Ultimate contrarian trade (Part 1)…

Financial crisis

The current unfolding crisis in Europe intrigued my curiosity about investing in Greek shares during this very uncertain period.  I know that investors tend to overreact and that the best time to invest is when everyone throws in the towel (capitulation), which is typically associated when fear is at it’s highest (be fearful when others are greedy and greedy when others are fearful).  I don’t know a whole lot about the current crisis but I’m quite certain that the 10 million Greeks will still need goods and services and that Greek companies will provide those goods and services regardless of whether Greece stays or leaves the Euro zone. Whether or not these goods and services are exchanged for Euro or new Drachma is not of vital importance in the long term.

To get a sense of potential returns from investing at the capitulation point in a crisis, I have looked at 5 major financial crisis which I think all bear some similarity to what is happening in Greece today.  The similarities are one or a combination of the following: sovereign default, systematic banking failures, drop in GDP and economic activity, asset price contraction, bailouts from either the IMF or ECB, high unemployment rate from jobs losses, political turmoil etc.  For each of the crisis, I have charted the main stock market index from a high before the crisis to a 5 period after a capitulation point was reached. In chronological order:

  • The Great Depression (1929 – 1939) – arguable the worse economic crisis of the 20th century.

US great depression





  • Asian Financial Crisis (1997) – this crisis resulted in massive currency depreciation, bank failures, IMF bailouts and regime change for countries below.

Indonesia (AFC) Korea (AFC) Thailand (AFC)







  • Russian Rubble Crisis (1998) – Default on Russian debt resulted in 66% devaluation of the Rubble with inflation reaching 83%.

Russia crisis





  • Argentinian Great Depression (1998 – 2002) – This depression saw Argentina default on its debt, unemployment of 25%, 80% depreciation of the Peso and fall of the government.

Argentina (crisis)





  • Global financial crisis (2008) – For the countries below, this resulted in massive banking failures and effective nationalisation of the banking sector.  Ireland received an ECB bailout and Iceland’s banking collapse was arguable the largest ever experienced by any country.

Ireland (crisis) Iceland (crisis(





Summary of the extent of the stock market decline for each crisis and the subsequent 1 year, 3 year and 5 year returns are as follows:

Summary capitulation






Note that Russia experience a rapid recovery from higher oil prices. 

The data above shows that the range of stock market falls is between 65% – 95% with the average fall in stock market of about 80% from the high to the low.  In terms of the current Greek stock market falls; from a high point reached in October 2007 of 5334.5 points to the current period (end June 2015) of 797.5 points, the stock market has loss 85% of its value.  Comparing with the above crisis, this fall would rank as the 3rd worse drop in stock market performance.

In my next post I’ll write about how to invest in Greece as a foreign investor (even though the stock market is still currently closed).

Ohh, before I forget … check out this letter penned by Mr. Friedman in 1997 on the Euro.



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