trust with Wall Street analysts.
3. If the accounting measures are more honest today than they were in the past, wouldn't that mean better returns in the future for investors if everything else remains equal? I think there is a good argument to be made that there is more regulatory control today than in the past, thus more emerging market companies are acting with integrity.
4. Although there are no guarantees, shouldn't investors be rewarded with a premium for taking on the additional risks of investing in emerging markets?

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by nedsaid » Sun Jan 13, 2019 11:35 am

My take is that I want "Tiger in the Tank" investments in my portfolio. Stuff like US Small-Value, Emerging Markets, REITs, US Micro-Caps, International Mid/Small-Cap. That is, I want volatile and riskier investments in my portfolio that can boost returns but with more risk. Over time, these asset classes have very good returns and don't necessarily correlate with the broad US Stock Market. So I look at it as a way of putting more octane in your gas tank without blowing it up. You want to add some but not too much.

There are issues with the Emerging Markets but there are things in their favor. First, I see first world countries often counted as EM. Really, I think of nations like South Korea, Taiwan, Singapore, Malaysia as first world nations. Thus you will get some the of world's leading companies in an Emerging Markets index. China, which has the second largest economy in the world, how can that be an Emerging market? So I think the distinctions between Developed and Emerging are getting to be rather artificial. EM countries tend to have faster growth rates and younger populations and less debt. So I want to be in the game.
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by alex_686 » Sun Jan 13, 2019 11:41 am

nedsaid wrote:
Sun Jan 13, 2019 11:35 am
China, which has the second largest economy in the world, how can that be an Emerging market?
It is not about the country, nor the companies. It is because the market is of poor quality. Market regulators, institutions, reporting standards, independency of boards, etc. are weak. There are issues with insider trading, currency and capital controls, etc.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by UpperNwGuy » Sun Jan 13, 2019 11:54 am

samsdad wrote:
Sun Jan 13, 2019 8:19 am
Valuethinker wrote:
Sun Jan 13, 2019 8:10 am
nisiprius wrote:
Sun Jan 13, 2019 7:16 am


4) But don't kid yourself by pretending that there is some sound, rational basis. Say to yourself "I have decided not to do it because Just... Don't... Want to" and leave it at that. Admit your irrationality, accept it, embrace it. It doesn't matter whether it is hunch, intuition, or unconscious deep insight. The reason is that reaching a poorer outcome by backing your own judgement is unpleasant, but it is nowhere near as bad reaching a poorer outcome because you followed advice that went against your judgement.

Within the range that can be "all but proven" go with rational analysis; within the range where "everybody argues about it because nobody can be sure," go with your personal preferences and call it that.
This is what the human mind does not want to accept.

That it is not rational in making its decisions.
So I have to eat the bad apples that come in the bag from the store too, only because they represent a more accurate picture of the various types of apples in the universe? It’s irrational to want to only eat the good ones?
Yes, you do. If, like me, you own a Total International Stock Index fund, then you own emerging markets, and there are a few bad apples in those markets. What's the alternative? Invest only in domestic US stocks? Invest only in developed markets? I'll stick with Total International, thank you.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by ETadvisor » Sun Jan 13, 2019 11:57 am

Your premise may be true or may not be true. I have Vanguard accounts and model the 3 fund portfolio with an additional small cap tilt and my international is in VXUS and VSS so I hold some EM.

What is the saying on here "Nobody knows anything so just buy the entire haystack"

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by nedsaid » Sun Jan 13, 2019 12:05 pm

alex_686 wrote:
Sun Jan 13, 2019 11:41 am
nedsaid wrote:
Sun Jan 13, 2019 11:35 am
China, which has the second largest economy in the world, how can that be an Emerging market?
It is not about the country, nor the companies. It is because the market is of poor quality. Market regulators, institutions, reporting standards, independency of boards, etc. are weak. There are issues with insider trading, currency and capital controls, etc.
Good points. What I wanted to point out is that there is not a universal agreement about the definition of Emerging Markets or agreement about which countries should be included. Still hard for me to rate the number two economy in the world as an Emerging Market but given your arguments I too would extend such status to China.
A fool and his money are good for business.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by alex_686 » Sun Jan 13, 2019 12:13 pm

