Answers to your questions

by admin on September 26, 2012

Answers to rookie questions

 

From time to time I get asked by rookies and people suddenly worried about their investments one or more out of a somewhat predictable range of questions.

I’m going to write out the answers here to some of the more frequent ones.

This will hopefully enrich my life in the future by allowing me to point to a website instead of devoting time to repeating myself – which, I hate almost as much as standing in queues.

1. I have a little bit of money saved up – do you think it is safe to keep it in yen/ pounds/dollars/stocks/ etc.?

Answer:

There is no such thing as a safe asset. If you had your money in Argentine pesos for any time in the 1980s, or even in the early 2000s, you would be very unhappy with keeping your money in cash. I do not know the current situation of the Venezuelan bolivar, but last year people were buying cars as ways to store money, because they devalued less rapidly than the currency.

Now, clearly, the US dollar and the Japanese yen, etc, are not the same as South American currencies. However, Japan has gone through hyperinflation, and one US dollar nowadays is worth something like 1/20 of its value 100 years ago.

Also, I’m not going to explain this in full now, but debt is basically money. If the amount of debt in an economy rises, then the amount of credit will also rise. That credit has equal standing (in the current world system, but not in the gold standard) as does cash in your bank account. Therefore, increasing debt means increasing money supply, means eventual inflation. The Japanese yen has appreciated a lot against the US dollar, but there are limits to how far it can go. One of them is the profitability of Japanese companies. Once the yen is too strong, Japanese companies will start making losses on exports, this will reduce exports, so the demand for Japanese yen will decrease. You can read more about this here. However, the main point is that the yen is not really a haven over the long-term (and it might depreciate a great deal in a short period of time in certain circumstances).

All of the above is trying to convince you that holding cash is not a great idea.

The trouble is for you, dear reader, that there is really no such thing as a safe asset. If you bought gold in 1980, you would be up by now, but would you have held onto it over the course of 20 years or more while the price went down by 75%? (NB: I think that gold is not a bad investment even now, just because there needs to be a lot of inflation in the future in order to whittle down developed countries’ debts). How about art? The problem with art, you see, is that the art which really holds its value are the timeless pieces – the Picassos, Rembrandts, etc., and even if you bought them while the Japanese were bidding up art prices to stratospheric levels in the 1980s, then you would have to wait a long time to break even.

How about property? Property goes through very long cycles. The other problem with property is that most people by using leverage. If you bought at the top of the recent boom, then you will be still licking your wounds now.

The same applies to shares, bonds, and basically anything. I hope you can see the point by now – buying anything at a bad price is a bad idea, and even cash has a “price”, in the sense of interest rates. If inflation happens your cash decays more rapidly. If you do not think this is a big deal, how much do you think $100 will be worth after five years of 5% inflation (above what the bank pays you)? If you guessed $77, then you’re about right. Meanwhile, a good investment which benefits from inflation could easily be up 10% a year (net of inflation) over that time, so the opportunity cost of that $100, which is now, five years later, actually worth an adjusted $77, is in fact $161. Ouch.

So, what is the solution?

The only solution, I’m afraid, is to pull your finger out, stop worrying, and put your money into good deals.

So deceptively simple, and so difficult to strike the right balance.

If you can consistently and rationally put your money into stocks, bonds, property, etc. which you know is a screaming good deal, not because it is increasing in price, but because it is genuinely attractively cheap on rational grounds, then you are done. Hang up your boxing gloves, retirement will be glorious.

But the enemies of the wannabe member of the rentier class are formidable, and the most obstructive ones live within your own mind.

When you start out trying to allocate your capital, you will be faced with a babbling wall of confusion – unlimited quantities of well-meant advice from well-meaning morons, cynical advice from scoundrels such as FX-trading companies, mixed in with a small amount of good quality ideas.

Then, when you have finally made a decision, you will buy your stock and watch the price move every day, only to panic out of it at the slightest turbulence. Or, you will watch it with a sinking feeling as the price declines, helplessly.

The capability required here is being absolutely certain about the grounds on which you bought that investment. And, if you suspect that those grounds have been violated, you must ruthlessly and immediately cut yourself off from it with no hesitation.

When the market is a sea of green day after day, you will need to control your impulses and greed, and not get carried away, knowing full well that you are missing that adrenaline rush of your account balance being flattered, and falling behind your peers. When the market is in decline, you will need to be able to buy fearlessly, in the knowledge that the quotation on the day after will likely put you into the red.

If this is all too much to you, then I’m afraid that you will be banished to sub-optimal returns on your capital.

A friend of mine in Japan knows nothing about the stock market or investing at all, really, but in 2009, when the newspapers were full of blood on the streets, she made her first investment into the stock market, and has bought property using the same “street sense” in the past. My advice to you: do the same as her. Use your common sense. By things when they are on sale. Do not try to get every twist and turn in the market right. One correct decision every two years is enough.

Now, finally, stop worrying about it so much – try to imagine that it is not you who is searching for the share/investment property/other asset to buy, it is the asset which is calling out to you by being so attractively priced. It is not calling out to you, do not buy it.

