Education Bill Bernstein Interview

Discussion in 'Share Investing Strategies, Theories & Education' started by Nodrog, 19th May, 2019.

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  1. Nodrog

    Nodrog Well-Known Member

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  2. blob2004

    blob2004 Well-Known Member

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    I think Bernstein has not been very fond of EM for a while. In most his podcasts he mentions historically EM has had a lower returns compared to DM due to share dilutions (specifically China). He also doesn't trust these countries to act in the best interest of foreign shareholders.

    However I don't think he is completely against EM as he still recommends it for diversification/rebalancing purposes. I believe he has said previously that he thinks EM is more fairly valued at the moment compared to the US markets, and thus expected future returns should be higher at least in the short to medium term.
     
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  3. Nodrog

    Nodrog Well-Known Member

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    Actually he’s still believes EM should generally be in the portfolio but purchased when it’s undervalued. This could be considered market timing but given the relatively poor performance of EM vs Developed he appears to be more inclined to take this approach as opposed to regular rebalancing. That’s my interpretation which might be incorrect.

    I don’t like EM so I liked his view as it feeds into my confirmation bias:).
     
  4. The Falcon

    The Falcon Well-Known Member

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    Listened to this. Very hard to argue with Bernstein. Looking at the way the world is going, the narrative around CCP China liberalising has proven false....not hard to conceive a time when foreign (read US custodian) assets are appropriated. I see increasing risk in multi country EM vehicles where China exposure is high...question is, are you adequately compensated for that risk? Not sure.
     
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  5. Nodrog

    Nodrog Well-Known Member

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    Yes interesting to hear you view, perhaps a bit more cautious than previous?

    I do not like the way China is heading at all. My view on EM has not changed. If anything my conviction for not needing it in our portfolio has gotten even stronger.

    I don’t believe investors are adequately compensated for risk. And EM sharemarkets don’t necessarily reward investors with the same benefit of growth in their actual economies.

    Further unless an investor holds a large enough allocation to EM then it’s hardly going to make much difference overall. Which it then comes down to the question “are you willing to take potentially unrewarded risk in holding a sizeable enough exposure to EM”? For me that’s a big fat NO. Beside it’s one less holding in our portfolio which I like from a simplification perspective.

    I go back to the view that ironically I’ve seen from some immigrants out of the likes of China that they prefer the safety of “developed” markets. When a EM has proven itself worthy of inclusion in the Developed Market Index (robust regulatory environment and rule of law etc) then these investors like me will be happy to own it. Ironically it’s returns might be higher than compared to when it was an EM even without taking risk into account.
     
    Last edited: 22nd Jun, 2019
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  6. The Falcon

    The Falcon Well-Known Member

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    @Nodrog I’m torn on the issue. 5-10% portfolio range I think is OK but no more. Load up on VGS and you get a LOT of Japan, is that a good bet? I think you’ll always be uncomfortable with a portion of the portfolio if properly diversified.
     
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  7. oracle

    oracle Well-Known Member

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    I sold out of VAE recently and bought more IJR.

    Main reason I am bit concerned about China. It might sound strange but I was feeling do I really need so much diversification and thirdly it was also the costs at 0.4% in my books not cheap enough.

    So for me it’s Australia and US (IVV + IJR).

    IVV gives US plus some overseas exposure
    IJR gives mostly domestic US

    Happy with these two markets only in terms of diversification.

    Cheers
    Oracle
     
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  8. Hodor

    Hodor Well-Known Member

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    Great discussion.

    I just can't be bothered with EM currently, I do enjoy the growth story and I am often tempted. VAS and some LICs along with VGS gives me enough sleep at night. Hopefully it will prove to be 80% right in the long run.
     
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  9. Redwing

    Redwing Well-Known Member

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    International stocks outperformed the US over the period 2001 to 2008 and with the US currently at nosebleed levels, at some stage I expect international will have another good run
     
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  10. Snowball

    Snowball Well-Known Member

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    With 50% VGS you’d have just 4.2% Japan in the portfolio, that doesn’t seem like much overall.

