Japanese stocks have broken out, with both the TOPIX and the Nikkei 225 at levels not seen since August 1990. The inbound tourism revival is in full swing and foreign investors, including the great Warren Buffett are pouring in. So is it too late to get involved?
After a volatile year for stocks in 2022 and a big drop in the yen, it feels like there is a lot of money sitting on the sidelines. And while ‘scared money don’t make money’, Japanese stocks have been quietly putting together a world-beating two quarters. Here is a selection of year-to-date performance numbers:
Nikkei 225 +19.1%, Toyota +7.5%, Honda +30.6%, Fast Retailing +26.7%, ANA Holdings +12.8%, Keisei Electric Railway +44.6%, Kyoto Hotel Ltd +9.25%, Panasonic +32.8%, JFE Holdings +17%, Marubeni Corp +31.4%, Hub Co Ltd +28% (yeah boiiii!), Japan Tobacco +16.6%, Takeda Pharmaceutical +10.8%, Yaskawa Electric +38.2%.
You get the picture. Japanese stocks are on a tear and not many people saw it coming. Not so the eternal Japan Optimist, Jesper Koll. I had to smile at the title of his recent post ‘We’re all bullish Japan now…’ I’ve seen countless bullish articles on Japanese stocks this last week – suddenly everyone is jumping on the train.
Jesper has of course been riding this train for some time and does a great job in his post of identifying the reasons for the surge in Japanese risk assets. If there’s one lesson that we all should learn from the past few years, it’s that liquidity drives markets. And as developed markets go, Japan is the last remaining source of cheap money. As the US and European central banks raise rates to fight off inflation, the Bank of Japan has, predictably, kept things very easy. There was a slight blip as a new governor took over at the BOJ and a host of people, who should know better, speculated that he would be forced into tightening monetary policy and blowing up the bond market just to fit their narrative. Ueda-san quickly put such rumours to rest and confirmed that policy will remain easy for the foreseeable future.
Jesper rightly points out other factors in the rise of risk assets in Japan: inflationary fiscal policy, a refreshing wave of pro-shareholder regulation, the expansion of NISA, increased business investment and a rising corporate metabolism. To that, we can add a few sector-specific catalysts: the weak yen providing a tailwind for exporters, Chinas’s economic reopening boosting commodities and shipping-related business, and the inbound tourism revival pushing up travel-related stocks.
However, none of this means much without that steady stream of delicious liquidity; mmmm zero interest rates and yield curve control are still on the menu!
A lot has been made of Berkshire Hathaway’s investments in Japan’s big five trading companies. And without wanting to diminish the fact that one of the world’s greatest living investors is buying in Japan, a lot of the coverage ignores the blindingly obvious: Warren pigged out at the last cheap money buffet in the world! He issued debt in yen at around 1% to buy quality companies that pay 4% income. It’s an exquisite arbitrage, but hardly a ringing endorsement of corporate Japan. If interest rates remain high in the US and low in Japan, you can bet he will be back. That man can’t turn a good deal down!
So, the big question is, if you don’t have much exposure to Japanese stocks already, is it too late? Once more it’s fascinating, and somewhat alarming, to see almost total consensus from commentators: the market is going to keep going up! I’m not one to fight the trend, but when everyone thinks one thing is going to happen it’s usually time to open your eyes to the exact opposite scenario…
Quoting Jesper himself here: ‘after more than thirty years, a positive break-out above the historic “Bubble Peak” of 40,000 on the NIKKEI stock index is finally becoming a realistic prospect over the next 15-18 months.’
So let’s be cautiously optimistic here, while keeping in mind the second part of Jesper’s post, what could go wrong? If you’re serious about owning Japanese stocks, I urge you to read the post yourself, but clearly, the number one thing that could derail this rally is inflation refusing to die down as expected, forcing the BOJ to take action on yield curve control and interest rates. My personal take on this is that any attempt to ‘normalise’ rates will be met with chaos and a hasty U-turn, but the damage will get done very quickly amongst the chaos. There’s obviously an argument here for long-term investors to ride out the storm and wait for the rebound, but I would prefer not to ride into that storm with too much JP stock exposure myself.
So if you own JP stocks already, enjoy the ride, but keep an eye on those inflation numbers and an ear to any rumblings from the BOJ. If you are planning on getting in now, then you are probably not too late but you don’t have a lot of cushion on the downside, so act accordingly.
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
February 2023…wow, where does the time go? Our daughter was born almost a year ago, and when I think about it now it feels both like yesterday, and an age ago. The mind sure can play tricks on you sometimes.
Remember the Lehman crash? Was that really almost 15 years ago? It’s clear as day to me still, but an awful lot has happened since then. I remember in late 2008 listening to what, for me, was an early podcast. It was called the Financial Sense Newshour, and it is still going today. Boy, was that some doom and gloom! You see, they were looking at the government response to the meltdown, which was basically printing money and bailing out the banks, and discussing how this was going to destroy the global economy as we know it. The advice was to get into your bunker, buy gold and other precious metals, and wait for the storm to hit.
I knew a couple of people back then who took this to heart. They stopped buying stocks and only invested in metals. They were ready for the total debasement of Fiat currency as we knew it. And for a few years that was actually a solid strategy. Gold outpaced stocks until around April 2013. After the lines crossed though, gold was left in the dust and these guys missed out on, perhaps, the greatest bull market in stocks in their lifetimes.
They are still waiting to be right about armageddon today. They see no way that governments in developed markets with a ton of debt (hey, Japan!) can survive without destroying their currency, and paper assets with it. And, of course, they are right! It’s totally unsustainable over the long term. However, as Japan has proven, you can keep printing money and propping everything up for a hell of a long time before the music actually stops.
In the meantime, life goes on. Opportunities arise. March 2020 was one of those opportunities. I hold my hand up and say I didn’t see that one clearly enough at the time, but as risk assets plummeted, the thing to do was buy them! Not to be too hard on myself, I did buy them, but nowhere near aggressively enough.
The purpose of this post is not to prepare you for the unwinding of this gigantic, unsustainable debt bubble, although prepared you should be. It is simply to try to make you aware of something perhaps even more terrifying: You don’t really know what you are doing. Not just you, of course. Me, too. All of us. We think we know. We think we are smarter than the herd. But we are just human beings, governed by fear and greed, trying to think our way past our emotions.
