You are a biased investor
It never fails. I recently returned from a cruise vacation and of course, being on deck watching the whales, glaciers, and Alaskan coastal terrain drift by, the comments among my small group of fellow travelers boiled down to, what else? ?
The stock market, of course.
But I noticed something in my cats. Someone would talk about all the usual FANG suspects (Facebook, Amazon and Apple, Netflix and Google), or maybe General Electric or IBM. Whatever, they’re all American companies.
But raising the idea of investing in Europe or Asia, where valuations are lower and share prices cheaper?
The kind silence said it all. My cruise ship friends displayed the most humane traits of human investors, what financial guys call “home country 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. love shares within its own borders, allocating the vast majority of its funds to those companies.
But investing your money outside those borders? Meh.
In the IMF’s Coordinated Portfolio Investment Survey, US investors invest 70% of their funds in US stocks. Canadian and Australian investors showed the same kind 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 ship), 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 S&P 500 was priced cheap, relative to the corporate profits produced by its component companies. The Federal Reserve was determined to engineer a rebound for the economy.
Today, however, with the S&P 500 at new all-time highs, buying the same stock index is like buying the most expensive house on the prettiest street in town. It will make you feel good, but you are paying a very high premium for the experience.
Meanwhile, newly remodeled repairmen, with discounts to match, are hiding in plain sight just blocks away, waiting to be discovered by a new generation of shoppers with an open mind and fresh cash.
For example, the price-earnings ratio of the S&P 500, which is the price investors pay relative to the earnings of the index, has only been higher a couple of times in the last century, namely in 1929 and 2000. And for that risk, investors saw their shares rise 8.4% in the last six months.
On the other hand, an investor in any number of international indices has done much, much better:
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S&P 500: 8.4%
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Mexico City (S & P / BMV Index): 9.43%
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Spain (Ibex 35 Index): 12.7%
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Netherlands (AMX index): 15.7%
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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, trouble with Greece, the UK’s “Brexit” from the EU, and a stubbornly difficult economic environment. Companies have had to tighten their belts to stay in business and remain competitive in the global environment. If only investors got rid of their home country bias and noticed.
