What You Can Learn From Investors in Pakistan

Dan Solin

Pakistan is often in the news and usually in unflattering terms. The relationship between the U.S. and Pakistan is troubled, characterized by deep mutual distrust and conflicting goals. The economy of Pakistan is equally troubled. According to the Heritage Foundation, its economy has been plagued by "political instability and violence." Much needed economic reform has been stalled by bureaucratic delays and lack of political will. Property rights in Pakistan are "compromised." The rule of law is "fragile." Taxation is "poorly administered." Its public debt is over 50 percent of total domestic output. Foreign investment is declining. Its overall ranking on economic freedom is below the world and even regional averages, placing it in the category of "mostly unfree" economies. To put this in perspective, there is more economic freedom in Yemen, Senegal and Nigeria than in Pakistan. Its unemployment rate is a staggering 15 percent. Its inflation rate is 11.7 percent. Does this country seem like a good place to invest to you? Now for the shocker: Year-to-date returns for the stock market of Pakistan were 46.73 percent. That's not a typo. Year-to-date returns for the U.S. during the same period were 11.90 percent. Here are some other interesting facts. The stock markets in Nigeria and Kenya were 27.26 percent and 26.56 percent, respectively. What about the returns in fast-growing economies like Brazil and China? Brazil was an anemic 1.43 percent. China was a loss of 10.20 percent. If you are a typical investor, you believe paying attention to the financial news is important to your investing success. You read the financial media. You watch CNBC and pay special attention to the fund managers who "explain" the stock markets to you and encourage you to follow their advice (often by investing with their firms). Maybe you follow the stock picks served up by Jim Cramer, who appears to have an encyclopedic knowledge of all things financial. Let me ask you this question. Did any source of financial news advise you to invest in the stock markets of Pakistan, Nigeria or Kenya? Or Turkey, which topped the list with returns of 47.31 percent? How about your broker or financial adviser? They make it appear they have special insight into the financial markets. Did they advise you to invest in any of the countries reporting returns higher than the U.S.? The average returns of the 77 countries is a positive return of 8.47 percent. In 2011, the average was a negative 14.15 percent and the list of top performers was markedly different, with Venezuela, Jamaica and Botswana turning in stellar results, along with Pakistan which came in second. Trying to predict which country will perform best in 2013 is a crapshoot. So is trying to pick stocks that are mispriced, or betting on which asset class will outperform. Yet the securities industry continues to thrive by persuading you to pay its members fat fees for dispensing precisely this kind of "advice." The next time your broker peers into his crystal ball and makes a recommendation, ask this question: Did you predict stellar returns in Pakistan, Nigeria or Kenya for 2012? When you get the deer-in-the-headlights look in response, pull your account and buy a globally diversified portfolio of low management fee index funds in an asset allocation appropriate for your risk tolerance. I tell you exactly how to implement this strategy in The Smartest Investment Book You'll Ever Read and The Smartest Portfolio You'll Ever Own.