Global Bargain Hunting: The Investor's Guide to Profits in Emerging Markets

by Burton G. Malkiel, J.P. Mei

A guide to the world of emerging global market investing includes strategies for tapping into this market and explains how to find global investment bargains

240 pages, Hardcover

First published January 6, 1998

Reviews

[Liquidlasagna · Rating 1 out of 5]

Amazone

The Book Misleads

As is well articulated in the book Global Bargain Hunting: A noted economist named Markowitz has shown it is both prudent and profitable to diversify globally. He demonstrated that some degree of global diversification actually decreases overall portfolio risk.

It is possible to combine securities in such a way that higher returns and less risk are obtained.

And while a tendency exists for "short periods of stress to spread globally", research does not reveal a long term trend of increased correlation among world markets.

The authors of this book then conclude advocating and clearly biasing index funds as the "simplest way in selecting emerging market shares". But Thaistocks.com disagrees.

An index fund is an open-ended mutual fund (or an institution) that buys for their investors a pure and only representative sample of common stocks available. The bigger the stock of a select market the more these funds own their shares. The actual number of different kind of listed firms are held to a bare minimum. This portfolio is then simply held with no attempt to trade from security to security or country to country. The passive investment nature of index funds minimizes transaction costs and taxes they tell us, all true enough.

Index funds have produced before tax, net returns on average two points higher than managed mutual funds, they inform us. Of course this was measured during the boom years prior to the Asian crises.

Such large funds probably contributed to this crisis by increasingly paying irrational high stock valuations for pure liquidity and market capitalization, while ignoring rational valuations.

The authors concede that index funds tend to increase the weight of the countries whose stocks have recently performed well and so increases an investor's exposure to markets experiencing some kind of non sustaining speculative craze. But they stop short on telling us the real wake-up call to individual investors around the world! We much disagree with the key punch line of this book.

Index funds hold huge amounts of capital and are by any means very large investors when entering emerging markets. These funds by their very definition eliminate from possible ownership, all but the biggest shares in emerging markets.

This has been our main point from the very beginning in April 1997: namely, index funds (and many other funds as well), are void of smaller often profitable and very undervalued and neglected export oriented, "value" shares.

Index funds ignore the very segment of the SET market that since 1997 has by far outperformed the local index as we have documented frequently at our site. Further, this "valuation inefficiency" over many years has lead to huge stock pricing distortions. This I have witnessed here with my very eyes over the past 10 years.

Fast growing smaller companies better think twice before listing on the Thai stock market as more often then not they get ignored by almost all institutions and traders alike. Hence they receive undeservingly so a huge valuation discount. Yet, from a rational individual investor's standpoint, it is "values and dividends galore" in Thailand's secondary export and niche market shares.

The authors again and again tell us, "Transaction costs in emerging markets are so large that they will offset any advantage an active manager may gain".

This is a terribly misleading statement as in Thailand the buy and then sell trip on SET shares, is a touch above 1% and set to drop to only 0.6% later this year.

While the Authors Malkiel and Mei believe (and tell us so often) that index fund performance is superior performance, they tell us nothing about the forgotten deep values

The only qualifier is you cannot buy or sell large amounts of their shares quickly as they are illiquid. Illiquid, yes...but to whom? Institutional investors (like index funds) often have strict minimum investment mandates, which are in the millions of dollars worth (not Baht!), for each stock considered. More seasoned individual investors have a big advantage here over institutions.

Malkiel & Mei, "remain skeptical that anyone - even the pros-can, over the long run, beat the returns from an emerging market index or from a diversified portfolio of closed-end funds selling at substantial discounts." Perhaps they should come take a look at our work?

This book like so much other literature on this subject again and again fail to tell us the substantial and real advantages to individual investing.

......

Save your money

The book reads like a very bad Forbes article.

Definitely not what you would expect from noted academics. The book is anecdotal with limited academic evidence presented to prove the authors' thesis that a well-diversified portfolio should include investments in international companies (and probably mutual funds or other indexed investments).

Nothing you haven't seen before if you watch CNBC. Therefore, the book adds very little to an investor's understanding of international investing.

With a large universe of literature written about investing and portfolio management, save your money and avoid this book like the plague!

I wanted to add my 2 cents on the benefits and disbenefits of index investing (esp. vs. closed end funds).

Benefits:

1) low transcations cost
2) low tracking error (hopefully)
3) liquidity at NAV

Disbenefits:

1) vicious cycle of reinvesting in winners
2) fails to take advantage of the asymmetries of information in these markets
3) fails to use real information which analysts generate (e.g. shouldn't you pull out if you are predicting a currency crisis).

I took a class with Prof. Mei and even he favored buying into "beat-up" markets after a crisis.

That sounds like classic mean-reverting, market-timing investing to me and not buying an index. Don't beleive all the press you read on indexing.

[Mina · Rating 4 out of 5]

This book has a quite clear structure. Although I could not say it is a very academy book. However, it's good for beginners to build a analysis perspective for whole environment. Four star for this.