All of the US outperformance has come from PE expansion. If you believe that will continue then you should stay the course.
In what condition, will international significantly overperform US?
- unclescrooge
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Re: In what condition, will international significantly overperform US?
Multiple expansion and compression don't have to be speculative. In this case, the expansion has been driven by earnings growth and expectations for continued earnings growth.unclescrooge wrote: ↑Sun Apr 04, 2021 8:27 pmAll of the US outperformance has come from PE expansion. If you believe that will continue then you should stay the course.
Re: In what condition, will international significantly overperform US?
The expansion has been driven primarily by expectations for future earnings growth. Let's not get carried away.
It's not speculative if you believe the regulatory environment will continue as is or "better". And it might. Actually, it probably will. Until it doesn't. But who knows when that might happen. Maybe never. But probably at some point, eventually.
The next "arrgh" moment will be caused by the same thing as the last "arrgh" moments: somebody found a super cool new legal way to make a bunch of money, and then too many people did it in a little bit too sketchy of a way and screwed it up for everyone. If it affects foreign banks (it probably will since "I want lots of money" has no boundaries), everything goes "arrgh". If it somehow remains localized domestically because the foreign banks can't get away with that kind of stuff over there, well there you go. Sooo... be on the lookout for the next cool thing that makes a bunch of money. And figure out just how sketchy it actually is.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: In what condition, will international significantly overperform US?
How is that not speculative?foodhype wrote: ↑Sun Apr 04, 2021 8:34 pmMultiple expansion and compression don't have to be speculative. In this case, the expansion has been driven by earnings growth and expectations for continued earnings growth.unclescrooge wrote: ↑Sun Apr 04, 2021 8:27 pmAll of the US outperformance has come from PE expansion. If you believe that will continue then you should stay the course.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: In what condition, will international significantly overperform US?
Bitcoin?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: In what condition, will international significantly overperform US?
Step out of your macroeconomic point of view for a moment and consider how an intelligent investor would value an individual business. The investor would conservatively estimate the business's cash flows for the next 5 - 10 years, conservatively estimate its terminal value, discount all of the cash flows back at an appropriate rate (typically the 30-year treasury rate plus plenty of buffer in case rates go up). Finally the investor might demand some margin of safety (e.g. 50%) before actually buying the stock.Nathan Drake wrote: ↑Sun Apr 04, 2021 9:31 pmHow is that not speculative?foodhype wrote: ↑Sun Apr 04, 2021 8:34 pmMultiple expansion and compression don't have to be speculative. In this case, the expansion has been driven by earnings growth and expectations for continued earnings growth.unclescrooge wrote: ↑Sun Apr 04, 2021 8:27 pmAll of the US outperformance has come from PE expansion. If you believe that will continue then you should stay the course.
If you would consider that to be speculative, unfortunately that's about as good as it gets in the world of valuation. (If that's speculative, index fund investing is equally speculative albeit more diversified.) Intelligent active investors are usually not buying stock based on macroeconomic considerations. They are valuing individual businesses. American businesses have had high earnings growth because businesses in the technology sector have had fabulous characteristics for incremental return on invested capital. Those characteristics still exist, and the US still dominates the tech sector. If I were valuing only the FAANG businesses for example, it would be foolish of me to project an average earnings growth of only 8.6% in 2021.
Re: In what condition, will international significantly overperform US?
There are so many comments about how US stock valuation is much higher than international. This reminds me a radio talk show I listened to in the mid or late 90s:
Two hosts were debating whether people should invest in Wal-Mart. One host was saying Walmart was too expensive, way over valued, its P/E was too high (20s or 30s) compares to K-mart's (less than 10?). The other host was saying Walmart P/E that high for a reason.
Two hosts were debating whether people should invest in Wal-Mart. One host was saying Walmart was too expensive, way over valued, its P/E was too high (20s or 30s) compares to K-mart's (less than 10?). The other host was saying Walmart P/E that high for a reason.
Re: In what condition, will international significantly overperform US?