nedsaid wrote:
Sun Jan 13, 2019 12:05 pm
Good points. What I wanted to point out is that there is not a universal agreement about the definition of Emerging Markets or agreement about which countries should be included. Still hard for me to rate the number two economy in the world as an Emerging Market but given your arguments I too would extend such status to China.
To extend a bit, I can point to high quality Chinese companies which strive and meet DM standards in terms of reporting, boards, etc.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by nedsaid » Sun Jan 13, 2019 12:15 pm

alex_686 wrote:
Sun Jan 13, 2019 12:13 pm
nedsaid wrote:
Sun Jan 13, 2019 12:05 pm
Good points. What I wanted to point out is that there is not a universal agreement about the definition of Emerging Markets or agreement about which countries should be included. Still hard for me to rate the number two economy in the world as an Emerging Market but given your arguments I too would extend such status to China.
To extend a bit, I can point to high quality Chinese companies which strive and meet DM standards in terms of reporting, boards, etc.
Could you provide a few examples? Chinese companies have the perception of being manipulated by their government behind the scenes. This would be quite educational.
A fool and his money are good for business.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by alex_686 » Sun Jan 13, 2019 12:25 pm

nedsaid wrote:
Sun Jan 13, 2019 12:15 pm
Could you provide a few examples? Chinese companies have the perception of being manipulated by their government behind the scenes. This would be quite educational.
Lenovo - when I last checked which was a few years ago, so things may have drifted. It has a US headquarters. It has a sponsored ADR so files reports to US audit standards and is subject to SEC oversight. It trades in multiple markets giving it a fair amount of liquidity. Independent board of quality, transparent ownership with limited state ownership.

Actually, you can go through most of the 10 top EM holdings and the companies tend to be of high corporate quality.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by KyleAAA » Sun Jan 13, 2019 12:38 pm

Nicolas Perrault wrote:
Sat Jan 12, 2019 8:52 pm
KyleAAA wrote:
Sat Jan 12, 2019 8:43 pm
Nicolas Perrault wrote:
Sat Jan 12, 2019 5:27 pm
KyleAAA wrote:
Sat Jan 12, 2019 5:13 pm
Nicolas Perrault wrote:
Sat Jan 12, 2019 4:40 pm


Actually, I'm not assuming I know anything more than the market. I'm just not convinced I want to give emerging markets the benefit of the doubt, whereas the market partially does. In a world where the market knows nothing at all about the earnings of companies, the market is going to make a more or less uninformed bet. Imagine a man had a coin that he was going to flip. The man allows the market to bet on the outcome "heads" only (not tails), and does not allow the market to inspect the coin to make sure it's not biased in favour of tails. The man assures the market that if the market loses the bet, he will only charge him half. Were both the coin and the man fair, the market would win twice as much on heads than he would lose on tails. Sure, the market may say "10 bucks on heads!", but unlike the market, I will abstain on the bet. The market gives the benefit of the doubt to the man with the coin, but I don't. Do I need to believe I know more than the market to make this decision? No I don't.



Fair point, I understand the view that "The possibility that it is actually cheap and not just cheap on paper is a reason to buy." and I respect it.

I don't think avoiding a market is actively betting against it in the same way that, for example, short-selling it would be. I would not accuse you of betting against Bitcoin if you refused to buy any bitcoin (especially if your grounds for refusing to buy bitcoin are that the world of Bitcoin is so obscure that you don't want your money to have anything to do with it). You would be betting against it if you short-sold it.



Absolutely. If it's happening in the USA, imagine how it must happen elsewhere in places where institutions are probably not as solid as in the USA.



Your last sentence does not surprise me, after all the SEC is doing a good job. Do you think that's the case in emerging markets too? Why or why not?



Re Point 1) Do you believe that, perhaps, under these assumptions you would have bought South Sea stock in 1720? You would not have if you had demanded fair value. The fair value of the company was, after all, easy to evaluate, because all of its actual earnings came from the British government and left a paper trail. After the bubble burst, the price fell to that fair value. Do you think you could make the claim that the participants in the South Sea bubble were rational, both insiders and outsiders, because most of them intended to sell to a greater fool?

