Merry Christmas and a very happy New Year. Let’s make some money in 2017!
Merry Christmas and a very happy New Year. Let’s make some money in 2017!
Ever since the 2008 meltdown, it’s been “America the Beautiful” when it comes to investing. American stocks have consistently beaten their international peers on a level that would make our national basketball team proud.
Since the bottom in early 2009, the S&P 500 Index is up about 220%. The MSCI All Country World Ex-U.S. Index — which covers pretty much the entire rest of the world outside U.S. borders — is up less than 80% over the same period. But before you drape yourself in Old Glory and chant “U-S-A … U-S-A …” keep in mind that American outperformance has historically been cyclical. There are long stretches when American stocks dominate the competition like the Southeastern Conference in college football. But there are also plenty of times when U.S. stocks get clobbered as hard as Rocky Balboa by the Russian in the first 14 rounds of Rocky IV
Today, American stocks are expensive, trading at a cyclically adjusted price earnings ratio of 27, which implies annual returns over the next decade of about 1%. That makes the U.S. the most expensive major world market by a wide margin. By comparison, the U.K., France and Canada trade at CAPEs of 13, 15 and 18, respectively, implying annual returns over the coming decade of 7.2%, 6.7% and 5.1%.
These forecasts — like all market forecasts — should be taken with a grain of salt. The numbers do, however, suggest American stocks might fare more like the national soccer team than the national basketball team relative to the rest of the world in the coming years.
So with no more ado, here are 10 international stocks poised outperform ‘Murica.
Some very solid advice here from my friend and colleague Ari Rastegar.
From If I Knew Then…
My mistake was that I didn’t realize how important my physical health and well-being was to my business.
I woke up one morning, my wife and I had just started dating, and I got the worst pain I could imagine. There was a hospital six or seven blocks from the apartment and so I walked there. They did all these tests and I ended up having kidney stones.
This doctor came in and said, “How are you taking care of yourself?”
My wife, who was my girlfriend at the time, jumped in and said, “He eats steak every night and pizza for breakfast. He is out all night drinking and up at 7 in the morning for work…”
The doctor asked what I do for a living and I went into my pitch, “I am a real estate investor—we invest for the long term.”
And the doctor said, “You might not be around for the long term. Your investors will be, but you might not be.”
That was the lightbulb moment. I never looked back. Everything has been better since.
Treat your body as your most important asset. I now realize that the most important aspect is me. Health, for me, is vital,and it has allowed me to be so much more sufficient. Everything comes out of your health.
If you have all the money in the world, all the business success in the world and you have a year to live because of cancer—what is your business worth then?
Charles here. My line of work tends to be dominated by highly-driven people… people that often push themselves a lot harder than they should for a lot longer than they should.
It takes a toll. I’ve had a few physical breakdowns myself where I finally hit a brick wall.
So, if you’re reading this, step away from your desk. Take a walk around the block and clear your head. And next week, be sure to get a reasonable amount of sleep. And maybe eat a salad or two while you’re at it, and cut out the booze and junk food.
There is near universal agreement that the Brexit – and the walloping it gave the market – was a black swan event. But actually defining what a black swan is can be a challenge.
Most investors equate a black swan with a market crash. But that’s really putting the cart before the horse. A black swan is simply an event that no one saw coming… that also has a large, outsized impact. So a market crash is more the result of a black swan than a black swan itself.
And a black swan need not always be something bad. Sure, a meteor falling out of the sky and hitting your house would be a black swan event. But so would be an inheritance check for a million dollars from an aunt you never knew you had. Both would be completely unexpected… and both would have major impacts on your life.
Trader, professor and financial writer Nassim Nicholas Taleb made “black swan” a household word (at least in households that regularly debate financial topics… like mine) and gave it its current meaning, but the expression has been around a lot longer for something that was assumed to be impossible. The first recorded use of black swan as this kind of metaphor dates to the Roman Empire, and it was a common expression in 1500s London.
Until 1636 – when European exploration of Australia was underway – all swans were presumed to be white. No one had ever seen a black swan, so it was presumed that none existed.
If you want to get really wonky, the black swan is an example of the problem of induction, or trying to draw general conclusions from specific observations. In plain English, seeing a thousand white swans and not a single black swan doesn’t “prove” that no black swans exist. And just because something has never happened before doesn’t mean it can never happen. Up until March of 2000, it was popularly believed to be impossible for a tornado to hit a major, urban area. The thinking was that the skyscrapers affected the wind patterns in such as a way as to make a tornado touchdown impossible. Well, then on March 28, 2000, an F3 tornado touched down on downtown Fort Worth’s Main Street and proceeded to obliterate one of the largest skyscrapers in the city. (I was living in Fort Worth at the time, and distinctly remember cowering in the basement of the building I was in…)
Let’s get back to Nassim Taleb. In black swan of the financial variety, Taleb says you need to have three conditions in place:
And this is where you get back to the fun parallels with finance. No country has ever left the European Union before… and no opinion poll or betting market suggested it was possible. So the financial markets assumed a UK vote to leave to be impossible.
Well… it turned out that it wasn’t impossible, and the impact was definitely outsized. No one knew at the time – or knows now – what the full impact of Brexit will be once all is said and done. And as for the narrative, after the fact it became “obvious” that Brexit would happen because of the dissatisfaction of older, blue-collar British voters, the rise of Donald Trump in America or any number of other reasons.
So, Brexit does indeed make the cut as a black swan.
All of this is fine and good, but if black swans are always unpredictable and obvious only after the fact… what’s the point of even talking about them?
Even if you can’t anticipate individual black swans, you can definitely take a few simple steps to “black swan proof” your portfolio… or at least come close.
First, don’t make the assumption that something can’t happen simply because it hasn’t happened yet. Don’t be overconfident based on your limited observations.
Second, always have a little portfolio insurance. That can mean different things to different investors, but as a general rule it means you should have a few assets in your portfolio that zig when the market zags. Taleb himself made enough money in a single day to walk away from Wall Street forever. He was “long volatility” on the day of the 1987 stock market crash, and walked with millions when the market cratered.
Finally, beware of debt. Excessive debt has been the death of many a good trader. The people who ran Long-Term Capital Management were geniuses. They were quite literally the men who wrote the books on quantitative finance, a who’s who list of brilliant academics. And in 1998, their hedge fund blew up in spectacular fashion when a black swan hit. Russia defaulted on its debts, which was something no one expected. It caused investors to dump everything related to emerging markets and run for the hills.
Long-Term Capital Management went out of business, not because it made bad trades, but because it borrowed far too much money to make them. Had the professors simply borrowed less, they would have been able to ride out the storm and live to trade another day.
Excessive leverage can turn a safe investment into a risky one and make you more susceptible to black swan risks. So simply avoiding debt will do wonders for making your portfolio black swan resistant.
Photo credit: Joe Shlabotnik
I’m not writing much this week, and there is a good reason for that: I’m on a Christmas ski trip, trying my best not to make a fool of myself on skis. Assuming I don’t get myself killed, we’ll pick this up next week.
Charles Sizemore is the Editor of Peak Income and Peak Profits and a contributing writer to The Rich Investor. As Dent Research's retirement expert, he specializes in income solutions. (Read More)
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