And just as the US indexer doesn't have to take the risk of choosing wrongly between Walmart and Kmart, the World indexer doesn't have to take the risk of choosing wrongly between different geographies. Now, the magnitude of getting an individual stock wrong is likely to be greater than that of skipping the international index, but you still might be wrong and you won't know until after it happens.frand wrote: ↑Mon Apr 05, 2021 12:28 am There are so many comments about how US stock valuation is much higher than international. This reminds me a radio talk show I listened to in the mid or late 90s:
Two hosts were debating whether people should invest in Wal-Mart. One host was saying Walmart was too expensive, way over valued, its P/E was too high (20s or 30s) compares to K-mart's (less than 10?). The other host was saying Walmart P/E that high for a reason.
Re: In what condition, will international significantly overperform US?
The way that most people use P/E ratios doesn't make sense because they are trying to measure compound growth with a linear ratio. Most people don't understand that small differences in expected compound earnings growth justify big differences in valuations.frand wrote: ↑Mon Apr 05, 2021 12:28 am There are so many comments about how US stock valuation is much higher than international. This reminds me a radio talk show I listened to in the mid or late 90s:
Two hosts were debating whether people should invest in Wal-Mart. One host was saying Walmart was too expensive, way over valued, its P/E was too high (20s or 30s) compares to K-mart's (less than 10?). The other host was saying Walmart P/E that high for a reason.
Re: In what condition, will international significantly overperform US?
I'd like to throw a monkey wrench, I mean, a new variable, into the equation.
Sometimes there are trends, and we can't exactly define what is causing the trend, nor predict them. For example, valuations of US equities seem to be different post-1995 compared with before. Well, fine. Maybe it's OK that things change and we can't put our finger on why. Maybe there's no reason, other than we just feel different about it nowadays.
Here's another trend that I'm not sure anyone has measured: the proportion of GDP (or aggregate business operating expenses, or whatever) that is paid to US-based Big Tech.
While it seems clear enough that the trend has been positive over the past few decades, there's the possibility that it could flatten out, or even reverse. And maybe there will be no reason for it, other than we just start to feel different about it. Sometimes there's a shift in herd mentality.
In other words, maybe, over some period of time, we'll gradually come to realize that we don't need to hand over as much money to Big Tech as we do currently. Then, after the fact, we'll just say that it became obvious that we were overpaying for whatever it is they do, and that's that.
So, to answer the OP, this is one possible condition that could cause a change to the relative performance of not only US vs. international, but also Big Tech vs. the rest of the market.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
Re: In what condition, will international significantly overperform US?
So far the trend favors Marc Andreessen's maxim from 2011 that 'software is eating the world'.HanSolo wrote: ↑Mon Apr 05, 2021 1:39 amIn other words, maybe, over some period of time, we'll gradually come to realize that we don't need to hand over as much money to Big Tech as we do currently. Then, after the fact, we'll just say that it became obvious that we were overpaying for whatever it is they do, and that's that.
So, to answer the OP, this is one possible condition that could cause a change to the relative performance of not only US vs. international, but also Big Tech vs. the rest of the market.
The big spend used to be software licenses and hardware. Now it is public cloud services. If anything, businesses are ever more reliant on external tech.
The number of large non-US public companies currently participating in this is limited:
SAP, TATA, TSMC,Alibaba, Tencent,Samsung...
Re: In what condition, will international significantly overperform US?
Yes, that's what's true today, and will probably continue for a while. I'm only saying (a) things can change, and (b) even if businesses' reliance on tech stays about the same, the percentage of their operating expenses that they hand over to Big Tech companies could change (just like, for example, the percentage of their operating expenses they allocate to, say, telephone service may have trended down over time, even while they may make just as many phone calls... note that AT&T is no longer in the top 10 by market cap).danrock54 wrote: ↑Mon Apr 05, 2021 3:49 amSo far the trend favors Marc Andreessen's maxim from 2011 that 'software is eating the world'.HanSolo wrote: ↑Mon Apr 05, 2021 1:39 am In other words, maybe, over some period of time, we'll gradually come to realize that we don't need to hand over as much money to Big Tech as we do currently. Then, after the fact, we'll just say that it became obvious that we were overpaying for whatever it is they do, and that's that.
So, to answer the OP, this is one possible condition that could cause a change to the relative performance of not only US vs. international, but also Big Tech vs. the rest of the market.
The big spend used to be software licenses and hardware. Now it is public cloud services. If anything, businesses are ever more reliant on external tech.
In other words, while the reliance on Big Tech may be here to stay for a long time, the percentage of business operating expenses paid to them could go down (just as similar trends have occurred in the past, in relation to other sectors).
