It Never Fails I recently returned from a cruise vacation, and of course, as I stood on deck watching the whales, glaciers, and Alaskan coastal terrain, the comment among my small group of passengers boiled down to, what else?
The stock market, of course.
But I noticed something in my chats. Someone would bring up all the usual FANG suspects (Facebook, Amazon and Apple, Netflix and Google), or maybe General Electric or IBM. You name it, all of them American companies.
But does it give you the idea of investing in Europe or Asia, where valuations are lower and stock prices are cheaper?
The kindly silence said a lot. My cruise ship friends displayed the most humane traits of human investors: what financiers call “country of origin bias.”
An unsurprising trend
Earlier this year, the International Monetary Fund (IMF) surveyed investors in several countries and found an unsurprising trend: investors in a particular country to love shares within its own borders, allocating the vast majority of its funds to those companies.
But invest your money outside those borders? Meh.
In the IMF’s Coordinated Portfolio Investment Survey, US investors placed 70% of their funds in US stocks. Canadian and Australian investors showed the same type of bias.
We all have a natural tendency to want to invest in our home countries. We are more familiar with them. And when we talk to our friends and family (or people on a cruise), they are familiar with them too, which adds another level of psychological comfort.
Price paid, value received
The heavy allocation to US stocks made sense until recently. In 2009, the price of the S&P 500 was low, relative to the corporate earnings produced by the companies that comprise it. The Federal Reserve was involved in engineering a rebound in the economy.
Yet today, with the S&P 500 at new all-time highs, buying the same stock index is like buying the most expensive house on the best street in town. It will make you feel good, but you are paying a high price for the experience.
Meanwhile, newly remodeled fix-up homes, with discounts to match, lurk in plain sight just a few blocks away, waiting to be discovered by a new crop of buyers with an open mind and fresh money.
For example, the S&P 500’s price-earnings ratio, which is the price investors pay relative to the index’s earnings, has only been higher a couple of times in the last century, namely 1929 and 2000. And Because of that risk, investors saw its shares rise 8.4% in the past six months.
On the other hand, an investor in any number of international indices has done much, much better:
- S&P 500: 8.4%
- Mexico (S&P/BMV Index): 9.43%
- Spain (Ibex 35 Index): 12.7%
- Netherlands (AMX Index): 15.7%
- Italy (FTSE MIB Index): 22.7%
Since 2011, most of the offshore world has been in a bear market due to, well, whatever: negative interest rates, problems with Greece, Britain’s “Brexit” from the EU, and a stubbornly difficult economic environment. Companies have had to tighten their proverbial belts to stay in business and remain competitive in the global environment. I wish investors would shed their country-of-origin bias and take notice.
