# investing in japan



## joe sod (28 Sep 2010)

japan is one of the lowest priced stock markets in the world. It has fallen for the last 20 years, the ageing population and huge government debt and commitments are the reason for all the negativity. Although some analysts like marc faber have been recomending investors buy japanese stocks and banks. any opinions


----------



## camel (28 Sep 2010)

Just because it's fallen for the last 20 years doesn't make it cheap, so I assume you've some other formulas or ratios to back that up. Let us know what they are? I think you're probably right but it needs to be defined. 

I'd be interested in the region for the sake of geographical diversification alone...


----------



## ringledman (28 Sep 2010)

I am a huge fan of Japan as a long term investment. Cheap on a price to book of around 1 times compared to 2-3 elsewhere. Price to earnings around 16, not amazing but always been on a high rating. Peaked at crazy 50-100 times! Been regressing to the mean ever since. Google `japan ugly, unloved, undervalued, underowned`. I emailed Faber recently and he kindly said Japan was back in 'phase zero' as an investment in hìs emerging market lifecycle.


----------



## joe sod (1 Oct 2010)

what does phase zero mean, but you are saying he now classes japan as emerging market, i was thinking about investing through one of the rabo japan funds. I think it is important to pick the right investment vehicle, last year i invested in natural gas through UNG etf and i got totally screwed because of the way its set up. i didnt do enough research, natural gas went up in price but the eff went down because of contango


----------



## ringledman (2 Mar 2011)

joe sod said:


> what does phase zero mean, but you are saying he now classes japan as emerging market, i was thinking about investing through one of the rabo japan funds.


 
Every market goes through a secular (long term) bull market then a secular bear. 

Japan emerged in the 60s to 90s and then went through a 20 years of people forgetting about their market. Hence the term emerging or you could say 're-emerging' now applies to Japan in faber's eyes.

Anyone else going overweight in Japan? I certainly am...


----------



## Calico (2 Mar 2011)

Every year commentators say this will be Japan's year, and every year the recovery falters. It's in it's THIRD decade of stagnation now....don't see any reason for that to change.

ps Ringledman, did you once post on AAM as Walk2thewater (or something like that?).....just curious!


----------



## ringledman (2 Mar 2011)

Calico said:


> Every year commentators say this will be Japan's year, and every year the recovery falters. It's in it's THIRD decade of stagnation now....don't see any reason for that to change.
> 
> ps Ringledman, did you once post on AAM as Walk2thewater (or something like that?).....just curious!


 
You seem to be confused between economic growth and stock market returns. If you do some research you will find that there is zero correlation (actually there is a slightly negative correlation) between the two. 

As such Japan's economic recovery is irrelevant to the return of their stock market. 

The key driver of stock market returns is starting valuation for which Japan is the cheapest global market.

Never posted as anyone else. Why would I. But concerned if many other are into Japan. I dont like to be late to the investment class ;-). Prefer to buy low when the asset is truely hated. I'll let you know once Japan is back up for you to get in ;-)


----------



## farmerette (4 Mar 2011)

Calico said:


> Every year commentators say this will be Japan's year, and every year the recovery falters. It's in it's THIRD decade of stagnation now....don't see any reason for that to change.
> 
> ps Ringledman, did you once post on AAM as Walk2thewater (or something like that?).....just curious!


 
im in japan through a rabbo direct fund , its doing well 

im also in an india fund through rabbo which was thier top bet , its down 15  % since i got in back in january


----------



## Calico (6 Mar 2011)

ringledman said:


> You seem to be confused between economic growth and stock market returns. If you do some research you will find that there is zero correlation (actually there is a slightly negative correlation) between the two.
> 
> As such Japan's economic recovery is irrelevant to the return of their stock market.
> 
> ...


 
Def not confused with economic growth and stock market returns. I'm posting as someone who got burned by the 'buy Japan' argument. Invested early in 2007 when it was REALLY hated. Back then Nikkei was about 18,000....now it's 10,500. Not a good move! Then and since, I've read how Japan is going to come back....and maybe it will. I always thought it would benefit from a China lift. Having said that, the negatives are all there: ageing poplution, crushing public debt, endless deflation, inflexible labour market, unstable government, negative sentiment and general diminushing political and economic power. We shall see, but after my experience, I would advise anyone looking at investing in Japan to proceed with caution.


