Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

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Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by VTI »

("EMH" refers to the "efficient market hypothesis".)

I suspect many of us will be familiar with the legendary Eugene Fama, but if not, read his Wikipedia page:

https://en.wikipedia.org/wiki/Eugene_Fama
Eugene Francis "Gene" Fama is an American economist, best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis.

[...]

He is regarded as "the father of modern finance", as his works built the foundation of financial economics and have been cited widely.
Professor Fama's views were very briefly mentioned in a recent episode of the Rational Reminder podcast. The reason given in the podcast, which unlikely to be his only reason, is that that expropriation risk is not adequately reflected in the price of stocks.

To be clear, this doesn't defy the efficient markets hypothesis. Taking France as an example, there isn't an expropriation risk for French investors in the French stock market, so French investors could keep French stock prices "artificially" high from the perspective of an American investor.

I've mused before about the same dynamic applying to tax breaks and other tax advantages for domestic investors of various countries. Currently, I'm overweight international stocks, but I'm reconsidering.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by vineviz »

VTI wrote: Sat May 14, 2022 7:12 am To be clear, this doesn't defy the efficient markets hypothesis.
It doesn't, but it does have the effect of focusing on one particular risk to the exclusion of all other risks. And it ignores any sort of objective cost/benefit analysis.

It also implicitly assumes that expropriation risk is non-existent if you invest exclusively in stocks listed in your home country, which many investors can tell you from experience is not true.

It's a narrative, in other words, and not an actual argument.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by David Althaus »

I think some of this would be age dependent. At 75 I've held VXUS at 20% of equity for about as long as it's underperformed. Guess I'm fearful that if I switch to VTI that's about the time VXUS will revert to the mean. Probably demonstrates FOMO but I can't help it. VXUS does provide further diversification and a bit of a hedge against a weak dollar.

That said--Fama is a smart guy (understatement) and sticking with a US portfolio means you need not have to put up with oversocialized countries, communist countries, and other countries always seeming to be on the verge of falling apart. Plus, there's something about America that draws the best and the brightest.

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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by nisiprius »

Gurus and authorities are always to be taken with a huge grain of salt. This is particularly true when a guru opinion is brought to your attention to make a point, and it's not a guru you follow steadily and don't "know." E.g. "Don't you know that Ray Dalio says it is stupid to own bonds?"

All that said, I am more interested in Eugene Fama sound bites than in, say, Cathie Wood sound bites.

Also, given that Eugene Fama is a director of Dimensional Fund Advisors (DFA), and that DFA is currently offering--at a quick count--

21 equity funds with "US" in the name
45 with "Asian," "Continental," "Emerging," "Global," "International," or "United Kingdom" in the name...

...this does not sound like an obvious case of dubious motives.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Oregano »

VTI wrote: Sat May 14, 2022 7:12 am ("EMH" refers to the "efficient market hypothesis".)

I suspect many of us will be familiar with the legendary Eugene Fama, but if not, read his Wikipedia page:

https://en.wikipedia.org/wiki/Eugene_Fama
Eugene Francis "Gene" Fama is an American economist, best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis.

[...]

He is regarded as "the father of modern finance", as his works built the foundation of financial economics and have been cited widely.
Professor Fama's views were very briefly mentioned in a recent episode of the Rational Reminder podcast. The reason given in the podcast, which unlikely to be his only reason, is that that expropriation risk is not adequately reflected in the price of stocks.

To be clear, this doesn't defy the efficient markets hypothesis. Taking France as an example, there isn't an expropriation risk for French investors in the French stock market, so French investors could keep French stock prices "artificially" high from the perspective of an American investor.

I've mused before about the same dynamic applying to tax breaks and other tax advantages for domestic investors of various countries. Currently, I'm overweight international stocks, but I'm reconsidering.
Following this logic, no one in the world should invest outside their own country? It is also an error to think that domestic investors can't have their assets expropriated - this depends on whether the government wants to expropriate them - I would argue that the U.S. valuations don't reflect any risk premium for this possibility, but it is indeed a possibility.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by WoodSpinner »

nisiprius wrote: Sat May 14, 2022 8:41 am Gurus and authorities are always to be taken with a huge grain of salt. This is particularly true when a guru opinion is brought to your attention to make a point, and it's not a guru you follow steadily and don't "know." E.g. "Don't you know that Ray Dalio says it is stupid to own bonds?"

All that said, I am more interested in Eugene Fama sound bites than in, say, Cathie Wood sound bites.

Also, given that Eugene Fama is a director of Dimensional Fund Advisors (DFA), and that DFA is currently offering--at a quick count--

21 equity funds with "US" in the name
45 with "Asian," "Continental," "Emerging," "Global," "International," or "United Kingdom" in the name...

