Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

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nisiprius
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by nisiprius » Wed May 20, 2020 4:40 pm

vineviz wrote:
Wed May 20, 2020 4:19 pm
SteadyOne wrote:
Tue May 19, 2020 8:26 pm
HEDGEFUNDIE wrote:
Tue May 19, 2020 2:52 pm

With a low enough correlation, even an asset class that returns zero can improve the performance of a US-heavy portfolio.
So 1+0=2 ?
Yep, pretty much. With high enough volatility, low enough correlation, and periodic rebalancing you can increase the return and lower the risk of a portfolio by including an asset with an expected return of zero.
1) Only if you change the relative proportions of the rest of the portfolio after including the asset. You can improve the risk-adjusted return, but the return of a portfolio is just the weighted average of the returns of its constituents.

The annual return of a portfolio of 80% VBINX, 20% Whatever, equals 80% of the return of the VBINX + 20% of the return of Whatever. If Whatever has lower return than VBINX, the return of the new portfolio will be lower than the return of VBINX.

There's nothing profound about this and it should go without saying, but the rhetoric used by some advocates doesn't always make this clear.

If adding Whatever reduces the volatility of the whole portfolio enough, you can take the improvement in the form of higher return rather than lower volatility--but you need to change something. The most obvious change is to use leverage on the whole portfolio and lever it up until it has the same volatility as before, and it will have higher return. Depending on what is inside VBINX, you may also be able to do it by modifying the composition of VBINX. For example, VBINX is actually a 60/40 stock/bond portfolio, and you might be able to overcome the drag of Whatever by raising the stock allocation.

2) And only if "low enough" means "negative." It is theoretically possible to add a zero-return asset to a portfolio, adjust the proportions of the rest of the portfolio, and construct a new portfolio with higher return, but no higher volatility, than the original portfolio. This may require the use of leverage or short positions. It definitely requires negative correlation--not just low correlation, but negative correlation. In other words, when you say "low enough," you implicitly mean "negative."

3) I don't think robust negative correlation, over more than... let's say five years... has ever been seen between any two stock categories. Please educate me if I'm wrong about that.
Last edited by nisiprius on Wed May 20, 2020 4:58 pm, edited 5 times in total.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by hohum » Wed May 20, 2020 4:49 pm

HEDGEFUNDIE wrote:
Wed May 20, 2020 4:09 pm

This is where a few classes in Chinese political economy could come in handy. I'd recommend starting with Markets Over Mao: The Rise of Private Business in China

My point was this - for every foreign investor that was hurt by a financially fraudulent Chinese firm, there are a dozen Chinese investors who were also harmed, and more to the point, Chinese investors who live in China and have the ability to make trouble for the government. Social stability is a key performance metric for CCP cadre promotion, and really the raison d'etre for the whole system. Therefore the system as a whole has no incentive to encourage things like fraudulent accounting, etc.
You seem to have missed out on Sino Forest and all the Chinese reverse merger frauds that were all the rage ten years ago:

http://web.nacva.com/JFIA/Issues/JFIA-2013-2_7.pdf

The joke back then was that Chinese companies kept three sets of books. One for US investors, one for the Chinese government, and the real set of books. I remember also some whistleblower in China set up a time-lapse camera at one of the factories of these frauds, which was completely deserted until two days before there was to be a foreign investor tour ... at which point there was a whirlwind of bustle and activity, until the investors left ...

I mean, in the US or Europe there is one fraud at a time ... but there were hundreds of these frauds. Enough to ruin the performance of Joel Greenblatt's "Little Book that Beats the Market" stock screen, which kept selecting them for their high ROE and low valuations ...

And the comment another poster made recently along the lines of "just hope the Chinese government doesn't decide to eliminate foreign ownership like they did in 1949" is spot on. It's entirely possible for them to do things that are not completely harmful to Chinese nationals, but that would wipe out foreign nationals.

I was fortunate enough to be the owner of a Russian media stock (look at that low P/E and it's actually growing!) when Putin decided that foreigners shouldn't own Russian media stocks. The stock fell 40% instantly and there was nothing to do but sell, because you were going to be cashed out in 30 days whether you sold or not.

Ben Graham has a chapter in The Intelligent Investor on the foolishness of holding foreign sovereign debt, where he goes through all the historical defaults.

Andrew Tobias has a chapter in "The Only Investment Guide You'll Ever Need" on the foolishness of converting US dollars into Mexican pesos to get a couple extra percentage points of interest, given the historical pattern of devaluations.

