International Diversification

  • 13 Dec
    Worried About The Chinese Financial System? Read This

    Worried About The Chinese Financial System? Read This

    • Investors tend to shy away from complex situations because they are difficult to understand. However, complex situations are exactly where the outsized profits lie for those who are willing to dig deeper.
    • The Chinese financial system has two sides, a scary one and a strong one.
    • There is one thing China has that no other market economy has.



    Introduction

    I’ll start this discussion with the story of American Express (NYSE: AXP) and its 1963 salad oil scandal.

    Anthony “Tino” De Angelis, a former commodities broker, figured that he could trick inspectors by putting just a few feet of salad oil in his containers and make it look like the containers were full as the oil floats on top of sea water. This allowed him to borrow huge amounts against the salad oil collateral. At one point, the oil market crashed and it was impossible to cash in on the collateral as there wasn’t any. More →

  • 08 Dec
    A Random Walk Down Wall Street

    A Random Walk Down Wall Street

    • According to Burton Malkiel, both technical and fundamental analysis are futile.
    • You might agree or disagree, but there are extremely valuable investing gems in his book.
    • There is something more important than trying to beat the market.



    Introduction

    “Obsessing over stock charts puts holes in investors’ shoes and yachts in brokers’ docks.”

    One of the best books about stocks is Burton Malkiel’s A Random Walk Down Wall Street. It’s a book you should definitely read, if you haven’t already, as it gives a great representation of how Wall Street works over the long term and describes many stock market bubbles, stock valuations through time, the firm foundation theory and the castle in the air theory, and it dismantles technical analysis and fundamental analysis.

    Malkiel is strongly in favor of diversification, index funds, proper asset allocation, risk and long term investing, but the biggest value you can get from reading his book is the common sense related to personal investing and how the risk of investing is related to your personal financial situation and financial goals, not so much the stock market if you avoid doing stupid things.

    Let’s dig into some interesting concepts Malkiel shares and see how they apply to the current market environment.

    Is The Stock Market A Random Walk?

    The main point of the random walk theory is that short term stock price movements can’t be predicted by looking at past price movements as there is no correlation between what has happened in the past and what will happen in the future.

    The concept of a random walk is extremely difficult to grasp because it is in our human nature to attach a pattern and simplify the environment we operate in, a concept called statistical illusion. If we take a look at the S&P 500, we can definitely spot some trends and patterns.

    Figure 1: S&P 500 in the last 10 years. Source: Macro Trends.

    However, there aren’t any. The more historical data you use, the more you will see that there is no way of predicting what will happen next. Malkiel uses the following figure to show how a random walk can look.

    Figure 2: A pattern created by a coin toss. Source: Malkiel.



    The pattern of the S&P 500 isn’t much different than the pattern derived from a coin toss. So whenever you think you might be onto something, remember that a reversal is always around the corner and one short but strong bear market can erase gains that took a decade to build.

    After dismissing technical analysis, let’s see what Malkiel has to say about fundamental analysis.

    Malkiel and Cragg conducted a survey of Wall Street’s top analysts and found that they simply fail at accurately predicting earnings in every single industry both in the one-year and five-year periods. Other researchers like Sandretto and Milkrishnamurthi have reached similar conclusions.

    The book also includes a lengthy discussion about how trying to beat the market is futile. I could argue on that with value investing as it has proven profitable in the very long term. However, even value investing is on shaky grounds given the current accommodative monetary policies which are again a random walk as it was impossible to predict such a scenario 10 years ago. Malkiel argues that value investing did underperform in the 1990s and therefore it is again impossible to know whether past outperformance will replicate itself into the future. You may agree or disagree with Malkiel, but there is some extremely valuable information in his book.

    The Value Of Common Sense Shared By Malkiel

    I find the biggest value in Malkiel’s book is the common sense, which is extremely important in our investing life-cycle. I’ll share a few examples here. Let’s start with inflation.

    Most investors focus on the inflation rate measured by the consumer price index, but that rate has little meaning for an individual and you should think about how to protect your wealth from inflation even if it doesn’t seem important now when inflation is below 2%. The following figure will show how different items are differently impacted by inflation, so it all depends on what you want to buy in the future. If you want to retire on Hershey bars, you should worry.

    Figure 3: Inflation is different and, again, personal. Source: Malkiel.

    Another important factor is proper asset allocation which starts with proper diversification. Malkiel shows how important it is to be well diversified internationally and to rebalance accordingly through time. A portfolio of 20 well diversified international stocks (including U.S. stocks) leads to the same returns with lower risk.

    Figure 4: International diversification leads to lower risk. Source: Malkiel.



    The third Malkiel concept I want to touch on here is risk and age. A young person that has the best earning years ahead of them can afford to take higher risks as the increased future salaries can cover for eventual portfolio declines and even take advantage of lower prices and consequently higher dividend yields. A person close to or in retirement can’t take the risk of a lost stock market decade or any kind of potential portfolio decline.

    Conclusion

    Reading Malkiel’s book leads to an intriguing discussion with oneself, especially if you try to beat the market with a certain technique. However, I believe A Random Walk Down Wall Street is an essential read for anyone who owns any kind of investment vehicle.

    I might not totally agree with what Malkiel is saying, but I’m still young and can take a lot of risk as he would say. Nevertheless, where I agree with Malkiel is that investing is and always will be a personal issue.

    I would build on Malkiel’s work by saying that beating the market is irrelevant. What is relevant is that your investments, their risk and reward, are related to your personal financial life cycle goals. Malkiel’s book is an essential read for determining the relation between the risk reward of your investment strategies and your life goals.

