The time-tested Buffett rule of investing is to be fearful when others are greedy and greedy when others are fearful. The news that Berkshire Hathaway (BRK-B) is set to exercise warrants that will give it a sizable chunk of Goldman Sachs (GS) stock is just the latest evidence of how that has paid off for Berkshire Hathaway shareholders. Berkshire stepped in with a cash infusion (and image boost) for Goldman during the depths of the financial crisis pocketed a 10% annual interest payment on its $5 billion in preferred stock (which Goldman repaid two years ago adding in a $500 million prepayment chaser) and is now converting the warrants at a steep gain.
If you’re looking to be greedy among fear today, the U.S. market, represented by the S&P 500, isn’t the place to be shopping.
The place to be greedy today is Europe. Yes, the Eurozone is still a mess.
But despite its seeming insistence on taking a step back for every two steps forward -- see: the recent handling of the Cyprus bailout -- Europe is in fact on the mend. Michelle Gibley, director of international research at the Schwab Center for Financial Research recently pointed out that European countries still in recession should pull into growth mode sometime this year; purchasing manager indexes are already moving off their fall lows. Meanwhile credit markets are easing a bit, and stronger global economies-export markets for European firms-are all incremental positive signs.
“The sovereign debt crisis in Europe was dramatic and painful, and the region continues to face challenging economic conditions. However, we believe the Eurozone is better positioned for growth in the future due to a variety of fiscal and labor reforms and an improved global outlook. Stocks appear attractively priced, and have opportunities to rise amid an improving global economic climate. All these factors contribute to our newly positive view on Europe.”
To be clear, Schwab isn’t outright bullish; last summer it upgraded its Europe call from negative to neutral. But that’s a telling step in the right direction, and means there is still opportunity to buy in before the fearful have themselves turned greedy.
Vanguard chief economist Joe Davis made the same basic pitch to financial advisors in late March when the Cyprus mess threatened to undue all the momentum the European markets had gathered since Mario Draghi’s “do whatever is necessary” vow last July set a floor. Davis said recent short-term volatility “does not in any way invalidate our formative outlook for European equities over the next five to 10 years.”
It’s important to remember that markets turn long before economic data confirms a corner has been turned. That’s where the need to be greedy amid fear comes in. The smart money was still owning and buying U.S. stocks in early 2009; the fearful stayed out for years, and are only now dipping their toes back into equities after a 100%+ rebound. Europe is more akin to where the U.S. market was in 2009. There’s no guarantee it will double in four years; the point is that Europe still offers long-term value.
European stocks have actually been quietly rallying over the past year, as seen by the performance of the Vanguard European ETF (VGK), which sports a miserly 0.12% expense ratio.
The Vanguard Euro ETF invests in Eurozone and non-Eurozone regions including Switzerland and Great Britain. Its five largest holdings currently are Nestle, HSBC (HBC), Novartis (NVS), Roche, and BP (BP).
Gibley says Germany and France are two of the more compelling investment regions. She believes Germany’s preponderance of companies in cyclical sectors should benefit as global growth picks up. The iShares MSCI Germany ETF (EWG) currently holds stocks ranging from Siemens and Volkswagen to Adidas. Gibley likes France given it is the home base to many global market leaders, from energy to luxury goods. The iShares MSCI France ETF (EWQ) includes Total as well as LVMH Moet Hennessy Louis Vuitton.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.
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