Why will international stocks "mean revert" and begin beating domestic stocks?

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VTI
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Why will international stocks "mean revert" and begin beating domestic stocks?

Post by VTI »

For that matter, why does "mean reversion" happen at all?

My best guess: If mean reversion weren't to happen, it would imply that "the market" is consistently mispricing.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Wayson »

I personally don't believe that we'll see any 'mean reversion'. Why can't they be reasonably priced right now for their value? Over in Europe, demographics look poor, energy is expensive, and interest rates are negative. China has been in the news a lot lately, with floods, potential famines, and energy generation issues. These are all known issues that have to be priced in, and most likely have been.

I went from carrying 20% of equities in international starting in 2013 to ceasing new contributions and maintaining the existing positions in ~2018 to divesting completely 1.5 years ago in early 2020. (Had to free up cash for a down payment, international equities were at or below cost basis courtesy of the market crash, selling them made sense from a tax perspective.) My only regret is that I did not divest fully sooner. While eventually *performance* of international may outstrip that of US, I find it highly improbable that we'll see international stocks surge in such a fashion as to make up for their 13 years of severe underperformance.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by spectec »

But wait. We keep hearing how it's just a matter of time before international takes its rightful place. (I'm zero percent international other than the international component of the companies in VTI, so yes, I'm a victim of home country bias).
Last edited by spectec on Wed Nov 24, 2021 9:10 pm, edited 1 time in total.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by burritoLover »

International developed beat the US for 25 years straight starting around 1970. The same porfolios were about even by 2012. So virtually all of the US outperformance of the last 50 years is in the last 10. What does that mean? Nothing. Those saying it’s international’s time to shine are just as clueless as those that think the US will outperform forever. No one knows - there’s no reasonable guess - any future predictions are just something you pulled out of you-know-where and about as useful.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by UpperNwGuy »

When Europe, China, and Japan fix their economies, international stocks will likely perform better. How much better? I don't know.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by fennewaldaj »

At the moment Europe Japan and EM all have better Price to earnings growth ratios than the US. Seems like a decent chance that leads to outperformance.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by finite_difference »

VTI wrote: Wed Nov 24, 2021 7:12 pm For that matter, why does "mean reversion" happen at all?

My best guess: If mean reversion weren't to happen, it would imply that "the market" is consistently mispricing.
Greatly simplified take..

Markets have cycles, partly due to technological disruptions, which causes companies to become obsolete and die or slowly fade away, replaced by new kids on the block that eventually become behemoths themselves.

As a result markets can become overheated as they turn into high gear after having overcome disruptions, or if they are fed too much money by subsidies or policies (eg. favorable tax policies or having a monopoly, etc.)

On the flip side, markets can also cool off when technology disruptions cause industries to be toppled. Then capital investment is needed to build up new cutting-edge industries.

If a market becomes too overheated a bubble risks forming, and if it runs too cold it’s a recession, so the Federal Reserve and government are there to keep the market running not too hot and not too cold.

An overheated market may be overvalued and an underheated market may be undervalued. A return of the market to that Goldilocks zone is reversion to the mean.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by William Million »

I don't believe US markets can realistically represent 60 percent of the globe. So, yes, I expect international to outperform domestic.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by quattro73 »

Question- if low interest rates are fueling higher stock valuations in the US, why are low rates not having the same effect elsewhere?

Or are they?
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by lostdog »

Wayson wrote: Wed Nov 24, 2021 8:05 pm I personally don't believe that we'll see any 'mean reversion'. Why can't they be reasonably priced right now for their value? Over in Europe, demographics look poor, energy is expensive, and interest rates are negative. China has been in the news a lot lately, with floods, potential famines, and energy generation issues. These are all known issues that have to be priced in, and most likely have been.

I went from carrying 20% of equities in international starting in 2013 to ceasing new contributions and maintaining the existing positions in ~2018 to divesting completely 1.5 years ago in early 2020. (Had to free up cash for a down payment, international equities were at or below cost basis courtesy of the market crash, selling them made sense from a tax perspective.) My only regret is that I did not divest fully sooner. While eventually *performance* of international may outstrip that of US, I find it highly improbable that we'll see international stocks surge in such a fashion as to make up for their 13 years of severe underperformance.
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Last edited by lostdog on Wed Nov 24, 2021 10:16 pm, edited 1 time in total.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by luckyducky99 »

VTI wrote: Wed Nov 24, 2021 7:12 pm For that matter, why does "mean reversion" happen at all?

