A lousy stock market is the least of the problems facing Greece at the moment, although the country's long-running debt crisis has certainly hurt domestic investors. Greek stocks have suffered an almighty collapse, falling by 85 per cent since the mood began to darken in late 2007.
For investors everywhere, there are lessons to be learned from the Greek experience.
Stocks for the long run?
Investors are often told that stocks invariably deliver the goods over long holding periods, but that hasn’t been the case for Greek investors. A major market bubble in the late 1990s resulted in the Athens stock exchange peaking at 6,355 in September 1999. Stocks subsequently collapsed before staging an impressive rally between 2003 and 2007, one that saw the index soar from around 1,700 to above 5,300.
Another collapse was to follow, of course. Last month, the index fell below 700, meaning that patient investors who sat out the market swings have seen their investments fall by 87 per cent over the last 16 years.
Greece is not the only country to suffer atrocious long-term returns. Japan's Nikkei index lost 82 per cent of its value between late 1989 and early 2009. Investors in Russia and China were wiped out in the first half of the 20th century, and the Chinese are facing another crisis just now.
These are extreme cases, obviously, but it’s worth remembering that stocks can stagnate over long periods. Japan, Germany, France and a host of other European markets have all suffered 50-year periods where stocks failed to keep up with inflation.
The notion that stocks are a sure thing over the long run stems from the US where stocks have never failed to beat inflation over a 20-year period. However, the US is not typical; only three other countries can match this record, so a 20-year holding period is no guarantee of success.
This doesn’t mean stocks are a bad long-term bet. They are a very good investment over long holding periods, but individual stock markets can go into a funk for long periods, as Greek investors have discovered. The moral is clear: spread the risk and hold a global basket of shares rather than a portfolio that is concentrated in a handful of markets.
Blood in the streets
Clearly, Greek investors who bought during the heady days of the late 1990s will have to wait a long time before they see any profits, but what about those who buy into market plunges?
Should investors steer clear of falling stock markets, or is it usually profitable – if unnerving – to buy when there is blood in the streets?
According to US money manager and Global Value author Mebane Faber, the latter is the case. You can have "fairly explosive moves", he writes, "when things go from 'terrible' to merely 'not as bad' ".
His research shows that, since 1980, investors who bought into countries with the very lowest valuations – generally, countries in the middle of a deep crisis, such as Ireland in late 2008 or Greece in 2012 – have been rewarded with five-year annual returns of 20.4 per cent or 10-year annual returns of 14.4 per cent.
Irish investors who followed such an approach have done nicely in recent years, with the Iseq more than tripling between early 2009 and today.
The same pattern seemed to be playing out in Greece; by early 2014, the ASE index had almost tripled after bottoming below 500 in June 2012. Greek stocks have again tumbled over the last year, however, and the continued uncertainty means violent market swings are unlikely to disappear any time soon.
Catching a falling knife
What do you call an investment that falls by 90 per cent? One that fell by 80 per cent and then halved.
There’s a moral behind that oft-repeated market joke, one that Greek investors (and investors in Irish bank stocks) will surely understand; prices can go lower than you ever thought possible, and bottom-fishing doesn’t always pay off. Stocks become dirt cheap because there is a “non-zero risk of the investment going to zero”, to quote from Mebane Faber once again. Fund managers who take the plunge may end up losing their jobs, he says, while ordinary investors may end up in the divorce courts.
The best approach is to buy a basket of cheap countries, says Faber, rather than piling into one or two downtrodden markets that may well continue to sink. Even then, would-be value investors should be cognisant that it can be an unnerving ride; note that the Cambria Global Value ETF, an exchange traded fund launched last year by Faber, lost more than a quarter of its value in the second half of 2014.
Investors who like the thought of buying out-of-favour indices but who don’t fancy the thought of a rollercoaster ride might consider drip-feeding their investments over time. Online finance firm CircleBlack points out that anyone who invested $1,000 in 1929 and who deposited the same sum in every subsequent year, would have been in profit by 1936, despite the fact that the Dow Jones index plunged by 89 per cent between its 1929 high and its 1932 low.
Market contagion?
Greek investors are not the only ones to be nervous about the country’s economic future. European indices have been hammered in recent weeks, and many commentators have warned that a global equity sell-off is possible.
Analysis of past market shocks by S&P Capital IQ strategist Sam Stovall indicates it's generally a bad idea to sell in the wake of such events, however. He looked at 14 "shocks to the system" in past decades, events ranging from the Pearl Harbor attack in 1941 to the Cuban missile crisis in 1963, the 1990 Gulf War, the September 11 attacks in 2001 and so on.
Stocks suffered a median decline of 2.4 per cent on the day after a market shock, Stovall found (similar to the 2.1 per cent decline suffered by the S&P 500 in the aftermath of the Greek referendum vote). Market declines tend to be short, with stocks typically recovering their losses within 14 days.
Each case is different, of course. The collapse of Lehman Brothers in 2008, for example, was a much more bruising affair. Nevertheless, history suggests investors should stay cool and remember that more often than not, market storms tend to be fleeting affairs.
Don’t blame shorts
Whenever there’s a market crisis, you can be sure someone’s about to complain about short-sellers, those dastardly devils that make money during market declines.
Back in 2010, then Greek prime minister George Papandreou said that "unprincipled speculators" were "making billions every day by betting on a Greek default", forcing interest rates on Greek bonds to record highs.
“Many believe there have been malicious rumours,” he said, before calling for “clear rules on so-called shorts”.
Plus ça change. A fortnight ago, Greek regulators announced a ban on short-selling despite the fact that no one is actually interested in betting against the Greek stock market.
“Recent short-selling activity in Greek equities has been relatively non-existent”, according to data provider Markit. In April, just prior to the deterioration in Greece-EU relations, the value of Greek short positions totalled just $60 million. Low as that was, it fell further in the following weeks, to just $12 million before the short-selling ban was announced. In terms of short-selling, Greece is “firmly at the bottom of the euro zone league table”.
Short-sellers, recognising the huge uncertainty that exists, simply have no interest in betting against Greece, and have had nothing to do with recent market falls.
The moral is obvious: stock markets don’t fall because of short-sellers, they fall because long investors want to get out.