I'm just saying it's possible.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
Re: In what condition, will international significantly overperform US?
I mean. It is pretty sketchy.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: In what condition, will international significantly overperform US?
Pardon me if someone already asked this, but isn’t the reason to invest in international exactly because you do not know the conditions it may or many not significantly outperform the US?
That’s why I do. Nobody knows nothin’.
That’s why I do. Nobody knows nothin’.
Being wrong compounds forever.
Re: In what condition, will international significantly overperform US?
Well, that's not why I do it.Wanderingwheelz wrote: ↑Mon Apr 05, 2021 8:26 pm Pardon me if someone already asked this, but isn’t the reason to invest in international exactly because you do not know the conditions it may or many not significantly outperform the US?
That’s why I do. Nobody knows nothin’.
I don't invest in international on the basis of it ever potentially outperforming.
I do it for the slightly reduced correlations to US markets and to diversify away from the fact that my megacorp employer is one of top holdings in the US market.
And it's not only my job -- the RSU portion of my compensation, too.
I'm reducing concentrated risk.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: In what condition, will international significantly overperform US?
Well I guess in that case I’m free to invest in any publicly traded index since my wife and I own 100% of the shares of the company that produces all of our household income.watchnerd wrote: ↑Mon Apr 05, 2021 9:21 pmWell, that's not why I do it.Wanderingwheelz wrote: ↑Mon Apr 05, 2021 8:26 pm Pardon me if someone already asked this, but isn’t the reason to invest in international exactly because you do not know the conditions it may or many not significantly outperform the US?
That’s why I do. Nobody knows nothin’.
I don't invest in international on the basis of it ever potentially outperforming.
I do it for the slightly reduced correlations to US markets and to diversify away from the fact that my megacorp employer is one of top holdings in the US market.
And it's not only my job -- the RSU portion of my compensation, too.
I'm reducing concentrated risk.
Now our concentrated risk will have me awake all night tonight for the first time in 23 years. Thanks.
Being wrong compounds forever.
Re: In what condition, will international significantly overperform US?
I think the BH motto "Nobody knows nothin’" applies to the stock market and such, and hopefully not to your own business.Wanderingwheelz wrote: ↑Mon Apr 05, 2021 9:47 pmWell I guess in that case I’m free to invest in any publicly traded index since my wife and I own 100% of the shares of the company that produces all of our household income.watchnerd wrote: ↑Mon Apr 05, 2021 9:21 pmWell, that's not why I do it.Wanderingwheelz wrote: ↑Mon Apr 05, 2021 8:26 pm Pardon me if someone already asked this, but isn’t the reason to invest in international exactly because you do not know the conditions it may or many not significantly outperform the US?
That’s why I do. Nobody knows nothin’.
I don't invest in international on the basis of it ever potentially outperforming.
I do it for the slightly reduced correlations to US markets and to diversify away from the fact that my megacorp employer is one of top holdings in the US market.
And it's not only my job -- the RSU portion of my compensation, too.
I'm reducing concentrated risk.
Now our concentrated risk will have me awake all night tonight for the first time in 23 years. Thanks.
30% US Stocks | 30% Int Stocks | 40% Bonds
Re: In what condition, will international significantly overperform US?
ARKK sounds perfect for you.Wanderingwheelz wrote: ↑Mon Apr 05, 2021 9:47 pm
Well I guess in that case I’m free to invest in any publicly traded index since my wife and I own 100% of the shares of the company that produces all of our household income.
Now our concentrated risk will have me awake all night tonight for the first time in 23 years. Thanks.
You need to take some big boy risks to parity-match owning 100% of a company.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: In what condition, will international significantly overperform US?
What about valuations?
Re: In what condition, will international significantly overperform US?
Vanguard projects the US more likely to under perform international over next 10 years because of valuation contraction.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Re: In what condition, will international significantly overperform US?
All good points. As pointed out by another poster, I should have said "SCV has outperformed total market index" in the past. Who knows what would happen in the future -- everyone has their own take on this. I personally believe in the risk story for SCV. Small value stocks are more risky, so investors should expect a higher return from them; otherwise the price would fall even lower.Scooter57 wrote: ↑Sat Apr 03, 2021 12:54 pmThis is not necessarily true. The findings of academic research are that in the past, going back decades, small cap companies outperformed. But what this doesn't take into account is that in those past decades companies went public when they were small, whereas nowadays many stay in the hands of private equity investors until they are large enough to IPO with at billion dollar market caps.
