Subject: Re: Brazil the cheapest?
> "I usually eliminate industries with high risk or no control over their pricing ... real estate)."
...
This statement sounds strange to me. Real estate isn't an industry but rather a diverse variety of industries.

I eliminate only "pure" real estate firms. i.e., firms whose business is primarily owning property. Related industries, like real estate brokerages, are often very good businesses to be in. Further afield, sellers of building suppliers can be very good.

That's because, when screening, I'm only interested in "value added" product or service businesses. That's where the money is--the rest of the business world makes decent money only when luck favours them, which isn't all the time. In the case of a firm whose core is owning real estate, the value added is relatively minor and the total is very much at the mercy of the prevailing prices of real estate and rental rates.

Coming at it another way, the long run return of almost any firm eventually approximates their long run returns on equity and assets, which is generally a very low cap rate for firms whose primary business is holding property. In a handy database of (mostly) US stocks, REITs rank 80th out of 94 industries for average ROE, and 82nd for average ROA. I'd rather be in (say) beverages with ranks 12 and 10 on those metrics.

(developers are in the middle: they do add value and do better than real estate holders on average, but their average return hides way too much risk and cyclicality to make them worth considering. It's easy, almost normal, to get almost wiped out in the wrong part of the cycle)

I eliminate property holders from my screening for the same reason I eliminate gold miners. A gold miner can be creative and efficient in the ways they extract, refine, and sell gold...but in the end, the investment results are dominated by the market price of gold, over which they have no control, and which they don't even produce. A real estate holding firm which does very high quality buying, selling, and some development will still have results dominated by the prevailing prices of real estate (capital and rental), which in most areas don't rise much in real terms over the long term, and can fall precipitously depending on the market cycle. Just look at prime central London housing, often cited as the world's best example of a "never lose" real estate market...prices are ~10% lower than they were 12 years ago even before you count inflation.

That's not to say there aren't occasional great deals in property firms, but those are exceptional, and require selecting the right security at the right moment, meaning deep analysis--not the investing style related to broad global screening. The average return, which is what you're expecting for if you're screening for a slate of stocks, is neither particularly attractive nor predictable. The world has many industries. There are lots of better fish in the seas, so you might as well stack the odds in your favour by eliminating the known laggards. If you're going to have a broad portfolio with less informed analysis per security, you need to choose from a pool which high average returns so the inevitable duds will be more than compensated for.

As a random example, a simple slate of US-listed medical device firms, equally weighted, has beat the S&P 500 by 3.9%/year in the last 29 years, despite lagging hugely in the last 5 years while giant tech ruled the roost. With "good tailwind" industries like that out there, I'm happy to skip the ones with laggard averages and leave them in the "too hard" pile.

Jim