Re Point 2) Very interesting. I guess you shouldn't overthink it. Just make a decision and stick to it.
There is definitely some cognitive dissonance here. You claiming the market is giving emerging markets the benefit of the doubt is a positive claim demanding evidence. It is, quite literally, a claim that you know more than the market. Regarding the limited effectiveness of creative accounting, it has little to do with anything the SEC is doing so yes, it applies fairly well to emerging markets. It isn’t a function of institutions. The market evaluates he reliability of data and prices accordingly.
I do appreciate your attempt at psychologising, but I think you've misinterpreted the purpose of my post. You claim that my claim is a positive one that demands evidence. That would be correct, but only if I were trying to convince you of this claim. That's not what I'm doing. I'm telling you "I may or may not be right, but this is what I believe in right now. You're most welcome to try and prove me wrong. If I am wrong, and you prove me wrong, it could save me some money."

Oof, people on this forum are bloody aggressive.
Best regards,
I do not see how your motivation for asking makes a difference. I see no reason to accept your premise absent evidence.
I'm not asking you to accept this premise, I'm asking you to challenge it. This you've done, but without advancing any evidence whatsoever.
If you want evidence for a contrary position, you should present evidence of your own for others to evaluate. I'm not sure what benefit anybody gets from discussing your belief absent evidence. The most straight-forward evidence that markets are able to evaluate emerging markets fairly well is that it has appeared to do so in the past. There aren't any major identifiable anomalies to explain away.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by Ben Mathew » Sun Jan 13, 2019 1:19 pm

You are raising a few separate questions that are not directly related to each other, and it's best to discuss them separately.

(1) Will emerging markets emerge?

The top ten countries, which account for 92% of Vanguard's Emerging Market Index Fund (VEMAX), are:

China (34.7%)
Taiwan (14.1%)
India (11.7%)
Brazil (8.5%)
S Africa (6.8%)
Thailand (4.0%)
Russia (3.8%)
Malaysia (3.2%)
Mexico (3.0%)
Indonesia (2.4%)

Their weighted average real GDP growth rate 2013-2017 (Wikipedia) is 5.0%. Some (Brazil, Russia) are slower, some are faster (India, China), but the average is high. By contrast, the United States is growing at 2.27%, UK is 2.34%, Germany is 1.72%, and Japan is 1.31%. If real GDP growth is what you're referring to, emerging markets are, in fact, "emerging". Whether they will eventually catch up to developed countries is a different question. But it's not quite relevant to whether you think emerging market investments are a good idea.

(2) Are there profits to be made in emerging markets?

A business can make money serving any niche. There is nothing in economics that says Pottery Barn should be more profitable than IKEA. At some price, every market becomes profitable.

We see multinational companies salivate over the prospects of getting into emerging markets. I doubt they'd be so eager if there were no profit opportunities in developing countries. After all, they have the option of focusing on developed markets only. Why don't they?

(3) Can you trust the accounting?

This is a hard question. There are smart people like Warren Buffet (and I think John Bogle?) who worry about it. So I am certainly concerned, and this is an issue that I would like to explore more. There is one thing to keep in mind, though: time will inevitably reveal fraudulent accounting. Balance sheets and statements of earnings are necessarily linked across time. It's not possible to overstate earnings year after year after year without creating a massive gap between book value and true value over the course of many years. Given that there are companies with long histories in these countries, and we are not seeing spectacular accounting fraud blowups at exceptionally high rates, I remain optimistic that these accounting measures are rooted in reality to a significant degree.
Last edited by Ben Mathew on Sun Jan 13, 2019 2:02 pm, edited 2 times in total.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by BuyAndHoldOn » Sun Jan 13, 2019 1:29 pm

nisiprius wrote:
Sat Jan 12, 2019 9:52 pm
BuyAndHoldOn wrote:
Sat Jan 12, 2019 8:48 pm
My question for the OP/this audience is: What are the likes of GMO (etc.) missing when they recommend Emerging Markets as a value play?
From another thread, GMO 7 year forecasts are worse than a toss of a coin

Image

What were they missing when they predicted that emerging markets would return 7.6% annualized, when they actually returned 0.7% annualized? Well, if you invested $10,000, they were predicting you'd have $16,700, and you actually got $10,500, so my answer is "they were missing about six thousand dollars."

Here is my chart of how their forecasts compared to reality:

Image

And in case your eyes are picking out patterns that aren't there, the correlation between predicted and observed is 0.05, that is to say, virtually none.
Thanks for the reply.

