Investing World Cup Final: Western Europe Rebuttal

A bet on India and Southeast Asia is in the time-honored investing tradition of overpaying for growth and then generating subpar future performance. Practitioners of this tradition often employ valuation techniques that allow them to fool themselves (note the small "f") into believing that they're actually not overpaying. Chief among these metrics is the forward P/E, upon which Tim has based his argument.

The universal sign of the investor who knows he's paid too much but wants to convince himself otherwise, the forward P/E uses forecasted earnings as the denominator. Forecasted earnings rely on analysts' growth estimates, and such analysts have a history of being bad prognosticators -- overly optimistic when things are expensive, and overly pessimistic when things are cheap. Extrapolating from the very recent past (hey, remember when JDS Uniphase (Nasdaq: JDSU  ) was expected to grow explosively for a quarter-century?) is silly and a poor guide to the future; so much for the forward P/E.

Tim asks whether you'd rather invest in "a slow-growth region with a history of relative underperformance, or a high-growth region that has, virtually overnight, been made a whole lot cheaper?" He has a funny definition of "a whole lot cheaper." The BSE Sensitive (India's benchmark index) closed Wednesday barely 20% off its all-time high and is actually up nearly 7% for the year. When it grinds down 53% to a barely double-digit trailing multiple (much as the FTSE 100 did between the end of 1999 and March 2003), then I'll believe that it's gotten "a whole lot cheaper." For now, let's just agree that the region has experienced some recent downside volatility.

And while the locals may be assuaging their fears by reassuring each other that this is only panic selling, I recall reading very similar headlines when the Nasdaq hit 4,000, then 3,500, and 3,000 ... and it seemed to peter out below 2,000. Just because you call it panic selling, that doesn't mean it's so.

Fools don't chase returns. Reminiscent of newcomers piling into science and technology funds in 1999-2000, looking to the past is a recipe for pain. It's the oft-repeated boilerplate from every fund out there -- past results are no guarantee of future performance. Unless you've owned the India Fund (NYSE: IFN  ) since Tim's chosen date of July 1, 1997, past returns are irrelevant for investors today. Also, the past returns that Tim presents are comparing apples to igloos. Since July 1, 1997, Western Europe has endured a massive run-up and subsequent crunch -- sorry, "return to normality." And yet the long-term returns, as measured by the Europe Fund (NYSE: EF  ) , have been 16.8% annually.

And finally, where is there mention of the country risk -- that added measure of return that a prudent investor demands when considering his or her valuation analysis of potential foreign investments? From Stern Finance Professor (and Fool contributor) Aswath Damodaran's website:

Western Europe Country Risk Premia

United Kingdom

0%

France

0%

Germany

0%


India and Southeast Asia Risk Premia

India

4.05%

Indonesia

7.5%



Not very inspiring, is it?

It hurts me to say this to a fellow New York Islanders fan, but I think Tim has forgotten what happened when the Edmonton Oilers met the Isles in the 1983 Stanley Cup final. The flashy, bold, and exciting Oilers were widely expected to vanquish the older, slower, and worn Islanders; of course, the Isles dispatched the young upstarts in the minimum four games. Only later, after they had grown into the role, were the Oilers championship material. India and Southeast Asia will undoubtedly be powerful economic engines in the later half of this century -- but the time to invest there is not yet, dear Fools, not yet.

Let the Fool's sharpest investing minds take you on a global quest for the world's best stock opportunities with a copy ofThe Motley Fool's international report.

Western Europe is facing India and Southeast Asia in this final round of the Investing World Cup. Go back to the intro page to navigate your way to another part of this contest, and then vote for the region that you think should win the tournament!

Jim Gilliesowns no shares of any company mentioned. He is a member of theMotley Fool Hidden Gems newsletter team.

This article represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc., or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts. So before buying, do your homework and review The Motley Fool's superbly sportsmanlikedisclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 505121, ~/Articles/ArticleHandler.aspx, 10/1/2014 11:10:00 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement