Investing in Greece: A High Risk, High Reward Strategy

If you watch any bit of news, you've likely seen what's going on in Greece. In a nutshell, the country is overextended, and it risks defaulting on its loans. This means that without some sort of extension or bailout, the country may not make good on its debts. That’s a classification usually reserved for corporations and businesses that are suffering and borrowing beyond their means, not for governments. (See also The Origins Of Greece's Debt Crisis.)

Without getting into the politics, is it a good time to invest in Greece? Some might say, “The country can’t pay their debts. Why invest?” But we know from history that when things look bleak, it's often the best time to invest.

Generally speaking, when prices are depressed, that's the time to buy. Here’s what that looks like.

In 2008, Microsoft Inc. (MSFT) was negotiating to buy Yahoo Inc. (YHOO) — two Internet giants competing for market share. Microsoft was in a position to overtake Yahoo and offered more than $44 billion for the buyout. Then CEO Jerry Yang turned down the deal, which analysts across the board said was a great deal. Overnight Yahoo’s stock dropped significantly. The morning after the drop, you could purchase as much Yahoo stock you could afford and by noon, sell it all for around an 8% profit.

The idea there was that temporary market fluctuations are the time to invest and capitalize. The Yahoo situation was unique; it was media scare about an ownership issue. The Greek situation is very different. It’s not a temporary hiccup that will balance out, but an issue that runs much deeper.

MSCI, the Morgan Stanley Capital International, is an index that tracks markets around the world. There's an all nations index but also one that's specific to just about every country. It's a great way to see how healthy the stock market is in each country. Looking at the history of the Greek index, we see things don't look so hot.

In October 2007, the global economy was fantastic. The Dow Jones Industrial Average was at an all-time high; people and corporations were buying, borrowing, and spending; and the MSCI Greece index looked great. On October 31, 2007, that index hit a high point of 1,040. On May 29, 2015, the index had sunk to a near all-time low of just 53.68; that’s just 5.1% of its highest value.

The economy is looking so bleak, though, that in 2013 MSCI dropped Greece from a developed country back to an emerging market. For investors, the reclassification mean better potential returns, but also significantly more risk. The index may drop the Greek economy even further from emerging market to standalone. Essentially, Greece would be ousted from the MSCI. (See also Greece: By The Numbers.)

Some say it has (nearly) no place to go but up. But the problem isn’t entirely in Greece. 

Greece as a country is in dire financial straits. However, there are a lot of companies that are incorporated there and are still doing well. They are still producing, selling and earning money. The problem is that the financial problems extend well beyond the Greek borders.

Even for those interested in investing in the country, the index could easily double in the next year or two, and it would still be down 90% off its highest point ever. But the issue is that the euro is slipping in value compared to the dollar. (See also The Pros and Cons of a Weak Euro.)

A Greek company that's faring well and earns 10% this year may not look quite as promising when you factor in the exchange rate to convert to dollars. Many analysts are saying that you want to own the stock, but you want to avoid the currency.

So that still leaves the question: “Should I invest in Greece?” It's still a hard question to answer. The Greek economy is depressed; that’s a given. And since the index is at a mere 5% of its all-time high, there's a lot of room to grow. However, one of the bigger issues is that the euro is holding a lot of countries back (not just Greece). So what does an investor do?

For those who want to take risks, Greece is a great investment. In fact, investing directly into the Greek economy through an ETF like GREK is the easiest way to do so. Another option is finding another mutual fund or index that closely tracks the Greek economy. If you want a gamble that could yield big gains, then invest in Greek bonds.

Those who are a little more risk averse can still capitalize on the depressed economy. Instead of investing in the country, there are a number of attractive Greek companies still poised to take off. Many of these larger companies will trade on a US exchange, so you don’t have to worry about losing money to the dollar/euro exchange rate. (See also 6 Factors That Influence Exchange Rates.)

At the time of this writing, Greece needed to pay off a large chunk of its borrowed money quickly. The country doesn’t have that money. By the time you read this, things may be drastically different. But one thing is certain: The Greek economy is in trouble, and there are ways to grow your portfolio by taking calculated risks. You can invest in the country, the index, or the companies that are domiciled there.

If you are young and you have time to recover if things don’t pick up quickly, then the higher-risk-but-higher-reward option might be right up your alley. However, for those who need more of a sure thing, then investing in those companies on the US exchange might be the better choice.