Author Topic: Why I think international make sense  (Read 8778 times)

Grog

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Why I think international make sense
« on: July 19, 2015, 03:54:05 AM »
Disclaimer: I'm not an US citizen, but I'm too concerned with the dilemma of diversification, international, and so on.

I stumbled upon this video (relevant for US citizen):
https://www.youtube.com/watch?v=voUiWOGv8ec

And after watching it (notabene: LUX is not a part of the Total Stock Market Index or the S&P500, although has a market CAP of 34 bln) I thought to myself that fuck it. One can buy clearly american brand (like Ray Ban) in clearly american glasses shop and everything is owned by italians. There is no point anymore in thinking locally, really.

I think in today's world is very difficult to recognize what is local and what is not, and what all happens "behind the curtains". This video is just a small example, but I think is a good one. Paradoxically, American investing in the US total stock market, aren't making practically a single dime on the local rise of this glass-estethics-mania, if not for the other options.

forummm

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Re: Why I think international make sense
« Reply #1 on: July 19, 2015, 07:13:24 AM »
If you don't own international stocks, you don't own Nestle, Budweiser, Honda, Toyota, etc.

forummm

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Re: Why I think international make sense
« Reply #2 on: July 19, 2015, 07:46:20 AM »
That was a really interesting video, thanks for posting. It's amazing what the sheeple will buy at outrageous prices when the corporate advertising tells them to. The power of brands is huge.

Grog

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Re: Why I think international make sense
« Reply #3 on: July 19, 2015, 09:46:55 AM »
thanks, I thought so too. It's incredible what appears to be so different, in reality are really all linked to a few company. I found this example of the glasses's market really extreme.

It's kind of crazy to think that if you don't own total international, you don't own something so clearly american like Ray-Ban. I hear often that if you buy the s&p500, half of the revenue of these companies are international. But the reverse is true: a lot of business and revenue in the US goes to international companies.

I think total world makes a lot of sense.

forummm

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Re: Why I think international make sense
« Reply #4 on: July 19, 2015, 10:00:00 AM »
thanks, I thought so too. It's incredible what appears to be so different, in reality are really all linked to a few company. I found this example of the glasses's market really extreme.

It's kind of crazy to think that if you don't own total international, you don't own something so clearly american like Ray-Ban. I hear often that if you buy the s&p500, half of the revenue of these companies are international. But the reverse is true: a lot of business and revenue in the US goes to international companies.

I think total world makes a lot of sense.

Yeah. And historically, you get about the same returns but with less volatility over the long run. And you can limit the effects of your home country going into a Japan-like extended low return period.

johnny847

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Re: Why I think international make sense
« Reply #5 on: July 19, 2015, 10:10:23 AM »
Wow, thanks for that. That was insightful. Speaking of which, I need to get new glasses soon haha.

And I agree with the total world approach. I recently dropped by bonds and went market weight US/Intl.


Along the vein of large companies whose products/services you use everyday without realizing it...Akamai Technologies. They deliver 15-30% of all Web traffic. So not as dominant in their industry as Luxottica is in theirs, but still.

Heckler

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Re: Why I think international make sense
« Reply #6 on: July 19, 2015, 10:28:42 AM »
if only Youtube would think International...


forummm

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Re: Why I think international make sense
« Reply #7 on: July 19, 2015, 11:53:23 AM »
if only Youtube would think International...

Looks like CBS decided not to make it available in Canada. They probably sold the foreign rights to some other firm so they are contractually prohibited to make it available through another distribution channel.

samuck

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Re: Why I think international make sense
« Reply #8 on: July 19, 2015, 12:43:48 PM »
100% with you, Grog - should be obvious to any investor outside the US, but your example shows, also owning the roughly 50% of the total market (the "US part") is not good enough.
btw pretty rough ride for the Lux CEO, did not seem comfortable nor well prepared...

acorn

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Re: Why I think international make sense
« Reply #9 on: July 19, 2015, 01:21:41 PM »
That was a really interesting video, thanks for posting. It's amazing what the sheeple will buy at outrageous prices when the corporate advertising tells them to. The power of brands is huge.