----------



## Chris (7 Mar 2011)

Calico said:


> Back then Nikkei was about 18,000....now it's 10,500.



But you have to also take exchange rates into account, as this has a huge impact in the case of Japanese investments in the last few years:
2007: Nikkei 18000 at EURJPY 160 = 11250
2011: Nikkei 10500 at EURJPY 115 = 9130

Personally I have not yet invested in Japan, but I am looking.


----------



## Calico (11 Mar 2011)

Calico said:


> Having said that, the negatives are all there: ageing poplution, crushing public debt, endless deflation, inflexible labour market, unstable government, negative sentiment and general diminushing political and economic power.



....we sadly now have to add the cost of today's huge earthquake and tsunami to that list.


----------



## SPC100 (11 Mar 2011)

I missed that news. that is terrible.

Re investing Japan

Buy and hold....and re balance
I prefer cheap stocks to expensive ones......
I think it is 1/8 of my stockmarket asset allocation


----------



## farmerette (14 Mar 2011)

i bailed out of japan over the weekend , this story is going from bad to worse , if the nuclear plant goes up , japan will be toxic in more ways than one for a long time


----------



## ringledman (15 Mar 2011)

The time to buy is when sentiment is awful. 

I will be topping up my holdings over the next 6 months. 

If you have a 20 year time frame then then recent events will likely prove a good entry point. 

Japanese equities were undervalued before and even more so now. 

The tragic events will probably eventually prove bad for Japanese bonds and the Yen but for equities possibly not. 

I hope things get sorted there soon. Fantastic country and people.


----------



## camel (15 Mar 2011)

To back up the case for investing against the current crowd see this:

http://www.fool.com/investing/value...t-from-this-panic.aspx?source=ihpsitth0000001


----------



## Marc (15 Mar 2011)

This is a common misconception around price and value.

On the morning of Friday 11th march the price of stocks in japan reflected all the information in the Market and expectations of the future prospects of Japanese enterprises. 

Then we had some news. A report of a previously unknown event. 

This caused the prospects for these companies to be reevaluated and the price fell. 
The news continued with reports of explosions in a reactor and prices fell again. 

The current prices now reflect exactly the same prospects for Japanese enterprises but simply incorporate additional information which wasn't known on Friday morning. The profitability of Japanese companies has gone down and so prices have fallen simply to maintain the same expected return for an investor for the future. 

Equally the expected return on japanese companies is broadly the same as that of usa companies and UK companies given the free movement of capital around the globe.

In order to be indifferent between say microsoft and say Sony investors require a discount on the price of Sony in order to be induced to buy it rather than Microsoft but the expected investment return for both companies is about the same. 

Price is different to value which is a combination of two variables price and book value. 

Companies trading at a high book to Market ratio are value stocks and have a higher expected return than growth stocks. 

But the "value" in the Japanese Market as a whole is the same today as it was on Friday morning. The expected return for an investor today is broadly the same reflecting the impact on the profitability of the market for the future.


----------



## bullworth (15 Mar 2011)

But market investors don't behave rationally at all times. They act on fear and greed. Stocks can be perceived as ''oversold.'' I remember US stocks went down after September 11 but rocketed soon after. Anyway its always a gamble so be careful out there and only risk what you can afford to and only as part of a diversified set of investments.


----------



## ringledman (15 Mar 2011)

I was going to post about the wrongs of the EMH but decided not to. Another time...

I hope this situation resolves itself soon, but it's seems to be getting worse by the minute.


----------



## Marc (16 Mar 2011)

Not to bother in the interest of balance I'll do it for you 

[broken link removed]

wouldn't want anyone missing out on a robust academic and peer reviewed critique of the emh now would we?