My best guess: If mean reversion weren't to happen, it would imply that "the market" is consistently mispricing.
I don’t think mean reversion is a thing in markets. The fact that it doesn’t happen would only indicate mispricing if economic frameworks never changed, but they are constantly changing. Yesterday’s “correct” prices could easily be incorrect tomorrow due to technology changes, regulatory changes, geopolitical changes, environmental changes, monetary policy changes, social changes, etc, etc. The list goes on.

It’s not quite a random walk, but it’s so chaotic and unpredictable it might as well be.
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VTI
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by VTI »

lostdog wrote: Wed Nov 24, 2021 9:55 pm
Wayson wrote: Wed Nov 24, 2021 8:05 pm I personally don't believe that we'll see any 'mean reversion'. Why can't they be reasonably priced right now for their value? Over in Europe, demographics look poor, energy is expensive, and interest rates are negative. China has been in the news a lot lately, with floods, potential famines, and energy generation issues. These are all known issues that have to be priced in, and most likely have been.

I went from carrying 20% of equities in international starting in 2013 to ceasing new contributions and maintaining the existing positions in ~2018 to divesting completely 1.5 years ago in early 2020. (Had to free up cash for a down payment, international equities were at or below cost basis courtesy of the market crash, selling them made sense from a tax perspective.) My only regret is that I did not divest fully sooner. While eventually *performance* of international may outstrip that of US, I find it highly improbable that we'll see international stocks surge in such a fashion as to make up for their 13 years of severe underperformance.
[Deleting this because the poster deleted it.]
I'm not trying to challenge you, but why are you invested in US bonds only?
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by gtrplayer »

VTI wrote: Wed Nov 24, 2021 7:12 pm For that matter, why does "mean reversion" happen at all?

My best guess: If mean reversion weren't to happen, it would imply that "the market" is consistently mispricing.
Isn’t it hard to say international vs US when international includes many countries with varied governments and different economics whereas the US is one country, one economy, one government… Doesn’t feel like apples to apples but if you don’t invest in international, you might miss out on the country that one day overtakes the US.

VT makes most sense - if the US drops, another country will take its place at the top. I don’t invest solely in VT, though, because I’m not convinced that’s going to happen any time soon. I could be wrong, though.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Apathizer »

burritoLover wrote: Wed Nov 24, 2021 9:02 pm International developed beat the US for 25 years straight starting around 1970. The same porfolios were about even by 2012. So virtually all of the US outperformance of the last 50 years is in the last 10. What does that mean? Nothing. Those saying it’s international’s time to shine are just as clueless as those that think the US will outperform forever. No one knows - there’s no reasonable guess - any future predictions are just something you pulled out of you-know-where and about as useful.
This. We can't know for certain if ex-US markets will outperform the US in the future, but based on history and current valuations it seems likely. That's the empirical and logical argument for global diversification.
Last edited by Apathizer on Wed Nov 24, 2021 11:23 pm, edited 1 time in total.
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Karamatsu
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Karamatsu »

Some of the researchers at Vanguard seem to think that international equities are likely to outperform over the next decade. Predictions are, of course, just predictions, but you can at least check out their reasoning: A Tale of Two Decades.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by 9-5 Suited »

“Over the 25 years that I have been an investment adviser, I’ve learned that one of the greatest problems preventing investors from achieving their financial goals is their preoccupation with short-term performance. When it comes to judging the performance of either an investment strategy, money manager or fund, they believe three years is a long time, five years is a very long time, and ten years is an eternity. We observe this even with supposedly more sophisticated institutional investors.” - Larry Swedroe

The US can outperform international for decades, and it says nothing about the validity of global cap weighting. Looking at recent history, even seemingly “long” recent history, and bemoaning non-US equities is confusing outcome with strategy.