I've always been convinced that all the different brands of creams and lotions at the drugstore come from the same factory and are exactly the same.

TreeTired

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Re: Why I think international make sense
« Reply #10 on: July 19, 2015, 01:26:29 PM »
I saw the 60 Minutes piece on eyeglass frames when it aired a couple of years ago (the crux of the story is that one company practically has a monopoly on eyeglass frames which is why they are so expensive),  but I have been happily buying very inexpensive glasses from Zennioptical.com   for years.   

acorn

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Re: Why I think international make sense
« Reply #11 on: July 19, 2015, 01:31:45 PM »

dachs

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Re: Why I think international make sense
« Reply #12 on: July 19, 2015, 01:59:13 PM »
That was a really interesting video, thanks for posting. It's amazing what the sheeple will buy at outrageous prices when the corporate advertising tells them to. The power of brands is huge.

I've always been convinced that all the different brands of creams and lotions at the drugstore come from the same factory and are exactly the same.

Just because they come from the same factory doesn't mean they are the same. The ingredients change, the concentration of different ingredients change as well. However, that doesn't necessarily make a more expensive brand better.

The funniest thing is that they will sell you very little amounts with some very rare ingredient (that will probably not even have any effect) and sell it incredibly expensive.

Tyler

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Re: Why I think international make sense
« Reply #13 on: July 19, 2015, 02:31:16 PM »
I worked in product design for many years and also have direct experience with retail merchandisers.  I was the guy who would sit at the factory to sort out new designs, or chat with the buyers about what product to buy & sell in their stores.  The industry is -- interesting.

1) It's true that a small number of manufacturers produce a large percentage of competitive products.  And we're not just talking glasses.  The headphone industry is definitely that way, with very expensive brands and cheap knockoffs made side by side.  Most mobile accessories are made at the same handful of factories, and when you visit you bump into competitors all the time.  Basically, in my experience (I've worked all over the map) most products are like this at some level.  It's true that this doesn't imply that everything has the same components, but when you look behind the scenes at quality control at the little guys (most people can't afford Foxconn) you realize just how much implied "quality" is driven by marketing.

2) The simplest trick companies use to make a "high quality" product is to pay more for the packaging.  It can be virtually the same gizmo, but put it in an expensive box with a nice matte finish instead of a plastic bubble, and people will pay more for it.  The way some people idolize "unboxing" reinforces this.  They see it as thoughtful, when from a marketing perspective it is often manipulative.

3) The Illusion of Choice goes much farther than a few conglomerates owning many brands.  Walk down the aisles in a retailer today, and most would be shocked to learn that many (if not most) of the brands are owned by the store themselves.  It's called "private label" branding.  The buyers go to Asia to visit factory showrooms.  They pick three items off the shelf.  Then marketing divides them up.  The cheapest looking one gets the "good" brand.  The one with the nice paint gets the "better" brand, and the fancy one with a custom design and the expensive package gets the "best" brand.  A good example is the cable aisle at Best Buy.  You feel like you have a decent selection, but Insignia, Dynex, and Rocketfish products are all direct sourced by Best Buy very likely from the same group of vendors with mostly cosmetic differences. 

But back to the OP -- just because the box gives the address of an American company does not mean that the product was made here. Even "Made in the USA" can be deceiving, as some companies still make 90% of the product overseas and only do final assembly in the US to earn that label.  For better or worse, industry is quite globalized these days. 
« Last Edit: July 19, 2015, 03:06:50 PM by Tyler »

forummm

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Re: Why I think international make sense
« Reply #14 on: July 19, 2015, 04:43:51 PM »
I don't have inside knowledge on this, but I think the same is true with groceries too. My hunch is that all the peanut butters are made in the same or similar factories, but with different labels slapped on them. And peas are bought in bulk from the same or similar farms and then frozen and shoved into bags with different brands (including the store brand) on them. And chicken is pretty much the same 5 suppliers with no differentiation. Whole Foods is a brand in itself and just has higher pricing on the same stuff because it's in their store. Branded bottled waters are just filtered municipal tap water. Etc.

deborah

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Re: Why I think international make sense
« Reply #15 on: July 19, 2015, 07:57:56 PM »
if only Youtube would think International...


