The Coffee Hypothesis

Loyal readers, there are tough times ahead for us. Very shortly there will be a posting about the tax consequences for Israeli Americans. This will not be fun unless you generally take pleasure in punishing yourself. Although, you did buy your house from an Israeli builder, so maybe this is something you enjoy.

What will get us through these tough times? The same thing that gets us through everything else. Caffeine, of course.

Dividends in Shekels

I have a developed a theory about the financial markets in Israel based on what I believe is a highly accurate observation about coffee. It goes like this: if an Israeli “large” coffee is really an American “small” coffee, shouldn’t Israeli “large” company stocks act just like stock in “small” American companies?

I’m a data-oriented sort of person, so to test my hypothesis, I graphed the performance of the Tel Aviv 100 against the Russell 2000 using “the internet”:

The graph suggests that there is “similarity” in the way the stocks behave. This is important because it suggests that you not giving up much at all by investing in Israeli stocks over U.S. stocks, especially for money you otherwise were planning to invest in small companies.

                                                                                                                                   

In fact, alert readers will notice that the Tel Aviv 100 has been performing better than the Russell 2000, especially after 2002. Before you pull out the chocolate spread to celebrate, you should keep in mind that past performance is at best an indicator, it is not a guarantee.

The recent success of the Israeli stock market is probably related in part to the strengthening shekel which started around 2002. It also has come with significantly more dramatic up-and-downs (oy vey, 2008!), or what the experts would call “higher volatility” which is consistent with the way stocks in the “emerging markets” change in value. 

I am not suggesting that you should put all of your money in the Israeli stock market. However, whatever money you decide to bring to Israel and invest in the Israeli stock market should be a very nice overall addition to your investments.

Unfortunately, it won’t be as simple as just buying the Tel Aviv 100 index. As an American tax payer, buying an Israeli mutual fund will not be a viable option for you. I’ll explain why in a later post. In the meantime, just trust me.

(Important life note: if an Israeli ever says to you, “just trust me”, what he really means to say, “do not trust me.” Obviously, this does not apply to me. You can always trust me.)

But have no worries. You will be able to invest in Investing by Accident’s very own Israel Price Ratio Asset Yield index, or I-PRAY. I am almost ready to publish this index which will consistent entirely of stocks that I have chosen by accident. I can already guarantee you that the I-PRAY index will give you results that are either similar to the Tel Aviv 100, or that are different from it, depending on how the stocks perform.

I hope that the coffee hypothesis will you get through the tough times ahead. Whenever you think about giving up, just remember what it’s all for. When your money makes aliyah, it doesn’t only help protect the shekel-value of your money from a weakening dollar. It also gives your money the opportunity to benefit from the Israeli stock market.

You’ll still need to figure out exactly how much you want to invest in Israeli stocks as compared to the options that you have in the U.S., but let’s not get into that right now. For just this once, I’ll let you finish your latte.