Stocks go up if you hold them for the long term. That’s it. If you buy a bunch of stocks, hold them and don’t sell them, you will make money. If you buy them when nobody else wants to buy them, you will make even more money. It’s really as easy as that. And nothing you believe, no matter how true it might turn out to be eventually, is likely to change that.
Do you want to be right, or do you want to make money? I think about this question sometimes. I get this with Bitcoin sceptics a lot. They are usually smart people, often quite technical and analytical. And they look at Bitcoin and say things like: “I don’t see this ever being used for day-to-day transactions” or “There’s no way governments will ever let this take over from actual money that they control”.
I don’t disagree with them on either count. In fact, they are probably right. However, the value of Bitcoin will likely go up regardless. And I can make a number of solid arguments for why that is the case, and these people will not care. Which is totally fine. I’m not interested in being right, or in convincing them. I’m interested in making money.
As an aside, there’s a neat little segment in this podcast, which comes around the 52-minute mark, where legendary investor Howard Marks describes how talking with his son helped him overcome his knee-jerk scepticism about Bitcoin. If you think you might need a little help overcoming your own scepticism, then maybe start by reading my encouragingly titled Bitcoin is Dead post.
Back in April 2019, I wrote a short post about how Bitcoin was in an accumulation phase. It was a really short post, because I didn’t actually understand very much about Bitcoin at the time and was just quoting other people’s work! But I owned some, and I was pretty sure I was going to make money. The Bitcoin price was about $5,200 then. It had shot up to $20k in the 2017 bull market, crashed back to $3k in short order, and was gradually being accumulated ahead of the next halving in 2020. The 2021 bull market which followed saw it peak at $69k.
And so here we are in February 2023 in an accumulation phase. You might hate Bitcoin. You certainly might hate crypto and crypto bros. You might have lost money on FTX or Luna. You might worship Charlie Munger and think that a 99-year-old man is a good source of opinion on blockchain technology. But we’re in an accumulation phase regardless. The halving is around April/May next year. And in the bull market that follows, where quite coincidentally central banks might just have cut rates to head off some devastating crisis, it will hit prices that will make your eyes water. Especially if you don’t own any…
Do you want to be right, or do you want to make money?
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
If there is one thing I have learned in all of my years of financial planning, it is this: people are way more focused on product than on what to invest in within the product. People will spend hours comparing investment accounts to find the one with the best tax advantages, lowest fees, and most comfortable user interface. Then once they decide, they just chuck all their money into the first global stock fund they find on the list. Somebody once said, “people will spend more time deciding on a pair of jeans than on what to invest their retirement fund in.” What follows is far from the definitive guide to investing in NISA, but it should provide some angles to consider it from.
Before that, I have a simple security tip for you. A friend of mine realised recently that someone was trying to change the email address on one of his financial accounts. They knew his email, and had figured out that he had an account with this particular institution, and were trying to get the institution to change his email address so they could get access. Scary, huh! Luckily my friend caught it in time, and rather than responding to emails/chat messages, he set an appointment to talk to a representative. (don’t get phished!) That representative gave him a great security tip: make an email address that no one (except maybe your immediate family) knows about, and only use it for your financial accounts. I thought that was pretty good advice and am implementing it myself. It may be a bit of a pain, but not as painful as having one of your accounts drained – this particularly goes for crypto accounts!
Ok, back to NISA. Obviously, I can’t give blanket advice that works for everyone. The investments you choose will depend on your base currency, attitude to risk and timeframe. Another big factor to consider is that NISA itself is changing from next year, which perhaps affects your strategy for this year. Given the above, I will try to provide a general guide with some helpful ideas:
Yes, this again…Currency may seem irrelevant in a Japan-based account such as NISA, but I would argue that you have to at least think a little about when and where you will spend the money. If you are living and working in Japan, I would assume you at least have some need for yen as a base currency. However, if you plan to move or return home in five or ten years’ time, should you really be building assets in yen? I can’t speak to all of the NISA products out there, but my SBI account allows me to buy US-listed stocks and ETFs through their international site, and you can buy these for your NISA account too. Now, given that NISA is not a good fit for US citizens, why would you buy USD assets? Well take a look at my previous article on the yen and think if you really want to build all of your assets in yen. Yes, when you cash out you will have to cash out to your Japan yen account once, but you can then quickly convert to the currency of your choice. You can also buy yen-denominated funds / ETFs that invest in global assets, so even if the investment is priced in yen your underlying exposure is to other currencies.
So, if you are going to spend the money in Japan, should you only buy Japan-based assets? That would depend on your overall asset allocation and whether you have some exposure to overseas assets through other investments. Compared to the rest of the world combined, Japan is not such a big market and it would seem like a risk in itself to only have Japan exposure, but I would still aim to keep a reasonable amount in yen, just in case it’s 80 yen to the dollar when you want to sell the assets and spend the money. Personally, I already have global exposure, so am mostly buying JPY assets in my NISA account.
Managing risk
Knowing your own tolerance for risk is important. No one wants to be lying awake at night worrying about their investments. The only thing I go on about more than base currency is diversification. The problem with Japan-based accounts is it is hard to diversify well if you are investing in yen. Japanese government bonds? No yield and more risk than anyone at the BOJ wants to admit, hmmm. I think REITs offer an opportunity for diversification and a quasi-bond type profile. Also, diversification across styles can help: don’t just buy a Nikkei 225 tracker – look at high dividend stock ETFs, look at value ETFs and growth ETFs. You can also buy individual stocks if there are companies you know well, or that fit your risk profile. Warren Buffet is buying Japanese trading companies. Maybe he knows a thing or two? Also, perhaps put 5-10% in a gold ETF.
What about the new NISA?
You may have heard that NISA is changing in 2024. From next year you will be able to allocate up to ¥3.6 mill per year. You have to put ¥1.2 mill in mutual funds, but you are free to allocate the remainder as you wish. The maximum total contribution limit is ¥18 mill, but you can leave this invested tax-free for life!