Russia famously defaulted on its ruble-denominated debt (why?) in 1997 ...


Maybe now things are different? (?)
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by SteadyOne » Wed May 20, 2020 5:28 pm

vineviz wrote:
Wed May 20, 2020 4:19 pm
SteadyOne wrote:
Tue May 19, 2020 8:26 pm
HEDGEFUNDIE wrote:
Tue May 19, 2020 2:52 pm

With a low enough correlation, even an asset class that returns zero can improve the performance of a US-heavy portfolio.
So 1+0=2 ?
Yep, pretty much. With high enough volatility, low enough correlation, and periodic rebalancing you can increase the return and lower the risk of a portfolio by including an asset with an expected return of zero.
But if this is true, then nothing beats short term Treasuries as a second asset since it has zero risk and expected return higher than zero.
Last edited by SteadyOne on Wed May 20, 2020 5:39 pm, edited 1 time in total.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by SteadyOne » Wed May 20, 2020 5:37 pm

hohum wrote:
Wed May 20, 2020 4:49 pm
HEDGEFUNDIE wrote:
Wed May 20, 2020 4:09 pm

This is where a few classes in Chinese political economy could come in handy. I'd recommend starting with Markets Over Mao: The Rise of Private Business in China

My point was this - for every foreign investor that was hurt by a financially fraudulent Chinese firm, there are a dozen Chinese investors who were also harmed, and more to the point, Chinese investors who live in China and have the ability to make trouble for the government. Social stability is a key performance metric for CCP cadre promotion, and really the raison d'etre for the whole system. Therefore the system as a whole has no incentive to encourage things like fraudulent accounting, etc.
You seem to have missed out on Sino Forest and all the Chinese reverse merger frauds that were all the rage ten years ago:

http://web.nacva.com/JFIA/Issues/JFIA-2013-2_7.pdf

The joke back then was that Chinese companies kept three sets of books. One for US investors, one for the Chinese government, and the real set of books. I remember also some whistleblower in China set up a time-lapse camera at one of the factories of these frauds, which was completely deserted until two days before there was to be a foreign investor tour ... at which point there was a whirlwind of bustle and activity, until the investors left ...

I mean, in the US or Europe there is one fraud at a time ... but there were hundreds of these frauds. Enough to ruin the performance of Joel Greenblatt's "Little Book that Beats the Market" stock screen, which kept selecting them for their high ROE and low valuations ...

And the comment another poster made recently along the lines of "just hope the Chinese government doesn't decide to eliminate foreign ownership like they did in 1949" is spot on. It's entirely possible for them to do things that are not completely harmful to Chinese nationals, but that would wipe out foreign nationals.

I was fortunate enough to be the owner of a Russian media stock (look at that low P/E and it's actually growing!) when Putin decided that foreigners shouldn't own Russian media stocks. The stock fell 40% instantly and there was nothing to do but sell, because you were going to be cashed out in 30 days whether you sold or not.

Ben Graham has a chapter in The Intelligent Investor on the foolishness of holding foreign sovereign debt, where he goes through all the historical defaults.

Andrew Tobias has a chapter in "The Only Investment Guide You'll Ever Need" on the foolishness of converting US dollars into Mexican pesos to get a couple extra percentage points of interest, given the historical pattern of devaluations.

Russia famously defaulted on its ruble-denominated debt (why?) in 1997 ...


Maybe now things are different? (?)
One day Putin decides to took over a huge oil company:


From Wikipedia:
“Between 1996 and 2003 Yukos became one of the biggest and most successful Russian companies, producing 20% of Russia's oil output. In October 2003, Khodorkovsky—by then the richest man in Russia and 16th richest man in the world—was arrested, and the company was forcibly broken up for alleged unpaid taxes shortly after and declared bankrupt in August 2006”,
Last edited by SteadyOne on Thu May 21, 2020 10:24 pm, edited 1 time in total.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by vineviz » Wed May 20, 2020 5:39 pm

SteadyOne wrote:
Wed May 20, 2020 5:28 pm
vineviz wrote:
Wed May 20, 2020 4:19 pm
SteadyOne wrote:
Tue May 19, 2020 8:26 pm
HEDGEFUNDIE wrote:
Tue May 19, 2020 2:52 pm

