Which is more predictable over the next three years: the future of a particular company or the future of a particular country? The question matters because an investor can buy a basket of stocks – called an ETF – from a particular country in the same way one would buy stock in just one company. Ideally, you want to invest where there is the most predictability.
I believe countries are more predictable than individual companies. For that reason, I think investing in ETFs by country makes more sense than buying individual stocks. Allow me to explain.
A company is subject to its own risks plus the risks of the world. If the entire global economy crashes, so goes the individual company. But an ETF carries only the global risk plus the risk that the government will make an unexpected dumb move. I would argue that governments make important moves far less often than companies, and unlike companies, most modern governments signal their moves well in advance. Compare that to Apple who may or may not introduce a TV product in the next year. Companies have the right to secrecy. Governments do a poor job of keeping secrets. Government predictability comes from the fact that they move slowly and they have an obligation to transparency.
In a company, the CEO and the CFO can fudge numbers and keep it a secret. A modern democratic government would have a hard time fudging national employment numbers or anything else of that magnitude. So while government has as many or more liars as private industry, a democratic government is less likely to get away with fudging a major economic statistic.
If you made a list of the nations with the most effective governments, you’d see they also have the best economies. There are exceptions, of course, but overall, effective governments create good economies. The correlation between management skill and company profits is less direct. It doesn’t matter how good a CEO you are if your competition invents a killer product or your supplier can’t deliver enough components.
If you ask me to predict ten years out, I’d say with some confidence that countries such as Denmark, Sweden, and Switzerland will be doing just fine. But a company as strong as RIM can be eviscerated by strong competitors in just a few years. And a company such as Enron might be nothing but a fraud. In five or ten years, Denmark will still be Denmark.
Full disclosure: I have investments in ETFs for both Israel and Turkey. Those countries have plenty of regional drama, but both countries are governed effectively. In the long run, I expect both countries to do well unless the entire world goes into the crapper.
So I put the question to you: Which is more predictable over a three year horizon, a company or a country?