This has led me to decide that for this year’s contributions, I am going to focus more on dividend-paying stocks for my NISA and I will re-evaluate when the rules change next year.
Tax-free growth or tax-free dividends?
Here’s an interesting way to look at things. If you only have a limited allocation that is free from tax on capital gains or dividends, which do you try to maximise? Do you go for all-out growth and try to increase the value of your investments as much as possible over time, and take those gains tax-free? Or do you focus on more stable, dividend-generating stocks and REITs, whereby you get a more predictable annual yield with no tax on the dividends?
This again depends on your attitude to risk and how your other investments are allocated. Already have a broadly diversified portfolio elsewhere and NISA is a relatively small part of your overall allocation? Why not go for growth and try to shoot the lights out? On the other hand, if NISA is an important part of your long-term plan, perhaps you should take a more balanced, diversified approach and try to maximise dividends?
How do you actually go about allocating the money in your NISA? Do you dump it all in during January? Or do you allocate a little every month? If you are investing monthly you are taking a lot of the timing risk out of the allocation process, so you can lean more heavily into higher-growth stocks. This works great for Tsumitate NISA. If they go down, you buy more next month. If you are allocating in one go, you might try to diversify a little more.
Do your own research
I was considering putting a list of interesting funds, ETFs, and stocks at the end of this post for people to do some reading/research on, but I don’t want to be seen as recommending particular investments over others. Plus, that’s what my paid coaching sessions are for! The fact is, it doesn’t matter so much which global stock fund you choose. It’s more important that your overall allocation fits your personal situation, time frame and medium to longer-term goals. Putting in the work will lead to a better understanding over time. Don’t be afraid of making mistakes, but do spend a little more time deciding your investments than you would over buying a pair of jeans!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
November 2021 was when we heard the first whispers of the Federal Reserve reversing course and hiking interest rates. The very smart few realised right then that risk assets were heading for trouble and made their way to the exit. For the rest of us, things weren’t looking so bad. Tech stocks were hitting home runs, Bitcoin was over $56,000. Christmas was coming!
It always looks so clear in hindsight. Risk assets were, of course, swimming in a giant pool of liquidity. Low interest rates, massive covid stimulus, glorious liquidity! And the spectre of inflation, caused by that very excess, was about to prompt the Fed to drain the pool. The onset of war in Ukraine certainly did not help the cause, but those who blame Putin for the economic state we are in are (sometimes deliberately) missing the big picture. If there’s a lesson we can all learn from this year, it’s that liquidity drives markets. When central banks are cutting and keeping rates low, risk assets make money. When they start increasing rates, and draining that liquidity, look out below.
Risk-off assets have not behaved well either thus far. Your typical 60/40 stocks/bonds portfolio is down almost 20% year to date. Even well-diversified investors haven’t really escaped the pain, but that’s how it can go when liquidity is sucked out of the market. One of the few bright spots this year has been energy, and that one does have more to do with President Putin than underlying economic conditions.
When’s the recession?
‘A recession is a significant, widespread, and prolonged downturn in economic activity. A common rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth mean recession, although more complex formulas are also used.’ – Investopedia
Talk of recession has been swirling for some time, with governments even accused of changing the definition above to prevent the mood from getting too dark. The consensus view is that much of the world will be in recession for some part of 2023. It’s more of a when than an if thing, although the severity of the coming downturn is yet unknown. Unsurprisingly, stocks do not fare well during recessions – when income and employment decline, companies struggle to stay profitable.
Recessions are, however, usually accompanied by the cutting of rates and at some point, a trough is formed and both the economy and stock prices begin to recover. There’s that liquidity we’ve been thirsty for!
For those who can afford it, recession offers an opportunity for careful accumulation of growth assets. There is no need to try to catch the absolute bottom, just keep adding to your long-term positions.
What about Japan?
As discussed in previous posts, Japan has avoided the worst of the inflation that has caused so much trouble this year. This, coupled with the Bank of Japan’s commitment to continue providing massive liquidity, has also sheltered the stock market from a lot of damage, albeit at the cost of the yen. I have been buying Japan dividend stocks on dips throughout the year and am pleased to find myself in positive performance territory, with some nice dividend payments to boot. The capital gains can, of course, disappear quite quickly, but the dividends will still be paid.
Warren Buffet clearly sees something in Japan, as Berkshire Hathaway has just raised its stakes in the 5 major trading houses to more than 6%. This is a serious long-term investor who says he may not be done buying yet. (see Reuters article) Who would have thought that Japan would look so attractive in a year like this?
For a foreign resident, trapped in yen due to currency weakness, there are some pretty good options here to outperform inflation over the next few years. See my previous post for ideas.
Crypto really is dead this time, huh?
My thoughts on crypto winter were laid out pretty clearly in my Bitcoin is Dead post. It was always going to be ugly but wow…just wow! I’m not going to dig into the details of the crimes and insolvencies because if you’re interested you already know, and if you’re not you don’t care. Suffice it to say that human greed and leverage will always be a bad mix when liquidity dries up.
So is it all over this time? Of course, it is not. The Bitcoin protocol is no more affected by all the drama than it is by the outcome of the World Cup. Companies have blown up, and people have lost money, but Bitcoin didn’t do it to them. The protocol keeps churning out blocks, the next halving is around April 2024, and things will get interesting again after that.
If you know what you are doing, now is the time to average into BTC. It’s another accumulation game. If you want to study up during the winter, check out Jameson Lopp’s treasure trove of information and resources.
Also, take a look at this incredible chart from CryptoShadow:
And this one from Fidelity:
Lessons in crypto frequently have to be learned through painful experience, but if you are not learning them, you shouldn’t be involved. Here are my main takeaways from recent events:
Do not leave your coins on the exchange unless you are actively trading, no matter how high-profile the exchange may be. Learn to self-custody or research multisig solutions. Find what works best for you and use it.
Stay away from services offering interest on your crypto – they will make a comeback at some point and they are a massive house of cards. Locking up your coins with a centralised institution for a yield means you cannot move them when the rumours start and you go down with the ship.
