Which is more predictable over the next three years:  the future of a particular company or the future of a particular country? The question matters because an investor can buy a basket of stocks - called an ETF - from a particular country in the same way one would buy stock in just one company. Ideally, you want to invest where there is the most predictability.

I believe countries are more predictable than individual companies. For that reason, I think investing in ETFs by country makes more sense than buying individual stocks. Allow me to explain.

A company is subject to its own risks plus the risks of the world. If the entire global economy crashes, so goes the individual company. But an ETF carries only the global risk plus the risk that the government will make an unexpected dumb move. I would argue that governments make important moves far less often than companies, and unlike companies, most modern governments signal their moves well in advance. Compare that to Apple who may or may not introduce a TV product in the next year. Companies have the right to secrecy. Governments do a poor job of keeping secrets. Government predictability comes from the fact that they move slowly and they have an obligation to transparency.

In a company, the CEO and the CFO can fudge numbers and keep it a secret. A modern democratic government would have a hard time fudging national employment numbers or anything else of that magnitude. So while government has as many or more liars as private industry, a democratic government is less likely to get away with fudging a major economic statistic.

If you made a list of the nations with the most effective governments, you'd see they also have the best economies.  There are exceptions, of course, but overall, effective governments create good economies. The correlation between management skill and company profits is less direct. It doesn't matter how good a CEO you are if your competition invents a killer product or your supplier can't deliver enough components.

If you ask me to predict ten years out, I'd say with some confidence that countries such as Denmark, Sweden, and Switzerland will be doing just fine. But a company as strong as RIM can be eviscerated by strong competitors in just a few years. And a company such as Enron might be nothing but a fraud. In five or ten years, Denmark will still be Denmark.

Full disclosure: I have investments in ETFs for both Israel and Turkey. Those countries have plenty of regional drama, but both countries are governed effectively. In the long run, I expect both countries to do well unless the entire world goes into the crapper.

So I put the question to you: Which is more predictable over a three year horizon, a company or a country?

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Dec 11, 2012
If you want to make a bet on a specific country, perhaps buying its government bonds (treasuries) would make sense. But then you're really betting on their monetary policy - which these days is highly influenced by global rates.
Dec 10, 2012
Funny - A few posts ago, you virtually guaranteed that Israel will soon become a post-apocalyptic wasteland. Do you have guest bloggers occasionally write for you? Or do you not believe your own BS?
+5 Rank Up Rank Down
Dec 10, 2012
Many have already made great points about the hidden finances of countries. But I'd like to point out that you're comparing a mutual fund (specifically an ETF) to a single stock. Of course the fund is "safer" - it owns hundreds of (or more) stocks, which is always more diversified than owning a single stock. The fact that you're concentrating them in a single country means that taking unnecessary risk by foregoing the diversification of a global ETF, but it's far more diverse than one stock.

Also, when you own a stock, it is, by definition, just one of the stocks in that country's ETF. Your Turkish index fund is probably 45% financials, and 13% Turkiye Garanti Bankasi (because that's their share of Turkish market cap). And your Israeli ETF is 24% Teva Pharmaceutical. But you probably didn't make those bets intentionally. And in the case of Teva, most of the value has nothing to do with the fact that it's based in Israel.

Bottom line: the country vs. company argument is interesting; but your argument, ETF vs single stock, is much different.
0 Rank Up Rank Down
Dec 10, 2012
This is already happening at so many more levels.

Significant point of interest: The Danish reference interest rate set by the national bank is negative ... read that again ... negative!
This means that a significant amount of investors are willing to PAY interest to lend money to the Danish state.
Source: http://nationalbanken.dk/dnuk/specialdocuments.nsf

This is also reflected on the mortgage market where private home owners with annual variable interest rates pay 0.41% interest and if you are in it for the long run you can get a 30 year mortgage for 3.0%.

On behalf of the Danish people, I thank you.
Dec 10, 2012
i dont think there is any comparison between the stability of govt and any proven corporation.

govt has cops, judges, armies, laws, media.

given these advantages it should be overpowering in any endeavor it puts its hand to. its basically the exact opposite.

so why is this? it has drastically more versataile power, yet its predictability and solvency is within a few orders or magnitude compared to a mere financial organization.

if you are just going with practicality, pick the one with a legal monopoly on violence (and power of taxation and printing press) every time.

if you are trying to have a meaningful comparison you have to acknowledge govt underperforms every solvent corporation in the world when evaluating how well it does with the resources and powers it has.

if you had to pick an instiutition to gain more power you should pick govt last every time forever.
Dec 9, 2012
dejapooh is succinctly correct, a diverse basket of stocks is more predictable that one stock in that basket. that does not make it the better or safer investment per se, if that's your goal. the idea extends further, which is pertinent to you - you would get more diversity and predictability if you invested in more countries than just Turkey and Israel and especially if you diversified your regions (Syria could easily screw up both of those countries at once, but would have little direct effect on Canada except to increase the value of their oil and gold). I think you want a global ETF, which you can buy with the money from selling Israel and Turkey. This list of pertinent things I'm not mentioning is stunningly long, but I'm trying to do unto others as they wish to be done unto (keep this somewhat short).
0 Rank Up Rank Down
Dec 9, 2012
Beginning of fourth dash point should read:
- As for the "death spiral list", the assumption apparently is that "a state needs more makers than takers".
+2 Rank Up Rank Down
Dec 9, 2012
Phantom II:
Just some points:
- SOX: What are you saying there? You cite a law that shouldn't be in support of what? Or are you generally in favour of laws where costs outweigh benefits?