 

2. I want to learn about the stock market – I have been reading about FX trading – what do you recommend I read?

Answer:

Firstly, get the hell out of that FX trading account right now.

The purpose of an investment operation is to make money.

The purpose of an FX company is to screw you so badly that you have no money left. This is a conflict.

An FX company will give you 200 to 1 leverage. That means that if you have a $10,000 to invest they will allow you to “buy” (actually, gamble on) $2,000,000 of “financial products”.  (NB: this word makes me sick, even more than “for your health and safety…” – a product is something you eat, read, ride, or otherwise use, not something you buy for its cash flow). Anyway, if a 0.5% change in the price of, say, the euro or natural gas futures, will wipe out all your money, then you will very quickly have no money.

But if it was just that, I would not mind so much. What really gets me is the advertising – you know it’s kind of goes like “I’m average Joe and I made $4681 in only four days – much better than going to work!”

And I know that it sucks in innocent victims, because I’ve met so many of them. A friend of a friend in here in Japan last year “invested” (i.e. lost) over $40,000 thanks to this kind of financial vomit, sorry, I mean “product”.

Don’t do it, it’s only entertainment, but really expensive – you are not only losing money, but losing time which you could use to actually become a proper investor. Real investing requires sitting on your bum and reading lots of static numbers in black-and-white (i.e. not flashing up and down arrows).

 

3. Why are you interested in Japanese companies? Nobody is interested in Japan. I mean, Japan is doing so badly, and the Japanese shares have not performed well at all for the last two decades or more.

The reason why I’m interested in Japanese companies is exactly as you say. Nobody is interested in it, and the shares are down a lot. There are many companies in Japan which are so inexpensive relative to how good their cash flow is, that you basically buying them for free.

Now, I am not sure exactly when Japan will recover, but I am pretty sure that it will recover.

There is this kind of impression amongst investors that Japan is doomed to a slow decline into old age when something really bad will happen.

The reality is that (according to Rakuten Securities) Japanese shares outperformed the rest of the world in five out of the seven years from 1999 to 2005. The reasons for this were over excitement about US stocks leading to Japanese stocks being too cheap in 1999, and a recovery from a recession leading to our performance in 2000 to 2005. Small companies outperformed further still.

Japanese stocks performance vs overseas stocks Japanese stocks performance vs overseas stocks

Japanese stock performance vs. overseas: Yellow = Japanese stocks; Green = Overseas bonds; Blue = Overseas stocks; Orange = Japanese bonds; Pink = Mixed;

Source; Rakuten Securities, who got it from Lipper Japan

Even though the Japanese market has gone down since I started investing in it, the shares that I have been investing in have gone up quite a lot. The reason for this is that I buy companies which are not the cheapest, and not the best, but which are extremely cheap given how good they are.

The idea that Japan is on a slow grinding decline that it will never recover from, and that stocks (at least the stocks which I look at, not overpriced trash like the electronics manufacturers) will go from extreme undervaluation to super-extreme undervaluation, is simpleminded. Nothing goes in a straight line. Japan has been in decline for a long time, and there have been ups and downs in the stock market, and there will be yet more. The stock market is mainly represented by large clumsy loser companies, and if you are any good stock picking, then you will be able to outperform the lumbering giants. If you cannot see the bad news in good news, and the good news in bad news, then you will have problems in your investing career.

Oh yeah – please do not ever use the “its gone down so much so it must be a bad investment argument” – just do me a favor and figure it out.

That’s it for now folks – I will write up a few more of these if I get asked any different questions.

{ 5 comments… read them below or add one }

Mazzo September 29, 2012 at 1:30 am

I just found your blog after trying to find out why Japanese trading companies are trading so cheaply (while also wondering why anyone in their right mind would buy Sony). Great collecton of articles! I really look forward to reading future posts.

Reply

admin September 30, 2012 at 9:21 am

Thanks – which companies are you interested in?

Trading companies are very hard to figure out within an acceptable degree of error.

It’s as if they mix everything up on purpose.

JP

Reply

Claus November 3, 2012 at 3:20 am

I have been buying japanese value stocks for years with the intention to hold them until the hausse comes – and it will come.
Good things comes to those who wait! Take a look at the most indebted japanese consumer finance stock: Aiful. It’s up +130 % YTD. A sign that the bullmarket is here. I think so!

Reply

admin November 3, 2012 at 2:13 pm

Claus – there have been quite a few huge rallies, especially in small caps, and none of this seems to be noticed by anyone – inside or outside Japan. But, with increasing liquidity there will be more undervalued small-caps coming back to realistic valuations. In February, when the BoJ started to make some positive noises, there was a big rally in some shares such as Maeda Kosen and Teikoku Sen-i. The BoJ will ease more and more, and small, undervalued, illiquid stocks will eventually overshoot their true value. JP

Reply

Claus November 3, 2012 at 3:25 am

I have been buying japanese value stocks for years with the intention to hold them until the hausse arrives – and it might be around the corner. Good things comes to those who wait! Take a look at the most indebted japanese consumer finance stock: Aiful. It’s up +130 % YTD. A sign that the bullmarket is here. I think so!

Reply

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