With a low enough correlation, even an asset class that returns zero can improve the performance of a US-heavy portfolio.
So 1+0=2 ?
Yep, pretty much. With high enough volatility, low enough correlation, and periodic rebalancing you can increase the return and lower the risk of a portfolio by including an asset with an expected return of zero.
But if this is true, then nothing beats short term Treasuries as a second asset since it has zero risk and expected return higher than zero. Please
You need high volatility to gain power as a diversified, and short-term Treasuries have precious little of that.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Rosencrantz1 » Wed May 20, 2020 6:49 pm

cfaboy wrote:
Wed May 20, 2020 8:08 am
The most recent example of outright fraud was Luckin' Coffee, which was supposed to have been the Chinese answer to Starbucks. 310 million in outright overstated sales. The NASDAQ is about to delist the company's ADR shares. They had a lot of adherents in the USA, including among sophisticated hedge funds and other investors. Appeared to be a great story. Executives being investigated in China now.

China is a fascinating country and has a great people, history and culture. But fraud is pervasive, as most Chinese would admit when you speak with them privately. I remember the second time I moved to China: I went to the market and bought a bottle of head and shoulders shampoo, which I was happy to find. In the shower, I discovered as I tried to lather my hair that the regulation P&G bottle contained nothing other than colored water w/o soap content.

There is a lot of fraud everywhere in China, but this has a chance of getting better over time. Something to watch. The dilution bothers me as well. Perhaps this could improve if the populace demands it. BUT, as I think Bill Bernstein said in one of his works, a country that doesn't care about policing companies that are putting lead in toys given to children is not going to be concerned about the rights of the holders of common stocks.
I read through this thread with a lot of interest - truly a lot of information to digest. The above highlighted comment really stands out to me. I imagine there will be some here that say "that - that's what you gleaned from 3 pages of input ??"

Yeah. That's my takeaway (well that and the dilution issue and CCPs idea of market oversight). Invest/add investments in China? NO, thanks.

\0.02cents.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by SteadyOne » Wed May 20, 2020 7:02 pm

vineviz wrote:
Wed May 20, 2020 5:39 pm
SteadyOne wrote:
Wed May 20, 2020 5:28 pm
vineviz wrote:
Wed May 20, 2020 4:19 pm
SteadyOne wrote:
Tue May 19, 2020 8:26 pm
HEDGEFUNDIE wrote:
Tue May 19, 2020 2:52 pm

With a low enough correlation, even an asset class that returns zero can improve the performance of a US-heavy portfolio.
So 1+0=2 ?
Yep, pretty much. With high enough volatility, low enough correlation, and periodic rebalancing you can increase the return and lower the risk of a portfolio by including an asset with an expected return of zero.
But if this is true, then nothing beats short term Treasuries as a second asset since it has zero risk and expected return higher than zero. Please
You need high volatility to gain power as a diversified, and short-term Treasuries have precious little of that.
Then TLT.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by nisiprius » Wed May 20, 2020 7:30 pm

Right now we have two simultaneous threads, this thread suggesting that cap-weighted index funds don't hold enough Chinese stocks and another suggesting that they hold too much. It is always thus.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Northern Flicker » Wed May 20, 2020 8:12 pm

SteadyOne wrote:
Tue May 19, 2020 4:12 pm
SimpleGift wrote:
Tue May 19, 2020 8:44 am
simplesauce wrote:
Tue May 19, 2020 7:42 am
Has anyone considered adding a China ETF to their portfolios based on this flaw presented by Dr. Malkiel?
Anyone who has been a passive investor in an emerging markets index fund in recent years (using either MSCI or FTSE indexes) has been automatically adding an increased China exposure to their portfolios, as these indexes gradually reconstitute to include more mainland China A-shares in their makeup (chart below).
China is currently over 40% of Vanguard's Emerging Markets Stock Index — and with the addition of more mainland A-shares in the years to come, it will one day soon be over 50% of the index. For many investors, that's more than enough China exposure, depending on their portfolio allocation to an emerging markets index.
Why China even is classified as ‘Emerging’ it is presumably second economy in the world? Something is shady about all this.
China A-shares (those that trade on exchanges in Shenzhen and Shanghai and which make up the vast majority of Chinese market cap) were elevated from frontier market status to emerging market status by FTSE and MSCI in recent years leading to their inclusion in EM indices.
Last edited by Northern Flicker on Wed May 20, 2020 8:56 pm, edited 1 time in total.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Northern Flicker » Wed May 20, 2020 8:14 pm