- Government lies: Before or after SOX, the regular case is that fudging takes place when a company goes down the drain. Someone will be punished but you might as well punish water for passing a sieve. It's not changing much. How often have you seen a president or someone similar throwing up his hands saying "Hey, the money's gone, have a nice day!" an go home? Yes, Greece. But every employee in a dying company knows how this goes in the private sector. "Everything's fine, still dandy, more money on the way, big customer just around the corner, everyone's fired, off you go." Spread over the final quarter.

- "71,000 of them were in government, draining the treasury and producing nothing." Are there any numbers that support this? I mean, what are they? Firemen? Teachers? Policemen? What would you call a useless job?

- As for the "death spiral list", the assumption apparently is that "a state needs more takers than makers". And somehow someone just assumes that government means "takers" and private means "makers". Is this some article of faith or does it have a base in reality? If a prison gets privatized, do the people move from the "takers" to the "makers" side without "producing" anything either? Would, while working at Lehman Brothers, the average emplyee have qualified as "maker" or "taker"? Does funneling profits offshore and letting the government pay for the collateral damage (in terms of lost jobs, poverty, higher crime rates and so on) count as "making" too? Could you please provide details? The other criterion, a rating by a company at least I haven't heard of until now and which normally specializes in insurance, I'd be interested as to why this one in particular.

- Regarding country ETFs, you're right. Just out of curiosity, how much of your money sits outside the US? If it's less that 70% you are taking a lump risk. Even more if your remaining future wages depend on the US too.
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Dec 9, 2012
A country.
A country, or, at least an economically relevant one, has a lot of things that won't go away:
people, laws, territory and probably other things too.

Indices are bound to territory, so, even if that changes hands, the index will still be there and measure something reasonable.
+4 Rank Up Rank Down
Dec 8, 2012
Sorry to burst your bubble, but I have some experience in both stocks and accounting, and you seem to have a whole series of misconceptions.

1. It is much easier for a government to "fudge the numbers" and get away with it than a company. In a company, the stockholders will eventually catch you at it and haul you into court. In the government, the few people who CAN hold you answerable will probably keep silent since their careers depend on the leadership's goodwill. (And the people most likely to tell that sort of Big Lies are above the law -- for example, Barney Frank's announcement that Fannie and Freddie were "doing just fine" six months before the collapse was made on the floor of Congress, so he is answerable to no one.)

2. Yes, you'd like your investments to behave "predictably", but if you choose them that way, you will buy the lowest-paying "blue chip" stocks and will almost certainly be left behind the next time someone comes up with a wonderful new tech toy. If you're a smart investor, what you really want is a stock whose performance YOU can predict better than the rest of the market can.

And 3, of course, most of the big bad "surprises" that happen to companies are inflicted by governments, so if you invest in just one or a few stocks you're still betting that the governments of countries where those companies operate won't decide to screw them. Thus given the choice, I'd usually rather go with a country-wide or even international fund just to avoid the possibility of losing everything when one company or country does something stupid.
Dec 8, 2012
Isn't this just a different angle of the age-old tension between risk and reward?

If you are satisfied with returns of the GDP of a stable country, go for it.
If you want much better returns with only marginal increase in risk, this isn't for you.
Dec 8, 2012
Country is more predictable by far. And I say that even after the country I lived in until 1991 collapsed (Yugoslavia) and now I'm living in a smaller new country with such a lousy government (Croatia) that we had to incarcerate the former PM for 10 years and the vice-PM is incarcerated for 1 year in Hungary for killing two people in a car accident there.

I would like to say that things could only get better, but I can't. The only hope I have is that joining the EU next year will have a good effect on my country's economy.
Dec 8, 2012
The most popular "country ETFs" are all baskets of company stocks. The companies are just restricted to those that are located in a single country. And they are usually that country's largest companies. So a Canadian ETF has stocks for big Canadian banks, big Canadian energy companies, big Canadian telecommunications companies (including RIM), etc.

Country ETFs will prosper or suffer as that country's companies prosper or suffer. The companies in a well-governed country will benefit. But they are still subject to market forces. And, increasingly, every country's largest companies are international. So you might not get as much insulation from international market swings as you'd like.

There are also country bond ETFs. Are you buying baskets of bonds of Israel and Turkey?
Dec 8, 2012
If you're investing in countries, there is one thing more than quality of governance or capability of fudging numbers etc to consider.

Governments (particularly of third world countries) have shown themselves capable of outright thievery. Eg, they can target foreigners and their companies and pass unfair laws that will kill their business. Worst come to worst, suddenly one day they can simply nationalise foreign businesses or just throw foreigners out of the country en masse.