...this does not sound like an obvious case of dubious motives.
Nisprius,

Give the Podcast a listen! It’s definitely one of my favorite episodes!

What I really loved was his humility, clear answers, and recognitions of risk and probabilities. It was refreshing to listen to and a very different message than I get from others who are discussing his work.

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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by VTI »

Oregano wrote: Sat May 14, 2022 8:48 am Following this logic, no one in the world should invest outside their own country?
He addressed this specifically for Canada. He said Canada's economy isn't diverse enough.
Oregano wrote: Sat May 14, 2022 8:48 am It is also an error to think that domestic investors can't have their assets expropriated - this depends on whether the government wants to expropriate them - I would argue that the U.S. valuations don't reflect any risk premium for this possibility, but it is indeed a possibility.
The American government can indeed expropriate stocks, but that risk doesn't only exist for American investors. In fact, it's probably less likely for American investors.
vineviz wrote: Sat May 14, 2022 8:02 am It also implicitly assumes that expropriation risk is non-existent if you invest exclusively in stocks listed in your home country, which many investors can tell you from experience is not true.
I don't believe he's implicitly assuming this. Instead, he's assuming that the risk of expropriation is higher for foreign investors than domestic investors. I don't think that's an unreasonable assumption.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by nisiprius »

WoodSpinner wrote: Sat May 14, 2022 8:55 am...Give the Podcast a listen! It’s definitely one of my favorite episodes!

What I really loved was his humility, clear answers, and recognitions of risk and probabilities. It was refreshing to listen to and a very different message than I get from others who are discussing his work.

WoodSpinner
I will.

I only discovered the Rational Reminder podcasts recently. They're great. I'm not quite prepared to binge-listen to two hundred of them, but this one for sure. And, forgive me, I always want to skip the part before they get to the main topic and I usually waste about five minutes going backward and forward trying to find it.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by VTI »

nisiprius wrote: Sat May 14, 2022 9:14 am
WoodSpinner wrote: Sat May 14, 2022 8:55 am...Give the Podcast a listen! It’s definitely one of my favorite episodes!

What I really loved was his humility, clear answers, and recognitions of risk and probabilities. It was refreshing to listen to and a very different message than I get from others who are discussing his work.

WoodSpinner
I will.

I only discovered the Rational Reminder podcasts recently. They're great. I'm not quite prepared to binge-listen to two hundred of them, but this one for sure. And, forgive me, I always want to skip the part before they get to the main topic and I usually waste about five minutes going backward and forward trying to find it.
If you must listen to only a few, listen to this one, as well as episodes 100 (Kenneth French) and 169 (John Cochrane on modern portfolio theory).
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by vineviz »

VTI wrote: Sat May 14, 2022 9:03 am I don't believe he's implicitly assuming this. Instead, he's assuming that the risk of expropriation is higher for foreign investors than domestic investors. I don't think that's an unreasonable assumption.
That assumption might not be unreasonable, but it doesn’t (by itself) get you from “most investors should hold the market portfolio” to “US investors don’t need any ex-US stocks”. Unless you assume that expropriation is the only relevant risk.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by VTI »

vineviz wrote: Sat May 14, 2022 9:38 am
VTI wrote: Sat May 14, 2022 9:03 am I don't believe he's implicitly assuming this. Instead, he's assuming that the risk of expropriation is higher for foreign investors than domestic investors. I don't think that's an unreasonable assumption.
That assumption might not be unreasonable, but it doesn’t (by itself) get you from “most investors should hold the market portfolio” to “US investors don’t need any ex-US stocks”. Unless you assume that expropriation is the only relevant risk.
I agree with you, and I'm sorry if something I said implied that the only reason an American investor shouldn't worry about international investing is because of expropriation risk. I don't believe that, and I can nearly guarantee you Eugene Fama doesn't believe that, either.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Triple digit golfer »

I didn't read anything other than the title, but "don't need to bother" doesn't really convince me not to do it. It's not a bother at all. My threshold is much more than a bother anyway. I need a good reason not to and I'm yet to see one.

Past performance or beliefs about the future are not good reasons.

I'm very pro-America, but that doesn't mean I think we're immune from disaster.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by visualguy »

Triple digit golfer wrote: Sat May 14, 2022 10:27 am I'm very pro-America, but that doesn't mean I think we're immune from disaster.
The probability of a disaster striking the US without dragging ex-US with it is negligible. If you want insurance against a US disaster, investing in ex-US indexing isn't it.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by omedus82 »

This isn't directed at anyone in particular, but I'm always confused why some US investors believe the US stock market is somehow lower risk AND has a higher expected return. You can't have both.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by vineviz »

VTI wrote: Sat May 14, 2022 10:14 am I agree with you, and I'm sorry if something I said implied that the only reason an American investor shouldn't worry about international investing is because of expropriation risk. I don't believe that, and I can nearly guarantee you Eugene Fama doesn't believe that, either.
I also don’t think Fama believes that expropriation is the only risk an investor faces, and I think that if Ben had pushed back on this a little more we might have gotten a more complete and nuanced insight into Fama’s position.