Also a word on the other project you should be following. Since its merge and transition to proof of stake, the issuance of Ethereum has dropped significantly. The network that is likely to power the majority of NFTs and DeFi being deflationary, in a market as weak as this, is actually quite remarkable. We all need some hope during crypto winter and if I was going to pin it anywhere it would be on Bitcoin and Ethereum.
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
The chart says it all. The Yen is toast, brown bread even, if you know your cockney rhyming slang. Talking to people about money, as I do, I keep hearing the same refrain: “With markets down it seems like a good time to invest, but I don’t want to convert yen at this rate.” I feel your pain, I really do. I feel it so strongly that I needed to sit down and bash out some ideas to help us all get through this. Where do you invest if you are holding JPY at a time like this?
First of all, if you are wondering how we got here, please take a peek at my article on The Weak Yen Dilemma from April. In short, America is raising interest rates to fight inflation, Japan does not want to raise rates, so money seeking a “low risk” return goes from JPY to USD and hey presto, 145 yen to the dollar! Secondly, we are really talking about USD strength here rather than Yen weakness. If your base currency is GBP, for example, nothing much has changed for you as the pound has taken, well, for want of a better word, a pounding against the mighty dollar too.
If you are a dollar investor though, there is little doubt: If you hold yen you are pretty much stuck with it until inflation eases and Jay Powell backs off on rate increases. It most likely will take a recession, or at least a short-term panic in markets, before we see this though so there is still a way to go. So what are you going to do with your yen? Leave it sitting in the bank earning nothing with Japan inflation at 3%, and other developed market inflation at 8-10%? Below are a few ideas to get you thinking. For the most part, you will need a Japan brokerage account to access these opportunities. Als0 kindly note, below I am going to name actual investments, stocks, ETFs etc. that I feel are worth investigating in this environment. I have positions in some of these already, and will likely buy others soon. This is not an invitation to jump in blindly, get burned, and blame me for it! If central bankers ditch this jetliner in the ocean, we’re all going to get wet! Do your own research and know your own tolerance for risk. With that said, let’s brainstorm a little.
The Tourists are Coming Back Baby!
Unless you have been living under a rock, you will be aware that Japan finally re-opens to tourists on October 11th. This time it’s for real – no tour group requirement, no daily limit. Put on your mask and get ready for it! So what kind of businesses are going to be happy to see the return of the horde?
Airlines are an obvious one. JAL (9201) and ANA (9202)stock have already pumped in anticipation so I think we’re a little late here. Plus the cost of fuel is a bit of a concern. No reason they won’t continue to do well, but I’m not feeling the airlines.
Hotels are also obvious, but I like them a little more. In case you didn’t know, it’s really easy to get exposure to hotels in a Japan brokerage account. Check out Japan Hotel REIT Investment Corporation (8985), Invincible Investment Corporation (8963), and the Ichigo Hotel REIT Investment Corporation (3463). As business comes back these REITs should start paying a better income, and there’s room for a little growth too.
The winter ski season is shaping up to be a big one, with revenge tourists from Australia and elsewhere itching to get back to Japan’s ski fields. It may not sound like the most exciting company, but Nippon Parking Development Co. Ltd (2353) operates ski resorts and theme parks and is worthy of research.
Holiday-makers in Japan need to get around, and they love to shop, so the likes of Tobu Railway Co. Ltd (9001) and Hankyu Hanshin Holdings Inc (9042) do a great job of covering both. These companies also operate numerous hotels and leisure facilities, so will be looking forward to the reopening. Isetan Mitsukoshi Holdings (3099) is another big department store operator.
Whether Chinese tourists will be able to travel freely due to Covid restrictions is still a question, but once they come back you know how much they love tax-free shopping in Japan. They particularly like to stock up on electronics and are also renowned for shopping heavily at drug stores. Bic Camera Inc. (3048) and Laox Co Ltd (8202) cover the former, with Sundrug Co. Ltd (9989) and Tsuruha Holdings (3391) leading the drug store operators. Another big favourite with tourists are the colourful Don Quijote stores, operated by Pan Pacific International Holdings Corp (7532)
Japan boasts some of the best food and drink in the world, but you know the tourists love The Hub! Hub Co. Ltd (3030) has had a torrid time the past two years and will be looking to recover strongly, especially with the opportunity to screen the Football World Cup coming up in November. I have owned Hub stock for much longer than I probably should, and it’s just hovering around my average buy price now, so let’s all hope I’m right about this one!
Mmmmm Dividends
John D. Rockefeller sure did love his dividends, and so should you. If you are stuck in Yen and trying to keep up with inflation, Japanese Government Bonds are not going to do it for you. Get yourself some dividend stocks and hold on to them. If you are looking for the easy way to do this, just find yourself a Japan dividend stock ETF and buy that. Then maybe check out their top ten holdings and see if there is anything there you want to own directly. This is exactly what I did with the Next Funds Nikkei 225 High Dividend Yield stock 50 ETF (1489)
Who Else Benefits?
Put on your thinking cap and consider what other businesses benefit from a weak yen. Exporters are an obvious beneficiary, which in Japan generally means, but is not limited to, automakers. A few months back a friend of mine tipped me off that he was interested in a high-end Tokyo residential property REIT, given that foreign buyers are going to love Tokyo property at 145 yen to the dollar. That made sense to me, especially as it pays over 4% income. Sekisui House REIT Inc. (3309) is the one if you want to take a look, but remember, my friend won’t take responsibility for your decisions any more than I will!
Get Me Out of Fiat!
If you are paying attention to what is going on, you will realise that as the Yen, Pound and Euro are beaten down, eventually the US Dollar will suffer the same fate. This is not likely to end well for Fiat Currency. So buy yourself some insurance. Get an allocation to gold, and if you have the risk tolerance, Bitcoin too.
That’s all I’ve got for now. Hope it provokes some thought. Do your own research, make your own decisions, further disclaimer below blah blah blah!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
We humans are a complex bunch. I have heard that there are five stages of grief: denial, anger, bargaining, depression and acceptance. With covid, entire countries seem to have gone through their own version of this, which may or may not have included these stages: zero covid, flattening the curve, lockdowns, mass vaccination, and finally living with covid. In the end, it seems, we have to accept and live with whatever pains us.
