When the third richest person in the world speaks, people listen. Some even pay millions of dollars just to have lunch with him.1
Do you know who I'm referring to? He is the guy that is known as the “Oracle of Omaha”. The one that bought a struggling textile manufacturer in the mid-1960s and grew it to the fourth largest publicly held company in the world.2
He is the legendary investor, Warren Buffett.
Don’t get me wrong, I greatly admire and respect Mr. Buffett. His value approach to investing has been shown to have persistent advantages over other investment styles. His famous $1,000,000 bet that an S&P 500 Index fund would beat a basket of carefully selected hedge funds over a 10 year period is the stuff of legend. But even legends occasionally are wrong.3
Recently, in an interview on CNBC4, he suggested that investors should be biased against investing outside of the US.
“You really want to bet on America.”
The Oracle is wrong. I believe that Buffett’s opinion about investing primarily in the United States is not great advice, although it certainly has looked pretty good recently. My reasoning is based on several observations. The first of which is that by limiting yourself to investing only in US companies, you are eliminating nearly half of opportunities in the world, as seen in Exhibit 1. Not to mention that 95% of the world’s population resides somewhere other than the US.
Exhibit 1. Nearly half of the money in the world is invested outside the US
Secondly, as we have seen many times in history, things change. Take a look at Exhibit 2 for some idea of how much returns have varied by country just over the last 20 years.
Exhibit 2. What Country Has Performed Best?
Of these 22 developed markets, can you tell what country has had the best return since 1999? I will tell you that it wasn’t Finland, even though the Finns had the best return in four different years (1999, 2007, 2013, 2018). It also wasn’t the US, even though we were the top performer in 2014 and came in third last year. Over the entire 20-year period, the US only had an annual average return of 4.9%.
The highest returning developed market over that same time period was Denmark, averaging 9.1% per year. That included 2015, when it was the best performing market followed by 2016 when it was the worst. In fact, for many of the years, Denmark was solidly in the middle or even bottom of the pack.
What Finland, the US, and Denmark demonstrate is that the random nature of returns makes it extremely difficult, or even impossible, to pick the winner from year to year. We see similar challenges in emerging markets, as seen in Exhibit 3.
Exhibit 3. Which BRIC was best?
Emerging markets tend to be more volatile than developed ones, but they also have higher expected returns. Back in the early 2000’s, we started to hear about BRICs, an acronym used to describe four of the largest and fastest growing emerging markets, Brazil, Russia, India, and China. If you had to guess, which one of the BRICs do you think was the best performer over the last two decades?
You may be surprised to learn that it wasn’t the largest emerging market, China. While the People’s Republic had an annual average return of 7% over that time frame, Brazil came in at 10.5%, and India was better still at 11.8%. However, it was the other formerly communist BRIC, Russia, that was the best performer at a 14.2% annual average between 1999-2018. But you would have needed quite a stomach to stay that course alone, with losses in 2008 and 2014 of 73.9% and 46.3% respectively!
Given all of the apparent risks of trying to predict what country may perform best each year, why would anyone even try? Investing in a globally diversified portfolio such as we do for clients at ATX Portfolio Advisors allows us to pursue higher expected returns to capture them when and where they occur with less volatility than investing in any single nation, even our own. That should lead to more reliable outcomes over time.
Any Oracle should should be able to see that.
If you have questions about foreign stocks in your portfolio, get in touch.