    © 2017 Investiv

  • 30 Nov
    Does It Make Sense To Invest In Russia Now?

    Does It Make Sense To Invest In Russia Now?

    • Russia is looking better and better from an economic perspective.
    • However, the risks are always there and they have to be accounted for when contemplating such an investment. I’ll share my opinion on investing into such risk reward plays.
    • Individual investments in Russia still offer opportunities.



    Introduction

    I mentioned in a recent article about international diversification that Russia is one of the cheapest markets out there when looking at fundamentals.

    In today’s article, I want to analyze the Russian market a bit more in depth to distinguish between oil and gas related cheapness and other sectors. I’ll analyze the risks and potential rewards and then conclude with what might be the best way to get exposure to such a market. More →

  • 27 Nov
    This Is Why International Diversification Is So Important

    This Is Why International Diversification Is So Important

    • The 30% international revenue exposure the S&P 500 offers isn’t enough.
    • It’s possible to add significant returns and lower your risk when investing internationally.
    • A look at economic health and fundamentals will show where it’s best to invest now.



    Introduction

    An often overlooked part of investing and portfolio strategies are currencies.

    The easiest way to look at it is to say that it all evens out over time and that the only thing important is to be diversified. By owning the S&P 500 or companies that have global revenues, we could say that a portfolio is well diversified. More →

  • 20 Nov
    Chinese IPOs Are Hot – Here’s How To Profit On Them

    Chinese IPOs Are Hot – Here’s How To Profit On Them

    • Today I’ll discuss 3 recent Chinese IPOs and will give you a few investing tips through these examples.
    • One thing you have to be accustomed to is volatility, thus allocate a proper part of your portfolio to Chinese IPOs.



    Introduction

    Investing in recent IPOs in a treacherous thing to do.

    The first difficulty is that there aren’t any historical prices to study. This is somewhat of a good thing because it means we cant anchor to any past stock prices which allows us to really be what investors should be, business analysts. More →

  • 16 Nov
    These Two Chinese Retail Giants Could Deliver HUGE Returns

    These Two Chinese Retail Giants Could Deliver HUGE Returns

    • I’ve created simple models that estimate future earnings and stock price potential for two of China’s biggest retailers, JD.com and Alibaba.
    • In addition to their potential, we’ll also discuss their risks.
    • I recommend checking out yesterday’s article about the Chinese e-commerce market before jumping into today’s.



    Introduction

    Yesterday we discussed the Chinese retail environment and discussed what to look for when searching for a good investment.

    Today, I’ll dig deeper into specific investments in order to apply my theory. I’ll dig into the biggest Chinese e-commerce players, look at what the real value they offer is at current prices, and look at the risks and rewards at this point in time. More →

  • 06 Nov
    This Is Why You Need To Be Invested In Emerging Markets

    This Is Why You Need To Be Invested In Emerging Markets

    • In investing, having a strong tailwind is perhaps more important than picking the right stocks.
    • Finding good stocks in emerging markets isn’t that difficult, and plenty of them trade on U.S. exchanges.
    • It all boils down to fundamentals. Rebalance accordingly between developed and emerging markets.



    Introduction

    I’ve talked a lot about investing in emerging markets, but I’ve never assessed emerging markets from an holistic perspective.

    Today, you’ll read everything you need to know about investing in emerging markets. It’s extremely important to know why to invest in emerging markets, and then to understand the best way how to do so because not every investment in emerging markets is going to do well. More →

  • 04 Oct
    The New Silk Road Will Change Everything – Here’s What You Need To Know

    The New Silk Road Will Change Everything – Here’s What You Need To Know



    • What’s going on in Asia isn’t news that sells. But the consequence is that we are poorly informed about the groundbreaking One Belt One Road project.
    • Lack of and poor information doesn’t allow for proper capital allocation and international diversification.
    • We’ll discuss what’s going on in Asia and how you can profit from it by buying foreign but also domestic stocks.

    Introduction

    What we’re mostly focused on now will probably be completely irrelevant in a few years and will almost certainly be in fifteen years.

    Most of the market related talk now focuses around possible tax reform or similar incentives. As these are short term factors and the economy offers no free lunch, nobody knows how those probable measures will actually impact the economy and stocks. More →

  • 20 Sep
    The Time Is Now To Invest In Russia

    The Time Is Now To Invest In Russia

    • The Russian economy has returned to growth and the long-term prospects are positive.
    • The combination of the relative stock market cheapness and economic upturn could lead to outsized returns.
    • The ruble could strengthen further while the current dividend yield of 5% isn’t bad at all.

    Introduction

    At the end of 2016, I wrote about how it was best to avoid Russia due to its dependency on oil, slow development and progress even if it was and still is the cheapest stock market in the world. Since then, the Russian ETF has dropped almost 20% but has currently recovered to the December 2016 level. More →

  • 19 Sep
    10 More European High Dividend Yielders You Should Consider Now

    10 More European High Dividend Yielders You Should Consider Now

    • There are interesting recession-proof companies on this list, all yielding 5% or more.
    • Some companies are cash cows, but don’t forget that tobacco companies have been the best investment in the past 30 years.
    • I’ll finish this list with a systemic risk analysis and a surprise stock with huge growth potential that offers a nice yield of 3%.

    Introduction

    I hope you enjoyed the first part of my two-part series of European stocks with dividends that yield 5% or more.

    Today, I’ll present you with another 10 interesting dividend plays, and I’m sure you’ll find interesting picks that fit your portfolio risk reward appetite. More →

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