So are we in a bear market yet? Some would argue not – the S&P 500 is down some 18% from its January peak, and bear markets are defined as falls of 20%. So they are correct, but the NASDAQ has already passed 20%, so it sure does sound a lot like denial, don’t you think? I’m generally an optimist, but I’ve come to appreciate the value of time as I get older, and therefore think we can all save some of this valuable commodity by skipping past anger, bargaining and depression and moving to accept the bear! Grrrr…
Spotted in Marunouchi recently.
So what is it like living with a bear? Well, let’s take a look at some of the qualities of this charming beast: Historically bear markets occur every 3-5 years, and on average they last about a year. The S&P 500 typically falls around 33% during bear markets, although a third of these delightful periods have seen drops of over 40%. Bear markets typically end, and bull markets begin, when investor confidence is at a low point. In terms of character, although they may start with a crash, bear markets tend to be a slow grind down, peppered with the odd burst of optimism. Yes, bear market rallies are very much a thing, usually spurred by some piece of good news. However, the rallies are generally short-lived, and then the grind downwards resumes.
As you have probably already guessed, trading the bear is not as easy as you may think. Sure, we would all like to sell the top and then go to the beach, only to return to buy the beginning of the next bull run, but trying to do that can seriously damage your wealth if the market turns around quicker than expected. This is from a post of mine back in 2017:
In the years 1980 to 2015, the S&P 500 experienced an average intra-year decline of 14.2%. However, the market ended up achieving a positive return in 27 of those 36 years. That’s 75% of the time. You cannot afford to be sitting on the sidelines while this is happening. In fact, the opportunity cost of doing nothing will cost you far more than any of the corrections, bear markets, and flash crashes:
“From 1996 through 2015, the S&P 500 returned an average of 8.2% a year. But if you missed out on the top 10 trading days during those 20 years, your returns dwindled to just 4.5% a year. Can you believe it? Your returns would have been cut almost in half just by missing the 10 best trading days in 20 years! It gets worse! If you missed out on the top 20 trading days, your returns dropped from 8.2% a year to a paltry 2.1%. And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!” (from Unshakeable: Your Financial Freedom Playbook by Tony Robbins)
So how do you make the most of the slow grind downwards without trying to be too clever and missing out on the best trading days? First of all you need to stay calm. Bear markets are not the time for panic and dumping investments out of hand. If you are taking the time to read this blog you likely have a long term plan and there’s no need to deviate from that. Know your risk profile, stay diversified, and take this as an opportunity to accumulate assets at lower prices. Dollar cost averaging is your friend in the bear market. Rather than trying to catch the absolute bottom, keep investing little by little at regular intervals and build up your holdings at a nice average cost. Buy quality, buy what you believe in – this is not the time for speculation on penny stocks.
As to how this particular bear will play out, my thoughts, for what they are worth, are as follows:
The Ukraine situation is obviously a factor in inflation, but the main driver here is the Federal Reserve and other central banks.
Stocks in general, and tech stocks in particular, did well in the low interest rate environment during covid – lots of stimulus!
Now inflation is 8.3% and the Fed funds rate is 0.75%, and it’s a similar story elsewhere in developed markets ex-Japan.
The Fed has to close that gap – they will keep raising rates until they close it / inflation cools down, or until something breaks…
Means pain for stocks while this goes on – we could still go lower and there will be a plenty of volatility. I don’t see capitulation yet.
I think it will be later in the second half of the year before things start to look better – there are already signs that inflation is cooling off a little. We either get out of this because inflation eases off, allowing the Fed some breathing space, or something breaks and the Fed starts cutting rates again to head off the crisis.
How about crypto?
Crypto bear markets are a rare beast, in that they are programmed into the code of the leading crypto asset and arrive with the regularity of a Japanese train. If you don’t understand the Bitcoin 4 year halving cycle, you will constantly be bombarded with narratives to explain the pain, from the Mt Gox hack to the Quadriga scandal, to the Luna / UST debacle of late, there will always be a narrative to explain something that is actually pre-programmed. 2014 was a bear market, 2018 was a bear market, and so here we are in 2022. As with stocks, in crypto bear markets you accumulate quality. That means Bitcoin and Ethereum. Keep your hands off those alts unless you are really confident in their long term value proposition. Even then, prepare to be burned as the LUNAtics have been this week. Bad things happen to alts in bear markets… Bitcoin is down some 60% from its high so far this time around. Keep in mind that peak to trough 80% is the norm. BTC fell from $20,00 to around $3,000 in 2018. In the 2021 bull market it reached $69,000. If you have the nerve, now is the time to accumulate, and 2025 is the when the next bull market train comes along. Act accordingly and embrace the bear.
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
It’s been almost two months since my last post. Apologies for the silence but we have been busy at home with a new baby girl, born in early February! I must say that, despite the massive disruption caused by covid, working mostly at home has been a blessing this last couple of months. Some things really do only happen once or twice in a lifetime and it’s important to be present for them.
So I thought I would do a general roundup on things I have been thinking about during working hours, and how I am investing in this somewhat turbulent environment.
In my 2020 Investment Outlook post in December I wrote about having a view that guides your investment plan, and being prepared to change it if necessary. My focus for the year was on inflation and how Central Bank’s efforts to fight it would affect the investment environment. This, of course, has been somewhat overshadowed by the tragic events unfolding in Ukraine. I have no experience in international conflict, so little of value to add in terms of how things may play out there, but obviously we all hope that peace is restored as soon as possible.
The war has, of course, had a huge impact on the inflation narrative, as anyone who has visited a gas station recently will know. I actually accumulated a satellite holding in energy stocks during 2021 based on 2022 being a year of re-opening / reflation, with business getting back to normal, more travel, and therefore higher consumption of energy. It actually looks like energy prices could have some way to go, but I am out of those positions now and have rotated into tech stocks, which took a pretty good hit this quarter, and Japanese dividend stocks – largely inspired by @CacheThatCheque, who I interviewed in December. (that post is here)
My core holdings are unchanged, as they only require rebalancing once a year.