So what you're saying is: There's a chance that GMO (and other sophisticated investors) will be correct in their forecasts?

:happy

To be fair, we do need some active participants to set market prices at any given point in time.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by BuyAndHoldOn » Sun Jan 13, 2019 1:31 pm

reformed.trader wrote:
Sun Jan 13, 2019 12:49 am
If you suspect the financial statement numbers, you can also look at dividend yields(cold hard cash) as a gauge of value or cheapness. Here are some large EM countries...

Russia - 6.3%
China - 4.7%
Taiwan - 4.7%
South Africa - 4.4%
Turkey - 4.2%


For comparison the US is at 2.1%
I have TUR (Turkey) and I did not receive a 4.2% Yield on that - maybe because I have only held it for a few months, however. But yes, you are correct in your [general] observation, as long as the dividends don't get cut (Which I think they are in Turkey's case, maybe for S. Africa as well).

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by BoggledHead2 » Sun Jan 13, 2019 1:45 pm

Here is what I do know:

The best performing stock markets aren’t the same every year. US, Euro, Asia, “Emerging” - there isn’t much consistency.

So, I buy 2 funds that essentially guarantee I will own the top performing market while ultimately minimizing my risk/volatility due to the diversification. Will I get max returns? Maybe, maybe not.

I don’t consider the US the “no brainer safe haven” that many do - I’d love to elaborate, but I can’t.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by X528 » Sun Jan 13, 2019 2:20 pm

BoggledHead2 wrote:
Sun Jan 13, 2019 1:45 pm
Here is what I do know:

The best performing stock markets aren’t the same every year. US, Euro, Asia, “Emerging” - there isn’t much consistency.

So, I buy 2 funds that essentially guarantee I will own the top performing market while ultimately minimizing my risk/volatility due to the diversification. Will I get max returns? Maybe, maybe not.

I don’t consider the US the “no brainer safe haven” that many do - I’d love to elaborate, but I can’t.
I bet there were many Japanese that thought Japan was the “no brainer safe haven” in the late 80's and early 90's.

It pays to diversify broadly when investing.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by reformed.trader » Sun Jan 13, 2019 2:35 pm

BuyAndHoldOn wrote:
Sun Jan 13, 2019 1:29 pm
nisiprius wrote:
Sat Jan 12, 2019 9:52 pm
BuyAndHoldOn wrote:
Sat Jan 12, 2019 8:48 pm
My question for the OP/this audience is: What are the likes of GMO (etc.) missing when they recommend Emerging Markets as a value play?
From another thread, GMO 7 year forecasts are worse than a toss of a coin

Image

What were they missing when they predicted that emerging markets would return 7.6% annualized, when they actually returned 0.7% annualized? Well, if you invested $10,000, they were predicting you'd have $16,700, and you actually got $10,500, so my answer is "they were missing about six thousand dollars."

Here is my chart of how their forecasts compared to reality:

Image

And in case your eyes are picking out patterns that aren't there, the correlation between predicted and observed is 0.05, that is to say, virtually none.
Thanks for the reply.

So what you're saying is: There's a chance that GMO (and other sophisticated investors) will be correct in their forecasts?

:happy

To be fair, we do need some active participants to set market prices at any given point in time.
Long term valuation predictors like CAPE, which is used by GMO, aren't going to be right every time. You can get lucky and hit on a 19 while playing blackjack and get a 2, but that doesn't mean it was the best decision.

Image

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by HomerJ » Sun Jan 13, 2019 2:53 pm

develop wrote:
Sat Jan 12, 2019 9:44 pm
Nicolas Perrault wrote:
Sat Jan 12, 2019 2:46 pm
Perhaps the markets of countries where the institutions were solid enough and the people honest enough to allow fruitful investing all have already emerged. I have serious doubts that any of the remaining markets will do so in the next century. The institutional and cultural backbone might just not be there.
bold and underline mine

I'm going to give benefit of the doubt here and assume that you didn't mean that the way I read it. Surely you didn't mean that people who live in developing countries are generally dishonest by nature? Forgive me for misunderstanding.
In some cultures, corruption is not considered being dishonest. It's a reward a person deserves for reaching a certain station, or for being part of the correct family.

