Tuesday, June 26, 2012

Greece: Buying When There's Blood in the Streets

This is not an offer to sell nor the solicitation of an offer to buy any Greek securities. Such a decision should only be made after consultation with a competent psychiatrist.

Mebane Faber has been noodling on Robert Shiller's Cyclically Adjusted Price-Earnings ratio.
Here's one of his CAPE posts, from World Beta:
Blood in the Streets, or Greece
...I was reading an article from one of the banks that was talking about how low Greece’s CAPE was (the article cited around 2).  I wanted to examine what happens when a CAPE was really, really low.  So, we looked at the database for all instances where CAPEs were below 5 at the end of the year.  We only found nine total out of about 1000 total market years.

US in 1920
UK in 1974
Netherlands 1981
South Korea 1984,1985,1997
Thailand 2000
Ireland 2008
and…Greece in 2011

Can you imagine investing in any of these markets in those years?  Me neither.  In every instance the newsflow was horrendous and many of these countries were in total crisis.

Now what would happen if you invested in these markets, the literal worst of the most disgusting terrible markets/economies/political situations?  Below are local country real returns (net of inflation):

On average:
1 Year:  35%
3 Year CAGR:  30%
5 Year CAGR:  20%
10 Year CAGR:  12%

We have our own ideas on how to turn these stock market valuation metrics into investable portfolios, but would be open to hearing any new ideas as well....MORE