So what can we expect for the rest of the year? Well, the Federal Reserve went ahead and ended bond purchases on schedule, and then proceeded with a clearly telegraphed rate hike of .25% this month, and the market has reacted surprisingly favourably. It is said that stocks climb a wall or worry, and that’s exactly what they are doing at the moment. With more rate hikes to come I still expect plenty of volatility, but I don’t see any reason for big changes in allocation. Another dip in Q2 and a strong second half of the year is my working hypothesis.
Inflation means sitting in cash is a losing trade. Your spending power is being eroded day by day. And if you hold JPY cash, but are planning on spending the money in the US, for example, you are losing almost 8% per year and taking currency risk. However, investing overseas has been somewhat complicated by exactly that risk, as we have seen a sharp weakening of the yen – the Bank of Japan is by no means ready to taper and just announced they would purchase an unlimited amount of 10 year government bonds at 0.25%. If Japan is your home for the long term, I would estimate the real inflation rate, taking into account recent energy prices, at around 2% per year. This is why I think Japan dividend stocks are interesting as there are plenty of opportunities to earn more than 2% if you are willing to take a little risk. If you don’t have the time to research individual stocks, take a look at something like this Japan high dividend ETF:
As readers know, I also invest in crypto, and things have gotten interesting there again recently. A few weeks ago, Terra founder Do Kwon announced that they would be buying some $10 billion worth of Bitcoin to back their UST stablecoin over the coming weeks. And true to his word, Terra set about buying some $125,000,000 in BTC per day last week. If you are wondering if $125 mill per day is a lot, it is. And if you are wondering how you go about buying this much BTC, the answer is TWAP, or Time-Weighted Average Price strategy.
All this twapping appears to have been the catalyst for a rally in BTC to around $47,000, which is close to the year open price. L1 alts have also picked up significantly as a result.
One thing I am watching with interest is the Grayscale Bitcoin Trust (GBTC). The trust, which simply buys and holds BTC with a 2% p.a. custody fee is still trading at almost a 28% discount to the value of the assets it holds. At $30.8 bill in assets under management it is major contender for conversion to an ETF, if it receives approval from the US Securities and Exchange Commission. So GBTC, which can be bought through US brokerage accounts and retirement plans, offers the opportunity to invest in BTC at a 28% discount to current price, with a strong possibility that it will be converted to an ETF, whereby that discount will disappear. If you believe in BTC long term, it actually looks like a better buy than the asset itself. Obviously investing in crypto is high risk, but food for thought…
Best wishes to everyone. I hope you are enjoying the warmer weather and the cherry blossom!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
It was not even a month ago that I wrote a 2022 Investment Outlook predicting there was some volatility coming our way, and following the US Federal Reserve’s commitment to tackle inflation, the markets did not disappoint. The S&P 500 is down some 10% from its peak, the NASDAQ 15%, and Bitcoin, being Bitcoin, dumped over 50% in a matter of weeks. Welcome to 2022!
The last time I heard the term “indiscriminate selling” was March 2020, as stock markets were actually being closed early for falling to their limits for several days running. Risk happened fast as investors dumped everything: stocks, bonds, gold, crypto, you name it. Everything went to cash. There wasn’t a lot of thinking going on, just a mad rush for the exits.
We haven’t reached that level of panic so far this year, but in the US the steady pulse of easy monetary policy is fading, and as I write this the Nikkei 225 index is down over 3% on the day. There is clearly more volatility to come. So how do you invest in this environment? Selling indiscriminately along with the herd is clearly not the smart way.
As usual the strategy needs to be broken down into core and satellite. The core being the 70-80% of your portfolio that is broadly diversified, and satellite being the 20-30% you may have in something a little more sexy.
Core holdings – I have already written about how to buy low and sell high in your core allocation here. In short, you establish a strategic asset allocation that meets your risk profile and then rebalance it once per year. The rebalance in effect sells part of holdings that have gone up in value and reallocates them to the holdings that have gone down. That’s it, no further action required!
Satellite Holdings – Now for the fun part. Satellite holdings are generally invested in assets that add a little more spice to your overall portfolio. They usually have a higher risk / return profile and may change over time depending on market conditions and what is hot. So they could include an allocation to smaller companies, emerging markets, emerging technology, commodities, private equity, and of course crypto. I would note here that for someone who is retired, satellite holdings may actually be lower risk, alternative income-focussed assets, but for today we are talking about the racy stuff!
Higher risk plays tend to exhibit bigger swings, and are therefore more tempting to try and time the entry / exit. So, the first thing you need to do is make an honest assessment of your temperament and ability to manage more risk. I’m no trader and I know it, but I do have the stomach for volatility for part of my portfolio.
Scale in / Scale out: The simplest way to buy something volatile is a little at a time. Dollar cost averaging is probably the most effective way to do this. Buy a little every week, every month, or every quarter until you build your position into the size you want. As you get better at this you will learn to add a little more in months when the asset is cheap, and a little less when it is more expensive. Looking back at the chart above, it’s clear that the panic of March 2020 was a golden opportunity to acquire risk assets, but it takes some guts to be buying when everyone else is selling. That said, buying the asset is generally easier than selling it, and you don’t make money until you sell! Waiting for that perfect top is a recipe for disaster for all but the best market-timers. You need to set yourself a target price, and be prepared to adjust it if conditions change. Once you reach your target, sell half. If you think it might have more to run, don’t get too carried away. Average back out of the asset little by little, the same way you got in. You may end up feeling like you left some money on the table, but that money doesn’t exist if you go over the precipice and tumble down the other side.
If the asset is traded on an open market, learn how to set a stop loss. If it’s trading above your target price and you have already sold half, you can set the stop loss at your target price to make sure you get out if the market takes a turn.
All of this sounds great in practice, but I have personally screwed up trying to time markets more often than I have got it right. This is why position size is important. If you are in something volatile like bitcoin, which frequently dumps 50% just when you think it’s going to the moon, you are going to get it wrong sometimes. You shouldn’t have half your net worth in there! I would also say that you should be invested in assets that, although they may be hot at the moment, you don’t mind holding for the next 10 years. It takes a lot of pressure off if you get stuck in something you understand and believe in during a bear market.
