Dearth Of Value In The US: Global Value Investing In A Responsible Manner

Dearth Of Value In The US: Global Value Investing In A Responsible Manner

I am trying to write a bit more but get very little time. However, I really want to share my thoughts even if quick (and please excuse grammar and lack of more hard data) since I think I sometimes bring up important points (even my wife will agree to that) and ValueWalk for better or worse is very much associated with myself since it began as a hobby in early 2010.

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I see a lot of articles popping up about the dearth of value in the US and offering different solutions. Some of these solutions are smart (diversify, be patient etc) some are really dumb (mortgage your house to buy stocks on margin) and most are in between. Here is one suggestion which I do not think gets enough attention.

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While the US is expensive there are many other markets where stocks are cheap. A recent Goldman study (which for some reason I cannot locate) but Ban McCrum of FT did a good job summing it up.

Goldman states:

We estimate that over the last decade, domestic holdings of broadly-defined domestic equity in developed markets (DM) have gone from around 81% to 76%, and from 90% to 88% in emerging markets (EM). This ‘home bias’ is visible not only in equities, but also in debt securities and other assets.

This means that 76% of money is held domestically on average. Now a very important point which I am not sure Goldman mentions…. No hard data in front of me but if I am wrong let me know, I am pretty sure that investors flock towards foreign markets at exactly the wrong time. For example, many media pundits were saying to buy Chinese equities  in 2007/2008, and everyone was saying to sell Greece until very recently. The international environment is like a more comprehensive version of the S&P 500.

Just as investors buy and sell domestic stocks at the wrong time, they do the same thing abroad. Therefore, investors are much less ‘diverse’ than they or we believe. Since, money goes in when markets are hot and out when they are cold, international exposure is not really diversifying your portfolio (except some hardcore value investors) since you are buying with the momentum and the stocks are usually overpriced.

We will not get into correlation, but that aside most people likely buy international stocks at the wrong time, just as they do the same with domestic equities. However, there are exceptions and there are many markets, and now might be the time to go international.

Back to dearth of value, I agree. I am lucky to have bought in 09/10 but found little value after that. Thankfully, I am not a macro investor and was still 90% long equities for most of the time since then. So where did I find value? Not in the US, but first I found it in PIIGs, even German/Austrian etc stocks are relatively cheap, but I dont want to get into that as I do too often. So why not invest in these markets, pro and cons below on global value investing.

Some charts from Morgan Stanley’s great weekly on European stocks is in order here before we continue.Screenshot_526








Should you buy foreign cheaper markets when US stocks are expensive?


Much easier to follow US equities

Much easier to understand US equities, GAAP is more familiar etc as opposed to foreign markets

Certain foreign markets have many risks; currency risk, sanctions, underdeveloped markets etc.

Clients/investors might not look favorably or even allow that


Pros (note: Although, I try to list positive and negatives I am biased and think pros outweigh cons so that is the reason for the length). 

Much better reward opportunities

You can develop an understanding of these markets

ETFs or baskets of stocks can help mitigate these risks greatly

The best value is usually where macro is horrible, but there are strong economies where stocks are much cheaper ie Germany, Austria, UK etc

If you are investing for yourself or clients who are very much value oriented you have a big advantage

I think cons 1/2 are the most common and valid points – foreign stocks are harder to value, have risks etc. Let me give you an example that shows how one can offset these disadvantages.

Way before anyone heard of Abenomics, value investors were looking at Japan. Some got in way too early and eventually threw in the towel as markets went almost nowhere for 20 years. However, others saw in 2010/11 that some companies were INCREDIBLY cheap. They reckoned that even if the Nikkei did not advance much they could make a fortune. Most of these value investors bought medium size or small net nets. These stocks were trading for less than net cash. Most (if any of these investors) could even read Japanese so what they did do mitigate risk is buying baskets of Japanese stocks. By the time the Nikkei got a slight boost from Abe, some of these companies were trading at 3-4x what they had been purchased at.

Another new approach is buying ETFs. There are a LOT of ETFs and many are useless, risky (3x inverse bitcoin in yen etc) but there are some good ones. Meb Faber just came out with an ETF which purchases the cheapest global companies based on CAPE. Investors must do their own due diligence but I looked into this and decided to put some of my money in here. Assuming the world does not end, this ETF should do well regardless of the S&P 500 cape.


However, assuming you missed Japan and dont want to go that deep value, you can find many cheap companies in ‘developed’ countries. Although the big multinational companies like Nestle have gotten more pricey as the S&P 500 got more expensive, there are thousands of medium (and small sized) European countries which are cheap and have competitive advantages. You can create your own basket of these companies (please someone make some value ETFs for European small/caps, PIIG value etc.).

With that I will leave you off. Instead of reading 5 articles about how the US stock market is not expensive and then another 5 about how it is a bubble, spend that time looking for where there is much more value; abroad!

PS Tweedy Browne (among many others) proves value investing works abroad in their must ready white paper ‘WHAT HAS WORKED IN INVESTING’

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