Charles Kirk kicked off yesterday’s daily email with a quote from Seth Klarman from the Baupost Group as follows; “The best investors in the world do not target returns; they focus first on risk.” The quote appeals to me intellectually and it is also relevant to what is going on today in Tunisia and spilling over to other nearby countries.
The crew over at ETF Database had a pretty thorough recap of the situation and the apparent spillover to Egypt and the Market Vectors Egypt ETF (EGPT). For the last three days EGPT is down 8.18% with most of that coming at the open on Tuesday. In looking at a few other funds that could be considered as being close (eye of the beholder) the WisdomTree Middle East Dividend Fund (GULF) was down 1.61%, the Market Vectors Gulf States ETF (MES) down 1.25% and the Market Vectors Africa Fund (AFK) was down 2.6%.
The Tunisia story is still unfolding as is whatever the collateral damage will be. The ETF Database article has some tie ins to financial conditions and to the extent this is about the problems facing the poor people in Tunisia it could be similar for people in proximate countries (more of an acknowledgment of the possibility than an analysis of the situation).
In the world of niche or specialized investing this sort of thing happens occasionally and obviously any fund or stock you own in the affected niche will go down; there is concern that Tunisia will have some spillover into Egypt. Circling back to the Seth Klarman quote above it is very unlikely that one could see turmoil in Tunisia causing an Egypt ETF to go down a lot–this is sort of a wildcard that is not reasonably analyzable. However given that there is no end to the types of unanalyzable events that could impact your holdings your best chance to prevent being truly hurt by this sort of thing is with proper diversification.
This takes me back to ten or eleven years ago when people thought owning a search engine, a network equipment maker, a B2B (remember those?) and Infospace made for a diversified portfolio. It turned out that a grouping like was only diversified on the way up (humor attempt). At some point there will be a nasty decline in emerging market stocks and it is a good bet that when it happens it will take commodity related stocks down at the same time.
Or there will be declines that take down other related segments and what matters here is not that some niche you favor gets pasted every so often but what the overall fallout is in your portfolio. If you had a 4% weight in EGPT you are less likely to question the merit of the country out of fear and sell in a panic than if you have 10% in EGPT. Whatever the prospects for Egypt are for the new decade it is unlikely that they are much different with the Tunisia news. But if it turns out that this really is a game changer then a moderate weighting simply causes a drag on the portfolio not the need for a whole new financial plan.