This may have been more true in the past than now, but corruption levels have been and are absolutely different in the various countries around the world. But not because people are dishonest by nature. But because some cultures see corruption as more of a norm.
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by HomerJ » Sun Jan 13, 2019 2:56 pm

columbia wrote:
Sun Jan 13, 2019 7:33 am
nisiprius wrote:
Sun Jan 13, 2019 7:16 am
Here's what I honestly believe.

(I assume that you are talking about the choice of holding emerging markets at cap weight, or excluding them; not overweighting them or shorting them or anything bold like that).

1) I don't believe it can make much difference, for reasons I explained above. If emerging markets grew to be 40% of international markets that might need to be revisited--but I don't think it will, because the markets that get big will "emerge" and get reclassified as developed.

2) You clearly do not want to invest in emerging markets.

3) So, don't invest in them. Make a decision and then stick to it, and stay the course.

4) But don't kid yourself by pretending that there is some sound, rational basis. Say to yourself "I have decided not to do it because Just... Don't... Want to" and leave it at that. Admit your irrationality, accept it, embrace it. It doesn't matter whether it is hunch, intuition, or unconscious deep insight. The reason is that reaching a poorer outcome by backing your own judgement is unpleasant, but it is nowhere near as bad reaching a poorer outcome because you followed advice that went against your judgement.

Within the range that can be "all but proven" go with rational analysis; within the range where "everybody argues about it because nobody can be sure," go with your personal preferences and call it that.
I think it’s perfectly sound and rational for someone to choose to avoid investing in countries run by dictators.
I have to agree with this.
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by BoggledHead2 » Sun Jan 13, 2019 3:15 pm

X528 wrote:
Sun Jan 13, 2019 2:20 pm
BoggledHead2 wrote:
Sun Jan 13, 2019 1:45 pm
Here is what I do know:

The best performing stock markets aren’t the same every year. US, Euro, Asia, “Emerging” - there isn’t much consistency.

So, I buy 2 funds that essentially guarantee I will own the top performing market while ultimately minimizing my risk/volatility due to the diversification. Will I get max returns? Maybe, maybe not.

I don’t consider the US the “no brainer safe haven” that many do - I’d love to elaborate, but I can’t.
I bet there were many Japanese that thought Japan was the “no brainer safe haven” in the late 80's and early 90's.

It pays to diversify broadly when investing.
exactly. you may not get the absolute best/max return possible, but there's no way of knowing that anyway (untll you're done playing). i'll bet on the world as a whole, not 1 country. and i'll do is cheaply and quite simply. that, to me, is the "no brainer"

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by patrick » Sun Jan 13, 2019 3:37 pm

samsdad wrote:
Sun Jan 13, 2019 8:10 am
I agree with you. Not wanting to invest in countries run by dictators is a completely rational decision. Ignoring what you’re actually investing in because it’s going to “diversify your portfolio” is turning a blind eye to the risk involved. History is replete with examples of how dictators behave and what that means for free enterprise in their country. Ignoring that because it’s gonna give you a different kettle of fish is frankly short-sighted imho. Would investing in Saddam’s Iraq sound like a great plan? Gaddafi’s Libya? Maduro’s Venezuela? Xi’s China, where gulags have reappeared?

Despite protestations otherwise, all diversity, no matter what it entails, is not good imho. There are bad investments. I don’t have to have them because they’ll occasionally zig when my good ones zag. Country risk is real.
China is the only one of your examples that actually is in emerging markets funds. Iraq and Libya never even qualified as frontier markets let alone emerging markets. Venezuela used to be in the emerging markets index but was kicked more than a decade ago.

There is surely some risk the Chinese government will take actions harmful to the interests of investors. But that risk exists in every country, including the United States. The risk may well be higher in China, but for it to be a bad investment decision to include China, there would have to also be something preventing the market from pricing in the extra risk.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by BuyAndHoldOn » Sun Jan 13, 2019 3:43 pm

reformed.trader wrote:
Sun Jan 13, 2019 2:35 pm

Long term valuation predictors like CAPE, which is used by GMO, aren't going to be right every time. You can get lucky and hit on a 19 while playing blackjack and get a 2, but that doesn't mean it was the best decision.

Image


Right - but this is the original point I was getting at.

GMO (etc. - Even Vanguard) will reference the *valuation* of EM equities. They obviously are placing some - I would say, a lot of - reliance on the financial metrics being reported.