Not available in Australia either - anyone want to do a synopsis for those of us who can't see it?

forummm

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Re: Why I think international make sense
« Reply #16 on: July 19, 2015, 08:02:46 PM »
if only Youtube would think International...


Not available in Australia either - anyone want to do a synopsis for those of us who can't see it?

I saw the 60 Minutes piece on eyeglass frames when it aired a couple of years ago (the crux of the story is that one company practically has a monopoly on eyeglass frames which is why they are so expensive),  but I have been happily buying very inexpensive glasses from Zennioptical.com   for years.   

Luxxotica produces all the major eyeglasses and sunglasses frames with all the major brands, and owns the major eyeglass and sunglass stores in the US. People see lots of different brands, but they are all the same company. And they are all very expensive now.

Grog

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Re: Why I think international make sense
« Reply #17 on: July 20, 2015, 01:37:18 AM »
ops sorry for that I didn't thought the video was regionally locked. One way to avoid the lock is to trick youtube into thinking you are brwosing fro ma legit country, for Firefox/chrome see:
http://hola.org/download


I don't want to dismiss local indexing, I just wanted to point out that in today's world is very difficult to see what is local. Maybe there were US with the total stock fund happy to see people line up in commercial mall to buy US-stuff, like Ray-Bans, and thinking "woah look at our economy how is going strong I'm happy I'm investing in the US economy" but in reality everything is not what it seems. I know that there are concern with the efficiency of the stock markets in other non US countries, but I do think that in most of the developed world it does'nt really makes sense anymore to think locally or regionally.

Monkey Uncle

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Re: Why I think international make sense
« Reply #18 on: July 20, 2015, 04:33:54 AM »
Yeah, a lot of US financial planners and brokerages are still pushing outdated asset allocations that relegate international equities to something like 10% or less of the portfolio.  International stocks are somehow viewed as more risky than US stocks, which doesn't make a bit of sense.  The real risk distinctions are between small cap vs. large cap, cyclical vs. staples, and emerging markets vs. established markets.  There is no reason to expect the US market to perform as well in the future as it has over the last 100 years.  The US is economically and demographically much more mature than it was in the last century.  Which means growth may be a lot harder to find in the US going forward.

Aphalite

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Re: Why I think international make sense
« Reply #19 on: July 20, 2015, 06:56:16 AM »
Yeah, a lot of US financial planners and brokerages are still pushing outdated asset allocations that relegate international equities to something like 10% or less of the portfolio.  International stocks are somehow viewed as more risky than US stocks, which doesn't make a bit of sense.  The real risk distinctions are between small cap vs. large cap, cyclical vs. staples, and emerging markets vs. established markets.  There is no reason to expect the US market to perform as well in the future as it has over the last 100 years.  The US is economically and demographically much more mature than it was in the last century.  Which means growth may be a lot harder to find in the US going forward.

Two problems with that philosophy:

1) Some international locales don't have as stringent accounting standards as EU or the US. This means a far higher likelihood of a disconnect between reported earnings and actual cash flow.

2) Most of the mature firms you are talking about from the US and EU are getting their growth now from international locations. It doesn't make a lot of sense to project past US growth to current international countries as conditions are not the same as back then. Growing companies in the US in 1950 didn't have the competition today's emerging economies might have (the same companies that have now matured and are now competing on international turf)

grantmeaname

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Re: Why I think international make sense
« Reply #20 on: July 20, 2015, 07:32:45 AM »
Some international locales don't have as stringent accounting standards as EU or the US. This means a far higher likelihood of a disconnect between reported earnings and actual cash flow.

Most of the international world uses the exact same accounting standards as Europe, especially in a cap-weighted index. And reported earnings were never intended to measure "actual cash flow" anyways. If you want actual cash flow, go look it up on the Statement of Cash Flows! It's there if you want it. But there's a lot more and a lot better information in net income, and making net income closer to cash flow would probably destroy important information.

Aphalite

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Re: Why I think international make sense
« Reply #21 on: July 20, 2015, 08:18:26 AM »
Most of the international world uses the exact same accounting standards as Europe, especially in a cap-weighted index.