    And wouldn’t Japan’s negatives be well known and factored in?

    Curious on your thoughts.
     
  11. The Falcon

    The Falcon Well-Known Member

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    @Snowball I suppose that’s one way to think of it. 8.4% position size in VGS, used to be a bit higher. I suppose the point is it’s not a market I’m bullish on, but hold it anyway. If you are well diversified there will always be components that you don’t like, but trust the market to get it broadly right over time.
     
  12. Nodrog

    Nodrog Well-Known Member

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    As least with Japan you’re not likely to lose your assets.
     
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  13. Nodrog

    Nodrog Well-Known Member

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  14. Redwing

    Redwing Well-Known Member

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    upload_2019-6-24_13-16-45.png

    VTS ASX last 5 years
     
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  15. Zenith Chaos

    Zenith Chaos Well-Known Member

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    For a number of reasons suggested, there's a valid argument for the el-cheapo MER Aus-domiciled portfolio of:
    A200 + IVV + IJJ + IJR

    You may not cover EM, Europe or REIT directly, but indirectly there is exposure.
     
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  16. Ross36

    Ross36 Well-Known Member

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    China is a tricky one. I went on a work tour throughout different provinces recently and the shear scale of the place really blew me away. The key investment related things for me were:
    1. Whilst there were starbucks and maccas EVERYWHERE, the complete absence of facebook, alphabet/google etc. and presence of tencent and baidu was thought provoking. Speaking to the locals it was like an alternate reality, and it appeared to offer some great diversification options. It made me question the long term future of the former countries if they cannot access nearly 20% of the earths population.
    2. Healthcare seems to be a priority as they transition from eastern to more western medicine.
    3. Watching footage of how the shanghai skyline has changed from looking like a small town to massive city in just the last 20 years was evidence of how hard and fast they can go when they decide to do something.
    4. It is much more consumer focused than I expected. So many shopping malls full of people spending money.

    But

    5. I agree that it is unlikely they care about protecting foreign investors.
    6. Speaking to local manufacturers they were all talking about shifting production to other SE asian countries to save costs. The Chinese government is offering a lot of incentives to stop this, but if it will work I don't know.

    To me it was just too big and different to ignore. It was easy to get carried away and see it as the world superpower in 50 years. Some of the tech stuff there was mind blowing - their national gene bank and work on bringing the woolly mammoth back boggled the mind. Not that I'd go crazy with it as a % of my portfolio, but having it and other emerging markets as a diversifier makes more sense to me now. It seems more emerged than emerging in many ways.
     
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  17. The Falcon

    The Falcon Well-Known Member

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    Good post. What I struggle to get past is the Elephant in the room; you have an ethno-nationalist totalitarian state, dictator for life, no individual or property rights, and a judiciary that is wielded as an arm of the party. In the end this is a path to crony-capitalism and economic stagnation. This all looks a lot worse now than the outlook even 5 years ago. I've been a regular visitor on business since 2004 and I am no longer optimistic about the long term outlook.

    Now, as to link between stock market returns and economic growth this paper may interest some, and explains China's woeful stock returns despite its economic growth:

    https://tandfonline.com/doi/full/10.2469/faj.v74.n4.4
     
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  18. Nodrog

    Nodrog Well-Known Member

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    Exactly. The assumption that investing in China’s sharemarket enables a foreign investor to fully reap any benefit from economic growth occurring in that country is a risky one.

    I’m content to reap these benefits through investing in developed markets which benefit from China’s economic growth. If that benefit disappears it probably means China has closed its door, it’s relationship with the west has collapsed and perhaps any assets held directly in China’s sharemarket by foreign investors have been confiscated:).

