Your Bias Against These Stocks Is Costing You Money
Editor's note: Most investors only want to buy stocks from their own countries...
If you live in the U.S., this "home-country bias" has probably worked out well for you over the past decade. The benchmark S&P 500 Index keeps hitting new all-time highs.
But there's no guarantee that U.S. stocks will rise forever. And this type of narrow focus could cause you to miss out on amazing opportunities in the rest of the world.
Specifically, as regular Digest readers know, our colleague Steve Sjuggerud has pounded the table over the past few years about the massive opportunity in Chinese stocks.
Today's Masters Series is adapted from the July 19 and October 11 editions of Steve's free DailyWealth e-letter. In this essay, True Wealth Opportunities: China analyst Brian Tycangco details how home-country bias could be hurting your portfolio... and explains why a $1 million bet by one of the world's top investors would've ended differently in China...
Your Bias Against These Stocks Is Costing You Money
China and President Trump have something in common...
It seems like 99% of their news coverage in the U.S. is bad.
The problem for China is that unlike Trump, it doesn't have a Twitter account with nearly 67 million followers.
That's partly China's fault... because it bans the use of Twitter.
It can't redirect the narrative being strewn on the mainstream media. And it couldn't effectively counter Trump's China-bashing tweets earlier in the year, including this one from July...
China's 2nd Quarter growth is the slowest it has been in more than 27 years. The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving. This is why China wants to make a deal with the U.S., and wishes it had not broken the original deal in the first place...
Look, I'm no preacher for all things China. But you can see why it's easy to develop a bias against the world's second-largest economy.
The problem is, having bias against China could be costing you a lot of money.
Let me explain...
With the benchmark S&P 500 Index up roughly 24% for the year, the U.S. stock market is the envy of the world right now.
Most folks haven't realized it, but Chinese stocks have nearly kept pace with that stellar return. China's benchmark Shanghai Composite Index is up about 20%.
There's a similar story taking place in these two countries' biggest and most important tech companies... where China's best are nearly keeping pace with the U.S., too.
I'm talking about four of the largest technology-driven Chinese companies – three of which trade publicly in New York.
This includes Alibaba (BABA), Tencent (TCEHY), JD.com (JD), and iQIYI (IQ). They have a combined market capitalization of nearly $1 trillion. And after a rough 2018, they're soaring this year...
In 2018, the trade war slammed anything and everything that had to do with China. But so far this year, these stocks have performed exceedingly well.
The average year-to-date return for these Chinese tech stocks is about 29%. And that nearly matches the returns from the most famous American tech giants...
That group includes Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google's parent company Alphabet (GOOGL). They're collectively known as the "FAANG" stocks.
Combined, they have a roughly $3.5 trillion market cap. That's about the size of the entire Shenzhen Stock Exchange – the smaller of China's two stock markets.
But while the FAANG stocks wiped the floor with those top Chinese companies last year, 2019 is turning out to be a different story. Look at how the U.S. tech leaders have done...
On average, these U.S. tech stocks are up about 32%. That's impressive. And it just barely beats China's hottest tech companies today.
I don't expect this will last forever, though. You see, China's stock market has severely underperformed its own booming economy. Chinese stocks need to soar an eye-popping 1,000% or so from present-day levels just to catch up with China's economy.
That's why I expect a huge catch-up rally over the coming years. And China's big tech names will be an important part of it.
The point is... the U.S. is performing fantastically this year. But if you're only thinking about the U.S., you're missing out.
You wouldn't have known this listening to the news. That's anti-China bias in action. Don't let it fool you into missing out on the big opportunities happening in China.
This is especially true right now as the country's stock market starts to kick into high gear.
Warren Buffett Would Have Lost This $1 Million Bet on China
If there's one thing we can all agree on, it's that Warren Buffett – one of the world's most successful investors – is anything but a gambler.
But in 2007, Buffett stunned the investing world when he made a controversial investment. He bet that one kind of investment would outperform a basket of stocks handpicked by a well-known New York money manager.
