No matter how interesting it is for me to travel overseas exploring investment opportunities for you, there is a special feeling when I return to Colorado. For one thing, the air is a lot cleaner. It’s also nice to put my head down on my own pillow and get back to my normal routine and all the familiar surroundings.
In the same way, investors also feel more comfortable with companies close to home. The technical term for this is “home bias” and researchers find that one persistent trend in investing is the inclination by investors to favor their home stock market. One team of researchers (Coval & Moskowitz) even found investor preference for companies located in their home city or state.
I think it’s great that investors back local companies where they shop or have friends that work. But when you really think about it, this home bias is a bit puzzling. Why should the world’s best companies with the best growth prospects just happen to be in America or wherever your home country happens to be?
When America represented more than half of the world’s economy and American multinationals completely dominated world markets, home bias made more sense. But while America’s economy is still twice the size of China and almost three times Japan, we now live in a different, more global world due to incredible jumps in technology and communications. In short, where a company is based means less and less and what it does and how it performs means more and more.
And this is especially true for emerging markets as the value of their stock markets play catch up with their contribution to global economic growth and share of the global economy. Just take a glance at these two great charts by JP Morgan.
U.S. stock markets still dominate accounting for 46% of the value of all listed companies in the world while Japan’s share has dropped sharply from its peak in 1989 at over 30% to just 8% today. The share going to emerging markets has grown sharply but still sits at around 13%. There is still a big gap between the value of all emerging market publicly traded companies and their contribution to global growth and the world’s economy.
My opinion is that, though it won’t be anything like a straight line, over time this gap will continue to narrow. This is your opportunity. The strategy you use to take advantage of this mismatch is critical. Move incrementally and buy emerging markets when they are down and out. Stick with high quality companies showing good growth and strong balance sheets. Diversify across many countries and favor those that respect private capital, rule of law, a free press and open markets. Most importantly, always use a trailing stop loss to minimize risk.
Get comfortable with a smart global portfolio and watch it grow.