simplesauce wrote:
Wed May 20, 2020 2:12 pm
Northern Flicker wrote:
Wed May 20, 2020 2:07 pm
Chinese companies also have a high debt load. From: https://www.bloomberg.com/news/articles ... k-by-years
China’s nonfinancial corporate debt accounted for 156.7% of the country’s gross domestic product as of the third quarter of last year, down from a peak of 162.8% in early 2016 but up sharply from 98% on the eve of the global financial crisis. It’s also well above the 74.2% for the U.S. or 101.9% for Japan, data compiled by the Institute of International Finance show.
The question is how profitably all of the capital from debt and equity issuance is put to work. If it is profitable enough, share dilution is not a problem and actually could be a good thing. When people talk about share dilution being a problem it usually means that the capital raised is put to work less profitably than the existing business so that earnings per share go down.
This is the first someone has suggested share dilution be a good thing. Could you expand on this? I do not quite understand how it could be beneficial.
If a company issues new shares to raise capital to invest in a business that proves to be more profitable than the previous business activities then the combined business can be more profitable per share than before the dilution. The issue is not share dilution but allocation of capital. A company cannot issue lots of new shares regularly and regularly expect the level of success with the new capital that will increase value for the current shareholders.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by columbia » Wed May 20, 2020 8:32 pm


A company cannot issue lots of new shares regularly and regularly expect the level of success with the new capital that will increase value for the current shareholders.
Which is what Mr. Bernstein indicated about China.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Northern Flicker » Wed May 20, 2020 9:03 pm

columbia wrote:
Wed May 20, 2020 8:32 pm

A company cannot issue lots of new shares regularly and regularly expect the level of success with the new capital that will increase value for the current shareholders.
Which is what Mr. Bernstein indicated about China.
My impression is that there is a fair amount of mis-allocation of capital in China, but I’ve never been there or investigated anything like that in any direct way, so I’m really not in a position to render an opinion about that.

In general, if the case for EM investment is blistering growth, then it should not be hard to allocate capital well. Saying an asset class is attractive because of extremely robust growth opportunity is actually contradictory with share dilution being a problem. If something is wide open opportunity, you want lots of capital to take advantage of it. If share dilution is a drag on returns, it means that there are not enough opportunities to allocate the capital productively. You can’t have it both ways.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by columbia » Wed May 20, 2020 9:07 pm

Northern Flicker wrote:
Wed May 20, 2020 9:03 pm
columbia wrote:
Wed May 20, 2020 8:32 pm

A company cannot issue lots of new shares regularly and regularly expect the level of success with the new capital that will increase value for the current shareholders.
Which is what Mr. Bernstein indicated about China.
My impression is that there is a fair amount of mis-allocation of capital in China, but I’ve never been there or investigated anything like that in any direct way, so I’m really not in a position to render an opinion about that.

In general, if the case for EM investment is blistering growth, then it should not be hard to allocate capital well. Saying an asset class is attractive because of extremely robust growth opportunity is actually contradictory with share dilution being a problem. If something is wide open opportunity, you want lots of capital to take advantage of it. If share dilution is a drag on returns, it means that there are not enough opportunities to allocate the capital productively. You can’t have it both ways.
I don’t know if he’s said anything on it being an attractive asset class with growth opportunity. I definitely have no interest, either way.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Northern Flicker » Wed May 20, 2020 10:58 pm

Right. But there is a general notion that EM countries like China, India, and others will be the big drivers of growth, but that the benefit is tempered by share dilution. I think those are generally contradictory points of view.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by KEotSK66 » Wed May 20, 2020 11:18 pm

vineviz wrote:
Wed May 20, 2020 5:39 pm
SteadyOne wrote:
Wed May 20, 2020 5:28 pm
vineviz wrote:
Wed May 20, 2020 4:19 pm
SteadyOne wrote:
Tue May 19, 2020 8:26 pm
HEDGEFUNDIE wrote:
Tue May 19, 2020 2:52 pm

With a low enough correlation, even an asset class that returns zero can improve the performance of a US-heavy portfolio.
So 1+0=2 ?
Yep, pretty much. With high enough volatility, low enough correlation, and periodic rebalancing you can increase the return and lower the risk of a portfolio by including an asset with an expected return of zero.
But if this is true, then nothing beats short term Treasuries as a second asset since it has zero risk and expected return higher than zero. Please
You need high volatility to gain power as a diversified, and short-term Treasuries have precious little of that.
absolutely, you need to offset the gains in your stock portfolio during a bull market
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Ari » Thu May 21, 2020 5:00 am

Seems to me there are two things being labelled as "share dilution" in this thread. One is more companies entering the market, thus being included in the index, "diluting" your investment in the existing companies if you hold an index fund. The other is companies issuing new shares, diluting your ownership in the company. The first one is a good explanation as to why EM stock markets fall behind their GDP growth figures. The growth is taken in part by new companies. However, this doesn't really hurt the investor, as in it doesn't cancel out any of the money the investor gains from the companies they own. If those companies are making profits, those profits still find their way to the investor. The second type, however, is directly cancelling out the stock returns. If a company dilutes its shares, you now own less of that company, and less of the profits will find their way to your pocket.

