Comments on The Psy-Fi Blog: Puke: Don't Invest In The Familar

In your essay, you note:"despite the plentiful obs...

2010-07-10T21:26:48.786+01:00

In your essay, you note:"despite the plentiful observable evidence that this reduces performance".

I wish I found the evidence so clear. To me, there is perhaps modest evidence that international diversification improves the risk/reward picture (for US investors), but much of the extra cheese comes from the relatively recent returns in Emerging markets. These are a moving target with not much of a track record that one can ponder in a statistical sense.

Lesson: the second mouse may well get the cheese b...

2009-10-30T14:11:29.515Z

Lesson: the second mouse may well get the cheese but soon learns only when accompanied by a corpse.

Hi LevR Essentially the research shows that by in...

2009-10-30T13:28:06.540Z

Hi LevR

Essentially the research shows that by investing in overseas markets it’s possible to generate returns greater than those of developed markets. Logically this also makes sense – developed nations like the US and the UK will find it harder to grow proportionately to developing nations like Brazil and Indonesia. The classic case study is Japan from 1945 to 1990.

So all this is saying is that, over time, by investing in developing markets it’s possible to generate excess returns over a developed market with no extra risk. The “time” piece is important because volatility can be excessive over shortish periods.

None of this means that the genuinely clever, home based active investor can’t beat these numbers easily and you’ve given a number of good reasons in support of that. The problem is that the evidence also shows that the majority of people who think they’re genuinely clever active investors can’t be: which is why I prefer research to anecdote and logic to opinion :)

Good to see you here.

PIs prefer to hold companies domiciled in their ow...

2009-10-30T12:44:02.463Z

PIs prefer to hold companies domiciled in their own country:

Yep, I'm guilty of that, but don't see it as overwhelmingly bad. Some plus points are being more aware of the markets in which the company operates; having greater access to data/news on the company; and at least having the opportunity to attend AGMs etc.

Many 'home' companies operate globally to offer the opportunity for market and currency diversification.

The exception (for me) would be when the 'home' market becomes overpriced and offers poor value compared to accessible alternatives.

Overcoming that programming requires hard work and...

2009-10-29T09:25:46.948Z

Overcoming that programming requires hard work and a willingness to learn by observation rather than at first hand.

I like the essay a lot.

The only part that doesn't satisfy is the sentence quoted above. The solution offered here is too vague.

I've come to see this as a common trait of those in the behavioral finance school. They are great at seeing the problems, not so great at spelling out the solutions. That's a frustrating mix.

I don't have a solution to offer. I just mean to make the observation that those in the behavioral finance school are going to need to focus more on providing solutions if they are to grow in influence.

Rob