My point is just that “expropriation risk justifies a 100% US portfolio” is an improper conclusion.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by packer16 »

The very real fact is not all countries have what I would describe as the Anglo/Dutch framework of capitalism. With this framework the fruit of capitalism is broadly shared with shareholders (LLC with limited liability are created) and the value of inside information is reduced as it has to be disclosed if it is material to market participants. This system as been refined in the English colonies (US/Canada/Australia/S. Africa) and has been adpoted in the Scandinavian countries. So it is no surprise that those places have the highest stock market returns. It also is not surprising that the asset pricing models would not work as well in countries with more directed capitalism and less disclosure or a culture of not sharing information. This type of capitalism is disruptive to the incumbent approach of business via family connections which excludes information from all those outside the family. This family approach to businesses has been practiced for 1000s of years before the Anglo/Dutch system appeared in the 1600s. How close a country gets to the Anglo/Dutch conception of markets waxes and wanes throuoghout history with a definite tilt towards the Anglo/Dutch model over time. The idea that expropriation cannot be predicted is true but places that have had the Anglo/Dutch system for long periods of time have never turned to be less open over time so you can indentify the places where expropriation is more likely than others. Expropriation is more than taking over firms it can include government direction of how firms cash flows should be directed.

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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by patrick »

If the potential expropriation would target the company as a whole, thus impacting all of its investors, the risk ought to be factored into the market price.

Only the asymmetric risk of a government expropriating foreign investors but not domestic ones provides a reason to tilt because different investors face different levels of risk. However, the additional risk seems rather small except for China and must be balanced against the reasons for overweighting foreign stocks
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Nathan Drake »

I think it's time people stop relying solely on guru's to drive investment choices. We can respect certain things they bring to the discussion through their careers, but their thoughts are not gospel.

In the podcast, Fama does not say you DON'T need to bother with international, but his position is you don't need TOO much. That's a distinction. Secondly, you can look through the rest of the interview where he says that the default position should be "the market portfolio" including a mix of stocks/bonds at cap weights. The position to exclude international would be logically inconsistent with this view.

The expropriation risk is no different than re-valuation risk, bubble risk, fraud risk that has been clearly shown throughout US markets. Emerging markets and developed markets are so highly diversified that it makes expropriation risk a non-factor, in my view. There's no evidence that expropriation risk HASN'T been priced in either.

Secondly, his position that US and international have similar volatility, therefore you don't need as much international, is inconsistent with the facts. It's not daily correlations or volatility that matter, it's long term returns. And we all know that markets can diverge greatly in terms of returns or valuation multiples.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Nathan Drake »

visualguy wrote: Sat May 14, 2022 10:41 am
Triple digit golfer wrote: Sat May 14, 2022 10:27 am I'm very pro-America, but that doesn't mean I think we're immune from disaster.
The probability of a disaster striking the US without dragging ex-US with it is negligible. If you want insurance against a US disaster, investing in ex-US indexing isn't it.
The 1966 - 1982 period was disastrous for the US stock market and a US TSM only investor. It wasn't disastrous for the US economy as a whole (it kept humming along), and it certainly wasn't for exUS which did well through this period.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Doc »

I don't invest in foreign large cap on "my theory" that it is dominated by large international companies that should have similar performance to large US companies which are also international, and hence you get no diversification except for currency differences which get hedged way by the fund companies anyway.

Sorry Eugene.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by alluringreality »

Doc wrote: Sat May 14, 2022 11:39 am you get no diversification except for currency differences which get hedged way by the fund companies anyway.
I'm under the impression that a majority of international stock funds are unhedged. Vanguard foreign stock prospectuses definitely include a reference to currency risk.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by pascalwager »

Fama hasn't seemed to be a real fan of international. In the past he has said it's a "matter of taste".
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by pascalwager »

Nathan Drake wrote: Sat May 14, 2022 11:30 am I think it's time people stop relying solely on guru's to drive investment choices. We can respect certain things they bring to the discussion through their careers, but their thoughts are not gospel.

In the podcast, Fama does not say you DON'T need to bother with international, but his position is you don't need TOO much. That's a distinction. Secondly, you can look through the rest of the interview where he says that the default position should be "the market portfolio" including a mix of stocks/bonds at cap weights. The position to exclude international would be logically inconsistent with this view.

The expropriation risk is no different than re-valuation risk, bubble risk, fraud risk that has been clearly shown throughout US markets. Emerging markets and developed markets are so highly diversified that it makes expropriation risk a non-factor, in my view. There's no evidence that expropriation risk HASN'T been priced in either.

