Portfolio design ruminations

[zbigi]

@jacob Isn't a lot of that equalized by global investors (incl. active funds) who are looking for best deals across all markets around the world?

[jacob]

@jacob Isn't a lot of that equalized by global investors (incl. active funds) who are looking for best deals across all markets around the world?

Apparently not.

[Bankai]

@Bankai - I just see a lot of those things differently, and also don't see the relevance of some of your arguments (how is low crime or decent healthcare going to protect us against foreign influences?).

Your argument was about the country being unstable. Crime rate is one of the most important aspects of stability - consider Haiti where gangs have overthrown the government or Mexico where cartels control parts of the country vs. Scandinavian countries where crime is generally one of the lowest in the world and are widely considered to be some of the most stable countries in the world.

Note how Polish's stock market's P/E is barely at 11, whereas for example German's at 16.75. And that's whilst Poland is projected to have one of highest GDP growth in Europe in 2025, while Germany will have one of the worst. That's not random IMO, that's just markets pricing in the geopolitical risk. People with money vote with money, and they voted that Poland is a risky place to store assets in.

I had a quick check with GPT*, and it doesn't seem there's any significant difference in PE ratio. Poland's PE was an average of 14.5 for the last 20 years vs. 14.3 for the previous 3 years. Poland's PE was also lower than Germany's by 1.4 over the last 20 years vs. 1.5 in the previous 3 years. So, the difference since the war is minimal, if any. This makes a lot of sense since both stock markets are basically 'old economy' dominated by banks, insurance, heavy industry, mining, etc. Germany also has cars and pharma (both typically low PE sectors). There were 2 outlier years (2009 and 2022) where indeed the markets were punishing the Polish stock market more severely (as they did with other 'emerging' markets) and excluding those, the difference in PE between both countries is only 1 (15.2 vs. 16.2). Now, IF anything serious happens, markets will very likely be panicking again, at least initially. But they seem to be quite relaxed now. Also, consider that foreign direct investments are still growing which would not be the case if there was any significant risk priced in.

Also consider people who want you to move your assets abroad usually are paid commissions for affiliate links you click from their websites or try to make money on you in some other ways such as by selling you a book/guide/blueprint on how to secure your finances.

*Year Poland P/E Ratio Germany P/E Ratio Difference (Poland - Germany)
2004 12.5 15 -2.5
2005 14.3 14.8 -0.5
2006 15.8 16.2 -0.4
2007 18.2 17.5 0.7
2008 8.9 10.4 -1.5
2009 6.7 12 -5.3
2010 11.4 13.5 -2.1
2011 10.3 12.8 -2.5
2012 12.1 14 -1.9
2013 13.6 15.2 -1.6
2014 14.5 16 -1.5
2015 13.9 15.5 -1.6
2016 15 16.8 -1.8
2017 17.6 18.3 -0.7
2018 14.8 16.5 -1.7
2019 13.5 15.7 -2.2
2020 20.7 22.1 -1.4
2021 28.2 25.4 2.8
2022 9.5 14.2 -4.7
2023 15.6 16.9 -1.3
2024 17.9 16.5 1.4

[zbigi]

Your argument was about the country being unstable. Crime rate is one of the most important aspects of stability - consider Haiti where gangs have overthrown the government or Mexico where cartels control parts of the country vs. Scandinavian countries where crime is generally one of the lowest in the world and are widely considered to be some of the most stable countries in the world.

I was talking about geopolitical instability, not internal one. I agree that internal situation in Poland is decent compared to most of the world. Unfortunately, it does not translate to resiliency to external threats. BTW our geopolitical situation was also ok (not great, because the threat was always looming) till the last 5 years or so.

*Year Poland P/E Ratio Germany P/E Ratio Difference (Poland - Germany)
2004 12.5 15 -2.5
2005 14.3 14.8 -0.5
2006 15.8 16.2 -0.4
2007 18.2 17.5 0.7
2008 8.9 10.4 -1.5
2009 6.7 12 -5.3
2010 11.4 13.5 -2.1
2011 10.3 12.8 -2.5
2012 12.1 14 -1.9
2013 13.6 15.2 -1.6
2014 14.5 16 -1.5
2015 13.9 15.5 -1.6
2016 15 16.8 -1.8
2017 17.6 18.3 -0.7
2018 14.8 16.5 -1.7
2019 13.5 15.7 -2.2
2020 20.7 22.1 -1.4
2021 28.2 25.4 2.8
2022 9.5 14.2 -4.7
2023 15.6 16.9 -1.3
2024 17.9 16.5 1.4

Those numbers are completely inconsistent with the sources I use. For example, this page (https://stooq.pl/q/?s=wig_pe) shows WIG's P/E to be at around 10.3 at the end of 2024. I have no idea what is the source for that number though, the page doesn't say. GPW's (Polish stock exchange) official number here (https://www.gpw.pl/gpw-key-statistics) is 9.10, although they give the caveat that it's an "average for all companies" (so likely not a weighted average, which would make more sense). Also, among Polish press and analysts I have never ever seen the numbers given above, and always saw numbers consistent with the sources I use (which is why I haven't particularly questioned them so far).