----------



## bullworth (16 Mar 2011)

When you invest in any stock you are making a gamble of some sort. The key is to identify what outcome you are gambling on and why.
If the crisis in Japan is a ''reason'' to invest then the gamble is that it will not be as bad as the fears of other investors who exit Japan. Other investors will  also exit Japan based not upon fact but upon rumor  and speculation because they have a duty to their investors to maintain a particular risk profile and diversify away from risk. They may also be acting wisely to not have all their eggs in one basket. I suggest anyone who invests in Japan or elsewhere does the same. 
In the real world apart away from the stock market the only winners will probably be the construction companys  which rebuild the infrastructure of the area. Exporters based in the disaster zone will be out of business, hence making less profits and dependent on any insurance payout.
Stock prices won't stabilise until the full outcome of the tsunami and earthquake/nuclear event are known. With such unknowns hanging over investors it's absurd to talk about  ''value based upon fact.''


----------



## ringledman (16 Mar 2011)

Marc said:


> wouldn't want anyone missing out on a robust academic and peer reviewed critique of the emh now would we?


 
You spelled out the failure of the efficient market hypothesis in that short sentance. 

'Academic'. 

The biggest proponents of the EMH are all academics. In the real world of investing the hypothesis isn’t given much credence. Year by year it is falling from grace.

I prefer to take the view of the likes of Jeremy Grantham, James Montier, Marc Faber, Jim Rogers, Peter Schiff, John Mauldin. 

Real world money managers who think independently and contrarian. 

People who understand economic history and that markets are more often inefficient, often overvalued, often undervalued, and often driven by fear and greed. 

You'll find a world of investors and managers out there who disagree with your views. Sometimes it is worth listening to the opposite view.

Out of interest you seem to ignore all of the following concepts in your posts: Regression to the mean from overvalued or undervalued assets, the secular (long term) cycle, net inflows and outflows from asset classes, the yield cycle, the Kondratieff cycle, the business cycle, etc, etc. 

i.e. everything that affects the price of stocks in the real world. I get the impression that as long as you invest mechanically then these issues are all irrelevant?

Do you agree that the West is in a secular bear/sideways market? We haven't breached the 2000 highs. History shows that secular bears last 15-18 years or so on average, until P/E values become extremely low. Good time to buy Western indexes or perhaps a value approach would be better for the next few years?

Would you have been happy to have invested in the 'efficient' Nikkei at 39,000 in 1989 with a P/E of between 50 and 100 times? Or the Dow in 2000 at a P/E of 25-40, perhaps the Nasdaq in 2000 on a P/E of 100-infinity?

As you previously stated risk is not the fluctuation in price but the permanent loss of capital. 

Did the middle aged Japanese salary man investing in 1989 at 39,000 not have seen a permanent loss of capital? 

In my eyes the greatest risk to investing is the starting valuation of the stocks or markets in question. Pay a high price and the price will eventually regress to below the mean.

Prior to the crisis Japan was the lowest valued market on the basis of price to book, Price to sales, price to cash flow. It had a similar P/E to other markets but this was purely by chance not by the efficiency of the market. 

Japan's P/E has fallen from 50-100 times in 1990 to 14 times in 2011. The rest of the West had rising P/Es from 1990 to 2000 after which they fell to 2009, then rose. There is no link between valuations of every market in the world. 

As greed takes over from the magical draw of a new paradigm, the secular trend results in rising P/Es and increasing risk, likewise as fear kicks in P/Es drop and risk reduces. 

There are two sides to every market, which is why it is always worth listening to the opposing view. I read what the EMH has to say but find a lot of it hard to buy. 

Markets can be efficient for periods of time, perhaps during times of calm and bull markets. When hugely volotile markets present themselves over a quick period of time, the market becomes highly inefficient. 

Often with falling markets the price fall is greater than the fall in value. BP last summer was a classic example. 

Headline news for a week. Even factoring in a worst case scenario of US government lawsuits couldn't equate to the loss of market value from peak to trough. The market was in fear and highly ineficient at that point in time. 

As of today I have read or overhead on the news that this Japanese crisis is as bad as chernobyl, not quite as bad as Three mile, a category 7, completely overblown. The authorities are providing conflicting stories. I haven't a clue what is going on. But I must be 'rationally' taking in all the information along with the millions of other investors around the world, each with their own cultural spin on things to make the market work on perfect information? Somehow I dont see it. 

Often crisis are more overblown than the real situation and more so than the market fall. Not always but I do hope this one is. 