I've seen both of these things being referred to as "share dilution" in this discussion, but they are very different things, no?
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by ValuationsMatter » Thu May 21, 2020 5:59 am

It's too bad my moral argument against was pulled, as it is directly linked to the business case to avoid investment.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Alchemist » Thu May 21, 2020 7:27 am

That is going to be a hard no from me, Comrade Malkiel.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by WS1 » Thu May 21, 2020 7:34 am

Northern Flicker wrote:
Wed May 20, 2020 8:14 pm
simplesauce wrote:
Wed May 20, 2020 2:12 pm
Northern Flicker wrote:
Wed May 20, 2020 2:07 pm
Chinese companies also have a high debt load. From: https://www.bloomberg.com/news/articles ... k-by-years
China’s nonfinancial corporate debt accounted for 156.7% of the country’s gross domestic product as of the third quarter of last year, down from a peak of 162.8% in early 2016 but up sharply from 98% on the eve of the global financial crisis. It’s also well above the 74.2% for the U.S. or 101.9% for Japan, data compiled by the Institute of International Finance show.
The question is how profitably all of the capital from debt and equity issuance is put to work. If it is profitable enough, share dilution is not a problem and actually could be a good thing. When people talk about share dilution being a problem it usually means that the capital raised is put to work less profitably than the existing business so that earnings per share go down.
This is the first someone has suggested share dilution be a good thing. Could you expand on this? I do not quite understand how it could be beneficial.
If a company issues new shares to raise capital to invest in a business that proves to be more profitable than the previous business activities then the combined business can be more profitable per share than before the dilution. The issue is not share dilution but allocation of capital. A company cannot issue lots of new shares regularly and regularly expect the level of success with the new capital that will increase value for the current shareholders.
This is exactly what happens as a start-up progresses through the seed > angel > vc > ipo pipeline

The founders gradually control a smaller share of a bigger pie. Look at this dynamic next to the fact that lots of U.S. share buybacks just offset shares created via employee stock based compensation and you realize shares are just a form of money to be created and destroyed as a funding mechanism..

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by BigJohn » Thu May 21, 2020 4:27 pm

simplesauce wrote:
Wed May 20, 2020 8:12 am
It is frustrating for me as well, since this was the first book I read on investing and I would truly enjoy implementing some of Dr. Malkiel’s advice since I have great respect for his work. However with each edition, the advice changes. It is quite maddening.

The question is, as passive investors, do we need to continue reading the latest research and insights and adjust our portfolios? Or is this counterproductive? For me, I really prefer to hold a simple 3 or 4 fund index portfolio with confidence for the long-term. I am sure this is the right way.
I share your frustration. Random Walk was the book that got me started on indexing and a simple 3-4 fund approach 10-15 years ago. However, with the constantly changing advice, often significantly changing, I’ve had to put Dr Malkeil in the same corner as Jim Cramer and others... just more noise to ignore.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Northern Flicker » Thu May 21, 2020 4:41 pm

Seems to me there are two things being labelled as "share dilution" in this thread. One is more companies entering the market, thus being included in the index, "diluting" your investment in the existing companies if you hold an index fund. The other is companies issuing new shares, diluting your ownership in the company.
The first is not share dilution. Index changes from new companies happen in all markets. Google, Netflix, and Amazon did not exist 30 years ago. Nobody is arguing that US equity index returns are depressed by share dilution because these companies were founded and ultimately were included in US indices.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Random Musings » Thu May 21, 2020 9:18 pm

Alchemist wrote:
Thu May 21, 2020 7:27 am
That is going to be a hard no from me, Comrade Malkiel.
I agree. Bogle built Vanguard to give a fair shake to investors. China, with a history of allowing dubious accounting procedures, using dilution, currency manipulation, and more have no interest in giving investors a fair shake.