That's true. However, reporting standards does not equal reporting quality. As you may or may not know, IFRS is a very flexible framework. That means that it's usually up to two other stakeholders to determine whether the reported results are in line with reality of not. 1) The investor, and if you are indexing, you don't interpret reported results. 2) The auditor of the financial statements. A quick google search on international audit quality results should give you the answer you are looking for there. Here is the first link I found: https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2015/March/International-audit-regulators-express-concern-ove.aspx

And reported earnings were never intended to measure "actual cash flow" anyways. If you want actual cash flow, go look it up on the Statement of Cash Flows! It's there if you want it. But there's a lot more and a lot better information in net income, and making net income closer to cash flow would probably destroy important information.

You are missing my point and this is a slightly more advanced topic. You are correct that the net income information is a more complete view of the Company's results, but that's not what I'm talking about.

First, the philosophy behind the importance of actual cash flow available to the company and its owners: Consider two companies reporting the same amount of net earnings of $1 million. One is a shipbuilder and one is a technology company. The shipbuilder must plow a portion of its annual profits back into its factories and maintenance of its existing fleet before any cash is available for growth, while the technology company is free to use that profit to either expand its business or distribution to its shareholders via dividends or share buybacks. Even though both companies are showing the same GAAP/IFRS earnings, its business results is not the same.

Which brings me to the main point, if there's a way for reported earnings and actual cash flow to differ substantially, it's management optimism, which is extremely dangerous to investors. Consider the extreme scenario of Enron, which used mark to market accounting to generate massive "profits" which are reported on its income statement. Are the accrual earnings real? No one knows for sure at the instant it's reported, with the benefit of hindsight we now know they were not realizable. This is the danger in relying strictly on the income statement. An opposite extreme where cash flow far exceeds reported results would be a case like Philip Morris International. It's underlying cash flow available to the company and its owners far exceeds actual reported net income. This is a result of PM doing 100% of its business outside the US, but having to report earnings in USD. The recent currency valuation means that it must report far lower earnings than it normally would.

grantmeaname

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Re: Why I think international make sense
« Reply #22 on: July 20, 2015, 10:51:26 AM »
Most of the international world uses the exact same accounting standards as Europe, especially in a cap-weighted index.
That's true. However, reporting standards does not equal reporting quality. As you may or may not know, IFRS is a very flexible framework. That means that it's usually up to two other stakeholders to determine whether the reported results are in line with reality of not. 1) The investor, and if you are indexing, you don't interpret reported results. 2) The auditor of the financial statements. A quick google search on international audit quality results should give you the answer you are looking for there. Here is the first link I found: https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2015/March/International-audit-regulators-express-concern-ove.aspx
The degree of audit oversight is not an accounting standard. You stated that differing accounting standards allow more difference between cash flows and accrual net income, and I showed that there are not differing accounting standards for most of a cap-weighted index of funds. And the goal of accounting standards was never to keep cash flows close to accrual net income anyway.

Quote
Quote from: grantmeaname
And reported earnings were never intended to measure "actual cash flow" anyways. If you want actual cash flow, go look it up on the Statement of Cash Flows! It's there if you want it. But there's a lot more and a lot better information in net income, and making net income closer to cash flow would probably destroy important information.
You are missing my point and this is a slightly more advanced topic. You are correct that the net income information is a more complete view of the Company's results, but that's not what I'm talking about.
Sorry, I guess my master's degree and work experience in accounting on multiple continents doesn't qualify me to post in such rarefied air.

Quote
First, the philosophy behind the importance of actual cash flow available to the company and its owners: Consider two companies reporting the same amount of net earnings of $1 million. One is a shipbuilder and one is a technology company. The shipbuilder must plow a portion of its annual profits back into its factories and maintenance of its existing fleet before any cash is available for growth, while the technology company is free to use that profit to either expand its business or distribution to its shareholders via dividends or share buybacks. Even though both companies are showing the same GAAP/IFRS earnings, its business results is not the same.
The shipbuilder's maintenance is an expense and the depreciation approximately corrects for the capital consumed during the period; for a steady-state firm the capital that must be used to buy facilities and the depreciation will be similar, so these effects are both already in net income. If the tech company has the same reported earnings as the shipbuilder, it must either have comparable expenses or much lower revenue than the shipbuilder. But that's not even really the point. This is the point: The fact that accrual earnings could differ from cash flows does not cause risk to the investor. The investor can find out the company's cash flows if he or she wants them.

