Buy low. It’s a simple concept. But it’s downright difficult to execute.
Truth is most investors buy stocks when the crowd is buying. Demand is high. So prices are high too.
Prices are low when demand is low. This happens when the majority of investors are discouraged and pessimistic.
This is when you need to fade the crowd and BUY.
This is easier said than done. Nobody likes to admit it. But we all find it difficult to ignore the pull of the crowd.
But here is something you should know: If you buy the same securities everyone else is buying, you’ll have the same results as everyone else. By definition you can’t outperform the market.
This was one of the core insights of the “godfather” of modern overseas investing, Sir John Templeton. And it made him and many of the investors in his overseas investing fund rich.
What Templeton realized was that bull markets “are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
In other words, if you buy when the mainstream is already optimistic (and prices are already high as a result) you are by definition buying into an already mature bull market. Most of the gains have already been made.
This is why at the start of every week I download a table of the price-to-earnings ratio of stock markets around the world and make a list of the cheapest ones.
Where Are the Best Stock Market Bargains Today?
This is what my most recent list looks like:
Russia – P/E of 8.3
China – P/E of 10.4
Brazil – P/E of 11.3
Argentina – P/E of 11.4
Turkey – P/E of 12.4
Actually, this list just covers emerging markets. A number of distressed European nations’ stock markets are trading on lower earnings multiples. The Portuguese stock market is on a P/E of just 5.2, for example.
But let’s stay focused on the emerging world for now. I’ve already written about opportunities in distressed Europe.
For me, the name that leaps off this list is Russia.
A Real Bargain at Current Levels
The Russian stock market is trading at just over 8 times earnings. That means investors are willing to pay just $8 for every $1 the companies in Russia’s main stock market index produce in earnings.
By contrast, investors are willing to pay $18 for every $1 companies listed on the South Africa’s main stock market index produce in earnings.
And investors are willing to pay $21 for every $1 companies listed on the Chile’s main stock market index produce in earnings.
Now, I’m not saying investors don’t have good reasons for investing in South Africa and Chile. These are attractive investment destinations.
All I’m saying is that these markets already expensive. Meaning buying low and selling high is a difficult proposition.
Put another way, investors are already optimistic about the prospects of South Africa and Chile. And as Templeton showed, you don’t want to buy optimism. You want to buy pessimism, no matter how counterintuitive or difficult this may be.
We first recommended you buy Russia here at International Living Investor just under a year ago. Back it was trading at a P/E of 9.
If you had followed that initial recommendation, and bought the Market Vectors Russia ETF Trust (NYSE:RSX), you would be up 31% as of Friday’s close.
This despite the fact that the Russian stock market, at that stage, was trading on the kind of P/E you would expect to find at the end of a bear market, not the start of a 30+% run-up.
What to Do
Russia has a lot going for it:
- It is a larger oil producer than Saudi Arabia.
- It has five times more arable land than it needs to feed its population.
- It has 15% of the world’s fresh water supply.
- Its domestic retail market is bigger than that of Germany.
- And its citizens are four times wealthier than Chinese and 11 times wealthier than Indians.
But right now Russia is deeply unpopular with investors. And as a result, it is trading at a bargain valuation.
In fact, it’s even cheaper now than it was a year ago.
This is a great opportunity to follow Sir John Templeton’s advice and buy low.