As I learned the ropes of financial markets, one of my guiding mentors was legendary investor John Templeton.
Templeton rose to fame following a strategy decidedly against the normal course of human nature, buying stocks “at the point of maximum pessimism.” When things were at their bleakest for a sector or company, and other investors were tossing their holdings away in a fit of fear, he would stoop down to scoop those unwanted shares up from the floor.
Some of his famous trades included buying railroad stocks in the middle of the Great Depression. He assumed World War II would raise them from the doldrums. He was right.
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In the 1960s, he bought Japanese equities — right before a three-decade boom in that country.
Templeton also purchased U.S. equities in the early 80s when they were dirt cheap. (This was the tail end of the era that saw BusinessWeek magazine infamously proclaim on its cover “The Death of Equities.” We all know what happened between then and the year 2000.)
In 1997, Templeton was diving into South Korean stocks at the depth of the Asian financial crisis. Another point of “maximum pessimism,” another successful trading strategy for the great Sir John.
In researching past collapses, I found Templeton to be 100 percent accurate in his assertion that you want to buy crashes and crises.
One of the most profitable things you can buy is a sovereign default. The average investor does not see this, because they're focused on the daily news headlines. They see horrifying visions of countries in the grip of hyperinflation, with rampant unemployment and rioting in the streets, scaring them from any sort of related trade when a default is underway.
What the average investor doesn’t realize that, at the point of default, the market is usually sold out and bottomed, and probably even overshot to the downside.
In my last blog post, I urged Europe to kick Greece out of the eurozone, reasoning that no one country should be allowed to hold the other nations of Europe essentially hostage with political unwillingness to prudently manage its debts and budgets.
Such an action is drastic, and will mean plenty of turbulence for Greece. But the people of that nation seem perfectly willing to embrace a post-euro existence, based on their voting preferences for fascists, neo Nazis and communists. The rest of the globe cannot save them from themselves, and it’s time to stop trying.
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Meanwhile, Greece’s euro exit could mean long-term gain for brave investors seeking the point of “maximum pessimism.”
Are we there? We’re certainly close if not. Greek stocks are about 95 percent lower than their 2000 highs. Such a drop signals that the markets have discounted the impact of “economic Armageddon” in Greece.
If we look back to past defaults, such as Russia in 1998 or Argentina in 2001, we see their stock markets soared in the years following default.
Five years after the Russian default and Argentinean defaults, both the Russian and Argentinean stock markets were trading 1,000 percent higher.
Based on such precedent, if Greece leaves the euro, defaults and enters a period of hyperinflation, it may in fact represent a great buying opportunity. So, from our vantage point, instead of fearing a Greek default, we should instead be poised to take advantage by bargain hunting for cheap Greek stocks and investments.
It’s just the type of counterintuitive trade that made Templeton one of the most successful investors in history.
About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.
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