Secondly, his position that US and international have similar volatility, therefore you don't need as much international, is inconsistent with the facts. It's not daily correlations or volatility that matter, it's long term returns. And we all know that markets can diverge greatly in terms of returns or valuation multiples.
But he doesn't define "market". He may mean VTI.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Nathan Drake »

pascalwager wrote: Sat May 14, 2022 12:23 pm
Nathan Drake wrote: Sat May 14, 2022 11:30 am I think it's time people stop relying solely on guru's to drive investment choices. We can respect certain things they bring to the discussion through their careers, but their thoughts are not gospel.

In the podcast, Fama does not say you DON'T need to bother with international, but his position is you don't need TOO much. That's a distinction. Secondly, you can look through the rest of the interview where he says that the default position should be "the market portfolio" including a mix of stocks/bonds at cap weights. The position to exclude international would be logically inconsistent with this view.

The expropriation risk is no different than re-valuation risk, bubble risk, fraud risk that has been clearly shown throughout US markets. Emerging markets and developed markets are so highly diversified that it makes expropriation risk a non-factor, in my view. There's no evidence that expropriation risk HASN'T been priced in either.

Secondly, his position that US and international have similar volatility, therefore you don't need as much international, is inconsistent with the facts. It's not daily correlations or volatility that matter, it's long term returns. And we all know that markets can diverge greatly in terms of returns or valuation multiples.
But he doesn't define "market". He may mean VTI.
He does define the market as the entire invest-able landscape, including things like Private Equity, etc. Some are not easy to access for individual investors. But international stocks certainly are.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by LTCM »

If French stocks are appropriated by the French government then French investors experience less damage than US investors in the form of lower taxes or improved services. In theory.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Oregano »

VTI wrote: Sat May 14, 2022 9:03 am
vineviz wrote: Sat May 14, 2022 8:02 am It also implicitly assumes that expropriation risk is non-existent if you invest exclusively in stocks listed in your home country, which many investors can tell you from experience is not true.
I don't believe he's implicitly assuming this. Instead, he's assuming that the risk of expropriation is higher for foreign investors than domestic investors. I don't think that's an unreasonable assumption.
But still, the question is not whether the risk is higher, but whether or not it is being priced appropriately. Fama claims to know the answer, but he's full of it. No one knows how much is being priced in, and no one can reliably predict the probability of expropriation.

If you take the recent problematic issues with Russian stocks (not expropriation, at this time, but severely restricted)...well, Russian stocks did actually trade at very low valuations compared to most of the world BEFORE the invasion of Ukraine. So it seems like investors did appreciate a lot of excess risk in owning Russian stocks, but of course they could not have predicted exactly what or when something might happen.

Finally, as others have pointed out, there are a large number of risks in investing, so the idea that you should choose your investments solely based on one factor is a pretty weak argument. And I can imagine a not-too-distant future in the U.S. where expropriation, or other valuation-reducing scenarios, become a real concern - and the U.S. stock market is not pricing in this risk AT ALL. It seems that Fama, like most mortals, is falling into the trap of looking backwards instead of forward.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by pascalwager »

Nathan Drake wrote: Sat May 14, 2022 12:30 pm
pascalwager wrote: Sat May 14, 2022 12:23 pm
Nathan Drake wrote: Sat May 14, 2022 11:30 am I think it's time people stop relying solely on guru's to drive investment choices. We can respect certain things they bring to the discussion through their careers, but their thoughts are not gospel.

In the podcast, Fama does not say you DON'T need to bother with international, but his position is you don't need TOO much. That's a distinction. Secondly, you can look through the rest of the interview where he says that the default position should be "the market portfolio" including a mix of stocks/bonds at cap weights. The position to exclude international would be logically inconsistent with this view.

The expropriation risk is no different than re-valuation risk, bubble risk, fraud risk that has been clearly shown throughout US markets. Emerging markets and developed markets are so highly diversified that it makes expropriation risk a non-factor, in my view. There's no evidence that expropriation risk HASN'T been priced in either.

Secondly, his position that US and international have similar volatility, therefore you don't need as much international, is inconsistent with the facts. It's not daily correlations or volatility that matter, it's long term returns. And we all know that markets can diverge greatly in terms of returns or valuation multiples.
But he doesn't define "market". He may mean VTI.
He does define the market as the entire invest-able landscape, including things like Private Equity, etc. Some are not easy to access for individual investors. But international stocks certainly are.
OK, yes, as a default, but he seems to consider expropriation risk a reason to then strongly tilt away from world market. You have about 0.6% Germany (seemingly de-industrializing, in effect!), and me about the same, so that probably doesn't matter too much to us. But considering the present state of the world, it's got me thinking, and I've been 50% international (lately lower--world AA) since 1995.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by JoMoney »

