I don’t own a single emerging market investment.  Why not?  Because I’m greedy, and I want the largest long term profits I can get my hands on.

And I really want someone to prove me wrong on this one—because I’m either crazy, or conventional wisdom is about as bright as a bar of soap.

Conventional wisdom suggests that high risk investors putting their money in Emerging Markets will reap the long term rewards of castles painted in the sky, if they can stomach the volatility.

But all of the research I’ve done on this thesis reveals the opposite:  invest, for the long term, in emerging markets, with high GDP rates and you’ll make less money than if you invested in slow growing, stodgy markets.

In Kenneth Fisher’s book, The Only Three Questions that Count, he gives long term stock market performance data for Japan from 1971 until 2005. Japan’s stock market (an economy that grew rapidly during that time) underperformed both the U.S. stock market (a slower growing economy) and the UK stock market (an even slower growing economy).

Fisher’s data on Japan’s total stock market growth in Appendix I, pages 397-399, don’t compare as favorably to the data in Appendix B and F—the respective U.S. and UK levels of stock market growth.

The data in Jeremy Siegel’s Stocks for the Long Run, third edition, reveal similar data showing that $100 invested in the Japanese markets in 1969, with all dividends reinvested, would have turned into $2,923 by 2001.  And the same $100 would have turned into $3,344 in the U.S. market, and $3,722 in the UK stock market.

Even during the short time period from 1998 to 2009, an investor in the Japanese markets would only have made half of what an investor in the S&P 500 (U.S.) would have made.

It’s true that the emerging markets can offer a hairy ride, and short term, profits can be substantial, but after ironing out the meteoric rises and killer crashes over the long term, there aren’t  the kind of returns I’d expect.

Comparing the emerging markets index (EEM) over the past two years to the S&P 500 index doesn’t reveal a significant advantage for the emerging market investor either.
Focussing on one of the fastest growing economies of all leads us looking at China.  From 1997 until 2007, China’s GDP grew by leaps and bounds.  And its stock market was like a hairy roller coaster.  But during that time, its performance lagged the S&P 500.

Not until its recent two year performance has its stock market exceeded the U.S. market.  Fidelity’s China Fund paints a fairly accurate performance picture.

Longer term, David Swenson, Yale University’s famous endowment fund manager suggests that there may not be adequate returns with emerging markets either:

“Investors in emerging markets equities require substantial expected returns…[but] during the period for which good data exist, investors received inadequate compensation for risks incurred”

He explains that from 1985 (when reliable data was first available for emerging markets) to December 2006, the emerging markets lost more than a percentage point a year to the S&P 500 index, while losing 0.4% to the first world international stock index (Swenson, Pioneering Portfolio Management, pg. 179).

What makes it worse is that most investors usually perform more poorly in emerging markets than the returns of the emerging markets themselves.  Sexy markets and promising high growth industries attract plenty of attention from speculators. 

And sadly, because most of them jump into markets and stocks that have risen a great deal over a short period of time, (getting in too late) they tend to miss out on the gains that may have already occurred before they jumped on board, only to set themselves up just in time for the pain of the eventual correction. 

It hurts to think of the “investors” who sold out in late 2008 after the 75% bath the Chinese market took in the preceding 12 months.  Considering the inadequate long term returns—considering the risk– that’s not the kind of volatility I want to put up with.

Investors who sit tight in emerging markets for many years will likely earn returns (if history is an indicator) that are nearly as good as those returns established in stodgy, slow growing economic markets.  But sadly, too many people jump in and out of these kinds of markets—and their expectations are far too high.

To the detriment of their success, they end up buying high, after a short term skyrocketing, and end up selling out of fear during a market skydive.

I’m not even going to bother buying emerging market investments.  I’m too greedy.   I think I can make a lot more money investing only in places where I can safely drink the water from the taps..