Regards.


----------



## Marc (16 Mar 2011)

Warren Buffett said, “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting"


----------



## Marc (16 Mar 2011)

Better still is the quip from Buffett’s mentor, Benjamin Graham, “If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.” (Security Analysis, 1934)


----------



## ringledman (17 Mar 2011)

Ahhh Buffett and Graham, the great index investors ;-)

I don't ever pretend to be able to forecast the markets, none of us can tell the future. 

However what economic history can teach us is that market moves in cycles. It isnt that hard to tell when the market is heading towards bubble territory so as to avoid it. Or as a minimum acknowledge that your investments are in bubble territiory and get out before the peak. likewise acknowledge that we are 10 years into a 15-18 year secular bear market in the West (USA, UK, Germany, France, etc) and index investing in these countries will most likely produce negative inflation adjusted returns over the next 5-7 years. 

All i'm interested is in buying asset clases that are reasonably priced based on the centuries of economic history that we have.

This is a concept the EMH cares to ignore. The belief that it doesn't matter what price you pay for a stock or stock market index is a dangerous proposition. 

Value investing is above all else a method of preserving wealth. As Buffett says, 'number one rule is not to lose money. The number 2 rule is see number one'. The efficient market hypothesis is full of risk. 

Would you seriously have invested in the Nikkei in 1989 or the dow/Nasdaq in 2000 based on an academic theory that says that bubble investing is ok as long as everyone else is in the same boat?


----------



## bullworth (18 Mar 2011)

ringledman said:


> likewise acknowledge that we are 10 years into a 15-18 year secular bear market in the West (USA, UK, Germany, France, etc)



Where did you get 15 to 18 years from and why is this applicable just to ''the west'' ?


----------



## North Star (18 Mar 2011)

Rather than get involved in a debate re different schools of thought re efficient investment methodologies; lets get back to the original question. re views on investing in Japan.
 When the post first went up my response would have been that despite views on price or value , there are two twin issues which would discourage me from advising clients take or increase exposure to Japan;
1) the very poor demographics and 2) the huge levels of debt; which is currently funded predominantly by domestic savings; but what happens when the aging population needs those savings?

However since the earthquake and subsequent nuclear power plant problems; I now somewhat bizzarely find myself considering recommending clients to get or increase exposure to Japan. The reasons?
1 - The Yen will strengthen due to substantial repatriation of external investments  ( which will cause further unwinding of the carry trade leading to more yen strength )
2- the massive amounts of liquidity which the Bank of Japan will pump into the system to support stability will find its way into Japanese equities which will drive their prices upwards.

Any comments?

[broken link removed]


----------



## ringledman (18 Mar 2011)

bullworth said:


> Where did you get 15 to 18 years from and why is this applicable just to ''the west'' ?


 
It is applicable to the West for two reasons. Only the West is in a secular bear currently, the Emerging markets have been hitting new highs over the last decade, implying they are in a secular bull market. 

Secondly, there isn't much historical data for a lot of the emerging markets to form any view on the secular trend. As each secular trend (bear or bull) lasts approx 15-25 years then you need a good century of empirical data to prove or disprove the concept. Most Emerging markets have new stock markets that only opened 20-30 years ago so it is impossible to prove or disprove the secular trend for these. 

I would say the emerging markets are in a secular bull market following the 1997/98 crises. A lot haven’t risen over their 2008 highs so they may now be in a secular bear but if so then the run from 1997/98 to now would constitute a short secular bull market based on the evidence of the West. 

In terms of the 15-18 years for the Western markets, this is an approx period based on evidence of the Dow over the last century. If the secular bear ended in 2009 then it would constitute the shortest secular bear market on record. 

http://www.amateur-investors.com/Secular_Bear_Markets_vs_Secular%20Bull_Markets.htm

*‘The big question is now are we in the beginning stages of  a 4th Secular Bear Market which started in 2000.  The average length of the previous 3 Secular Bear Markets was 18 years with a minimum of 16 years and a maximum of 21 years.  Thus if you add 18 years to the year 2000 and take + or - 3 years on either side then the next Secular Bull Market may not begin until sometime in the 2015 to 2021 time period if we are now entering a 4th Secular Bear Market.  However I would like to point out that even in a Secular Bear Market there can still be Bull Markets lasting a year or two as the longer term charts of the Dow show below’. *

The dow peaked in 2000 on a huge P/E multiple and all secular bears last until P/Es become the cheapest for a generation. As the Western P/Es in 2000 were the highest on record, this would imply that the following secular bear must be correspondingly long in duration order to get back to a generational low P/E multiple. 