Quote
Which brings me to the main point, if there's a way for reported earnings and actual cash flow to differ substantially, it's management optimism, which is extremely dangerous to investors. Consider the extreme scenario of Enron, which used mark to market accounting to generate massive "profits" which are reported on its income statement. Are the accrual earnings real? No one knows for sure at the instant it's reported, with the benefit of hindsight we now know they were not realizable. This is the danger in relying strictly on the income statement. An opposite extreme where cash flow far exceeds reported results would be a case like Philip Morris International. It's underlying cash flow available to the company and its owners far exceeds actual reported net income. This is a result of PM doing 100% of its business outside the US, but having to report earnings in USD. The recent currency valuation means that it must report far lower earnings than it normally would.
I never argued for relying on only the income statement. My point is that an investor can sit down with the financial statements and peruse everything that's publicly available, from the four statements to the notes, and add to that analyst forecasts, conference calls, industry knowledge, and more. Accounting standards that allow a firm to recognize more income than you would like them to are not necessarily a problem given all this other information. There is no need for net income to be like cash flows - investors that care about cash flows already have a place where they can get them in the 10-K.

Many of Enron's frauds (improper capitalization and round-trips, for example) affected both operating cash flows and net income, and only $5 million of several billion of foreign currency translation losses for Philip Morris hit the income statement last year (see Form 10-K page 62), so both of your examples don't actually work.
« Last Edit: July 20, 2015, 10:53:08 AM by grantmeaname »

forummm

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Re: Why I think international make sense
« Reply #23 on: July 20, 2015, 10:53:46 AM »
International market cap indexes are supermajority Europe, Japan, Canada, and Australia. Their accounting standards are solid.

Aphalite

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Re: Why I think international make sense
« Reply #24 on: July 20, 2015, 12:43:58 PM »
The degree of audit oversight is not an accounting standard. You stated that differing accounting standards allow more difference between cash flows and accrual net income, and I showed that there are not differing accounting standards for most of a cap-weighted index of funds. And the goal of accounting standards was never to keep cash flows close to accrual net income anyway.
If you were quoting verbatim, then sure, I said accounting standards, but to me, that means both the rules in place as well as the execution of those rules. Accounting is not a perfect way of depicting actual business results. I agree that accrual basis is better than cash basis, but going back to Monkey Uncle's original assertion that US firms won't grow as fast as International, my point is actual usable cash flow is a much better predictor of investor return than straight accounting net earnings because accounting earnings are subject to manipulation while cold hard cash is harder to fake.

Sorry, I guess my master's degree and work experience in accounting on multiple continents doesn't qualify me to post in such rarefied air.
No need for snark, it doesn't matter to our discussion what your credentials are. I said it's a more advanced topic because most of the posters here don't really make the net income vs cash flow available to owners distinction. Besides, I'm disagreeing with you, not attacking you as a person. Don't take it so personally

The shipbuilder's maintenance is an expense and the depreciation approximately corrects for the capital consumed during the period; for a steady-state firm the capital that must be used to buy facilities and the depreciation will be similar, so these effects are both already in net income. If the tech company has the same reported earnings as the shipbuilder, it must either have comparable expenses or much lower revenue than the shipbuilder. But that's not even really the point. This is the point: The fact that accrual earnings could differ from cash flows does not cause risk to the investor. The investor can find out the company's cash flows if he or she wants them.

