The stock markets are in turmoil. I've been too busy searching for the great Oz in an effort to find out how to best invest in such a volatile environment -- too busy to blog in fact. The answer has not been forthcoming.
One dependable theory of investing used to be that one could mitigate risk by diversifying across 
companies, industries and, yes, across markets. With respect to markets, the thought was that the political, social, economic and other market influencers at work in one part of the world were not the same as were at work in others. As a result, if the market were to decline in the U.S., there was an excellent chance that it would be still be going strong in Europe or Asia.
The performance of various broad stock market indexes over the past month of upheaval in the U.S. market suggests some problems with the efficacy of the latter part of this diversification theory. For the month of January before the up-tick of the last 2 days, the broad U.S. market as measured by the Wilshire 5000 index was down 12.4% -- a pretty dismal month by anyone's reckoning; a month in need of some portfolio diversification away from such a bearish market.
Unfortunately here's the hook: over the same month, the performance of other key world stock indexes were as follows:
- China CSI 300 -- down 13.9%
- Russia MICEX -- down 9.4%
- U.K FTSE 100 -- down 18.1%
- Japan Nikkei 225 -- down 14.8%
Thus far in 2008, it would appear that the worst place in the world to invest in stocks was the U.S., except for all the others. It would seem that global financial markets are becoming so interdependent and that the information that shapes perceptions of market risk travel so fast and seamlessly that risk mitigation by diversifying across markets is no longer a viable strategy.
So what's the answer? Investment and business decisions should not be based on market generalities, but rather on specific companies or opportunities. If you're looking to export to Thailand for example, the question isn't so much whether Thailand's economy as a whole is good or bad, but whether the market dynamics regarding your product or service are good or bad. Decisions shouldn't be based on the latest hot marker fad, but rather on the following types of questions:
- Is there real money being made?
- Do the market dynamics make sense in terms of supply and demand?
- What market forces will allow the opportunity to be sustainable?
Of course this approach sounds like the lessons learned after the dot bomb meltdown a few years ago. When investing, at a minimum one should avoid coupling a bad short term memory with a belief that globalization hasn't already happened.
[Note of attribution: The statistics on changes in global stock indexes from January 1, 2008 to January 23, 2008 taken from the Wall Street Journal -- Chart accompaning story entitled "Stocks Show Classic Bear Signals, And This Time, Impact IS Global"]
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