So are these sophisticated institutional investors/managers etc. being duped? I know it's possible, but I'm wondering how they are so off the mark. How they are so uninformed. (And maybe they are? I'm not saying its impossible).

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by patrick » Sun Jan 13, 2019 4:04 pm

nedsaid wrote:
Sun Jan 13, 2019 11:35 am
There are issues with the Emerging Markets but there are things in their favor. First, I see first world countries often counted as EM. Really, I think of nations like South Korea, Taiwan, Singapore, Malaysia as first world nations. Thus you will get some the of world's leading companies in an Emerging Markets index. China, which has the second largest economy in the world, how can that be an Emerging market? So I think the distinctions between Developed and Emerging are getting to be rather artificial. EM countries tend to have faster growth rates and younger populations and less debt. So I want to be in the game.
Singapore is classified as a developed market. South Korea is also classified as developed by FTSE (which Vanguard uses) but not by MSCI. China's economy is large on a total basis but is only about equal to the world average in per capita GDP. The developed market classification is based not only on the overall economy but also on various aspects of how the securities markets operate.

If anyone is interested, you can find the full criteria here:

https://www.ftse.com/products/indices/c ... sification
https://www.msci.com/market-classification

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by nedsaid » Sun Jan 13, 2019 8:10 pm

Ben Mathew wrote:
Sun Jan 13, 2019 1:19 pm
It's not possible to overstate earnings year after year after year without creating a massive gap between book value and true value over the course of many years.
Oh yes it is. Microsoft has a book value of $9 per share. The stock market values Microsoft at $102 a share. Is market value the true value of Microsoft?

In Microsoft's case, could it be that earnings were dramatically understated?

I have posted a few times about this very issue and used Microsoft as an example. I also have questioned the relevance of book value as a metric. There is something out there that the accountants are missing. The difference between $9 book value and $102 of stock market value can't all be speculation.
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by fortyofforty » Sun Jan 13, 2019 8:20 pm

patrick wrote:
Sun Jan 13, 2019 3:37 pm
samsdad wrote:
Sun Jan 13, 2019 8:10 am
I agree with you. Not wanting to invest in countries run by dictators is a completely rational decision. Ignoring what you’re actually investing in because it’s going to “diversify your portfolio” is turning a blind eye to the risk involved. History is replete with examples of how dictators behave and what that means for free enterprise in their country. Ignoring that because it’s gonna give you a different kettle of fish is frankly short-sighted imho. Would investing in Saddam’s Iraq sound like a great plan? Gaddafi’s Libya? Maduro’s Venezuela? Xi’s China, where gulags have reappeared?

Despite protestations otherwise, all diversity, no matter what it entails, is not good imho. There are bad investments. I don’t have to have them because they’ll occasionally zig when my good ones zag. Country risk is real.
China is the only one of your examples that actually is in emerging markets funds. Iraq and Libya never even qualified as frontier markets let alone emerging markets. Venezuela used to be in the emerging markets index but was kicked more than a decade ago.

There is surely some risk the Chinese government will take actions harmful to the interests of investors. But that risk exists in every country, including the United States. The risk may well be higher in China, but for it to be a bad investment decision to include China, there would have to also be something preventing the market from pricing in the extra risk.
Given that, why would Venezuela be "kicked out" of an index? Shouldn't we rather let "the market" decide whether and how much to invest in Venezuelan companies? Anything else is not a pure market-driven metric.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by rkhusky » Sun Jan 13, 2019 9:33 pm

fortyofforty wrote:
Sun Jan 13, 2019 8:20 pm
Given that, why would Venezuela be "kicked out" of an index? Shouldn't we rather let "the market" decide whether and how much to invest in Venezuelan companies? Anything else is not a pure market-driven metric.
The market doesn't determine what's in an index. The index providers decide. The customers of the index providers (e.g. mutual fund companies) are the "market" that provide feedback on whether the index providers are doing a good job or not.