And the comments about Europe’s demographics, energy prices, etc. are also misleading. Those things are all KNOWN. So they might impact Europe’s economy, but they are priced into equity values and aren’t secret information that will depress expected returns.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by One More Thing »

I believe that it is more rational to believe that the global stock and bond markets will shift away from the USA over the course of my lifetime than to believe that the USA will lead the markets for the rest of my life. Hence my investments in VT and BNDW.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by TJat »

Karamatsu wrote: Wed Nov 24, 2021 10:36 pm Some of the researchers at Vanguard seem to think that international equities are likely to outperform over the next decade. Predictions are, of course, just predictions, but you can at least check out their reasoning: A Tale of Two Decades.
The researchers at vanguard have been that saying for at least a decade.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by arcticpineapplecorp. »

this is the chart from JP Morgan's Guide to the Markets:

Image

It doesn't tell you WHY international stocks "mean revert" and it doesn't tell you WHEN international stocks will "mean revert".

But it shows that international has outperformed US at times by different amounts and for different lengths of time and underperformed US at times by different amounts and for different lengths of time.

So at some point it is believed that international will outperform US, but when, how long that will last, and by what amount is unknown.

Therein lies the risk of investing. If something was certain, it would pay a lower return than stocks have.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by 40 Years' Gatherin's »

Drop the International and just do VTSAX. It's really that simple.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Beensabu »

I think maybe you mean when will US stocks experience a reversion to the mean? Who knows.

http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf

Gosh. Look who said earnings growth matters.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Bluemnatra »

Beensabu wrote: Wed Nov 24, 2021 11:59 pm I think maybe you mean when will US stocks experience a reversion to the mean? Who knows.

http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf

Gosh. Look who said earnings growth matters.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Nathan Drake »

If valuations are lower for exUS, and earnings growth is the same, then exUS will outperform because you paid less for your ownership of earnings.

US has to have much better earnings growth to justify its higher valuation and outperform.

And in the case where valuations mean revert, US will perform dramatically worse because that would likely mean that growth expectations were not lived up to.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Karamatsu »

The researchers at vanguard have been that saying for at least a decade.
So, no different from any other financial prognosticators, including those who predicted US outperformance over the same period. The stopped clock is eventually right, after which the financial media will promote the soothsayers as possessors of almost mystical insight, and it will all make sense in hindsight.

But really the useful thing in the Vanguard paper is how they reason about the problem, not necessarily the predictions. Too much weird, unexpected stuff still happens in the world to make market predictions reliable.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Nathan Drake »

Karamatsu wrote: Thu Nov 25, 2021 2:25 am
The researchers at vanguard have been that saying for at least a decade.
So, no different from any other financial prognosticators, including those who predicted US outperformance over the same period. The stopped clock is eventually right, after which the financial media will promote the soothsayers as possessors of almost mystical insight, and it will all make sense in hindsight.

But really the useful thing in the Vanguard paper is how they reason about the problem, not necessarily the predictions. Too much weird, unexpected stuff still happens in the world to make market predictions reliable.
Vanguard has NOT been saying this for a decade

They were neutral in 2011 and started favoring 10 year returns for exUS more recently

But their prediction bands are still large enough where US can outperform and still comply with their models
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by seajay »

Depends upon how you measure relative differences. UK cap weighted for instance has lagged US due to its largest caps being heavier into different sectors. More diverse/balanced has outperformed and the US is only more recently catching back up to that. That all tends to 'mean revert' as no one style consistently outperforms. When you diversify across multiples with the same/similar broad rewards that tends to do so with less volatility ... better risk adjusted rewards than a single.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by seajay »

Many investors opt to follow cap weighted. investing 5 times more in one stock than another because that stock is 5 times larger measured by its cap size. But each stock has the capacity to be the fastest/largest grower, if anything smaller cap stocks have the potential to grow more/quicker in percentage (and hence price) terms. Such tilted bets pay off if the largest cap grows the most, but in allocating more of ones own capital to one that leaves less invested in others compared to had each been equal weighted. US stocks endured a heavy hit in the dot com bubble burst in having relatively high weighting/exposure to dot com stocks. More recently such stocks have performed well, as did dot com stocks do well in the 1990's. A simplistic model that suggests US stock outperforming during the 1990's, lagging in the 2000's, outperforming in the 2010's as per the chart that arcticpineapplecorp posted.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Valuethinker »