RM
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Random Musings » Thu May 21, 2020 9:27 pm

Bill Bernstein wrote:
Tue May 19, 2020 2:41 pm
The reason to avoid China's equity markets can be summarized in one word: dilution.

The best estimates are that the Chinese equity markets dilute their share pools on the order of about 20% per year, so even if the country is growing its GDP and corporate profits at slightly less than 10% pa, they can't keep up on a per-share basis.

This is borne out by the MSCI China index, which since 12/31/92 has had a total return of 1.6% in nominal dollar terms, or less than zero in real terms.

The problem, of course, is that if you're indexing Emerging Markets, there's no way to avoid the country's ~30% weighting in most indexes.

Bill
Saying that, would you avoid funds like TISM as the EM portion puts some drag on that fund? Are there any decent ex-China EM funds to use?

Regards,

RM
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by HEDGEFUNDIE » Thu May 21, 2020 9:31 pm

All of the China-hating on Bogleheads makes me happy, in a way.

It keeps the risk premium, and expected returns, Hugh for the rest of us.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Northern Flicker » Thu May 21, 2020 9:53 pm

HEDGEFUNDIE wrote:
Thu May 21, 2020 9:31 pm
All of the China-hating on Bogleheads makes me happy, in a way.

It keeps the risk premium, and expected returns, Hugh for the rest of us.
I believe that is wishful thinking. Whatever the expected return, I doubt Bogleheads postings have any effect.
Index fund investor since 1987.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Rosencrantz1 » Thu May 21, 2020 9:57 pm

HEDGEFUNDIE wrote:
Thu May 21, 2020 9:31 pm
All of the China-hating on Bogleheads makes me happy, in a way.

It keeps the risk premium, and expected returns, Hugh for the rest of us.
Sounds like you and Xi are set to make a lot of yuan. China needs to be (a lot) more 'accurate' and transparent to pull me in.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by JonnyDVM » Fri May 22, 2020 6:06 am

Random Musings wrote:
Thu May 21, 2020 9:27 pm
Bill Bernstein wrote:
Tue May 19, 2020 2:41 pm
The reason to avoid China's equity markets can be summarized in one word: dilution.

The best estimates are that the Chinese equity markets dilute their share pools on the order of about 20% per year, so even if the country is growing its GDP and corporate profits at slightly less than 10% pa, they can't keep up on a per-share basis.

This is borne out by the MSCI China index, which since 12/31/92 has had a total return of 1.6% in nominal dollar terms, or less than zero in real terms.

The problem, of course, is that if you're indexing Emerging Markets, there's no way to avoid the country's ~30% weighting in most indexes.

Bill
Saying that, would you avoid funds like TISM as the EM portion puts some drag on that fund? Are there any decent ex-China EM funds to use?

Regards,

RM
I also would prefer less China in my life. But how? The emerging markets index funds overflow with Chinese companies. If one wants to invest international, one is stuck investing in China whether they want to or not.
I’d trade it all for a little more | -C Montgomery Burns

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by simplesauce » Fri May 22, 2020 7:52 am

JonnyDVM wrote:
Fri May 22, 2020 6:06 am
Random Musings wrote:
Thu May 21, 2020 9:27 pm
Bill Bernstein wrote:
Tue May 19, 2020 2:41 pm
The reason to avoid China's equity markets can be summarized in one word: dilution.

The best estimates are that the Chinese equity markets dilute their share pools on the order of about 20% per year, so even if the country is growing its GDP and corporate profits at slightly less than 10% pa, they can't keep up on a per-share basis.

This is borne out by the MSCI China index, which since 12/31/92 has had a total return of 1.6% in nominal dollar terms, or less than zero in real terms.

The problem, of course, is that if you're indexing Emerging Markets, there's no way to avoid the country's ~30% weighting in most indexes.

Bill
Saying that, would you avoid funds like TISM as the EM portion puts some drag on that fund? Are there any decent ex-China EM funds to use?

Regards,

RM
I also would prefer less China in my life. But how? The emerging markets index funds overflow with Chinese companies. If one wants to invest international, one is stuck investing in China whether they want to or not.
If you use the Vanguard Total World ETF, you’ll have about 5% exposure to China, which is relatively small. If you use a LifeStrategy or Target Date Fund, you’ll have even less because they are tilted toward the US. I’m comfortable accepting this low percentage.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by nisiprius » Fri May 22, 2020 8:02 am

HEDGEFUNDIE wrote:
Thu May 21, 2020 9:31 pm
All of the China-hating on Bogleheads makes me happy, in a way.