If the EMH guy says I don't need International, then I'm getting some International... I consider Fama the Jim Cramer of investment academia ;) :P :twisted:
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Corvidae »

JoMoney wrote: Sat May 14, 2022 3:21 pm If the EMH guy says I don't need International, then I'm getting some International... I consider Fama the Jim Cramer of investment academia ;) :P :twisted:
Chuckled at this. I don't know where Fama fits in, but some academics only believe in the game as much as they need to motivate themselves to keep playing, because with or without them, the game will go on.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by pascalwager »

Oregano wrote: Sat May 14, 2022 3:08 pm
VTI wrote: Sat May 14, 2022 9:03 am
vineviz wrote: Sat May 14, 2022 8:02 am It also implicitly assumes that expropriation risk is non-existent if you invest exclusively in stocks listed in your home country, which many investors can tell you from experience is not true.
I don't believe he's implicitly assuming this. Instead, he's assuming that the risk of expropriation is higher for foreign investors than domestic investors. I don't think that's an unreasonable assumption.
But still, the question is not whether the risk is higher, but whether or not it is being priced appropriately. Fama claims to know the answer, but he's full of it. No one knows how much is being priced in, and no one can reliably predict the probability of expropriation.

If you take the recent problematic issues with Russian stocks (not expropriation, at this time, but severely restricted)...well, Russian stocks did actually trade at very low valuations compared to most of the world BEFORE the invasion of Ukraine. So it seems like investors did appreciate a lot of excess risk in owning Russian stocks, but of course they could not have predicted exactly what or when something might happen.

Finally, as others have pointed out, there are a large number of risks in investing, so the idea that you should choose your investments solely based on one factor is a pretty weak argument. And I can imagine a not-too-distant future in the U.S. where expropriation, or other valuation-reducing scenarios, become a real concern - and the U.S. stock market is not pricing in this risk AT ALL. It seems that Fama, like most mortals, is falling into the trap of looking backwards instead of forward.
Yes, a good point you make. And the US has recently expropriated $300 million dollars in Russian assets.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by ApeAttack »

nisiprius wrote: Sat May 14, 2022 9:14 am
WoodSpinner wrote: Sat May 14, 2022 8:55 am...Give the Podcast a listen! It’s definitely one of my favorite episodes!

What I really loved was his humility, clear answers, and recognitions of risk and probabilities. It was refreshing to listen to and a very different message than I get from others who are discussing his work.

WoodSpinner
I will.

I only discovered the Rational Reminder podcasts recently. They're great. I'm not quite prepared to binge-listen to two hundred of them, but this one for sure. And, forgive me, I always want to skip the part before they get to the main topic and I usually waste about five minutes going backward and forward trying to find it.
That is the reason I unsubscribed from their podcast. I don't find their personal lives particularly entertaining and it takes too much effort to get to the meat of the episode.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by folkher0 »

I listened to this episode. I recommend it but its not gonna change your life. It’s nice to see how an academic views the implications of their work. It is often far more nuanced then many “true believers” represent.

FWIW the “international” question occupied very little of the episode. Frankly it seemed more like a footnote.

I am amazed how this forum repeatedly focuses pages and pages to this one debate.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Kevin K »

Thanks very much to the OP for posting the link to this podcast. I was glad to see there's a transcript (even though it seems to have been auto-transcribed as it's full of spelling errors).

I, too, think it's absurd that most of this thread has focused on the U.S. vs. Int'l stock allocation, which I found to be one of the least interesting parts of the interview. What a hard-working, brilliant and humble guy Mr. Fama seems to be!

I thought his answers to the interviewer's questions about in inflation and the Fed were one of the more interesting and provocative parts of the interview. Here's just a short taste:

"What can the Fed do? Can they do anything?

Well, the question is if they raise the Federal funds rate, how far do they have to raise it to have any effect on inflation? That's a wide open question. We don't have any data at all on that because this QE business is a new regime. The Fed was always operated in an environment where there were no free reserves basically. And now you get, I think about $9 trillion worth of pre reserves out there. So we've never had this regime, so we don't know what it will take to make it work, what it will take in terms of raising this short term rate. The big discussion is, is that an eighth a quarter? Well, I don't think that's anyway near, would it have to push it up to have any effect. It might be 10%. That's extreme, but wouldn't surprise me that they had to bring it up so that the real rate was positive. It wouldn't surprise me at all because historically the real rate's been fluctuating within plus or minus 1%, zero."