There are laws governing companies and their managements; there are few laws, if any, governing governments and politicians (at least as far as their propensity to grab private property is concerned). Companies are generally managed by rational people. Countries are generally ruled either by a luantic dictator or in a democratic country by a rabble rouser leading the latest mob frenzy.

I would prefer investing in companies. Governments can suck you dry and spit out the bones simply on a whim.
Dec 8, 2012
Scott, have you ever heard of something called. . . Sarbanes-Oxley? Where the heck have you been?

For those of you who don't know, a federal law was passed in 2002 sponsored by US Senator Paul Sarbanes and US Representative Michael Oxley. It usually is referred to as "SOX."

In condensed terms, the law requires corporate officers to sign a statement saying that the financial information they provide is true. If it is found out that they significantly misstated their financial results, they can go to jail. I'm not saying that the law is a good one, because it contains about a zillion new regulations and costs to businesses that IMHO outweigh any benefit, but it is the law.

Now, let's look at the laws that prevent government from lying to us. <sound of crickets> When was the last time a politician went to jail for misstating any financial numbers? How about obfuscating the real ones?

Take, for example, today's unemployment numbers. Oh joy, oh joy! Down to 7.7% Sounds great, doesn't it? Until you look further down in the weeds, and discover that the rate is lower because more than 500,000 more Americans gave up looking for work.

But wait, but wait! The economy added 146,000 jobs!!!! Wow!!!! Recovery city!!!!

Oh. 71,000 of them were in government, draining the treasury and producing nothing. The government's unemployment rate is down to 3.8%. All you suckers who are working in the private sector, what a bunch of idiots you are.

How about the rest of the newly-created jobs? Most of them were temporary jobs put on by retailers in anticipation of the holidays. They'll be gone come January.

But back to Scott's original question. Countries or Companies? I say, do both. There was an article in USA Today today (no, that's not redundant) reporting on investor returns based on various percentages of US mixed with foreign investments. Here are the results:

Less than 20% US investments (versus foreign) 6 month average: 0.74%

21-50% US investments 6 month average: 3.79%

51-80% US investments 6 month average: 5.55%

81-100% US investments 6 month average: 3.32%

Diversification is once again the key. The more you can spread your risk, the better off you are. Focusing on one stock, or one ETF, or one country, is not investment, it's gambling.

Oh, by the way, Scott, since we're both in California: did you hear about Forbes list of the "Death Spiral" states? The #3 worst state was (pause for effect) California. The ratings were based on the taker/maker ratio and the state's credit rating.

California's taker/maker ratio (the ratio of people living off government versus those actually working in the private sector) is 1.39. The example they gave was an electronic company employing 100 people was actually supporting 139 people who were either on government assistance or were working for the state government.

The states on the list, in order of best bad to worst bad were Ohio, Hawaii, Illinois, Kentucky, South Carolina, New York, Maine, Alabama, California, Mississippi and New Mexico. If you are thinking of investing, I'd stay away from those states. Ours included.
Dec 8, 2012
"A modern democratic government would have a hard time fudging national employment numbers or anything else of that magnitude. "

Actually, one of the main reason Greece got into such deep s#*t was that they had been fudging most national economic numbers for quite a while, especially the real amount of their government's borrowing. Any large organization, including a national government, is going to do whatever it can to hide or shade their shortcomings, if at all possible. Buyer beware; even democratic countries are not immune from manipulation of official statistics.
Dec 7, 2012
I have a question, if many people are trying to forecast, and their forecast can affect the economy, what percentage should a person attribute to forecasting behaviour in their forecast?
Dec 7, 2012
Country based ETF are by definition more diverse than investing in individual companies by themselves. What you are describing is investing in diversity in order to minimize risk... This is obvious to even the most basic investor. Investing in individual companies is for people looking to maximize returns without regard (or with little regard) to risk. Either investment style is appropriate based on your goals, your position, and your individual situation.
Dec 7, 2012
WATYF: The thing is, the US government is very transparent about what they do with the numbers. All the input numbers and how they massage them is published. So sure the way they calculate unemployment has changed a few times, but the information is still there to calculate unemployment like it was in the 30's, or calculate GNP like they did before switching to GDP.
+2 Rank Up Rank Down
Dec 7, 2012
Investing in countries is not much different from investing in companies. You need to do your research and you need to constantly reevaluate your position to make sure that the reason and conditions for your purchase have not changed. Take Argentina as an example. Was doing pretty well. Things went south when the new government changed the rules of business. You need to keep constant watch on your investments. You need to understand what matters and what doesn't. 99.9% of people do not have the time or the expertise or both to do this properly. Which is why you would be better off in Index funds, or finding a money manager whom you trust and believe in. Think of the couple (2 college professors) from Long Island who invested $50K with Warren Buffett and let it ride. They had $800 million that they gave away when they passed. Just as many people however ended giving their money to Bernie Madoff types. You have to recognize your limitations. I think for most people we would be better off following Dilbert's rules on investing.
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