The topic of global investing through allocating country risk was addressed in a recent CFA Institute interview with NYU finance professor Aswath Damodaran. While the goal of this approach is to minimize risk through maximizing diversified country exposure, Damodaran believes that much of it is misguided. “Here’s the strange thing: You don’t even have to leave your domestic market if you’re an American or a European to get country risk exposure.” He asserts that, by just using the S&P 500 companies, an investor could get exposed to “pretty much every market in the world.”

According to Damodaran, investors often make the mistake of focusing on countries instead of companies. He says, “I think it’s very dangerous to start with the country and then decide where I should invest. Cheap countries are cheap for a reason.” He cites the example of Russia, noting that while it’s probably the cheapest market in the world at the moment, he would be “crazy” to put more money into that market than is deserved based on its position in the global economy.

Damodaran believes that using multiples of pricing to allocate across countries isn’t the best approach. Instead, he suggests looking at top-line multiples (as opposed to EBITDA or net income multiples). And when it comes to evaluating country risk, he differentiates between “continuous risk” and “discrete risk”. The former, he says, speaks to the simpler notion that there is more volatility in developing markets. The latter, however, is trickier to evaluate because it speaks to issues such as political unrest or pending war.

The bottom line in this professor’s opinion? Country selection is not an investment strategy. He says, “If I try to chase success in country risk, I end up doing stupid things in my portfolio.”