[chenda]

Unfortunately, it does not translate to resiliency to external threats. BTW our geopolitical situation was also ok (not great, because the threat was always looming) till the last 5 years or so.

I'd argue your geopolitical position has actually improved a lot in the last five years, for various reasons. I agree with Bankai, I wouldn't be surprised if Poland becomes Europe's country of the future, a third Germany or France.

I am not clear if your trying to protect your assets or trying to time the market in the event of bad things happening.

[zbigi]

I'd argue your geopolitical position has actually improved a lot in the last five years, for various reasons. I agree with Bankai, I wouldn't be surprised if Poland becomes Europe's country of the future, a third Germany or France.

Poland's economy is a paper tiger, similarly to all other post-Soviet block countries which joined EU and went through the same process of development as Poland did. The process was basically to destroy (in the case of Poland, this was fully intentional, as documented by historical evidence) or sell out for cents on the dollar whatever domestic industry communist managed to create, open up for foreign investment, present oneself as geoarbitrate opportunity (cheap labor market) for Western capital. Also allow full penetration by foreign goods (no protective tarrifs etc.), which prevented development of any serious domestic industry. Anyway, it worked nicely as long as it could, i.e. as long as the price of labor was really cheap. But, for example in Czech Republic, it stopped working a couple years ago already. They reached a ceiling where they stopped being cheap and it was no longer a motor for growth - but they didn't build a new one in the meantime. Now they're pissed of that Poland is catching up to them (it's a popular subject of public debate in Czechia) - but only because Poland hasn't hit its head on the ceiling yet.

Contrast that with policies of East Asian economic miracles (Japan, South Korea, China). China is the most recent one, so probably best used as an example. They did everything in the opposite way to EE countries' approach:
1. Didn't shut down or sell out communist companies. Instead, they chose to reform them and use as basis for the new economy.
2. Protected domestic industry instead of destroying it, by letting foreign goods in.
3. Allowed foreign investments only as joint-venture firms with the Chinese. This made the Chinese partners and not just cheap labor. They learned and stole whatever IP they could from world's leaders, and just 40 years from that, they are the world leaders in many crucial market segments, like electric cars, wind turbines, PV panels and many, many more. Meanwhile, Poland's domestic industry is a market leader in making chicken breasts, jogurts and doors and windows (those are our largest exports from domestic companies).
4. Had very active industrial policy. By controlling the largest banks, they made banks invest (give loans for investment) into economy sectors they saw as having best future prospects. Meanwhile, since EE countries joined EU, having an industrial policy at all is basically forbiden by EU law (it's treated as illegal subsidies distorting the EU market), so the approach is to "let the chips fall where they may". This left underdeveloped Polish companies with having to compete with wealthy and mature Western/global companies while not having much access to capital, which led to us not having much of an advanced industry.

I am not clear if your trying to protect your assets or trying to time the market in the event of bad things happening.

I want the former. I'm not clear on how would the latter look?

EDIT: typo.

[chenda]

I want the former. I'm not clear on how would the latter look

Good because I've no idea on the latter either The obvious solution is just to firewall some of your assets abroad, such as in Ireland as you suggested. Without getting political, I think the prospect of Russian tanks (or even banks) in Warsaw is highly unlikely, history notwithstanding. However, if you disagree than you should invest in what you're comfortable with and makes you sleep better at night.

I don't know much about the Polish economy but I see Poland as a large-ish country with good geography and a highly educated workforce, so I rate it's long term prospects high. Or at least it's got high long term potential.

[Kipling]

@ Jacob - on your last ‘part’, I agree this has a real effect on p/e - part of the reason the UK stock market has gone the other way from the US, or flatlined, for the last 25 years is because of the removal of a substantial tax break for UK pension funds to invest in UK stocks - they used until the late 1990s to get a payable tax credit roughly equivalent to the profits tax paid by UK companies. That credit was a restriction on the free movement of capital and unlawful under EU law so had to go. But UK pension funds used to hold 75% of their equity portfolio in UK companies for the benefit from this tax credit; it’s now a fraction of that.

