With everything going on these days, it seems like everyone’s talking about investing internationally.
Family members and friends have been calling… wide-eyed and emotional, asking if it’s a good time to invest in Russian stocks.
We even had some of our readers write in saying, “Jeff! Please answer this (or have Eric or Imre send their thoughts). What about Russian energy stocks? Don’t they look like a fantastic fire-sale to you?”
So, here’s my take…
It’s never a good time to invest into corrupt and/or repressive countries.
It’s a personal investment policy… and aside from being a matter of principle, it’s a matter of economics.
There are just better, and less riskier opportunities in countries where laws are not applied ad hoc.
The ad hoc application of the law is the definition of uncertainty, and uncertainty is the enemy of your portfolio’s returns.
China can cancel entire sectors at will, as they did last year.
Or make the founder of one their biggest companies disappear like they did with Jack Ma.
And as we recently saw with the Russian currency (the ruble), Russia can extract most of its citizens’ wealth in a matter of days. The Ukrainian invasion wiped out 42% of the ruble’s value.
That’s the problem with these countries… they extract wealth from their population.
It’s the other way around in the U.S., where the population generates all the wealth.
That’s why countries like Russia, China, and areas of Latin America have a big “brain drain” problem (when the smartest, most capable people immigrate to Western countries).
And you can see the difference when you compare returns of emerging markets versus U.S. stocks.
Take a look at the returns of some of the big economies classified in the top ten as the most corrupt or repressive compared to the SPDR S&P 500 ETF Trust (SPY)…
I believe this chart answers the long-term question. I just don’t see the point in investing overseas.
Not only did the stocks in our own backyard outperform, they did it with less risk, as measured by the Sharpe ratio (a measure of risk-adjusted return).
Think of this ratio as the grey hair indicator… the higher the Sharpe, the less grey hair.
In addition, the massive commodity bull market we’re currently in should have resulted in better returns for exporting countries like Brazil.
But it didn’t.
So they don’t work as commodity proxies, and they don’t outperform the returns of the good ol’ USA.
Again… what’s the point?
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But there’s a difference between a short-term trade and a core allocation in a portfolio.
But even from the point of view of a short-term trade, I don’t think the VanEck Russia ETF (RSX) is a good idea.
And I completely understand the interest right now… Russian stocks are definitely “on sale.”
Are they worthless? No.
Is a penny you find on the floor worthless? Also no.
But does that mean you should even bother to pick it up?
The problem with buying Russian stocks now is that every Western country and hedge fund is trying to get out at the same exact time. And a lot of them are stuck with the Russian government banning sales of stocks.
This is a classic case of not trying to pick up a “falling knife” – when prices look cheap, but get even cheaper. For instance, it was cheap yesterday and today its 13% cheaper.
Based off its implied volatility (around 285), a 65% drop from current levels in one day is completely within reason.
(Remember: Implied volatility is the market’s forecast of a likely movement in a security’s price. It’s a metric used by investors to estimate future fluctuations (volatility) of a security’s price based on certain predictive factors.)
That means RSX can easily trade for around $2.50 per share before all is said and done.
You see, finance is driven by opportunity cost…
I’d rather buy bitcoin, a fallen hype stock with big potential like Roblox, or even blindly throw a dart at The Wall Street Journal and invest in whatever ticker I hit.
At least this way, my odds are better than catching a falling knife.
Regards,
Eric Shamilov
Analyst, Market Minute
Reader Mailbag
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