There is nothing preventing you from investing in public Venezuelan stock.

edit: Venezuela seems to be listed on some EM lists: https://en.wikipedia.org/wiki/Emerging_market
I don't see it on Frontier Market lists: https://en.wikipedia.org/wiki/Frontier_markets

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by fortyofforty » Sun Jan 13, 2019 9:59 pm

rkhusky wrote:
Sun Jan 13, 2019 9:33 pm
fortyofforty wrote:
Sun Jan 13, 2019 8:20 pm
Given that, why would Venezuela be "kicked out" of an index? Shouldn't we rather let "the market" decide whether and how much to invest in Venezuelan companies? Anything else is not a pure market-driven metric.
The market doesn't determine what's in an index. The index providers decide. The customers of the index providers (e.g. mutual fund companies) are the "market" that provide feedback on whether the index providers are doing a good job or not.

There is nothing preventing you from investing in public Venezuelan stock.

edit: Venezuela seems to be listed on some EM lists: https://en.wikipedia.org/wiki/Emerging_market
I don't see it on Frontier Market lists: https://en.wikipedia.org/wiki/Frontier_markets
I know indexes are creations of companies that then sell the rights to use those indexes to market funds and ETFs. Of course, you missed the point.

If we are going to pick and choose which countries are included in widely used and touted indexes, then there is nothing inherently "wrong" if some index excludes all emerging markets, or China, or Turkey, or Russia... Once we're picking and choosing, there is no moral "high ground" for someone using any particular index.
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by alex_686 » Sun Jan 13, 2019 10:10 pm

fortyofforty wrote:
Sun Jan 13, 2019 9:59 pm
I know indexes are creations of companies that then sell the rights to use those indexes to market funds and ETFs. Of course, you missed the point.

If we are going to pick and choose which countries are included in widely used and touted indexes, then there is nothing inherently "wrong" if some index excludes all emerging markets, or China, or Turkey, or Russia... Once we're picking and choosing, there is no moral "high ground" for someone using any particular index.
In Venezuelan case, it was the technical requirement for free flow of capital that got it kicked out. If you can’t freely moce cash in and out you certainly can’t count it as a investable market.


In mosr of the cases you are talking about there are technical reasons why a country is on one side or the other.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by patrick » Sun Jan 13, 2019 10:21 pm

fortyofforty wrote:
Sun Jan 13, 2019 8:20 pm
patrick wrote:
Sun Jan 13, 2019 3:37 pm
China is the only one of your examples that actually is in emerging markets funds. Iraq and Libya never even qualified as frontier markets let alone emerging markets. Venezuela used to be in the emerging markets index but was kicked more than a decade ago.

There is surely some risk the Chinese government will take actions harmful to the interests of investors. But that risk exists in every country, including the United States. The risk may well be higher in China, but for it to be a bad investment decision to include China, there would have to also be something preventing the market from pricing in the extra risk.
Given that, why would Venezuela be "kicked out" of an index? Shouldn't we rather let "the market" decide whether and how much to invest in Venezuelan companies? Anything else is not a pure market-driven metric.
It was removed due to the imposition of highly restrictive exchange controls. If you aren't allowed to move money in and out of a country, does it even count as part of the market at all? Either way, it doesn't matter much because the total market cap of Venezuelan stocks (if calculated using the market exchange rate instead of the official one) is a tiny fraction of a percent of global market cap.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by fennewaldaj » Sun Jan 13, 2019 11:33 pm

nedsaid wrote:
Sun Jan 13, 2019 11:35 am

There are issues with the Emerging Markets but there are things in their favor. First, I see first world countries often counted as EM. Really, I think of nations like South Korea, Taiwan, Singapore, Malaysia as first world nations. Thus you will get some the of world's leading companies in an Emerging Markets index. China, which has the second largest economy in the world, how can that be an Emerging market? So I think the distinctions between Developed and Emerging are getting to be rather artificial. EM countries tend to have faster growth rates and younger populations and less debt. So I want to be in the game.
I think it is clear that a lot of the countries in emerging market indexes (and even some in frontier markets) are economically near the status of developed markets (Korea, Taiwan, China, Turkey, ect) but there markets are not as well regulated. Morningstar I think is the only source that relies solely on GDP per capita (which is why South Korea, Taiwan, Saudia Arabia, Kuwait, ect are considered developed in their system)

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by SoonerD » Mon Jan 14, 2019 12:32 am

samsdad wrote:
Sun Jan 13, 2019 8:10 am
columbia wrote:
Sun Jan 13, 2019 7:33 am
nisiprius wrote:
Sun Jan 13, 2019 7:16 am
...
4) But don't kid yourself by pretending that there is some sound, rational basis. Say to yourself "I have decided not to do it because Just... Don't... Want to" and leave it at that. Admit your irrationality, accept it, embrace it. It doesn't matter whether it is hunch, intuition, or unconscious deep insight. The reason is that reaching a poorer outcome by backing your own judgement is unpleasant, but it is nowhere near as bad reaching a poorer outcome because you followed advice that went against your judgement.