He talks about just how unprecedented the current situation is and what tools the Fed actually has at its disposal, along with suggesting that even the Fed's ability to set short-term interest rates has been overstated. And in answer to the interviewer's question about "what's a typical 60:40 retail investor supposed to do?" he basically says "hope that the 60% does okay, because the 40 is toast."
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Oregano »

JoMoney wrote: Sat May 14, 2022 3:21 pm If the EMH guy says I don't need International, then I'm getting some International... I consider Fama the Jim Cramer of investment academia ;) :P :twisted:
Yes, I just came back to add one more comment: Fama has argued consistently in the past that even the DotCom bubble was not a sign of market inefficiency. So it's kind of ludicrous for him to argue this issue about international investing.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Seasonal »

Oregano wrote: Sat May 14, 2022 3:08 pmBut still, the question is not whether the risk is higher, but whether or not it is being priced appropriately. Fama claims to know the answer, but he's full of it. No one knows how much is being priced in, and no one can reliably predict the probability of expropriation.
Exactly.

For someone best known for the EMH (the idea that asset prices reflect available information) to say, in effect, that he can better price a risk than the market can is very strange, at best. I don't understand how he can make the statement consistent with his main work.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by LTCM »

Seasonal wrote: Sat May 14, 2022 6:18 pm
Oregano wrote: Sat May 14, 2022 3:08 pmBut still, the question is not whether the risk is higher, but whether or not it is being priced appropriately. Fama claims to know the answer, but he's full of it. No one knows how much is being priced in, and no one can reliably predict the probability of expropriation.
Exactly.

For someone best known for the EMH (the idea that asset prices reflect available information) to say, in effect, that he can better price a risk than the market can is very strange, at best. I don't understand how he can make the statement consistent with his main work.
The market as a whole has priced it correctly because the market is the entire world. For a specific subset of investors (non-domestic) it is priced incorrectly. Correspondingly it is cheap for those domestic investors. I think that's what he's saying.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by pascalwager »

I wonder if the financial experts generally invest based on academic principles. I guess Larry and Rick do.

But Markowitz does 50/50 stocks/bonds to "minimize regrets", and his stock money is all invested in Georgia (USA) companies that do disaster relief repairs. Another prominent economist just hands his money to an investment company and warns them not to bore him with the details.

I suspect Fama just sees a concerning new world with signs of advancing government totalitarianism wherever he looks, even if the market doesn't see it or care. Next, he'll be advising us to invest in hard-assets only, and work on developing any latent bartering skills.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by 000 »

VTI wrote: Sat May 14, 2022 7:12 am To be clear, this doesn't defy the efficient markets hypothesis. Taking France as an example, there isn't an expropriation risk for French investors in the French stock market, so French investors could keep French stock prices "artificially" high from the perspective of an American investor.
Simple question: what do you think your world looks like if France, UK, Switzerland, etc. are expropriating US investor assets? Do you really think, were such a situation to come to pass, that the US stock market would still just be riding high?

However, this may be a reason to avoid certain markets.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by TropikThunder »

Kevin K wrote: Sat May 14, 2022 5:36 pm I, too, think it's absurd that most of this thread has focused on the U.S. vs. Int'l stock allocation, which I found to be one of the least interesting parts of the interview.
It’s not absurd at all. OP focused on the Int’l aspect in their title, and most people won’t actually listen to the podcast. I’m certainly not going to spend over an hour waiting to hear whether there’s anything worth discussing or debating, with no bookmarks or chapter headings to let me know where to focus.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Seasonal »

LTCM wrote: Sat May 14, 2022 6:48 pm
Seasonal wrote: Sat May 14, 2022 6:18 pm
Oregano wrote: Sat May 14, 2022 3:08 pmBut still, the question is not whether the risk is higher, but whether or not it is being priced appropriately. Fama claims to know the answer, but he's full of it. No one knows how much is being priced in, and no one can reliably predict the probability of expropriation.
Exactly.

For someone best known for the EMH (the idea that asset prices reflect available information) to say, in effect, that he can better price a risk than the market can is very strange, at best. I don't understand how he can make the statement consistent with his main work.
The market as a whole has priced it correctly because the market is the entire world. For a specific subset of investors (non-domestic) it is priced incorrectly. Correspondingly it is cheap for those domestic investors. I think that's what he's saying.
If you accept his view on government, government expropriation would result in a major loss of value, even for domestic investors. The more a company has non-domestic ownership, the less his rationale (taking into account your interpretation) would hold.

Do you have a link or timestamp for his statements on the subject?
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by Hola »

A US-only investor does not necessarily avoid expropriation by avoiding international. Government monetary policy (tightening) is a form of expropriation if the goal is asset price reduction and reduced economic activity.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by jeffyscott »

VTI wrote: Sat May 14, 2022 7:12 amTaking France as an example, there isn't an expropriation risk for French investors in the French stock market, so French investors could keep French stock prices "artificially" high from the perspective of an American investor
Well then, they seem to be doing a d___ poor job of it :!: and that's not limited to France, nearly all of the rest of the world has been dismally failing to keep their stock prices artificially high from the perspective of this American investor.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by burritoLover »

nisiprius wrote: Sat May 14, 2022 9:14 am
WoodSpinner wrote: Sat May 14, 2022 8:55 am...Give the Podcast a listen! It’s definitely one of my favorite episodes!