9-5 Suited wrote: Wed Nov 24, 2021 10:38 pm “Over the 25 years that I have been an investment adviser, I’ve learned that one of the greatest problems preventing investors from achieving their financial goals is their preoccupation with short-term performance. When it comes to judging the performance of either an investment strategy, money manager or fund, they believe three years is a long time, five years is a very long time, and ten years is an eternity. We observe this even with supposedly more sophisticated institutional investors.” - Larry Swedroe

The US can outperform international for decades, and it says nothing about the validity of global cap weighting. Looking at recent history, even seemingly “long” recent history, and bemoaning non-US equities is confusing outcome with strategy.

And the comments about Europe’s demographics, energy prices, etc. are also misleading. Those things are all KNOWN. So they might impact Europe’s economy, but they are priced into equity values and aren’t secret information that will depress expected returns.
I am laughing because despite the alleged adherence to informationally efficient markets that we see here, that point just bounces. I have made it, perhaps less eloquently, many many times. It doesn't stick.

There's definitely a big "US is always best" belief. John Bogle had it. Warren Buffett is cited as having it - although that does not stop him from making international investments.

In actual practice over the very long run it shouldn't make a huge difference to returns. Given the increasing correlation of global stock markets (particularly during a crisis) the diversification benefits (for a US investor) are probably smaller than they were.

By contrast, and I don't think I get (much) kickback on this, home country bias for non-US investors really is a deadly sin.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by acegolfer »

In my opinion, "mean reversion" is often misunderstood. If everything mean reverts, one can time the market.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Flashes1 »

International will beat domestic when international companies' profits are growing faster than domestic and there's appropriate legal and regulatory protections provided by countries such as China. It's that simple. Profits and protection.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by DrivingFun »

To be perfectly honest, the fact that I have absolutely no idea, or have any faith in attempting to predict this, is why I'm a BH to begin with. I've picked 30% international 20 years ago because it was suggested to be in somewhere in the "proper" range. I've stuck to it, and continue to stick to it. IMHO it's impossible to have optimal performance outside of short term stretches. Maybe I should be all US. Maybe I should own a bunch of Bitcoin. I simply don't know, hence why I stick with what I know and what has been working reasonably well for me. I try not to indulge in FOMO.
Last edited by DrivingFun on Thu Nov 25, 2021 10:59 am, edited 1 time in total.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by danrock54 »

When will ex-us companies pursue such aggressive buyback strategies ?


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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by burritoLover »

China = 3.7% of Vanguard Total World - about the same as Amazon in the S&P 500 - let’s stop the whole tired knee-jerk jump to the China argument against international - it is laughable.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by JoMoney »

<begin snarky rhetoric>
Why will U.S. stocks "mean revert" and begin losing more, collapsing faster than international stocks?

What's the "international stock" equivalent of AMC and GameStop ?

</end snarky rhetoric>
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by MarkRoulo »

arcticpineapplecorp. wrote: Wed Nov 24, 2021 10:48 pm this is the chart from JP Morgan's Guide to the Markets:

Image

It doesn't tell you WHY international stocks "mean revert" and it doesn't tell you WHEN international stocks will "mean revert".

But it shows that international has outperformed US at times by different amounts and for different lengths of time and underperformed US at times by different amounts and for different lengths of time.

So at some point it is believed that international will outperform US, but when, how long that will last, and by what amount is unknown.

Therein lies the risk of investing. If something was certain, it would pay a lower return than stocks have.
That is an interesting chart. The last two waves of US out-performance, 1996-2000 and the current run, REALLY look tech driven. Specifically, *Internet* tech driven: dot-com for 1996-2000 and FAANG and friends for the current run.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by stormswami »

arcticpineapplecorp. wrote: Wed Nov 24, 2021 10:48 pm this is the chart from JP Morgan's Guide to the Markets:

Image

It doesn't tell you WHY international stocks "mean revert" and it doesn't tell you WHEN international stocks will "mean revert".

