There's never an answer to point 2. That somehow the market has missed the superiority of American publicly listed companies (really?). Perhaps if one twigged to what was going on with the "Magnificent 7" re dominance of their markets, one twigged early, one could say one beat the market (by overweighting USA).I can't reconcile the ideas that:One aspect of the exceptionalism argument, is that our whole-haystack thinking.... has an exception. We do, come to think of it, have a defensible reason to concentrate in the US and to eschew a straight-up global market-cap weighting. Yes, the global-cap will also capture US gains but it will perennially have large non-gains, from the ex-US holdings. It is a dilution.
#1 The US has advantages that are durable and well known, which drives up demand for US stocks (Yes, I agree)
#2 That these advantages are not already priced in (This seems to contradict #1 and is prima facie evident in higher valuations for US stocks)
You may have reasons to concentrate in the US, but so do a bunch of other folks, too.
Ergo, for the US to outperform, the US has to outperform the optimism that is already priced in.
Maybe it will, maybe it won't. But by holding global market cap, I don't have to make that wager. If the US outperforms, I get my weighted share. If it doesn't, I get the other side of the coin.
Yes, global market cap is a dilution and always will be. That swings both ways, good and bad.
Buried in there is a sort of national chauvinism (not only held by Americans, about the American market). Plus recency effect.
An argument that is consistent with an Efficient Markets framework is:
- investors are not compensated for foreign exchange risk
- the gains from international diversification in equities are, if anything, very small for an American investor (empirically)
- there might be dividend leakage
The first is an argument for hedging your foreign equity portfolio back into USD, rather than not holding foreign equities.
I shrug. For an American investor, not holding international stocks is probably not a grievous error. The risks won't show up too often.
For an international investor, not holding the global market equity portfolio is almost certainly a mistake -- home country bias is much much more serious.
Statistics: Posted by Valuethinker — Fri Nov 08, 2024 3:39 am — Replies 7180 — Views 1720012