Only a handful of investors beat the market by a substantial margin over the long haul.
Some of them do it by pursuing growth. Others focus on value. But all know one big secret.
[ad#Google Adsense 336×280-IA]What is it? I’ll give you three hints:
Lord Rothschild said, “The time to buy is when there is blood in the streets.”
John Templeton, the man who almost single-handedly pioneered the field of global investing, said the best bargains can be found only “at the point of maximum pessimism.”
And Warren Buffett, the most successful investor of our lifetime, said, “Be fearful when others are greedy, and greedy when others are fearful.”
The best investors have a contrarian spirit. They don’t care about the consensus. They draw their own conclusions.
Contrarians understand that fear and greed cause people to push prices too high or too low. So the key is to look at market fluctuations as your friend rather than your enemy.
That way you can profit from folly rather than participating in it.
How can you tell if something is truly a contrarian investment? There are three primary metrics. The first is if an asset class has underperformed its long-term average return for a substantial period of time.
Another is if valuation metrics show the asset is extraordinarily cheap relative to traditional assessments.
But here’s the third metric and the clincher. When you tell your friends and family what you are buying, they have to scrunch up their faces and say, “But why would you invest in that?”
With these metrics in mind, let me suggest that now is probably an excellent time for long-term investors to buy – egad – European stocks.
On the basis of sales, earnings, book value and dividends, European stocks were already nearly back to the 2011-12 crisis lows before the Brexit vote.
Since then they have gotten considerably cheaper.
On the day after the British vote to exit the European Union, the Vanguard FTSE Europe ETF (NYSE: VGK) plunged 11.3%. That was the worst one-day return in the fund’s history.
The next day, it fell another 3%.
Looking at our first contrarian metric, the fund has way underperformed its long-term average. (Over the last century, European stocks have returned 10% a year, the same as our domestic stocks.)
However, U.S. stocks have outperformed European stocks by 9.8% per year for five years running. In fact, European stocks have lost an average of 0.5% annually over the past decade, according to financial-data provider MSCI.
Metric 2: Are European stocks unequivocally cheap? Yep.
They are 20% cheaper than U.S. stocks on an earnings basis. Also, the S&P 500 currently yields 2%. European stocks yield 3.2%.
Metric 3: Are investors optimistic or pessimistic about Europe right now? Prepare for a lot of face scrunching. Most have very little invested there. Those who do – after experiencing a down decade – are wondering whether investing there will ever pay off.
Who says no one rings a bell at the bottom?
Of course, actual market bottoms can only be identified with the luxury of hindsight. And European stocks could certainly go lower in the near term.
But if you have any contrarian blood at all, take a half-position in a European fund like the FTSE Europe ETF. If Old World stocks sell off substantially further, buy the other half.
True contrarians will instinctively recognize the benefit of investing this way. (Higher returns with less risk.) The rest – the great majority of investors – will not put a single penny to work here.
In a speech in 1963, securities analyst Benjamin Graham, Warren Buffett’s mentor, said, “In my nearly 50 years of experience in Wall Street I’ve found that I know less and less about what the stock market is going to do but I know more and more about what investors ought to do.”
Indeed. If Benjamin Graham – the father of value investing – were alive today, one thing is clear.
He’d be buying the best European stocks.
Good investing,
Alex
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Source: Investment U