I want to take a pause from virus-related topics, since it is becoming more evident every passing day that is going to stay with us not for weeks but months; there will be plenty of occasions in the future to discuss panics, bear markets and new lows. You are probably already familiar with the concept of home-country bias and here is my personal experience of it.
In August 2018 a bridge on a highway near the Italian city of Genoa collapsed and 43 people died in the accident. I was already living outside Italy since twelve years and my memory of the Italian highway grid was a good one: roads are managed by private companies and, while tolls are expensive, it seemed to me that the maintenance was properly done. I drove extensively in all Western Europe (Portugal excluded) and rarely had a better driving experience than in Italy. Obviously overall the German system, for example, is better because highway are free but from a pure safety point of view I never had anything to reproach in Italy, at least in the northern part, where Genoa is.
So once I got back to visit my parents and my dad was driving us home from the airport, I asked him if the situation really deteriorated since I left. Inquiries after the tragedy were showing that it was not an unfortunate accident but that there had be a lack of proper maintenance for years in several parts of the grid, while the management company, one of the biggest in Italy by market capitalisation, was collecting fat fees with the ok of the Government. Rating Companies had just downgraded the company debt to junk status. My father comment was “well I hope the Italian Government is not going to revoke their management license, because I have invested in the company bonds and it would be a catastrophe”. I was puzzled and asked him why he was investing in single name bonds and not an index…and why THAT particular name; “Because it is Autostrade (the old management company name), it is never going to default” he replied.
Autostrade is indeed managing Italian highways since I was born and in his mind, like the majority of Italian people, the company destiny is deeply linked to Italy itself…and an Italian default is simply inconceivable. My dad was well and alive in 2012 and 1992, just to mention two instances where Italy was on the brink of collapse that I remember, and yet he still feel 100% safe investing in Italian assets. Like those investors who bought the 100 years Argentinian Government bond few years after the country defaulted on his debt for like the third time in the last few decades.
Obviously my father is not the only one. One of my friends is a private banker in Italy and shares with me the newsletter he prepares for his clients. More often than not, he writes a warning notes to investors who are overweight Italian Government Bonds or shares; these are not mom and pop investors but CEOs and managers of companies that sell worldwide: managing risks is part of their daily jobs and are full aware of the opportunities and the reality outside Italy. So why, I always ask myself, they do that?
Even if home country bias is now a well known issue in economic theory, the ‘system’ is no where close to help and educate the general public. I started reading about finance and investments when I was at high school. Every Monday the newspaper we had at home had a special issue dedicated to finance that I was jumping on as soon as I was back from school. Articles were mainly dedicated to Italian companies; even when they were writing about general theories, like the Dogs of the Dow (investing in the 10 higher dividend paying companies in the index will overperform in the long term), the reporter was twisting the subject to “here the 10 Dogs of the Italian Index”. Internet brokers were charging fees 10 times higher if you wanted to invest in shares outside Italy and you could access only mutual funds managed by Italian asset managers; ETFs came only later and even when they arrived, lots of magazines where cold about them: the ads that paid their salaries were coming from traditional mutual funds and so they did not have lot of incentives (aside of being a good reporter) to write about them.
This chart shows you the headwind of being an Italian based investor (green line) vs a US based one (white line):
You could be the best stock picker, have the best strategy and yet the odds are staked against you. I did not decide to be born in Italy and yet the environment determined probably 60% (?) of my trading returns, the rest were the usual rookie mistakes. And if you consider the whole world, I was VERY lucky of being born in Italy!
Now that we can access every market at zero cost, the worst possible lesson would be to invest only in US, because it was the best performing market of the last century. No one can guarantee you that US will be the next Italy and China (or any other country) will be the US of the new century. This is why it is crucial to diversify investments in different countries and definitely not be bounded to to some geography for random reasons, like where your parents decided (or not) where you had to grow up.
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