I was reading an article from one of the banks that was talking about how low Greece's CAPE was (the article cited around 2). I wanted to examine what happens when a CAPE was really, really low. So, we looked at the database for all instances where CAPEs were below 5 at the end of the year. We only found nine total out of about 1000 total market years.
US in 1920
UK in 1974
South Korea 1984,1985,1997
and…Greece in 2011
Can you imagine investing in any of these markets in those years? Me neither. In every instance the newsflow was horrendous and many of these countries were in total crisis.
Now what would happen if you invested in these markets, the literal worst of the most disgusting terrible markets/economies/political situations? Below are local country real returns (net of inflation):
1 Year: 35%
3 Year CAGR: 30%
5 Year CAGR: 20%
10 Year CAGR: 12%
Read it at World Beta
Blood in the Streets, or Greece
By Mebane Faber
Looking at the headlines makes one extremely hesitant about investing in Greece or the other European periphery nations. However, this data provides a tempting reason to take a contrarian point of view. Current economic deterioration is proving politically unstable, which makes drastic actions increasingly likely in the next few years. At such low levels of investor sentiment, the chances that actions/outcomes surprise to the upside are ever more favorable.
(Note: I'm currently long EWP, the iShares MSCI Spain Index Fund)
Disclosure: I am long EWP.