It keeps the risk premium, and expected returns, Hugh for the rest of us.
You've used varying hypothetical illustrations of vehicles that could have been used to invest in China. What actual funds or CEFs or ETFs do you use for your personal China investments, and starting roughly when? Approximately how much is your current weighting in China as a percentage of your international stock holdings? Are you up to "relative GDP weight?"

You've mentioned the Matthews China Fund several times, is that the one you use yourself?

I am personally invested in China through its presence in Total International, since about 2005. Thus, about 10% of total international stock holdings. and haven't felt it important to try to second-guess the decisions of Vanguard or its index provider, nor to go out of my way either to overweight it or underweight it. From about 2001 to 2005, I was using the only international stock fund in my employer's 401(k) plan, which was the Fidelity Diversified International Fund, FDIVX; I never bothered to check the composition. China is currently at 3.8% of FDIVX.
Last edited by nisiprius on Fri May 22, 2020 8:12 am, edited 1 time in total.
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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by JoMoney » Fri May 22, 2020 8:11 am

JonnyDVM wrote:
Fri May 22, 2020 6:06 am
...
I also would prefer less China in my life. But how? The emerging markets index funds overflow with Chinese companies. If one wants to invest international, one is stuck investing in China whether they want to or not.
VTMGX , Vanguard's Developed Market's Index Fund has very little in shares trading in / representing shares of PRC companies.
"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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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by finite_difference » Fri May 22, 2020 8:32 am

nisiprius wrote:
Fri May 22, 2020 8:02 am
HEDGEFUNDIE wrote:
Thu May 21, 2020 9:31 pm
All of the China-hating on Bogleheads makes me happy, in a way.

It keeps the risk premium, and expected returns, Hugh for the rest of us.
You've used varying hypothetical illustrations of vehicles that could have been used to invest in China. What actual funds or CEFs or ETFs do you use for your personal China investments, and starting roughly when? Approximately how much is your current weighting in China as a percentage of your international stock holdings? Are you up to "relative GDP weight?"

You've mentioned the Matthews China Fund several times, is that the one you use yourself?

I am personally invested in China through its presence in Total International, since about 2005. Thus, about 10% of total international stock holdings. and haven't felt it important to try to second-guess the decisions of Vanguard or its index provider, nor to go out of my way either to overweight it or underweight it. From about 2001 to 2005, I was using the only international stock fund in my employer's 401(k) plan, which was the Fidelity Diversified International Fund, FDIVX; I never bothered to check the composition. China is currently at 3.8% of FDIVX.
If you want to keep low weight: Vanguard Total Intl / VTIAX (10% China)
If you want to add weight: VEMAX (43% China, 16% Taiwan)

To those concerned about transparency issues in China, you could consider investing only in Taiwan.

In my view China will have to address transparency as it grows, or else it will risk bigger problems that stem from a lack of transparency.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Slowtraveler » Fri May 22, 2020 8:33 am

I believe SCHF, Schwab's developed markets fund, has very little China.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by unclescrooge » Sun May 24, 2020 6:06 pm

Northern Flicker wrote:
Wed May 20, 2020 8:14 pm
simplesauce wrote:
Wed May 20, 2020 2:12 pm
Northern Flicker wrote:
Wed May 20, 2020 2:07 pm
Chinese companies also have a high debt load. From: https://www.bloomberg.com/news/articles ... k-by-years
China’s nonfinancial corporate debt accounted for 156.7% of the country’s gross domestic product as of the third quarter of last year, down from a peak of 162.8% in early 2016 but up sharply from 98% on the eve of the global financial crisis. It’s also well above the 74.2% for the U.S. or 101.9% for Japan, data compiled by the Institute of International Finance show.
The question is how profitably all of the capital from debt and equity issuance is put to work. If it is profitable enough, share dilution is not a problem and actually could be a good thing. When people talk about share dilution being a problem it usually means that the capital raised is put to work less profitably than the existing business so that earnings per share go down.
This is the first someone has suggested share dilution be a good thing. Could you expand on this? I do not quite understand how it could be beneficial.
If a company issues new shares to raise capital to invest in a business that proves to be more profitable than the previous business activities then the combined business can be more profitable per share than before the dilution. The issue is not share dilution but allocation of capital. A company cannot issue lots of new shares regularly and regularly expect the level of success with the new capital that will increase value for the current shareholders.
Hmmm... Solar city/Tesla comes to mind. 🤔

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by unclescrooge » Sun May 24, 2020 6:16 pm

nisiprius wrote:
Fri May 22, 2020 8:02 am
HEDGEFUNDIE wrote:
Thu May 21, 2020 9:31 pm
All of the China-hating on Bogleheads makes me happy, in a way.

