You might not be surprised to learn that I love investment-related podcasts. I listen to about a dozen of them fairly regularly and am often impressed by the guests they get.

A recent episode of the Meb Faber Show featured an hour-long interview with Professor Gene Fama.

Fama is probably the most influential academic in modern finance after creating the Efficient Market Hypothesis in the early 1970s and co-creating the Fama French Three Factor Model in 1992. He won the Nobel Prize in Economics in 2013 for his work on efficient markets.

I’ve heard him speak several times at Dimensional Fund Advisors conferences and have had the opportunity to ask him a few questions over the years.

He’s funny and feisty, and I’ve heard odd things about him, like that he only holds the market without small cap or value tilts (those are the basis of his factor model) and that he doesn’t like international investing.

His disinterest in international and emerging markets stocks puzzled me because he’s such a fan of diversification that I couldn’t figure out why he would want to miss out on a pretty big opportunity.

It’s not that international stocks have done well – they haven’t. In the last 20 years, the MSCI EAFE of developed market stocks has underperformed the S&P 500 by 4.8 percent per year. Yes, per year. Yes, for 20 years.

Cumulatively, the difference is massive: 215.5 percent for the EAFE and 670.3 percent for the S&P 500. The S&P 500 has beaten the EAFE by more than 3x cumulatively in the last 20 years.

But that has nothing to do with why Fama doesn’t want to own them. It turns out he’s worried about expropriation risk in times of war. For example, if you own French stocks and we go to war with France, your French stocks will get taken from you, and your return on that part of the portfolio will go to zero.

I admit that his comments surprised me, given that the odds of such a thing seem relatively small.

I know it has happened over the last 100 years, and even in the last year, with Russian stocks. They weren’t expropriated by the Russian government, but the sanctions meant that no one could trade them, and most everyone marks them down to zero.

It could happen with China, which is now 7.1 percent of the exUS global market portfolio. But it doesn’t seem likely to me with Japan, the UK, Canada, Switzerland, or France, which make up the five largest exposures outside of China and constitute 45.1 percent of the exUS global market.

While we have developed and emerging market stock market exposure, we’ve always underweighted them compared to the global market portfolio, which is 45 percent foreign stocks right now. We’ve had our exposure at 25 percent for at least a decade, maybe longer.

Why not forgo international and emerging stocks, given the risk of expropriation or the lousy returns over the last 20 years?

Well, you just don’t know what’s going to happen next, and foreign stocks could be the place to be in the coming years.

Current valuations suggest as much, with the PE ratio on the S&P 500 1.75x the PE ratio on the MSCI EAFE and 2.00x more than the MSCI Emerging Markets Index. But they’ve been cheap for years compared to the US and could stay that way for some time.

Vanguard publishes their capital markets expectations each month, and they think that the S&P 500 will grow by 4.7-6.7 percent in the coming decade, while they think that developed and emerging markets will grow by 7-9.2 percent. That said, however good their models may be, they can’t predict the future better than anyone else.

My view is that it would be a mistake to give up on international and emerging markets stocks. I like the diversification, think their valuations are attractive, and, unlike Gene Fama, am not too worried about expropriation risk.