But it shows that international has outperformed US at times by different amounts and for different lengths of time and underperformed US at times by different amounts and for different lengths of time.

So at some point it is believed that international will outperform US, but when, how long that will last, and by what amount is unknown.

Therein lies the risk of investing. If something was certain, it would pay a lower return than stocks have.

As far as I can, which is probably an over-generalization, much of international vs. U.S. historical outperformance/underperformance seems to be nothing more than the price of the US Dollar. The USD has generally been rising since 2011 after weakening roughly 2002-2008; it previously had a long-duration rise from 1995 into 2001. Will the USD continue to rise in perpetuity? Unlikely not. We are probably one day closer to international outperformance (aided by a falling or 'reverting' USD), but who knows beyond that.


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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by atdharris »

Isn't most of the ex-US outperformance due to a weak dollar during those periods? I remember the dollar was weak in the 2000-2008 period and then really strengthened in 2012 or so, which is when the US really began lapping the rest of the world.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by visualguy »

burritoLover wrote: Thu Nov 25, 2021 11:01 am China = 3.7% of Vanguard Total World - about the same as Amazon in the S&P 500 - let’s stop the whole tired knee-jerk jump to the China argument against international - it is laughable.
I think the point being made is that ex-US is rife with issues from the point of view of investors in that index. Investing in Chinese stocks is highly problematic due to many reasons including government actions in both China and the US. Europe and Japan constitute more than half of ex-US and the've been stagnated for a long time even in traditionally strong industries for them such as automotive.

There is no other US to invest in out there. The situation with China is so disappointing because they certainly have the size, growth, and general potential to be the major engine for investment success among non-US stockmarkets, but they aren't that, unfortunately. Even if they become that at some point, they are diluted by all the other stuff in ex-US which is one of the problems with that index. Even if China became a stock investment powerhouse, that would be diluted by the large amount of Europe and Japan.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by burritoLover »

visualguy wrote: Thu Nov 25, 2021 1:28 pm
burritoLover wrote: Thu Nov 25, 2021 11:01 am China = 3.7% of Vanguard Total World - about the same as Amazon in the S&P 500 - let’s stop the whole tired knee-jerk jump to the China argument against international - it is laughable.
I think the point being made is that ex-US is rife with issues from the point of view of investors in that index. Investing in Chinese stocks is highly problematic due to many reasons including government actions in both China and the US. Europe and Japan constitute more than half of ex-US and the've been stagnated for a long time even in traditionally strong industries for them such as automotive.

There is no other US to invest in out there. The situation with China is so disappointing because they certainly have the size, growth, and general potential to be the major engine for investment success among non-US stockmarkets, but they aren't that, unfortunately. Even if they become that at some point, they are diluted by all the other stuff in ex-US which is one of the problems with that index. Even if China became a stock investment powerhouse, that would be diluted by the large amount of Europe and Japan.
So you can predict the future earnings, economic environment, governmental intervention, and investor sentiment of 50 countries yet completely ignore potential US problems like a declining birth rate and RAPIDLY increasing debt to GDP and increasing US govt intervention in markets? Do you think investing in only one country and HOPING it remains the best business environment going forward is more or less risky than diversifying across 50 countries?
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by JDave »

In 407 days, 8 hours, 43 minutes, and 19 seconds - exactly.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by illumination »

There is no "rule" that this has to happen.

Countries like Turkey, Iran, Venezuela etc. have had really long periods of terrible performance, why do we assume that in the future they will "make up for lost time" and start outperforming their peers ? It's no different than assuming because international has fallen behind "domestic" for a long time period that the "universe" will make it so this dynamic flips.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by visualguy »

burritoLover wrote: Thu Nov 25, 2021 2:00 pm
visualguy wrote: Thu Nov 25, 2021 1:28 pm
burritoLover wrote: Thu Nov 25, 2021 11:01 am China = 3.7% of Vanguard Total World - about the same as Amazon in the S&P 500 - let’s stop the whole tired knee-jerk jump to the China argument against international - it is laughable.
I think the point being made is that ex-US is rife with issues from the point of view of investors in that index. Investing in Chinese stocks is highly problematic due to many reasons including government actions in both China and the US. Europe and Japan constitute more than half of ex-US and the've been stagnated for a long time even in traditionally strong industries for them such as automotive.

