Home Bias = Home Expertise

There is a line of criticism in asset allocation behavior, called home bias — a tendency to buy assets at home, despite having an equal or more expensive price to the foreign counterpart. Anecdotally, I learned that home expertise justifies home bias. For example, a foreign investor with little understanding of Chinese culture may be shocked with Alibaba's underperformance from 2020 until 2023. There were political risks involved when investing in Chinese stocks as the main figure of Alibaba allegedly provoked the Chinese government. Many foreign investors neglected such risks with the perception that governments do not interfere with firms due to their political stance.

To overcome such lack of expertise, outsiders need more research and it is costly to learn "home expertise". Hence, once one obtains home expertise, they are likely to stay within their realm of confidence.

Relatedly, I don't think it is wise to diversify country-wise without proper understanding of macroeconomy and the financial system of the country. Simply applying a model we would use to a U.S. company will not work well for a firm in a foreign country, due to reasons like unstable currency, sovereign risk, etc. High-inflation countries come to mind, in addition to the Ukraine-Russia war in 2020 — most Russian stocks traded in U.S. markets were delisted.

This post reflects personal opinions and is not investment advice.