What I really loved was his humility, clear answers, and recognitions of risk and probabilities. It was refreshing to listen to and a very different message than I get from others who are discussing his work.

WoodSpinner
I will.

I only discovered the Rational Reminder podcasts recently. They're great. I'm not quite prepared to binge-listen to two hundred of them, but this one for sure. And, forgive me, I always want to skip the part before they get to the main topic and I usually waste about five minutes going backward and forward trying to find it.
If you go to the rational reminder page, it will break down the topics by time stamp for the podcast so you can skip like the book reviews and such (which are always at the beginning). For example:

https://rationalreminder.ca/podcast/199

"Today's book review, looking at Setting the Table by Danny Meyers. [0:08:47]
Christopher Bloomstran's thought-provoking critique of Ark Invest. [0:18:06]
A follow-up on our ongoing discussion about bonds and look at their recovery time. [0:20:04]
...."
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by folkher0 »

TropikThunder wrote: Sun May 15, 2022 12:27 am
Kevin K wrote: Sat May 14, 2022 5:36 pm I, too, think it's absurd that most of this thread has focused on the U.S. vs. Int'l stock allocation, which I found to be one of the least interesting parts of the interview.
It’s not absurd at all. OP focused on the Int’l aspect in their title, and most people won’t actually listen to the podcast. I’m certainly not going to spend over an hour waiting to hear whether there’s anything worth discussing or debating, with no bookmarks or chapter headings to let me know where to focus.
LOL there is an indexed "Key Points" on the site with a timestamp for every topic discussed. For reference: "Considering international diversification for investors in Canada. [0:29:05]" Within 3 minutes they move on to the next topic. There's even a transcript. 2 short paragraphs. Here they are:

RR guys:
... I want to touch on international investing for a minute. I've heard you say in other interviews that for a US investor, you don't really need to worry about international investing. And if I remember correctly, the reasons were there's expropriation that doesn't show up in the historical data. So the data is better than what you can actually get. And that US stocks are no more volatile than global stocks. So therefore a US investor probably doesn't need too much international diversification. My question is, does that change for someone in a country like Canada, which is a much smaller portion of the global market?
Fama:
Yeah. Great. That's a good one. Sure, it does. Sure, it does. I mean if Canadian investors only invest in Canadian stocks, it'd be really heavy in mining stocks. Right? So basically one industry concentration will be pretty high. We US Americans are very narrow in that perspective. So this was a statement for US investors, not for Canadian investors. Canadian investors clearly should be looking at investments, at least in the US. So whether the US or whatever expropriate, Canadian investors seems unlikely. Now, people look at expropriation risk as if it's not there anymore. This kind of stuff just doesn't happen. Well, I bet there's a lot of expropriation that's going to take place right now between US, Europe and anybody doing business with Russia. And the problem is, nobody cares about investors. Investors get expropriated, each side always expropriates the other sides investors, but they don't fix it after the war. It stays expropriated even if you win. So that's the risk of international investing and it's not gone. It's not gone. I mean, there's nothing more poignant right now than that actually.
RR guys:
We mentioned that doesn't show up in the data. Is there any way to see? I've looked and I haven't found any papers or anything. How do you find the historical-
Fama:
Also, I think Steve Ross and Roger Robertson maybe there was another guy involved. Way back when, what they did was they said, look, there's this risk that nobody takes into account, that markets actually close entirely. So during the second world war, for example, lots of markets just closed. And then they came back after the war. So they went and looked at, well, suppose we were holding the overall market portfolio back in whenever, what happened to us in the meantime, when these markets closed, how did we end up? And they had a paper on that, that was a long time ago in the '70s maybe. I don't know what would happen if you updated that. I haven't seen an update of that, but people have worried about that, that you only get data because the markets are open. And when they close, you don't have the data, so you tend to ignore that those periods. But an example I like to give you, is I think Argentina was the second biggest market at some point in the past. And that market has closed multiple times since then.
That's it. Certainly won't change my plans based on anything here.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by WoodSpinner »

TropikThunder wrote: Sun May 15, 2022 12:27 am
Kevin K wrote: Sat May 14, 2022 5:36 pm I, too, think it's absurd that most of this thread has focused on the U.S. vs. Int'l stock allocation, which I found to be one of the least interesting parts of the interview.
It’s not absurd at all. OP focused on the Int’l aspect in their title, and most people won’t actually listen to the podcast. I’m certainly not going to spend over an hour waiting to hear whether there’s anything worth discussing or debating, with no bookmarks or chapter headings to let me know where to focus.
In this case it’s well worth a listen.

You can read the transcript if you want a better sense.

