the end is near

Long title, I know. I’m not actually advocating a withdrawal from US equities based on some belief about the impact from China, the housing market, and whatever else. I’m just drawing attention to silly arguments. These come up all of the time, especially with the recent market drop and accompanied frenzy from certain cirlces. The problem is that such reasoning is like playing a 6 degrees of separation game based on an expectation market of global politics, market indicators, etc., and not on the real intrinsic value market of real companies with real products and services. As Ramit at I Will Teach You To Be Rich puts it, “These are not the reasonable conclusions of someone who’s informed about personal finance, but someone who’s cobbled together a shaky theoretical framework that ties personal finance, global politics, and entrepreneurship together.”

We’re accustom to thinking about the market through our expectation of a certain level of return in a broad sense. However, that doesn’t mean you can get a jump on future market changes and exploit some change for your own profit in a specific, planned, and guaranteed way. I’ve discussed the efficient market hypothesis before, but it’s even simpler than that. Markets are made up of companies that provide a real service or product in the hopes of profit. Global politics, consumer savings rates, and such may impact the flow of goods and services, but they don’t substantially change the underlying markets and companies, and being worried about the recent dip in the US market, which also occurred in foreign markets, doesn’t mean that you should get out of the US market.

The market works by pitting multiple companies against one another, and some will go out of business from that (good), and some will thrive because of that (good). The strength of the US market is derived from the companies that make up that market like GE, Microsoft, and Walmart. The strength of these companies is based on the people they hire and the innovations they create. Unless there is some great shift from that situation where a foreign company also takes the lead (like Toyota pounding previous auto industry leaders like Ford and GM), then you are very safe keeping your money in the US market. And even then, on average, US companies are still fighting hard and well against the competition.

Thinking about the large growth in some foreign markets like China and India may make you anxious, but you should realize that 1) growth is inversely related to return (and return is what we as investor really care about), and 2) even with substantial growth, the US economy and markets are massive in comparison, and 200% growth for India is worth half a percent of growth in the US. That doesn’t mean that foreign markets and companies aren’t good investments, but there seems to be a persistent pessimistic sense of doom for the US economy and market. That’s nothing new, and that might even be a good reason why the US economy is so strong as companies are always on the lookout for failures and opportunities.

There are two more final reasons why you shouldn’t fear foreign market growth, but actually hope for it. First, growth in foreign markets is good for the US market and investors. This is a pie getting bigger scenario, and not a fight for the same pie. Also, increased competition forces companies to compete that much better, which leads to the second reason for not being afraid; No other market is as well established as the US market for that kind of pressure.

As I said already, the American market is built on American companies that hire the right people, which includes foreigners. This is so easy in the US because of the vast number of universities including a large number of world class universities and their high concentration in areas like the Silicon Valley and Boston (the two leading world entrepreneurial hot spots). These mental hot spots breed good ideas, and draw smart foreigners as much as they draw smart locals, and they’re drawn into a culture that values and supports entrepreneurialism. Additionally, these areas are supported by very experienced, wealthy, and competitive corporate and private funding industries (think venture capital). Being able to draw these three key factors into one if not multiple spots like in the US, or elsewhere, takes tremendous time and effort as it takes time to establish good schools, a good encouraging culture, and the money to support both.

When you feel the urge to make 6 degrees of separation reasoning, take the time to think about the above factors, and decide if anything fundamental has actually changed. Most likely it hasn’t, and on top of that, I’d be surprised (no offense to the anonymous reader) if you actually had a clue what it means to the market when Japanese confidence in the US is low, and how that impacts the US housing market, and by “direct” reasoning means the US market is doomed. Very smart people make these statements every day having no idea what that really means if they’re even able to make it sound sensible. Trust the market as a whole, and be confident in the long term sustainability of the US market and economy. Even the UK, which was the world leader before the US, is still a very strong market and economy after having lost its spot to the US. So, keep saving and investing as usual, and don’t listen to kooky and conspiracy theory reasoning.