I never argued for relying on only the income statement. My point is that an investor can sit down with the financial statements and peruse everything that's publicly available, from the four statements to the notes, and add to that analyst forecasts, conference calls, industry knowledge, and more. Accounting standards that allow a firm to recognize more income than you would like them to are not necessarily a problem given all this other information. There is no need for net income to be like cash flows - investors that care about cash flows already have a place where they can get them in the 10-K.
Depreciation of existing assets are represented in current net earnings, but the shipbuilder, in order to grow and get new business, would have to spend some of its net earnings (or take on debt/issue equity, which the tech firm can do also) to build a new ship or a new factory (remember, we're discussing this in context of how the difference between accrual earnings and actual cash available affects growth). The tech company even with its lower revenues was able to extract more out of revenues, and can grow without as much capital expenditures. Theoretically this should be built into the P/E ratios of the market cap, but there's always inefficiencies when a majority of investors look at only earnings or only market cap. And yes, I agree with you that the investor can find out the company's cash flows if he or she looked at the financials, but we're talking about index investors, when you index, you don't look at the underlying economics of a company and you're relying on the rest of the public to feed you the right price. Are you willing to bet that the rest of the public is able to understand the true economics of a company? (i.e., do you believe in the efficient market?)

Many of Enron's frauds (improper capitalization and round-trips, for example) affected both operating cash flows and net income, and only $5 million of several billion of foreign currency translation losses for Philip Morris hit the income statement last year (see Form 10-K page 62), so both of your examples don't actually work.
You are correct, changes in fair value mark will show up in the operating cash flows. But again, if it was so easy for everyone to see, why did investors have blinders on when it came to MTM earnings but did not deduct that when it was obvious the earnings were coming from changes in fair value?

Another example if Enron isn't doing it for you - there are many companies that are notorious for overestimating discount rate in pension accounting. That affects the net earnings each year, sometimes by a large material amount. Does that reflect actual economic reality? Even though cash flows are not increasing, the company is suddenly more profitable. These are the limitations of accounting that can seriously hurt investors.

On Philip Morris, you're not understanding me - I'm not talking about foreign currency translation, that's below the net income line in comprehensive income, I'm talking about how much the dollar has moved against actual net income operating results. It's taken a full $.80 (when compared to dollar strength at the end of 2013) before net diluted earnings of $4.76 a share. That's 14% of earnings gone before you see the final net earnings number. See page 25 of the 10-K (you could argue that these are management numbers and thus are not fully audited in most cases, but then we're back to talking about application of accounting standards, what's to prevent management from saying, oh the currency will adjust, let's just use USD strength as of 12/31/13 so we can have $5.56 per share earnings?)

International market cap indexes are supermajority Europe, Japan, Canada, and Australia. Their accounting standards are solid.
That's true, 70% of international is those 4 areas, that leaves 30% exposure to the other economies - but those 4 countries/regions are also super mature/established, some would argue more so than the US, so Monkey Uncle's point about the US not being able to grow as much as international would then be based on faulty logic. That's why in context I assumed he was discussing emerging economies and China
« Last Edit: July 20, 2015, 12:52:32 PM by Aphalite »

frugledoc

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Re: Why I think international make sense
« Reply #25 on: July 20, 2015, 03:12:05 PM »
From a UK investor point of view I buy mostly VWRL (all world) which is about 50% US and only has around 7% UK.

My logical indexing brain tells me that to hold more UK would be overweight UK and less US would be underweight US.  Why would an american investor want to have more than 50% american stocks if they believe in index investing?

I am thinking about putting 80% of my savings into VWRL with the other 20% into small cap funds/growth investment trusts (I need something for fun)


Monkey Uncle

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Re: Why I think international make sense
« Reply #26 on: July 22, 2015, 04:07:59 AM »
International market cap indexes are supermajority Europe, Japan, Canada, and Australia. Their accounting standards are solid.
That's true, 70% of international is those 4 areas, that leaves 30% exposure to the other economies - but those 4 countries/regions are also super mature/established, some would argue more so than the US, so Monkey Uncle's point about the US not being able to grow as much as international would then be based on faulty logic. That's why in context I assumed he was discussing emerging economies and China

I wasn't necessarily suggesting investing only in emerging markets, although those are certainly some of the choices available to boost growth.  The big advantage to international investing is that active fund managers have many more choices available to them than domestic fund managers, and thus many more opportunities to outperform.  Evidence suggests that active international fund managers do indeed outperform much more often than their domestic counterparts: http://www.marketwatch.com/story/this-study-shows-stock-fund-managers-can-beat-an-index-2015-06-03
That study is pretty recent, but the propensity for active management to beat the MSCI EAFE has been known for at least 20 years.

alsoknownasDean

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Re: Why I think international make sense
« Reply #27 on: July 22, 2015, 06:40:02 AM »
The other thing is any gains or losses from any currency fluctuations.