Secular bears end on very low P/E multiples. Between 5-10 times earnings. The Shiller 10 year adjusted multiple implies a 2009 market bottom, way above this level- 

http://www.ritholtz.com/blog/wp-content/uploads/2010/02/CAPE-.png

This doesn’t imply a P/E, secular market low to me. Add in the time frame of only 9 years and I would argue that the current bear has much longer to run. 

Most evidence on the secular theory relates to the USA but what happens in the USA is likely to apply to the rest of Europe who have all been in secular bears since 2000 and where the US market goes we follow.

Getting on the right side of the secular trend is the number 1 investment rule for the long term investor in my eyes. This is why I am currently avoiding western indexes, with the exception of Japan which surely must now be nearing one of the longest secular bears in history.

I may be wrong and the quantitative easing, huge money printing and negative interest rates that is currently present pulls the western markets into new secular bull markets but as they say the most dangerous words in finance is: 'its different this time'. 

A great book on sideways markets is - http://www.amazon.co.uk/Little-Book-Sideways-Markets-Nowhere/dp/0470932937/ref=sr_1_1?ie=UTF8&qid=1300453021&sr=8-1

The author advocates a value based approach, i.e. stocks that hit secular lows in 2009. 

Interesting View on the UK secular bear - 

http://www.fleetstreetinvest.co.uk/shares/ftse/ftse-secular-bear-market-02004.html


----------



## ringledman (18 Mar 2011)

North Star said:


> 1) the very poor demographics and 2) the huge levels of debt; which is currently funded predominantly by domestic savings; but what happens when the aging population needs those savings?
> 
> However since the earthquake and subsequent nuclear power plant problems; I now somewhat bizzarely find myself considering recommending clients to get or increase exposure to Japan. The reasons?
> 1 - The Yen will strengthen due to substantial repatriation of external investments ( which will cause further unwinding of the carry trade leading to more yen strength )
> ...


 
Japan's population is falling so long term the overall GDP will fall however the GDP per person will rise (the factories wont stop producing because the old age are dying). China has a worse potential aging problem as Japan is 20 years down the line. 

The yen will eventual fall significantly once the repatriation has occured and government become insolvent. This will be positive for exporter equities. They have become increasingly lean with such strength, the moment the yen collapses due to the indebted government then the stockmarket will rise. 

Government bonds yielding 1% will be dire in an inflationary environment of reconstruction and money printing. As only 7% or so of Japanese own equities they may well dump their JGBs in favour of equities and the new secular bull will be born.

I prefer currency hedged funds as one day the yen could become extremely weak.


----------



## ringledman (19 Mar 2011)

Here is an interesting chart of the Japanese market trading on a price to book of 1. 

http://www.istockanalyst.com/images/articles/Japan2011327774.jpghttp://www.istockanalyst.com/finance/story/4977184/time-to-nibble-on-japanese-stocks

One of the most innovative nations on the planet and their stockmarket is trading at nothing more than the break up (liquidated) value of their company assets. 

The small caps are trading on 0.7 times book value, implying you would get a 30% profit by breaking up the companies tomorrow and selling their plant, equipment and assets.

Truely amazing. 

Pricing in nothing for the innovation and enterprise that they have shown the world over the last half century and will continue to do so over the next 50. 

For comparison, the dow is trading on a price to book of 2.75.


----------



## soy (20 Mar 2011)

Hi Ringledman, can you point to an example of a currency hedged fund for Japan?


