Monday, May 21, 2012

European Stocks: A "Scared Witless" Opportunity?

Writing in last Saturday's Financial Times, columnist John Authers writes how difficult it can be to be a contrarian:

And when it comes to buying opportunities, they require you to buy when you are scared witless.

 http://search.ft.com/search?queryText=john+authers

As Mr. Authers writes:

The problem is that history's greatest returns on investments came as reward for taking serious risk.  And that is difficult to do. With hindsight there were great buying opportunities in UK stocks on June 6, 1975 (they doubled in five weeks) and in long-dated US Treasury bonds on 30 September 1982 (they hit a peak yield of almost 16 per cent, and have been gaining in price ever since).


The really big money in investing is usually made when times seem most dire.

While Mr. Authers notes the opportunity in long maturity bonds in the early 1980's, buying U.S. stocks in 1982 was also an unbelievable opportunity:  price/earnings ratios were in single digits and dividend yields were mostly above 5%.

However, as I can personally attest, investor interest in stocks was nonexistent 30 years ago.  After all, stocks had done nothing for investors during the previous 13 years.

Conventional wisdom at the time said that the economic outlook was just too uncertain, and the alternatives were much safer, than investing in common stocks.

Stocks of course then began the biggest bull market in U.S. capital markets, returning 19% per annum for the next 17 years.

The question is: Is Europe now just one of those "scared witless"  opportunities?

Stocks across the euro zone are now selling at single-digit price/earnings multiples, and dividend yields on many high quality European stocks are well north of 4%. And yet there is virtually no interest in moving into the European markets due to the obvious economic turmoil.

As previous posts have indicated, I think we are approaching the time of opportunity for European stocks, even if it is for a short term trade.