I'm kicking myself for not buying any US-denominated investments a year or two ago. Not only has the US market increased, but the $AUD has dropped, so these investments are worth even more in $AUD. A year or so ago, a local Vanguard ETF for the US market was $106AUD each (with $1AUD worth around $0.94USD at the time). Now, with $1AUD at $0.74USD, combined with the growth of the US market, that same ETF is now worth $147AUD.

Plus it's a bit of protection if the local market goes to shit (although less so in the US given its influence on world markets).

From an Aussie perspective, I'm more than happy to put a large chunk of my portfolio in the local market, but I'd like to have some foreign (especially US) investments too.

KCM5

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Re: Why I think international make sense
« Reply #28 on: July 22, 2015, 07:31:19 AM »
Why would an american investor want to have more than 50% american stocks if they believe in index investing?

I think this really comes down to American Exceptionalism. The insidious belief that we're special. And, economically speaking, that may be a bit true right now, but for how long? We're 60/40 American/International - I'm not sure what the best ratio is, but I don't think that's too bad.

Aphalite

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Re: Why I think international make sense
« Reply #29 on: July 22, 2015, 08:24:11 AM »
I wasn't necessarily suggesting investing only in emerging markets, although those are certainly some of the choices available to boost growth.  The big advantage to international investing is that active fund managers have many more choices available to them than domestic fund managers, and thus many more opportunities to outperform.  Evidence suggests that active international fund managers do indeed outperform much more often than their domestic counterparts: http://www.marketwatch.com/story/this-study-shows-stock-fund-managers-can-beat-an-index-2015-06-03
That study is pretty recent, but the propensity for active management to beat the MSCI EAFE has been known for at least 20 years.

I think you should be careful with that study. It's commissioned by Fidelity (so I atuomatically think there's a bias since Fidelity is trying to sell you a service, namely, their actively managed funds) and has two filters applied to the results. You always have a chance of picking an actively managed fund that can outperform, but average results could be skewed by one superfund doing 100x better than the others, while the majority of actively managed funds underperform - I can't say because I don't have the data. If you're opting for funds/etfs, that's something you should always be aware of when examining performance statistics

Scandium

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Re: Why I think international make sense
« Reply #30 on: July 22, 2015, 10:37:38 AM »
it's all an illusion of choice

While somewhat scary, most of the food/drink stuff on there is gross, processed crap that I try to avoid as much as possible. I didn't see any fruits or vegetables on there..

Lol. love the comment that says buy local and Trader joe's.. TJ which is owned by the largest grocery chain in Germany!

forummm

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Re: Why I think international make sense
« Reply #31 on: July 22, 2015, 10:53:15 AM »
I wasn't necessarily suggesting investing only in emerging markets, although those are certainly some of the choices available to boost growth.  The big advantage to international investing is that active fund managers have many more choices available to them than domestic fund managers, and thus many more opportunities to outperform.  Evidence suggests that active international fund managers do indeed outperform much more often than their domestic counterparts: http://www.marketwatch.com/story/this-study-shows-stock-fund-managers-can-beat-an-index-2015-06-03
That study is pretty recent, but the propensity for active management to beat the MSCI EAFE has been known for at least 20 years.

I think you should be careful with that study. It's commissioned by Fidelity (so I atuomatically think there's a bias since Fidelity is trying to sell you a service, namely, their actively managed funds) and has two filters applied to the results. You always have a chance of picking an actively managed fund that can outperform, but average results could be skewed by one superfund doing 100x better than the others, while the majority of actively managed funds underperform - I can't say because I don't have the data. If you're opting for funds/etfs, that's something you should always be aware of when examining performance statistics

I haven't read this study. But mutual fund companies are notorious for starting 10 active funds, waiting X years, and then marketing up the 2-3 that beat the market just by random chance. People rush to join those funds (and pay those big fees). But who knows if the random chance market beating performance will continue. I usually does not.