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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by mary1492 »

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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by vineviz »

mary1492 wrote: Sun May 15, 2022 9:03 am
Agreed. EMH is flawed in a big way. It becomes more obvious over time.
The only things more flawed than the EMH are the arguments that EMH is flawed, IMHO.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by JoMoney »

mary1492 wrote: Sun May 15, 2022 9:03 am
JoMoney wrote: Sat May 14, 2022 3:21 pm If the EMH guy says I don't need International, then I'm getting some International... I consider Fama the Jim Cramer of investment academia ;) :P :twisted:
Agreed. EMH is flawed in a big way. It becomes more obvious over time.
Examples of the flaws in presuming the market is efficiently pricing risk or even for a particular return objective, or share the same time-line for that objective, have become more apparent to me of late. Things like the whole "meme stock" fiasco, I wonder how Fama rationalizes the efficiency of GameStop stock pricing? Or with this ESG movement among institutions that seem to have thrown out the idea of a business prioritizing the product they deliver to consumers and the profits to their investors. In the past there were studies done showing a premium for "sin stocks", I wonder if there will be yet another market "anomaly" for investing in businesses with boards that take their fiduciary responsibilities as having a financial priority first.

Don't get me wrong, I do think markets are competitive and that low-cost broad market indexing will beat most other strategies. The aggregate of the stock market isn't going to achieve anything extra by people trading it. But I don't think the EMH or "risk premiums" explain what is going on.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by JackoC »

Nathan Drake wrote: Sat May 14, 2022 11:33 am
visualguy wrote: Sat May 14, 2022 10:41 am
Triple digit golfer wrote: Sat May 14, 2022 10:27 am I'm very pro-America, but that doesn't mean I think we're immune from disaster.
The probability of a disaster striking the US without dragging ex-US with it is negligible. If you want insurance against a US disaster, investing in ex-US indexing isn't it.
The 1966 - 1982 period was disastrous for the US stock market and a US TSM only investor. It wasn't disastrous for the US economy as a whole (it kept humming along), and it certainly wasn't for exUS which did well through this period.
I agree. To be fair the statement 'we're not immune from disaster' leaves itself open to rebuttal strictly in terms of 'disaster'. But 'disaster' isn't the only reason in general you diversify, anything. Japan wasn't a much worse place to live after the Nikkei crash than the 'Japan as No. 1' hype period. I happen to have lived there briefly in two stints before and after. Which is also not about 'but the US isn't Japan!!!'. That's not the point, but rather that seriously lagging market returns don't have to go with general societal or even economic 'disaster'. Equities in one place are never going to be a 'hedge' per se against equities in another place in terms of a large negative global economic event, fair enough. But the actual point is diversification not hedging.

The argument against diversifying outside the US should mainly be that the US is pretty much as diversified as you can be anyway. I don't think that's as true as it used to be. There's more specialization now, weighted by cap, in the kinds of businesses (even the specific things within a broad heading like 'tech') companies in different countries and regions tend to be strong in. It's easy to see that some types of companies have done much better recently, and that tends to be in areas where US companies are strong. But unless you know better than the market how to handicap that *going forward* the very strength of US companies in particular industries and parts of the value chain (eg. Apple doing what it does so well, but with physical product and component production mostly in foreign countries, a strength an even halfway efficient market must have priced in already) is a bigger reason to diversify.

As to the idea attributed to Fama in 'brief remarks' I see this as having possible validity mainly in one place which combines a) a significant market cap in one country with b) a plausible argument that home field investors less subject to expropriation than foreigners might inflate prices past what foreigners more subject to that risk would want to pay. That being China. Although only plausible not obvious because it's still a divided market where foreigners often pay less for the shares. I don't see expropriation, even in the soft form of govt guided 'stakeholder capitalism', as a measurably different risk for say US or German investors in German or US stocks, and would want to see actual evidence local investors in any DM markets have a systematically different view of those risks than US investors. The validity of that theory without specific evidence would seem doubtful to me outside EM's, and besides the relative concentration in China (3 some % of equity exposure at world cap, still not huge) no single EM is a noticeable concentration, it's basically an idiosyncratic risk.
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Re: Eugene Fama (Fama–French 3-factor model; EMH): Americans don't need to bother w/ international investing

Post by abuss368 »

vineviz wrote: Sun May 15, 2022 9:08 am
mary1492 wrote: Sun May 15, 2022 9:03 am
Agreed. EMH is flawed in a big way. It becomes more obvious over time.
The only things more flawed than the EMH are the arguments that EMH is flawed, IMHO.
Hi Vince -

What are your thoughts on “Americans don’t need to bother with international investing”. Excluding international investments would lower overall portfolio diversification (unless you consider the diversification benefits from a US only portfolio adequate). We appear to have many periods where one class out performs the other.

Best.
Tony
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