Japanese share trading account feature reveals philosophical bias

by admin on October 31, 2012

My Kabu.com account has a portfolio analysis tool.

This is how it analyses my portfolio. See the translations below the image.

 

Kabu dot com tool Kabu dot com tool

Points

Growth

Cheapness

Technical

Finances

Size

Return

Movement

 

Now, I would normally ignore this kind of entertainment feature, but it’s just occurred to me that this illustrates several major problems in many people’s thinking:

Problem 1 “I need to buy something which is large in size, because that is safe”

I often encounter this thinking with people new to investing, who tend to ask questions implying that this is their view. (Usually accompanied by “The analyst said it was good” – if they only saw how sausages are made in the sell side industry…)

Solution: Don’t worry about size. Liquidity is great in running away from a stock, but it might be a better idea to ensure that you don’t want to run away from it in the first place. Buy stuff that is good and inexpensive, and sleep soundly.

 

Problem 2: “If it moves around a lot, that’s good – because a lot of movement means a high return”

Even a child can see that this makes no sense. A lot of movement is not a lot of return – one day, all the academics who came up with this kind of stuff will get put into a basement and locked up.

 

Problem 3: “It has a good technical rating, so should buy it”

A stock will generally have a poor technical rating when it has fallen. This is the best time to buy stock (as long as you are sure that it is a good company in the first place).

Technical analysis should be used sparingly, as it is not a very good predictor of anything most of the time. If you find that there has been a large increase in volume and a large decrease in price, then you can make inferences about that. But if a computer algorithm tells you that a technical rating is such and such, then you really should ignore it.

 

Japanese people like large companies. Will the terrible performance of the country’s most well-known stocks change this? I don’t think so. I think that this is a systematic error (i.e. a bias), which may explain the ridiculous valuations in Japanese small caps.

{ 4 comments… read them below or add one }

Andy December 18, 2012 at 4:17 pm

academics come up with that sort of stuff *because* they have been put in a basement and locked up…

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admin January 7, 2013 at 9:06 am

Interesting.

Reply

F April 17, 2013 at 1:29 am

Investing in larger (i.e. well-known) companies – I think this is perhaps familiarity bias.

Just came across with this blog over the weekend. Not too many English-language blogs out there dedicated to net-net investing in Japan, but this is a good one – keep up the good work!

Reply

admin April 17, 2013 at 8:32 am

You are right about the larger companies.

What are you looking for in relation to Japanese stocks? What would you want from a blog on Japanese stocks?

Jan

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