    Diversification doesn’t mean one has to blindly accept everything on offer (@oracle ‘s conclusion also). Sometimes the risk of losing out is greater than the risk of missing out. Besides I’ve seen Boglehead oriented investors strongly argue the importance of diversification yet suggest that an Asian ETF is preferred over Total EM. This is taking a “view”. I have a negative view on China. Can anyone say 100% for sure that my view will be wrong? So I suppose you either embrace indexing in it’s entirety or admit to having a view and accept that you might be right or wrong but are comfortable with your decision. After all risk management is unique to each individual.

    At our age as retirees the decision to avoid investing directly in China is an easy one. So in our case the risk of “losing out” is much more of a concern than the risk of “missing out”. But I can understand it being a more difficult decision for younger investors.
     
    Last edited: 25th Jun, 2019
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  19. dunno

    dunno Well-Known Member

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    https://www.stlouisfed.org/~/media/publications/regional-economist/2016/april/lead.pdf
    Worth the read as a counter arguement to your concerns.
    Only profitable growth adds value. A competitive advantage analysis touchstone is that revenue is vanity and profit is sanity, another is capacity to suffer (ability to make long term investments at the cost of short-term returns). The elephant in the room seems to have the capacity to suffer in getting the nation industrialised quickly, but for what ultimate end are they doing it?

    That Chinese markets can’t fund enough growth from retained earnings and so must raise lots of capital is not the question. The question a paper should be asking is will this large upfront investment in nation building be profitable over “the long run”

    Has china’s large initial high investment phase in nation building set itself up for 50+ years of increasing profitability at the expense of mature markets that have not invested to the same extent? Or has it been an exercise in mis-investment – Ah the risk/reward of early(emerging) investment.

    A thought-provoking thread, with a couple of pearler observations.
    Many arguable approaches that should turn out to be at least 80% right and aiming for a savings rate where you only need to be 80% right to retire comfortably is probably the best margin of safety you can give yourself. In that context, I’m more than happy to have my VAE exposure.
     
    Last edited: 25th Jun, 2019
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  20. Ross36

    Ross36 Well-Known Member

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    I agree 100% - and prior to my trip I was more than happy to split between US S&P500 and Australian shares based on maths. But I have had a nagging feeling as I look around my house and see my Samsung fridge and phone and the cheap electronic gadgets I buy from China (I banggood ;)), that maybe I needed some Asian (ex-Japan) diversification as well. As crazy as it might be - and this goes back to behavioural issues - if I can see or sense a product that a company owns and I like it then it makes me more confident to own their shares through volatility. I don't use Facebook or Apple products and don't have Netflix so that makes the US market that little bit more abstract for me.

    I'm very keen to hear more about this if you are happy to expand on it. Having only been there once I have no historical benchmark to compare it to, but could see how some cracks may be forming in their success story. Without getting too political if Trump does decide to go the hardcore tariff stance and China does shut up shop I can see how this could wipe out the stock market for international investors which is a potentially major issue. But this would/could also decimate to a lesser extent a lot of US and Australian companies as well.

    On the flipside I do however wonder whether a country like China would be more capable of righting the ship in a bad storm then somewhere like Australia where we can't seem to keep the same prime minister for more than a few months.

    This is what I was thinking when I was there. I may be the only one, but if China does bring the Woolly Mammoth back to life which they are pumping a lot of resources into I would pay to go see it. From all accounts they are well ahead of other countries when it comes to this field, just as an example amongst others. If they ever decide to really open the doors to foreign investment and tourism I'd imagine the country could boom as it was really quite spectacular in areas. Whether this will happen or not though I have no idea. They are also putting a lot of effort into universal healthcare which could have a major impact on life expectancy and productivity as well.

    I'm still young-ish - hence the issue. I'm trying to go from being a dabbler to a systematic investor which requires me writing an investing plan that I will stick to for the long haul. I was all sorted for my equities to be 50% VAS, 25% IVV, 25% IJR but I'm now thinking maybe 15% VAE to dilute the US bias may not go astray (no interest in European stocks). I thought having a long-term, never sell plan would make things easier but there is a lot of hidden start-up complexity if you are planning to never sell out. Decisions, decisions....
     
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