What We Can Learn From Latvia

I found a lengthy post about the problems in Latvia (might be as bad as Iceland) at a site I read called A Fistful Of Euros (that has to be the best name for any blog out there). In terms of learning about Latvia the post is quite useful but there is a bigger picture point to make.

I’m a huge believer in foreign investing mostly with individual stocks selected in a top down process that gives weighting to a stock being a proxy for its home country—typically I’m trying to capture a country in this process. All countries have different attributes. Some have surpluses, some have deficits, some are commodity based and some are service based and so on. A successful portfolio strategy is blending together countries with different attributes such that if something bad happens in Latin America or Eastern Europe or with the commodity producers you don’t take a disproportionately large hit to your portfolio.

In the current bear market China was one of the first countries to get hit. Brazil and Norway did not get hit until many months later. Countries with different attributes tend to be at different points in their respective cycles which accounts for peaks in these markets being so far apart despite the extent to which correlations have generally gone up as prices have gone down.

If you have exposure to Eastern Europe, in all likelihood that stock or fund you own is down a ton. That it is down is not a problem. The problem comes if you own Hungary, Latvia, Ukraine and Estonia for your foreign and think you are diversified. By taking in countries with different attributes and from different parts of the world you are taking in different risks instead of piling on the same risks which in the case of the countries mentioned above include huge deficits and a lack of things other countries need.

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