Bull markets are all born in extreme pessimism. That means the time to invest is when the flames are licking higher, not after the fire trucks have arrived. And Europe is up in smoke right now…
I’m not calling for the bottom in Europe stocks or for an immediate end to the debt crisis there. Plenty more can go wrong. But contrarian investors “run into burning buildings.”
This doesn’t mean they’re daredevils. It just means they understand a basic principle of the market: That the best time to buy is when the crowd is running in the opposite direction.
This stampede effect causes prices of perfectly good assets to hit the floor.
The value of the underlying asset stays the same. But extreme negative shifts in investor sentiment cause selling pressure to overwhelm demand. And the price of the asset plummets.
With the crowd currently running out of the “burning building” of European equity markets, this presents some interesting opportunities. In fact, slowly, steadily taking up positions in quality European stocks is one of the best contrarian buying opportunities around.
There are two compelling reasons to go against the crowd and buy European stocks now: Valuations and yield.
The current plunge in valuation has sent dividend yields soaring. A stock’s dividend yield tells you how much the underlying company pays out in dividends each year relative to its share price. Think of it as how much “income” you receive each year on the shares you own.
Spain is the high-yielding market in Europe. But the average yield is pretty darned attractive, too. Many euro-zone nations south of the Alps are bankrupt and, sooner or later, will default on their debt. Many eurozone banks are effectively insolvent and are reliant on Central-Bank funding to keep the lights on. And there is a shortage of strong political leadership within the European Union.
But these are all “known knowns.” That means they are already reflected in market prices. Besides, you don’t get prices this cheap without lots of wailing and gnashing of teeth.
You just have to remember that markets tend to overreact in the short term and revert to the mean over a longer time horizon. (That is to say, they tend to move back toward their long-term historical averages.)
And what the markets are telling us now is that secure income has scarcity value right now. That value is destined to grow, as retiring baby boomers start shifting toward income-oriented investments.
If you want to secure steady income in Europe…and at the same time benefit from a bounce in stock prices after the panic fades…I reveal the best investment option in the current issue of International Living magazine. It’s a low-cost fund with stocks of companies located in 16 European countries. The annual dividend yield is more than 4%. And over the last three years it has handed investors a return of more than 50%.