There is no other US to invest in out there. The situation with China is so disappointing because they certainly have the size, growth, and general potential to be the major engine for investment success among non-US stockmarkets, but they aren't that, unfortunately. Even if they become that at some point, they are diluted by all the other stuff in ex-US which is one of the problems with that index. Even if China became a stock investment powerhouse, that would be diluted by the large amount of Europe and Japan.
So you can predict the future earnings, economic environment, governmental intervention, and investor sentiment of 50 countries yet completely ignore potential US problems like a declining birth rate and RAPIDLY increasing debt to GDP and increasing US govt intervention in markets? Do you think investing in only one country and HOPING it remains the best business environment going forward is more or less risky than diversifying across 50 countries?
No need to predict 50 countries. Maybe Brazil will do great or maybe not, but how is that going to matter - they are only a bit over 1% of ex-US. I don't need to try to predict that. The issue is with throwing money at this whole basket of 50. Maybe Korea and Taiwan are fine, but they are still way diluted in the whole index.

Again, the major components are Europe and Japan, so the fate of ex-US is highly tied to those markets within my investment time horizon. Yes, I think it's perfectly reasonable to focus my investment on the US and stay away from Europe, Japan, or the ex-US index as a whole. There are issues in the US that concern me from a stock investment perspective, but they pale when compared to the issues with Europe, Japan, and most countries in general.
minimalistmarc
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by minimalistmarc »

VTI wrote: Wed Nov 24, 2021 7:12 pm For that matter, why does "mean reversion" happen at all?

My best guess: If mean reversion weren't to happen, it would imply that "the market" is consistently mispricing.
They might or might not. I prefer to not try and outguess the market and buy the all world
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Northern Flicker »

VTI wrote: Wed Nov 24, 2021 7:12 pm For that matter, why does "mean reversion" happen at all?

My best guess: If mean reversion weren't to happen, it would imply that "the market" is consistently mispricing.
Correct pricing does not imply mean reversion. Moreover, stock returns may be a non-stationary process, which would mean that the distribution of future returns would be changing. The mean of future returns may be different from what the mean of future returns was at the start of sample that delivered a sample mean different from distribution mean.

If you believe the efficient market hypothesis is true, then the only thing leading to mean reversion is the law of large numbers. That is, mean reversions would happen if you have a long enough sequence of events just by the mean of future events eventually dominating the past outcomes in the history of outcomes.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by Anon9001 »

VTI wrote: Wed Nov 24, 2021 7:12 pm For that matter, why does "mean reversion" happen at all?

My best guess: If mean reversion weren't to happen, it would imply that "the market" is consistently mispricing.
Investing in a single country stock market should have more ability to out-perform massively than investing in a group of countries which are having stock markets but it also is having more ability to under-perform massively. That is the cost of diversification. Right tail is cut in exchange for left tail reduction ie single country stock market has something bad happen to it that doesn't effect ROW.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by burritoLover »

visualguy wrote: Thu Nov 25, 2021 2:50 pm
burritoLover wrote: Thu Nov 25, 2021 2:00 pm
visualguy wrote: Thu Nov 25, 2021 1:28 pm
burritoLover wrote: Thu Nov 25, 2021 11:01 am China = 3.7% of Vanguard Total World - about the same as Amazon in the S&P 500 - let’s stop the whole tired knee-jerk jump to the China argument against international - it is laughable.
I think the point being made is that ex-US is rife with issues from the point of view of investors in that index. Investing in Chinese stocks is highly problematic due to many reasons including government actions in both China and the US. Europe and Japan constitute more than half of ex-US and the've been stagnated for a long time even in traditionally strong industries for them such as automotive.

