The Peril of Home Cooking

There’s a handful of videos online that I’ll gravitate toward when I get into a mood. They’re a selection of silly, fuzzy, or otherwise feel-good vignettes that rarely fail to put a smile on my face and a readjustment of my attitude. One of these videos can be found here, but it requires some explanation. Professional cycling’s season culminates in a series of races known colloquially as “Worlds”; basically, one final monster one-day race whose winner is crowned as the world champ and carries the title over the next calendar year. They also get a snazzy rainbow cycling kit. It’s pretty much the greatest thing. In the 2014 Worlds Road Race, Polish cyclist Michał Kwiatkowski made an extremely shrewd and gutsy move off of the front in the final kilometers of the race and held on for dear life to win the race and become Poland’s first-ever cycling World Champion. The video above is of the final 8km of the race with Polish commentators. I have no idea what they are saying 99.8% of the video, but you really don’t have to be fluent to get caught up in the nervousness and the eventual delirious joy (YES! YES! YES! YES!) of the commentators as they see one of their own countrymen earn the rainbows for the first time ever. It’s an amazing accomplishment and an amazing encapsulation of national pride. That pride can be euphoric in cases like this, but it can also be very detrimental in others.

One of the more memorable guest presentations in my MFE program was given by Meb Faber, Co-Founder and CIO of Cambria Investments, fellow recovering STEM grad-turned-quant, and one of three quants whose ideas planted the initial seeds of what would eventually morph into Novatero’s strategy. At the beginning of his talk, he passed around a sheet of paper and asked us to write down the percentage of our capital that we currently had invested domestically. The paper eventually returns to the front, and Meb reads off a smattering of percentages and which country said student considered home. Across the US, India, China, Canada, and other countries in our program’s international spread, domestic investment was well above 50%, even reaching 90% or more for a few people. Meb the went on to explain that, for the US students, the weighting of the US in the global equity market was only around 50% while the US weighting in global GDP was closer to 25%. There is a massive home bias in the global market, with investors from all countries overweighting their portfolio’s allocation toward their own domestic stocks. Being a financial neophyte at this point, I was floored by the huge overweighting of our portfolios across different countries, mostly because I thought our sample size would be much more knowledgable that the typical investor!

It does make sense, though. When I’m out in the world on a daily basis, I’m going to be exposed primarily to products either built or created by US-based companies. Names like Ford, Target, IBM, etc. are much more familiar due to just plain seeing them on a regular basis. I’m not getting exposure to Carrefour in the US outside of their advertising in the Tour de France. Hell, I had to look up what Carrefour does in order to write this post! (FYI: they are a France-based hypermarket/superstore chain) Your typical individual investor isn’t going to want to put their hard-earned capital toward a company that they don’t hear about regularly, that doesn’t have product in their neck of the woods, and whose information is harder to get either due to international access or even a language barrier. You’re typically not hearing about the Hang Seng Index in the Finance section of your news broadcast unless something bad happens to it. It’s just easier to stick to what you know and not venture into the unknown: there be no dragons in the parts of the map that are filled in.

However, there are tangible benefits to global diversification in that unmapped land. First and foremost, it allows for a much more balanced global portfolio, allowing for the diversification benefit of being invested across a wide swath of lower-correlated products. For instance, let’s say your home country is currently embroiled in a <POLITICAL RANT DELETED> trade war with another country…let’s give a random name like “Cathay”. Ok, so your country is involved in a trade war with Cathay, making markets very unstable in both your country and Cathay. There’s uncertainty in how the situation will resolve, your 90%-domestic invested 401K is taking a hit because of the uncertainty in the domestic stock market, and your job is at risk because the cost of the Cathayan parts for the widgets your company makes are now higher in price due to tariffs. You’re essentially getting hit with a double whammy: loss of investments and potential loss of employment. However, if you had your 401K invested with a 50:50 split, with global diversification into a basket of developed (Helvetica, Bavaria, Albion, etc.) and emerging (Azteca, Amazonia, Hellenica, etc.) markets along with potential Regional or Growth and/or Value buckets, your investments would be less affected by the domestic trade war and wouldn’t take as much of an uncertain path. By diversifying outside your borders, you get a true hedge of your domestic positioning that can mitigate any downturns you see at home.

Of course, you’ll need to do your own due diligence on foreign investment products out there to determine if they’re right for you, but there’s plenty of information about products out there to help you make an informed decision. The dragons will still be out there, but diversification will make them more like Pete’s and less like Smaug. Also keep in mind that I do fall prey to being an unreliable narrator from time-to-time: I have been working on a globally-based investment strategy for nearly 4 years at this point, and despite my best efforts my own biases that will creep into my writing from time-to-time. I’ll do my best to not steer you, the reader, in the wrong direction on these topics, but my expertise only extends so far. It’s up to you to investigate the topics I bring up and reach your own conclusions.

Suffice to say that yes, Texas/Memphis/Carolina/KC BBQ is familiar and delicious, but don’t be afraid to try Thit Kho, Doro Wot, Cochinita Pibil, or even some Poutine. You might be surprised at what you end up liking.