That wager ended up netting Buffett $2.2 million. It wasn't even a contest... Over 10 years, Buffett's pick returned a compounded 7.1% per year, while its counterpart managed a mere 2.2%.
The amazing thing is that Buffett's pick wasn't some high-flying, tech-laden investment strategy. It was, in many ways, the simplest investment anyone could have made.
You see, Buffett bought shares in an index-tracking fund called the Vanguard 500 Index Fund Admiral Shares. It was created to do one thing – track the S&P 500 Index performance as closely as possible.
"The trick is not to pick the right company," Buffett said. "The trick is to essentially buy all the big companies through the S&P 500 and do it consistently."
He was confident his investment would always include 500 of the biggest and most profitable U.S. companies in the market. That gave him a high probability of outperforming most stock pickers, who spend enormous amounts of time and resources trying to beat the market.
But if Buffett had made a similar wager in China, he probably would have lost that bet.
You see, China's main stock index is the Shanghai Composite Index. It tracks the Shanghai Stock Exchange, the largest stock exchange in China and the world's fourth-largest by market cap.
Now, the Shanghai Composite Index includes all of the nearly 1,520 listed companies on the exchange. And any newly listed stock is only included 11 days after its initial public offering.
What this means is that the key China stock index used by the world to gauge the health and performance of the stock market – much like the S&P 500 is used for the U.S. – is deeply flawed.
Unlike its U.S. counterpart, it doesn't represent the biggest and most profitable companies in China. It's a "catch all" index that holds thousands of stocks. And it doesn't include the initial pop that can happen in a company's first days of trading.
So it's no surprise that the Shanghai Composite Index has lost more than 1% a year from 2008 to 2018. That's why Buffett would have lost his bet in China.
And if Buffett had invested his money in an exchange-traded fund ("ETF") that tracked the total share prices of all listed U.S. companies instead of just the S&P 500, his investment would have returned only 3.2% a year... and less than 50% over the past decade. Take a look...
Thankfully, Buffett had the option to invest in a professionally managed ETF capable of tracking the S&P 500 – which holds the biggest and best U.S. companies – at a low cost.
There are many others just like the Vanguard 500 Index Admiral Shares. And if you have a retirement account, it's likely you own at least one of these types of index-tracking ETFs.
Indeed, according to research by Morningstar, assets in passive domestic stock funds like Buffett's pick now account for the largest share of U.S. investor exposure to equities. A whopping $4.27 trillion, equivalent to about 3.8% of total U.S. household wealth, is now invested in these funds.
But China is just getting started...
As of 2018, only $105 billion (or 0.2%) of China's $51.8 trillion in household wealth was in stock ETFs. And things are about to kick into high gear.
Beijing is opening up its financial sector to allow full foreign ownership in Chinese financial-services companies by 2020. That's just a few months away.
This is huge. It means everyday Chinese investors – most of whom aren't able to invest outside of China – will soon have access to the same quality, professionally managed ETFs that U.S. investors are now using.
Right now, Chinese investors still have few options when it comes to well-managed ETFs with strong track records. But this change allows big names like JPMorgan Chase (JPM) and Morgan Stanley (MS) to get a firmer foothold in China. These big banks are already increasing their investments in Chinese joint ventures.
As this continues, more Chinese investors will want to put their wealth into ETFs. If investment in China ETFs only reaches half the penetration level of the U.S., money flowing into China's domestic stock market would soar nearly 10 times.
That's nearly a trillion dollars of new money entering Chinese stocks.
Investors should pay close attention as China opens up its markets. If you don't, you'll risk missing out on outsized, Buffett-like profits...
Good investing,
Brian Tycangco
Editor's note: Brian and the rest of Steve's True Wealth Opportunities: China team are preparing for a huge event that will soon take place for China's stock market. It's guaranteed to happen. And best of all, we already know the day it will occur...
On November 27, a massive wave of investment dollars – $22.7 billion, to be exact – will flood into a short list of Chinese stocks. According to Steve, it's the safest way possible to potentially double – or even triple – your money over the next 24 months. Learn more here.