Additionally, promising small companies over the recent decades have been acquired by large companies at a rate very different from what was the case in the 1950s-1980s, which is a period that is heavily represented in academic research. And in the rare event that a small public company gets much more successful (like say, Dunkin Donuts or Dell Computer or Dollar General) it is often acquired by private equity and taken off the market.
That is why iff you look at the stocks listed in small cap indexes nowadays, you will find them filled with small, old, legacy-business companies, small banks, and companies that have no obvious growth trajectory. They are not the hotbed from which the Apples and other hugely successful companies of the future will spring. Almost all the IPOs nowadays have market caps too large to ever make it into a small cap index. Hence they are not likely to outperform anything.
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- typical.investor
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Re: In what condition, will international significantly overperform US?
So? Low rates benefit the value of future earnings, which gives tech companies an advantage, and the US has more of them.
So I’d say rising/higher rates won’t have the same impact everywhere because future earnings account for today’s valuations more in the US due to its mix of companies.
Re: In what condition, will international significantly overperform US?
When heck freezes over by gollies!
Even educators need education. And some can be hard headed to the point of needing time out.
Re: In what condition, will international significantly overperform US?
In the conditions we have right now.
There has been a significant increase in the P/E in the past years. Sooner or later the P/E will reverse to the mean, because it always does. In order for this to happen, either earnings will grow at a faster pace than they have so far -but why would it happen?- or there will be a downward correction of share prices.
There has been a significant increase in the P/E in the past years. Sooner or later the P/E will reverse to the mean, because it always does. In order for this to happen, either earnings will grow at a faster pace than they have so far -but why would it happen?- or there will be a downward correction of share prices.
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Re: In what condition, will international significantly overperform US?
So I like to think of my company stock investing as being about gradually using my savings from work income to buy ownership shares in the world's productive assets, with the goal being to end up with the largest possible share once we stop working and start trying to live off those shares. The liquidation value of that company stock portfolio along the way isn't really a direct concern to me.
Having set a fixed U.S./ex-U.S. 60:40 allocation target, and rebalancing each year to keep returning to target, when you look at that chart, you can rightly conclude that periodically over the last 15 years or so we have been selling some U.S. stock to buy ex-U.S. stock, although of course we now have plenty more of both. We also tend to do some lump sum investing each year, and we have during this period done more of that investing into ex-U.S. stock, again because of what is represented in this chart, in order to get back to target.
And if you view CAPE as a measure of how much you own in terms of underlying productive assets--admittedly a somewhat dubious assumption in all details, but not necessarily a bad first-order estimate for the purposes of this discussion--then this combination of procedures has resulted in us using our income stream to buy a larger share of productive assets, even though the current liquidation value of our portfolio is lower. Meaning we have been buying productive asset (CAPE) shares cheaper by contributing more into ex-U.S. and rebalancing into ex-U.S., because CAPE shares have been priced lower in ex-U.S.
Cool!
Now, you might say, if we had the foresight to invest entirely in U.S. stocks until whenever that green line peaks, and only then sell a bunch of U.S. stock to buy cheaper CAPE shares ex-U.S., we'd be better off. Which is true, but I don't believe I have the foresight to do that.
So, my approach of just setting a target and contributing/rebalancing to that target is enough for me in terms of trying to make sure I am buying productive asset (CAPE) shares with my income at a reasonable price during this phase of our financial lives.
In other words, somewhat philosophically--you can look at charts like that and say people like me have missed out on some increases in liquidation value over the past 15 years or so by not being U.S.-only investors. Or, you can look at charts like that and say U.S.-only investors have missed out on some relatively favorable prices for productive asset shares ex-U.S.
But it is really only the person who correctly times their move from U.S.-only to a global balance of company stocks, or indeed ex-U.S. only, who gets bragging rights in general. And I am OK not trying to be that person.