Within the range that can be "all but proven" go with rational analysis; within the range where "everybody argues about it because nobody can be sure," go with your personal preferences and call it that.
I think it’s perfectly sound and rational for someone to choose to avoid investing in countries run by dictators.
With all due respect for nisiprius, whom I admire for how much time and effort he/she puts in here at least in part as service to the community, and having made many decisions based at least in part what he/she has said, I think nisi is wrong here.

I agree with you. Not wanting to invest in countries run by dictators is a completely rational decision. Ignoring what you’re actually investing in because it’s going to “diversify your portfolio” is turning a blind eye to the risk involved. History is replete with examples of how dictators behave and what that means for free enterprise in their country. Ignoring that because it’s gonna give you a different kettle of fish is frankly short-sighted imho. Would investing in Saddam’s Iraq sound like a great plan? Gaddafi’s Libya? Maduro’s Venezuela? Xi’s China, where gulags have reappeared?

Despite protestations otherwise, all diversity, no matter what it entails, is not good imho. There are bad investments. I don’t have to have them because they’ll occasionally zig when my good ones zag. Country risk is real.
Do the E.M. Index Funds typically include the countries run by dictators? Let's exclude the almost dictatorish run countries like China. Do the EM Index funds include countries with dictatorships and if so is it any meaningful percentage of the fund.

My guess is an E.M. fund that is say 5-10% of one's portfolio would have less than 0.5% total portfolio exposure to dictators. For the record, I don't invest in E.M.

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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by Ben Mathew » Mon Jan 14, 2019 1:31 am

nedsaid wrote:
Sun Jan 13, 2019 8:10 pm
Ben Mathew wrote:
Sun Jan 13, 2019 1:19 pm
It's not possible to overstate earnings year after year after year without creating a massive gap between book value and true value over the course of many years.
Oh yes it is. Microsoft has a book value of $9 per share. The stock market values Microsoft at $102 a share. Is market value the true value of Microsoft?

In Microsoft's case, could it be that earnings were dramatically understated?

I have posted a few times about this very issue and used Microsoft as an example. I also have questioned the relevance of book value as a metric. There is something out there that the accountants are missing. The difference between $9 book value and $102 of stock market value can't all be speculation.
Accounting tends to be conseravative, and will usually undervalue companies. So book value ends up being less than true market value. Microsoft's case is just a more extreme version of the typical scenario. There is no natural force that will cause this accounting error to blow up. The book value just looks more and more ridiculously low over time. But nothing blows up.

But fraudulent accounting that overstates earnings should, over time, result in a book value that is far greater than actual value. That, I think, will eventually have to blow up. Suppose the actual value was $9, and the accountants are saying it's $102. Somebody's bound to ask questions eventually. Where are the missing factories and laptops? Where's the profit that these assets should generate? Where are the bank accounts?

fennewaldaj
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Re: Emerging markets cannot be fairly valued and investors are better off elsewhere: Change my mind :)

Post by fennewaldaj » Mon Jan 14, 2019 2:25 am

SoonerD wrote:
Mon Jan 14, 2019 12:32 am

Do the E.M. Index Funds typically include the countries run by dictators? Let's exclude the almost dictatorish run countries like China. Do the EM Index funds include countries with dictatorships and if so is it any meaningful percentage of the fund.

My guess is an E.M. fund that is say 5-10% of one's portfolio would have less than 0.5% total portfolio exposure to dictators. For the record, I don't invest in E.M.
I think maybe they are being a bit loose with the term and considering the leaders of China and Russia as dictators. Though I do think the general point is valid. It is perfectly reasonable to not want to invest in countries if you find the leaders abhorrent (assuming you know enough to make that judgement). I don't invest like this but it seems perfectly reasonable. It is actually almost surprising there is not an ESG style fund that only invest in democratic Emerging Markets.

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