A contrarian moment

A contrarian moment

To be clear, I am not posting this article to give any opinion on European markets at this precise moment.  I felt this article was post-worthy for two reasons:  One, because it was different than everything else I have been reading about Europe.  Two, I felt this article was strong because it discussed how bad news is often fully priced in to a market or security.  Once news is fully priced in (or more than priced in),  a stock becomes an attractive and worthwhile purchase despite the bad news.  This price-to-value relationship is a critical investing concept but one that is difficult for many investors to reconcile in their minds.  For that reason, it is worth the read.

Excerpt from the article:

 But even if the European growth outlook is sluggish and no clear end to the debt crisis is in sight, there comes a point when all the bad news is reflected in the price, and contrarians should turn bullish. That point may have arrived…

…That is because what tends to matter most for investment performance is the initial valuation. When valuations are low, the odds shift in the investor’s favour. When they are high, the odds are against. That is clearest in the bond market (those buying German two-year bonds on a yield of zero are assured of exactly that return) but it applies to shares as well. Everyone was enthusiastic about equities in the late 1990s, so valuations reached giddy heights; subsequent returns have been low.”

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