Aphalite

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Re: Why I think international make sense
« Reply #32 on: July 22, 2015, 02:19:01 PM »
International market cap indexes are supermajority Europe, Japan, Canada, and Australia. Their accounting standards are solid.

One off event, but as it so happens, giant scandal at a large multinational in Japan recently:
http://money.cnn.com/2015/07/21/investing/toshiba-ceo-resigns/

forummm

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Re: Why I think international make sense
« Reply #33 on: July 22, 2015, 02:31:31 PM »
International market cap indexes are supermajority Europe, Japan, Canada, and Australia. Their accounting standards are solid.

One off event, but as it so happens, giant scandal at a large multinational in Japan recently:
http://money.cnn.com/2015/07/21/investing/toshiba-ceo-resigns/

Sure. And we have Enron, WorldCom, etc. It happens. The point is that there's a scandal when it does. It's not like China where everyone knows that there's some funny business going on in a widespread fashion and profits are not being returned to shareholders.

Monkey Uncle

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Re: Why I think international make sense
« Reply #34 on: July 23, 2015, 04:28:19 AM »
I wasn't necessarily suggesting investing only in emerging markets, although those are certainly some of the choices available to boost growth.  The big advantage to international investing is that active fund managers have many more choices available to them than domestic fund managers, and thus many more opportunities to outperform.  Evidence suggests that active international fund managers do indeed outperform much more often than their domestic counterparts: http://www.marketwatch.com/story/this-study-shows-stock-fund-managers-can-beat-an-index-2015-06-03
That study is pretty recent, but the propensity for active management to beat the MSCI EAFE has been known for at least 20 years.

I think you should be careful with that study. It's commissioned by Fidelity (so I atuomatically think there's a bias since Fidelity is trying to sell you a service, namely, their actively managed funds) and has two filters applied to the results. You always have a chance of picking an actively managed fund that can outperform, but average results could be skewed by one superfund doing 100x better than the others, while the majority of actively managed funds underperform - I can't say because I don't have the data. If you're opting for funds/etfs, that's something you should always be aware of when examining performance statistics

I share your skepticism of studies that are commissioned by companies that are trying to sell me something.  But I think you may have read something into the article that isn't really there.  The article says that the two filters were applied to the large cap US funds.  It doesn't say whether any such filtering was done on the international and small cap funds.

Here's another article that (sort of) supports the contention that active managers do better than indexing in the international realm: http://news.morningstar.com/articlenet/article.aspx?id=608086

The author pretty clearly says "most" funds, so taken at face value, it doesn't look like the results were massaged or skewed by the effects of a few super-performers.  I haven't taken the time to look up the original studies, so I'm relying on the journalist's accuracy and veracity (dangerous, I know).

TypicalVillain

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Re: Why I think international make sense
« Reply #35 on: July 23, 2015, 02:31:49 PM »
The way I think about it, are you investing in USA only because you were born here? Or do you feel that some person born in Finland should also invest exclusively in USA stocks? If not, I think your patriotism is clouding your judgement.

Not to mention, investing abroad is a good hedge against things in the USA going to shit, specifically because if you live and work in the USA then in that situation you may lose your job as well!

And finally, investing in at least slightly uncorrelated assets should increase your returns.

DavidAnnArbor

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Re: Why I think international make sense
« Reply #36 on: July 23, 2015, 09:52:34 PM »
I really enjoyed reading the accounting discussion between grantmeaname and Aphalite. Aphalite's discussion about management's manipulating the financial reporting through overestimating the discount rate in pension accounting, changes in fair value of assets, and through other methods underscores how little the average person can make an informed choice with respect to stock picking. The auditing profession can help to some extent in assuring the quality of these financial reports but somehow they are outsmarted by the management, or maybe the accounting firms don't want to lose business so they basically go along with management's reports. It does make sense to look at the cash flow of a company.  But I really don't want to bother and so I'll stick to the indexing of funds, and include an international component to prevent being stuck with the Japan scenario.