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Double Your Money With the Boldest Contrarian Investment of the Decade
3/20/2013 9:30:00 AM
Fighting trends in themarket without solid reasoning is a good way to go broke quickly. But thecontrarian strategy of buying at the bottom and selling at the top has earned huge sums ofmoney for master investors such as George Soros and John Templeton.
They've made uncannily accurate market calls by going against popular opinion. Inspired by their wildly profitableinvesting strategies, I did some research and uncovered what may be the boldest contrarianinvestment of the decade.
But first, I should point out that it takes a contrary statement to explain contrarian investing: Despite popular belief, this strategy isn't simply going against the crowd for the sake of challenging the status quo. Soros and Templeton, for example, use careful research to support their contrarian positions before they risk even one dollar on an investing idea.
This contrarian attitude allows investors to see the subtle signs that a market move is overextended or the first glimmer of hope when everyone has given up on aneconomy ,stock or market. They can see when thebull market exuberance is truly irrational, enabling shorting at the highs or buying near the lows.
This approach led me to an economically struggling nation that most investors have dismissed as having any potential for aturnaround .
I can't blame them.
After all, years ofdepression , out-of-control debt loads, riots and twobailouts from the International MonetaryFund that didn't seem to accomplish much have turned this beautiful island nation into a pariah of the global economy. But I say it's time to invest in the nation that nearly bankrupted the entire European Union: Greece.
Looking at the facts, the worst is over for Greece. The country has started its long climbback up the steps to respect.
This provides the perfect environment for risk-embracing, contrarian investors to enter long-terminvestments with strong potential for profits.
It's important to remember, however, that changeswill be slow and hard-won in this beat-down country. Regardless of the data's slight ticks higher, 30% of Greece's labor force remains unemployed, while 52% of its young people have not been able to find work. Times are still dire, and I am not saying things are back to normal in Greece. However, I strongly believe we are witnessing the first glimmers of improvement.
One of the first harbingers of economic stabilization is that the canaries in a coal mine are saying thebond market has improved. Greece's 10-yearbenchmark borrowing costs are one-third of what they were in May 2012 at 10.6% and have been fairly stable since the first of this year. This is because the EuropeanCentral Bank is acceptingbonds guaranteed by Greece ascollateral for its monetary operations. This is a huge first step as the nation lifts itself from the floor.
And the latest gross domestic product numbers indicate the Greek economy contracted at 5.7% in the fourth quarter of 2012, beatinganalyst 's estimates and 2011's 6% contraction during the fourth quarter. I know this is just a fraction of improvement, but any improvement is a step in the right direction.
In addition, the government under formerPrime Minister George Papandreou experienced much difficulty in followingIMF bailout requirements and targets. But the new government led by Antonis Samaras has successfully met or even beaten the requirements. Togain the votes needed to maintain adherence to the bailout rules, Samaras has built a coalition of centrist parties from the right and left that are decidedly supportive of the European Union.
As you likely know, this adherence to the IMF's bailout rules means austerity for the nation. No one said this reversal of misfortune was going to be easy, but at least we now know that Greece will likely not be leaving the euro zone. This means the formidable powers of the European Central Bank and IMF still can be expected to do whatever it takes to get Greece's economy back on track.
Sensing a positive turn, the Greek stock market has rallied by more than 82% since June 2012.
In addition, Standard & Poor's increased the country's sovereigncredit rating to "B" with a stable outlook -- up from a "selective default"rating just four months ago. These are all glimmers of hope in Greece's very negative economic environment.
How can contrarian investors bestcapitalize on the brewing Greek turnaround?
I think investing in individualstocks like the National Bank of Greece ( NBG ) is simply too risky at this stage of the game. While there may be large profits for those investors willing take the risk on individual stocks, the downside currently outweighs theupside potential.
Investors need to invest into the economy as a whole so that the sectors that are firing on all cylinders balance thelaggards . The way things are right now, it is difficult to determine which sectors will remain profitable and when the slow starters will finally roll over into profitability.
This is why a diversified instrument like Global X FTSE Greece 20ETF ( GREK ) fits the bill. Thisexchange-traded fund ( ETF ) holds 20% financials, 22% consumer goods, 14% telecommunications, 13% consumer services and 12% industrials as its top holdings. It is down slightly on the year, because of adowngrade to emerging-market status by Russell Investments. This pullback sets up a perfect time for savvy contrarian investors to start to build a position in Greece.
Risks to Consider: There is no question that Greece remains extremely risky. However, it is within this high-risk level that I see opportunity. The Greek stock market is rallying, but the question is, will there be another unforeseen bump in the road? You should always use stops and position size properly when investing, and this is particularly true in speculative contrarian ideas.
Action to Take --> GREK is trading above its200-day moving average but has fallen lower during the last 30 days, and has just bounced from support. This sets up an ideal time to begin accumulatingshares . Buying now makes sense with stops set at $16 and a 100%, 24-month return target at $34.