There were always some fleeting moments in your life when we have some free headspace to suddenly ponder about something that we didn’t realize in the past.
Usually, this will be triggered by something we have read or seen on TV.
I had that moment a couple of days ago when I was listening to The Razor’s Edge.
Akram didn’t say it directly but he said something that made me realize something very similar about this flight from traditional school business to tech companies that is very similar to last decade.
Back in 2002 to 2007, emerging markets were red hot.
I did not realize that I am among the uncommon investors who remember that decade until I had to explain to seemingly older 30-something investors.
Here is a chart of the MSCI Emerging Market index versus the S&P 500 versus the MSCI Europe index from 2002 to 2007.
This chart shows the growth of $1 at the start until the end of the period in 2007.
Most of us know what happened next. Everything went to shit during GFC and then the emerging markets went on to underperform the US greatly.
Many younger investors didn’t realize there was a period that the US market struggled not just against the emerging markets but against the supposed slow-growing, clunky Europe.
To be fair, if I have $1 mil at the start and it grows in 5 years to $1.42 mil, I would be pretty happy.
But here is the thing about investing: Sometimes, it is about the behaviour aspect.
How would you feel if all your friends grew their $1 mil to $4.5 mil or $2.28 mil when you only grow to $1.42 mil?
This is similar to the question would you prefer to be paid $500k a year but everyone around you gets paid $800k or would you prefer to be paid $80k a year while everyone is paid $30k a year?
Most people would feel shitty if it is the former situation.
In a way, Akram made me realize how similar the shift to no-earnings stock investing is and that emerging markets boom in the past.
Back then, the investors were influenced by the talking heads, which are the supposed investing professionals that the future growth will come from the emerging markets. U.S was done.
Quarter after quarter for five years, US was ranked by investing professionals (not just in Asia) to be the region that you should be underweight in.
This is damn hard for people to fathom now.
But you can see similarities today in that while the tech companies were beaten down, people felt that the growth will be in companies that do innovative things, but they are not throwing out GAAP earnings today.
I am not saying that emerging markets today equal technology, investing in the US today.
The stories that we tell each other are similar and let us ponder is something we should think about.
We can replace emerging markets with something else. The focus is not on emerging markets (which is why I put Europe there).
Sometimes we live in the present and in the present, are we overestimating some of these short term good performances to be too permanent?
I will write more about this perhaps in the coming weeks in short bursts.
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Sunday 13th of February 2022
That's the $64M question isn't it?
Probably the "right" approach is to be diversified enough based on personal approach, personal expertise, correlation, geographical, sectorial, asset. Hence may not be "wrong" for a senior semiconductor R&D engineer to have some overweight in semicon sector.
And being flexible & open to tweak changes when facts change. Ability to discern facts, noise, opinions, speculation thus important.
I started serious investing in 1999 & hence for many years afterwards I became too biased towards EM, Asia ex-Jap, and against tech, US, Japan.
Over the years, I've learnt not to make the big allocations based on predictions & not be too dogmatic.
Sunday 13th of February 2022
As I grow older (balls shrunk lol) and achieved more of the FI number, I've shifted more of my portfolio into "stay rich" mode rather than "get rich" mode.
That means more allocation like the Permanent Portfolio or the Ivy Portfolio.
Using the portfolio visualizer website, a widely diversified allocation like the Permanent Portfolio did Ok during the high inflation/ bad economy 1970s as well as during high-ish inflation & good economy 1980s.
Unfortunately there isn't available data series to view the performance of the Ivy Portfolio or Ray Dalio's All-Weather portfolio in the 1970s-1980s.
Sunday 13th of February 2022
I am probably a little younger, but I can understand why folks have those EM/China/India stuff in their portfolios. Its not easy. And I feel there is too much buy the S&P 500 rhetoric out there that if there is a change in trend, people will feel rather conflicted about their portfolio. I wonder if a semi-conductor engineer can see the change. I feel that they would have seen that their sector is rather cyclical and not have all their eggs in there. The tech engineers today understand their domain, and would be comfortable to be in those companies. It is a little different but my post questions how long term secular downturns and positive trends are.