[Jean]

We are already at the point were people move from the west to poland to get better life condition. I understand that you are woried about russia. But russia doesnt look very intimidating right now. I have less fear now than 4 years ago.
It is a good idea to protect your asset from foreign invasion risk. Obvious way is to buy assets that would gain value in such a case. I would say korean, japanese and us arm producers.

[zbigi]

I think just doing a bog-standard geographic diversification will get me most of the results I want. The kind that people living in most peaceful regions in the world are doing. I was keeping 100% of my NW in Poland.

[Jean]

Buy gold, and shape it like a giant butt plug so you can run away with it. It will also lower your center of gravity and make you a better skier.

[zbigi]

Gold is not worth that much (per ounce) to store significant part of portfolio up your ass. A large gold coin is just $2700.

[2Birds1Stone]

Gold is not worth that much (per ounce) to store significant part of portfolio up your ass. A large gold coin is just $2700.

A coke can made out of gold would be valued at ~$500k USD, I'm sure with enough practice.

ETA: On a more serious note, as a fellow Pole reading your OP and knowing your history and tone of posts here, I just can't help but wonder if this isn't missing the forest for the trees. You're rich, by global standards and Polish standards. As others have pointed out, things are either a lot less gloomy than your tinted worldview allows you to see, and if not you have many other options available to you with an EU passport and a fat bank account.

[chenda]

The Perth mint allow you to buy and hold physical gold, guaranteed by the government in a safe geopolitical location.

https://www.perthmint.com/

[Seppia]

A couple money only things you could think of

1/ open a bank account in another country. Or two.
In a certain way it doesn’t really matter if you put 1k, 10k or 100k. It will be 1k, 10k or 100k more than the average polish person has abroad in case SHTF.
If you want to protect your wealth, you could consider keeping your investments somewhere safe, someone suggested Ireland and it’s both remote and irrelevant enough that there should be no real risk

2/ buy a small amount of physical gold. Has to be in a location that’s always close to you so you could use them as “exit currency” in times of high stress

[zbigi]

For example, the default FIRE choice in Denmark is just to use a 100% world index much like American FIRE enthusiasts would just do 100% VTI

I took a look at contents of MSCI World Index and was frankly shocked that it's 74% US companies. Moreover, 25% of the whole index are just FAANGs. I wonder how many people holding it are aware that at the moment it's just an index on American stocks, with some global diversification added on top.

[Bankai]

Poland's economy is a paper tiger

"The term refers to something or someone that claims or appears to be powerful or threatening but is actually ineffectual and unable to withstand challenge"

We had three 'once in a century' events over the last decade and a half so it's a perfect opportunity to test how the economies of major EU countries withstood those challenges:

[zbigi]

Perhaps I used the wrong term then. What I meant is an economy whose sources of growth didn't come from internal strength, but rather from weakness (foreign investments flooding in during previous decades because labor so cheap, because country so backwards). We didn't build much strength along the way either. Already in 2021 I was a witness of a foreign bank, who previously offshored a lot of jobs to us, laying off 200+ IT people in Łódź, because we became to expensive compared to available alternatives. Growing beyond median EU GDP (if that) will prove to be challenging IMO.

[Bankai]

If foreign investments are bad, why are countries competing for them? And why is the poorest continent also having the fewest foreign investments? And why are the two biggest economies (the US & China) also the two biggest recipients of direct foreign investments?

I agree selling industry for close to nothing is a bad idea but it wasn't even that badly executed in PL - ours was a couple of years behind the neighbours which allowed better pricing to be achieved, and we largely avoided oligarchisation of economy similar to what happened in Ukraine for example.

You use a lot of generic statements and anecdotes, but the data doesn't support the PL economy being weak - since it does so much better in adversity than peers, if anything calling it antifragile is more justified! Most papers I read on the PL economy have 'resilient' and 'diversified' on 1st page and underline internal consumption as a key driver of growth - I'm not an economist but this seems to be the safest way to grow as it doesn't rely on other countries. Compare this to Southern countries with their massive reliance on good weather (tourists), the UK's reliance on its oversized financial sector or Germany's reliance on exports based on undervalued euro. All economies have their weaknesses and I don't see why the fact that many companies operating in PL are owned by foreign entities must necessarily mean the whole thing is a house of cards.

[chenda]

Also @zbigi even if Poland's economy is a house of cards (and I don't think it is) that doesn't mean it'll be a bad place to live for you. Indeed it might only exacerbate geoarbitrage opportunities if you have assets held abroad or are in the upper tier of Polish wealth.