If you’re new around here, there are several things you should know. They are, in no particular order:

  • I am literally the funniest man in the world. Think of me as the Dos Equis man, but for jokes.
  • This is the greatest song of all time. If you don’t play that song the next time you quit your job, you’re not doing life right.
  • I still play Words With Friends, even though that game hasn’t been cool since 1992.
  • I’m so cheap I’m currently wearing pants I bought in 2008. HEY. They’re nice pants.
  • Energy drinks are my crack.

That’s probably enough, before this gets embarrassing. Okay, one more.

  • I am obsessed with finding easy ways to beat the stock market.

This last HOT CONFESSION (coming soon to HBO!) is what led me to write today’s post. I wanted to see which was the world’s cheapest stock market, and whether buying such a stock market would have worked out in the past.

What are we waiting for? Let’s look closer, like that time you cracked out the binoculars when your neighbor was changing.

The world’s cheapest stock market

There are a few different ways we could possibly measure the world’s cheapest stock market. We could:

  • Look at the CAPE ratio of each
  • Look at price-to-book values
  • Look at trailing price-to-earnings
  • Look at forward price-to-earnings

Let’s start with CAPE. For those of you unfamiliar, CAPE was first mentioned by Warren Buffett’s BOY, Benjamin Graham, before Yale economist Robert Shiller really popularized it. CAPE is a really simple concept; instead of looking at a price-to-earnings multiple over one year, CAPE averages it out over a decade. It stands for Cyclic Adjusted Price Earnings, which is exactly what you’d expect an economist to call it.

There are a number of websites that keep track of CAPE for stock markets around the world. The best one I found was from Germany, because of course the Germans would be the best at it. Here are the five best CAPEs on the planet:

  • Russia (4.8)
  • Hungary (7.9)
  • Brazil (8.2)
  • Poland (10.3)
  • Turkey (10.3)

As you can see, these are not exactly the places where most investors are dying to put their money. Russia is lead by a crazy totalitarian leader who looks like a badass with no shirt and who gets involved in foreign wars as often as you or I change our underpants. Think of Putin as the world’s nosy neighbor.

Then there’s Hungary, which we cannot be 100% sure exists. Brazil is a bigger mess than the Washington Redskins Racists, Turkey is filled with crazy brown guys, and I’m pretty sure Putin just invaded Poland in the last 40 seconds.

These are not countries that normal people think are suitable places for their money. Hell, as far as I can tell, a Hungary ETF doesn’t actually exist.

(Aside: Most of Eastern Europe is cheap. If you’re looking for an ETF that covers the whole area, it exists. The ticker symbol is GUR, and it costs 0.49% annually to own. Liquidity is a problem though, it has a market cap of just $40 million and traded a grand total of 412 shares on Thursday.)

Unfortunately, it’s not quite as simple as looking at the cheapest CAPEs on the planet and investing in them. Some CAPEs (like Russia) like to stay permanently low, on account of crazy-ass Putin.

So let’s run a little experiment. We’ll go back to January, 2013 and buy the five cheapest country ETFs and compare the result to the S&P 500 and Canadian ETF trading in the U.S. (EWC). I’d go back further, but this information isn’t so easy to find.

ETF Total Return (2013-now)
Greece (CAPE 2.6) GREK -46.25%
Ireland (CAPE 5.0) EIRL 63.45%
Argentina (CAPE 5.2) ARGT -5.71%
Russia (CAPE 7.2) ERUS -43.53%
Italy (CAPE 7.4) EWI 13.7%
U.S.A. (CAPE ??) SPY 41.98%
Canada (CAPE 18.3) EWC -14.48%
Return buying cheap CAPE -3.67%
Return buying Can/USA (USD) 27.50%

Let me summarize the chart. You would have done much better buying the S&P 500 or even half the S&P 500 and half Canadian index (in U.S. Dollars). But this doesn’t really tell the whole story.

Let’s look at the Russian index as an example. It’s a little bit hard to see if you click the link, but in local currency, the Russian market is actually up since the end of 2012, by about 10%. The reason why the ETF did so badly was because the Ruble weakened considerably against the U.S. Dollar. If you take currencies out of the equation, Russia didn’t suck, especially considering how much energy has gone down between now and then.

Also, keep in mind that the U.S. markets were about as good as any performers over the last 2+ years. That skews results too.

How about cheap price-to-book stock markets?

The other way to find the world’s cheapest stock market is to look at each country’s price-to-book value ratio. Back to our German friends for the top five.

  • Greece (P/B of 0.5)
  • Russia (0.8)
  • China (0.9)
  • Hungary (0.9)
  • Austria (1.0)
  • South Korea (1.0)

I threw South Korea in there because it’s obvious many people will want nothing to do with Greece.

I wanted to do this experiment further back than the other one, but finding data for mere mortals like myself is tough to find.  And I won’t summarize it in table form, since there are a lot of the same stocks as the other list.

Back in mid-2014, the cheapest stock market in the world from a price-to-book basis was Russia, followed by Hungary, Italy, Austria and China. I don’t even need to figure out the results to know they lagged the S&P 500 over the last year and a bit.

So, should you blindly buy the world’s cheapest stock markets?

To be honest, I’m not exactly sure. Over the last couple of years investing in places like Russia, Greece, and Hungary wouldn’t have worked out so well — at least when you convert back to U.S. Dollars. As Canadian investors you would have fared a lot better, but not nearly as well as you would have if you’d just bought the S&P 500.

Lately, many of the same countries are showing up as cheap. They were cheap three years ago and they’re cheap now. As any good value investor can tell you, it sometimes takes time for these strategies to work out.

That’s the issue we’re facing. We know that generally stocks with low price-to-book values and low P/Es outperform. I’m confident that extends to countries too. I just can’t find any evidence that proves it.

To answer the question from the title, Russia sure looks to me like the world’s cheapest stock market. I’m tempted to throw a little money into it, but it’s also pretty easy to write Russia off as a value trap. After all, it’s been cheap for years. I’m officially on the fence about it, because opinions are for suckers.

Tell everyone, yo!