Cutting your losers quickly is good advice, but many people struggle with it as they get attached to the trade and don’t want to lose money. If it’s an asset you believe has great long term prospects, then you can ride out a few bumps in the road, but if the fundamentals change and you realise you were wrong, it’s time to take the hit. Psychologically, people are conditioned to try to be right all the time, but it simply isn’t possible in investing. Accept that you will be wrong sometimes and move on.
Experience is, of course, the best teacher. Keep your positions small enough that you can learn from your mistakes without blowing up your balance sheet. Keep an eye on what smart people are doing, but make your own assessment before entering something risky. One thing you can be sure of: taking a little risk helps you to get to know yourself better!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
I recently listened to this excellent podcast with investor Ray Dalio and it once again struck me how, out of all the “investment gurus”, Dalio really preaches simple, actionable investing that us regular people can easily understand and implement.
Dalio has just published a new book, which I haven’t read yet, but contains some eye-opening assessments of the decline of the United States, (30% probability of civil war in the next 10 years) and the rise of China. However, it’s the part covering how to invest in this turbulent environment that really caught my attention. Dalio sees the world economy approaching the end of a major cycle that could have dramatic repercussions for risk assets.
Here are some of the key points from the interview:
Don’t judge your wealth in nominal terms – i.e. how many dollars or yen you have. Judge it in terms of buying power. The ballooning of central bank debt has pumped up risk assets so people are feeling rich at the moment. However in real terms, inflation is eating away at your wealth.
Cash and bonds are a terrible investment in this inflationary environment. Both have negative real returns now, when measured against inflation.
Diversification is key. A diversified portfolio of assets should include inflation indexed bonds, stocks, and gold. Take a look at Dalio’s All Weather allocation to understand what a diversified portfolio should look like in an inflationary environment.
Don’t try to time the market yourself – that’s an extremely competitive game that even the pros struggle with.
Look for balance in your portfolio and make sure that once a year you rebalance back to your original weighting, effectively selling a portion of the assets that went up and investing them into the parts that went down.
Dalio is neither a raging bull or bear on Bitcoin and digital assets. He is impressed that Bitcoin has stayed around this long and been adopted so widely, and that means that some of the initial risks of hacking or replacement by a better asset have diminished. However there are risks that money in Bitcoin could flow to something else, and of course regulatory issues as the threat of a better (non-inflationary) currency is a perceived as a risk by governments who have outlawed gold and silver in the past. In all he says an allocation of 1-2% of your total portfolio to Bitcoin is about right.
Dalio also makes a great observation on the value of stock indexes, whereby all companies die at some point, but the index is refreshed as the old companies exit and new ones come in, so you don’t have to have your finger on the pulse continually. Simply buy the index and relax.
Just picking up on an important point here: Dalio talks about the negative returns on traditional government bonds, and suggests investing in inflation indexed bonds instead. These are often referred to as TIPS (Treasury Inflation Protected Securities) and seeing as some people may not know what they are here is the Investopedia definition. You are going to struggle to find these in a Japan-based account, but if you have a US account then the TIP ETF is a great way to get exposure. ITPS works for European accounts.
From my experience, I find that people who organise their own investments are often under-diversified. When you boil it down they are largely invested in global / US stock ETFs which all have a high concentration in the same major companies (mostly big tech). In the good times this allocation will perform perfectly well, but there is little protection there when markets take a turn for the worse. So if you are conducting your annual portfolio review as 2022 gets going, it would be a good time to consider if you are really properly diversified.
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
And so a New Year beckons. You have made your resolutions, started your iDeCo, opened your NISA and brokerage account, maybe got an overseas account too. What next? What should you actually be investing in? I interviewed stock investor @CacheThatCheque and he kindly provided some insights into how he chooses and organises his investments. I hope you find it useful!
Please tell us a little about yourself. How did you come to be in Japan and what got you started with investing? A little about myself – I am half Japanese, half American, but I grew up totally in the US in an area where there were few other Japanese people around. You could basically count the number of Japanese people living in my area on one hand. Eventually, I decided to move here to Japan to get closer to my roots, and now some 10 years later, I’m still here. While there are pro’s and con’s to living here like with anywhere else, my family and career that I’ve established here mean that I’m here now for good. As for investing – I started out perhaps a bit late. I bought my first stocks when I was 30 years old. My main reason for getting started was rather simple: I decided I wanted to have a way to grow my money and retire in the future. I also got interested in the idea of FIRE- achieving financial independence through investing so that I could either retire early or only pursue the type of work that I enjoy doing on my own terms. The more I read about FIRE, the more I became interested in investing and learning more about it. I really like the idea of being financially independent. I’m in my mid to late 30’s now, so while I wish I had started investing earlier, the best time to start investing is still always now rather than never at all.
What do you think about the current investment climate in Japan? The investing climate in Japan to me is quite interesting. Very few people in Japan actually invest, and when I first started investing while living here in Japan, I talked to many people around me about it, and they all thought I was crazy or eccentric. But since I’ve started investing, many of the same people around me that thought I was crazy for getting started with investing have since started investing themselves. While many people in Japan have an image of investing being dangerous or risky, there has also been an uptick in the retail investing culture here in Japan. More people have opened up brokerage accounts in Japan for the first time in the past few years, and TV coverage about Japan’s stock market and its many different tax advantaged investment products has increased. While many people here still don’t invest, it’s interesting to see how more people around me (whom I personally know) have gotten started with investing in recent years. I have been able to see the change and growth, which is exciting. One of my favorite Japanese celebrity retail investors is Kiritani-san, who is known for having built a small fortune from investing in Japanese stocks that hand out gifts to shareholders. While he’s funny and sort of crazy and wacky, he’s also sort of an inspiration for mom and pop investors like myself. It’s always great to see him talking about Japan’s stock market whenever he’s on TV.
