Fisher Investments on Emerging Markets

Chapter 7. SECURITY ANALYSIS

Turn on the television during market hours and there's a good chance you'll stumble across a purported expert expounding the virtues of some company's stock. Any number of reasons may be presented, but their focus will invariably be stock-specific—talk of supply and demand of securities or the importance of country and sector allocations is unlikely. That's because most investors believe investing begins and ends with picking stocks. Unfortunately, they're only half right.

As a top-down investor, you know the last step is indeed stock selection. But you also know it's the least important decision for your portfolio's overall return, and your investment process shouldn't start with it. This is especially so for emerging markets. As discussed in Chapter 5, emerging markets are concentrated. A few countries dominate the market, and a few sectors and stocks rule the country. This makes the top-down method the most logical approach because the largest companies—which often compose the majority of the country's weight—are often driven more by the economic, political, and sentiment drivers of the country than those specific to the company.

With the majority of excess return added in these higher level decisions, it's not vital to pick the "best" stocks in the universe. Rather, you want to pick stocks with a good probability of outperforming their peers. Doing so can enhance returns without jeopardizing good top-down decisions by picking risky, go-big-or-go-home ...