There is no other US to invest in out there. The situation with China is so disappointing because they certainly have the size, growth, and general potential to be the major engine for investment success among non-US stockmarkets, but they aren't that, unfortunately. Even if they become that at some point, they are diluted by all the other stuff in ex-US which is one of the problems with that index. Even if China became a stock investment powerhouse, that would be diluted by the large amount of Europe and Japan.
So you can predict the future earnings, economic environment, governmental intervention, and investor sentiment of 50 countries yet completely ignore potential US problems like a declining birth rate and RAPIDLY increasing debt to GDP and increasing US govt intervention in markets? Do you think investing in only one country and HOPING it remains the best business environment going forward is more or less risky than diversifying across 50 countries?
No need to predict 50 countries. Maybe Brazil will do great or maybe not, but how is that going to matter - they are only a bit over 1% of ex-US. I don't need to try to predict that. The issue is with throwing money at this whole basket of 50. Maybe Korea and Taiwan are fine, but they are still way diluted in the whole index.

Again, the major components are Europe and Japan, so the fate of ex-US is highly tied to those markets within my investment time horizon. Yes, I think it's perfectly reasonable to focus my investment on the US and stay away from Europe, Japan, or the ex-US index as a whole. There are issues in the US that concern me from a stock investment perspective, but they pale when compared to the issues with Europe, Japan, and most countries in general.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by ivgrivchuck »

VTI wrote: Wed Nov 24, 2021 7:12 pm For that matter, why does "mean reversion" happen at all?

My best guess: If mean reversion weren't to happen, it would imply that "the market" is consistently mispricing.
The reason for holding international is diversification, not "mean reversion".

Bad things can happen to any country (U.S. is not immune!), it's wise to hedge your bets.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by 9-5 Suited »

Valuethinker wrote: Thu Nov 25, 2021 5:27 am
9-5 Suited wrote: Wed Nov 24, 2021 10:38 pm “Over the 25 years that I have been an investment adviser, I’ve learned that one of the greatest problems preventing investors from achieving their financial goals is their preoccupation with short-term performance. When it comes to judging the performance of either an investment strategy, money manager or fund, they believe three years is a long time, five years is a very long time, and ten years is an eternity. We observe this even with supposedly more sophisticated institutional investors.” - Larry Swedroe

The US can outperform international for decades, and it says nothing about the validity of global cap weighting. Looking at recent history, even seemingly “long” recent history, and bemoaning non-US equities is confusing outcome with strategy.

And the comments about Europe’s demographics, energy prices, etc. are also misleading. Those things are all KNOWN. So they might impact Europe’s economy, but they are priced into equity values and aren’t secret information that will depress expected returns.
I am laughing because despite the alleged adherence to informationally efficient markets that we see here, that point just bounces. I have made it, perhaps less eloquently, many many times. It doesn't stick.

There's definitely a big "US is always best" belief. John Bogle had it. Warren Buffett is cited as having it - although that does not stop him from making international investments.

In actual practice over the very long run it shouldn't make a huge difference to returns. Given the increasing correlation of global stock markets (particularly during a crisis) the diversification benefits (for a US investor) are probably smaller than they were.

By contrast, and I don't think I get (much) kickback on this, home country bias for non-US investors really is a deadly sin.
Completely agree. Not likely to be a huge deal either way since the US drives so much of the global economy. But I do prefer the logic of buying the haystack which to me is the global market portfolio. No particular reason to exclude international so I don’t. I guess in fairness I keep it at 40% of equities for simplicity so it’s not always perfect.
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by arcticpineapplecorp. »

stormswami wrote: Thu Nov 25, 2021 11:49 am As far as I can, which is probably an over-generalization, much of international vs. U.S. historical outperformance/underperformance seems to be nothing more than the price of the US Dollar. The USD has generally been rising since 2011 after weakening roughly 2002-2008; it previously had a long-duration rise from 1995 into 2001. Will the USD continue to rise in perpetuity? Unlikely not. We are probably one day closer to international outperformance (aided by a falling or 'reverting' USD), but who knows beyond that.


Image
yeah, here's another from JP Morgan's Guide to the Markets:

Image

I like this one too, though the source has been taken down but the point's the same, sometimes currency fluctuations help and sometimes they hurt:

Image
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Re: Why will international stocks "mean revert" and begin beating domestic stocks?

Post by bertilak »

I think expectations about mean reversion usually do not take into account that the mean keeps changing.
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