Kiritani-san and his trusty mamachari
How do you organise your investments? At the moment, I organize my investments into different streams – passive US and international index funds (50%) and individual Japanese stocks (50%). This may not be the best way to do things, but it’s a reflection of how I got started out with investing. When I first got started, I opened an account with Interactive Brokers and bought only total market US index funds – simple and boring. I did this for several years until I got more interested in the idea of buying up individual stocks. When I started looking at buying up individual stocks, I then ended up getting really interested in the idea of buying individual Japanese stocks. I was really attracted by the low valuations of many individual Japanese stocks and how so many pay out really high dividend yields. While I also pursue a passive index investing strategy, I also got really into dividend investing the more I read about it, and when I found out how cheap so many reliably earning Japanese companies were, it seemed like a natural fit to make a portfolio made of ½ Japanese dividend paying stocks. I like the idea of getting regular dividend payments from companies I own, and it’s an important part of my goal in the future to one day achieve financial independence either completely or partly through solid dividend paying companies.
Do you have a regular investing routine? I invest regularly in the sense that I contribute every month into various index funds. I buy total stock market index ETFs every few months. I also manage family tax advantaged mutual fund accounts for my wife (ideco and tsumitate nisa) where money is contributed every month automatically. I allow the dividends I get from my Japanese companies to accumulate every few months where I then reinvest them into more dividend paying companies. Sometimes I buy more shares of the same companies I own but other times I add new positions into other companies that I am interested in. At the moment, I have about 30 different Japanese dividend paying companies in my portfolio.
What is your investment philosophy? My investing philosophy (if you can call it that) is basically a mix and blend of Boglehead investing, dividend growth investing, and value investing. Every month I buy index funds automatically regardless of whether the market is up or down. My index funds accounts are 100% passive. The price movements of my index funds day to day isn’t so important to me because they will only be relevant to me in 20-30 years when I decide to retire. My other part of my investing strategy is a combination of dividend growth investing and value. For this part of my investing strategy, I also see it as simple and long term oriented. As much as possible I want to buy shares of dividend paying companies at the best price possible. My goal is to buy up as many quality companies at cheap prices. For me, Japan happens to be one of the best places for this type of strategy. So many quality companies in Japan are at such deflated prices, it’s really astounding. My personal favorite sweet spot: a company with a single digit price earning ratio at half its book value paying out a 3-5% dividend yield – amazing how a search of a Japanese companies can bring up dozens of such companies that have nothing really wrong with them (aside from being unloved and unwanted because they are Japanese companies). While many detractors will say that buying up such companies is meaningless if their share prices hardly move, for this part of my investing strategy I am concerned only with the dividend payouts. My basic feeling on this is that if I lock in the basement price of a quality company already paying out a 3-5% dividend yield, I can just sit back and wait, while enjoying a good return through dividends while benefitting from any good potential upside while limiting my downside. I also think that if you’re an investor in Japan who can speak the language, it’s a major niche in your favor if you can read and learn about the Japanese stock market and all the quality companies that exist here that those outside of Japan who can’t speak the language don’t have access to.
How do you pick the actual investments? For my Japanese stock picking part of my portfolio, it’s almost like a shopping and bargain hunting experience for me that I enjoy doing. There are over 3,000 stocks in the Japanese market so there is no shortage of good deals out there. There are some good Japanese screeners like Buffett code that are useful that I recommend. Basically, while Japan has many quality large caps, the Japan small cap space is the most interesting. There are so many companies here that no one has ever heard of with net cash, zero debt, family controlled, paying more attention to shareholder value raising their dividends. Those are the stocks I am always looking to add more of to my portfolio. Stock screeners, Japanese blogs, youtube, and twitter are all ways I try to keep myself on the hunt for good companies to add to my portfolio.
What is a stock or stocks that you are really excited about now? I’ve posted about my portfolio before on twitter, but stocks that I really like are Japan’s many different trading companies – large, mid, and small cap. They’re often very old and established companies used to brokering deals and relationships with customers all over the world in all kinds of niche fields. They’re always very cash flow positive and also run many other different businesses as well, so they’re very diversified.
Do you hold any stocks that you will never sell? In principle, whenever I buy a stock I do so with the idea that I will never sell it. While I sell out of stocks sometimes for various reasons, I try to keep true to my rule.
I know you as a stock investor, but do you also invest in other asset classes? I only invest in stocks and some ETFs that have allocations to bonds. I don’t own any crypto. As there are people much smarter than me out there that have very contradictory views on crypto (“It’s rat poison! “crypto is the future!”) I’ve stayed away from crypto completely as an investing class. The way I see it, I can still reach my goal of achieving financial independence regardless of whether or not I ever buy any crypto or something I do not understand well.
Could you tell us about an investing mistake you have made, and what you learned from it? I think everyone makes mistakes in investing at some point. For me, while it’s not a major mistake perhaps, I used to make the mistake of checking my accounts constantly when I first started out with investing, which would lead to temptations to sell out of positions whenever they would dip in the market. Nowadays, I rarely check my accounts and feel content to know that there’s no need to do so when you’re confident and secure that you own many good companies for long term.
What basic advice do you have for people who are looking to invest more in Japan? Japan is a good market for value investors, but it’s also a peculiar market that has historically paid little attention to shareholders. While things are changing, I think investing in Japan still requires a lot of patience.
Anything else you would like to add? If you’re new to investing, it’s never too late to start. One obstacle to investing if you live here in Japan, though, is the added barrier and suspicion of investing in the stock market as something risky. There’s also the few number of other people around you who have any investments of any kind (aside from idle cash sitting in their bank accounts) who will make you feel crazy for trying to start. The irony of the risk averse nature of many Japanese though is how many don’t realize how many companies in Japan are very low risk to invest in because of their total lack of debt and solid balance sheets. It’s also interesting to me of how unaware many Japanese people are that their government is already using their tax dollars to invest in the stock market through its public pension fund (GPIF) and central bank buying (BOJ ETF buying). My feeling on this is that if the government is using public money to invest in the stock market, you may as well also invest for yourself as well. In Japan, especially, where many people can’t expect much in the way of major pay raises, investing in the stock market seems like the ideal way to grow your money for long term.
Where can people find you to follow your work? I don’t keep a blog or substack. I have a day job and family that keep me plenty busy, but if you want to follow my ramblings and thoughts on Japan and its market you can follow me at my twitter handle: @CacheThatCheque
There’s lots of detail in here that I’m sure readers will find useful. If you have any questions, please post in the comments or ask away on Twitter.
Thanks again to @CacheThatCheque and here’s wishing everybody all the best for 2022!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
Smart Money Asia 