Dumb Money and Emerging Markets


Howard Gold Image Howard Gold Founder & President, GoldenEgg Investing

Sometimes it takes investors a while to figure out that things have changed—and then it takes even longer for them to alter their behavior accordingly, writes MoneyShow editor-at-large Howard R. Gold, also of The Independent Agenda.

How many people bought technology stocks years after the Internet bust, hoping that Cisco Systems (CSCO) or JDS Uniphase (JDSU) would reclaim their former glory? They never did, of course.

The same thing is going on now with one of the few hot asset classes of the last decade: emerging market stocks.

Until the 2008-2009 crash, emerging markets were among the world’s top performers. These countries survived the Asian financial crisis and their economies boomed in the 2000s. China became a great economic power, Russia surged on higher oil prices, India was awakening from a long socialist sleep, and Brazil catapulted to the top of Latin America’s economic pecking order.

So, it would surprise many investors to learn that the much-maligned US stock market has outperformed the MSCI BRIC and emerging-markets indexes for the last three years.

In fact, US mutual fund investors pulled an astonishing $464.9 billion out of mutual funds focusing on US equities from 2007 to 2011, according to the Investment Company Institute. They stashed almost $800 billion into bond funds during that period, of course, but they also poured $73 billion into emerging-market equity funds.

Even in the first two months of 2012, US investors yanked $5.3 billion out of US equity funds and funneled $5.2 billion into emerging-market stock funds.

So, while US stocks were quietly recovering and outperforming, investors dumped them for an asset class that has lagged the entire time!

But individuals weren’t the only ones taking the sucker’s side of this bet.