It keeps the risk premium, and expected returns, Hugh for the rest of us.
You've used varying hypothetical illustrations of vehicles that could have been used to invest in China. What actual funds or CEFs or ETFs do you use for your personal China investments, and starting roughly when? Approximately how much is your current weighting in China as a percentage of your international stock holdings? Are you up to "relative GDP weight?"

You've mentioned the Matthews China Fund several times, is that the one you use yourself?

I am personally invested in China through its presence in Total International, since about 2005. Thus, about 10% of total international stock holdings. and haven't felt it important to try to second-guess the decisions of Vanguard or its index provider, nor to go out of my way either to overweight it or underweight it. From about 2001 to 2005, I was using the only international stock fund in my employer's 401(k) plan, which was the Fidelity Diversified International Fund, FDIVX; I never bothered to check the composition. China is currently at 3.8% of FDIVX.
Not hedgefundie, but i share much of his enthusiasm for China.

50% of equities in international, 1/3rd DM index fund, 1/3 EM index fund, 1/3 Chinese non-state owned enterprises indeed fund (CXSE). I've owned cxse since late 2017, slowly increasing the percentage allocation from DM until early 2019 to current allocation.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Alchemist » Sun May 24, 2020 8:01 pm

unclescrooge wrote:
Sun May 24, 2020 6:06 pm
Hmmm... Solar city/Tesla comes to mind. 🤔
It is popular to hate on Tesla, but its shareholders have been richly rewarded. Tesla is ironically in the best position to whether the current crisis vs the traditional carmakers. But I digress...
unclescrooge wrote:
Sun May 24, 2020 6:16 pm
Not hedgefundie, but i share much of his enthusiasm for China.

50% of equities in international, 1/3rd DM index fund, 1/3 EM index fund, 1/3 Chinese non-state owned enterprises indeed fund (CXSE). I've owned cxse since late 2017, slowly increasing the percentage allocation from DM until early 2019 to current allocation.
The United States State Department does not share your enthusiasm. Sanctions will likely be imposed soon under the Hong Kong Human Rights and Democracy Act passed in 2019; revoking Hong Kong's special status under U.S. law.

https://www.cnbc.com/2020/05/24/white-h ... g-law.html

And another few dozen Chinese firms have been recently added to blacklists:

https://www.cnbc.com/2020/05/23/chinese ... ebuke.html

Investing in China carries unique risks. Not of volatility, but of complete loss for a foreign investor.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by columbia » Sun May 24, 2020 8:12 pm


Investing in China carries unique risks. Not of volatility, but of complete loss for a foreign investor.
Allegedly that’s priced in. Down to the penny, in fact.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Alchemist » Sun May 24, 2020 8:48 pm

columbia wrote:
Sun May 24, 2020 8:12 pm

Investing in China carries unique risks. Not of volatility, but of complete loss for a foreign investor.
Allegedly that’s priced in. Down to the penny, in fact.
If anyone really believes that, I've got some Luckin coffee gift certificates and an all inclusive Xinjiang resort trip to sell them.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Rosencrantz1 » Sun May 24, 2020 9:17 pm

columbia wrote:
Sun May 24, 2020 8:12 pm

Investing in China carries unique risks. Not of volatility, but of complete loss for a foreign investor.
Allegedly that’s priced in. Down to the penny, in fact.
IMO, predicting how the CCP will respond/react to anything is a 'fool's errand'. I think you're correct using the word 'allegedly'.

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Re: Dr. Malkiel: “I believe that investors need to put more China into their portfolios“

Post by Rosencrantz1 » Sun May 24, 2020 9:21 pm

Alchemist wrote:
Sun May 24, 2020 8:48 pm
columbia wrote:
Sun May 24, 2020 8:12 pm

Investing in China carries unique risks. Not of volatility, but of complete loss for a foreign investor.
Allegedly that’s priced in. Down to the penny, in fact.
If anyone really believes that, I've got some Luckin coffee gift certificates and an all inclusive Xinjiang resort trip to sell them.
Better have your buyer use those gift certificates soon - I've read Luckin is shutting down outlets faster than they allegedly opened them :)

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