Having set a fixed U.S./ex-U.S. 60:40 allocation target, and rebalancing each year to keep returning to target, when you look at that chart, you can rightly conclude that periodically over the last 15 years or so we have been selling some U.S. stock to buy ex-U.S. stock, although of course we now have plenty more of both. We also tend to do some lump sum investing each year, and we have during this period done more of that investing into ex-U.S. stock, again because of what is represented in this chart, in order to get back to target.
And if you view CAPE as a measure of how much you own in terms of underlying productive assets--admittedly a somewhat dubious assumption in all details, but not necessarily a bad first-order estimate for the purposes of this discussion--then this combination of procedures has resulted in us using our income stream to buy a larger share of productive assets, even though the current liquidation value of our portfolio is lower. Meaning we have been buying productive asset (CAPE) shares cheaper by contributing more into ex-U.S. and rebalancing into ex-U.S., because CAPE shares have been priced lower in ex-U.S.
Cool!
Now, you might say, if we had the foresight to invest entirely in U.S. stocks until whenever that green line peaks, and only then sell a bunch of U.S. stock to buy cheaper CAPE shares ex-U.S., we'd be better off. Which is true, but I don't believe I have the foresight to do that.
So, my approach of just setting a target and contributing/rebalancing to that target is enough for me in terms of trying to make sure I am buying productive asset (CAPE) shares with my income at a reasonable price during this phase of our financial lives.
In other words, somewhat philosophically--you can look at charts like that and say people like me have missed out on some increases in liquidation value over the past 15 years or so by not being U.S.-only investors. Or, you can look at charts like that and say U.S.-only investors have missed out on some relatively favorable prices for productive asset shares ex-U.S.
But it is really only the person who correctly times their move from U.S.-only to a global balance of company stocks, or indeed ex-U.S. only, who gets bragging rights in general. And I am OK not trying to be that person.
- unclescrooge
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Re: In what condition, will international significantly overperform US?
DCF is a great way to value a stock. Unfortunately, you rarely end up with a PE of 50, and you would not invest in half of the FANGAM stocks.foodhype wrote: ↑Sun Apr 04, 2021 11:47 pmStep out of your macroeconomic point of view for a moment and consider how an intelligent investor would value an individual business. The investor would conservatively estimate the business's cash flows for the next 5 - 10 years, conservatively estimate its terminal value, discount all of the cash flows back at an appropriate rate (typically the 30-year treasury rate plus plenty of buffer in case rates go up). Finally the investor might demand some margin of safety (e.g. 50%) before actually buying the stock.Nathan Drake wrote: ↑Sun Apr 04, 2021 9:31 pmHow is that not speculative?foodhype wrote: ↑Sun Apr 04, 2021 8:34 pmMultiple expansion and compression don't have to be speculative. In this case, the expansion has been driven by earnings growth and expectations for continued earnings growth.unclescrooge wrote: ↑Sun Apr 04, 2021 8:27 pmAll of the US outperformance has come from PE expansion. If you believe that will continue then you should stay the course.
If you would consider that to be speculative, unfortunately that's about as good as it gets in the world of valuation. (If that's speculative, index fund investing is equally speculative albeit more diversified.) Intelligent active investors are usually not buying stock based on macroeconomic considerations. They are valuing individual businesses. American businesses have had high earnings growth because businesses in the technology sector have had fabulous characteristics for incremental return on invested capital. Those characteristics still exist, and the US still dominates the tech sector. If I were valuing only the FAANG businesses for example, it would be foolish of me to project an average earnings growth of only 8.6% in 2021.
If you believe tech is going to out perform went would you buy QQQ?
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Re: In what condition, will international significantly overperform US?
Over the long term the Tesla, GM analogy might make sense. As it currently stands, GM has double Tesla’s profit margin, 3x revenue, and sells 10x the number of cars in the US&China as Tesla sells worldwide. Some large percentage of performance has to be driven by expectation of future growth. Will the US maintain a near monopoly on high growth companies and stable capital markets or will the rest of the world catch on?Ocean77 wrote: ↑Tue Mar 30, 2021 6:38 pm People often think that it will take some extraordinary event or change for US stocks to start underperforming. That is not the case. You could just as well ask "When is General Motors stock going to outperform Tesla?" It is not necessary for Tesla to stumble in any way, or for General Motors to invent a flying car for that to happen. All it may take is for GM to execute slightly less bad than before. Or perhaps not even that - investor may simply see more value in GM's stock, and take profits in Tesla.