----------



## rochish (20 Mar 2011)

Hello,
Does anyone here know the correct current Shiller P/E for the Japanese stock market? Better yet, does anyone know where I might be able to get historical data to calculate it myself? 
 It looks like at least two sources provide conflicting information about it. In a WSJ article published yesterday, Ben Levisohn cites some Citigroup research suggesting that it is 14.5. (see the 4th paragraph in the article titled “Finding Bargains in Japan at wsj.com – you can find via a search on google).
 However, the website vectorgrader.com suggests that it may be closer to 35.87 (to see this, please type “vectorgrader japan cyclically adjusted P/E chart” on google and click on the first link that appears). 
Note that even if the info given at vectorgrader.com is a month or two old (they have not pricisely given the dates in the graph), it is difficult to imagine that the Shiller P/E went from 35.87 to 14.5 in the last month or two. Index earnings generally don't change that rapidly and Japanese stock prices have not reduced by more than half during this period. 
Am I missing something? Any insights or thoughts may be appreciated.  Thanks in advance.
Rochish
P.S.: Because I am a new user here, the system is not allowing me to post URL’s. I apologize for the inconvenience.


----------



## ringledman (20 Mar 2011)

soy said:


> Hi Ringledman, can you point to an example of a currency hedged fund for Japan?


 
Hi Soy, I am not Ireland based so not up to speed on whether there are any currency hedged funds there. 

I said they are my prefered choice, but thinking about it they are only one method I am using. Who knows which way currencies move, I hazard a guess that the yen will weaken, but my time frame is 10-20 years as they are likely the first Western government to become insolvent and have a devalued currency again.

I am also just buying cheap index funds and closed ended investment trusts which don't currency hedge. 

Currency hedging comes at a higher cost and I am somewhat skeptical of the financial industry at hedging correctly, often they think they are better at these things than they are. 

for a bearish view of Japan over the next 2-6 months or so, this is worth a read - 
http://www.gurufocus.com/news.php?id=126015

I believe Japan is cheap but it could fall further. One thing about Japan is that their stocks can be highly volotile from my experience. Expect a seriously choppy ride both upwards and downwards. 

Japan could easily swing another 20%-30% down or so I think over the short term. Until the full extent of the nuclear situation is known then I am nervous. 

I have previously learnt from bitter experience not to try and catch a falling knife or participate in dead cat bounces! Perhaps Japan is fully on the rise going forward, perhaps there are further falls to shake out the short term-ers.

I take a 20 view on Japanese stocks going up. In the short term who knows.


----------



## ringledman (20 Mar 2011)

rochish said:


> Hello,
> Does anyone here know the correct current Shiller P/E for the Japanese stock market? Better yet, does anyone know where I might be able to get historical data to calculate it myself?
> It looks like at least two sources provide conflicting information about it. In a WSJ article published yesterday, Ben Levisohn cites some Citigroup research suggesting that it is 14.5. (see the 4th paragraph in the article titled “Finding Bargains in Japan at wsj.com – you can find via a search on google).
> However, the website vectorgrader.com suggests that it may be closer to 35.87 (to see this, please type “vectorgrader japan cyclically adjusted P/E chart” on google and click on the first link that appears).
> ...


 
This is an interesting article putting the cyclically adjusted P/E at 16 - 
[broken link removed]

High but back to 1960s-1970s levels, ie pre the mad 80s boom. 

Interestingly Japan is not on that low a P/E compared to the level at which Western markets historically bottom. It's possible it has always traded slightly higher. Or perhaps the next 6 months will send the P/E even lower with further falls in the market. Who knows. 

Similarly, I kept an FT cliping from sometime in 2009 (cant find it now!) and I think the forecast P/E (not the 10 year adjusted) was around 20 at the time for Japan. so despite the Nikkei rising since then the P/E (current year projected forward) has fallen to 13 currently. 

Japanese companies have been increasing earnings pretty heavily since the low at a pace far greater than the rise in the market. This goes to show how a P/E can keep falling even in a rising market. Whether this happens to Japan next year or two remains to be seen. Perhaps earnings will fall as the previous post I made describes. 

It is however cheap on the basis of P/book, price to sales and price to cash flow compared to other Western markets (most notably the USA and UK market, not so cheap compared to European indexes, it depends what ratio you are looking at).

I have been reading an interesting book about the legendary John Templeton and he says that in finding the market bottom for any market, you dont always get all the fundamentals showing a bargain. Perhaps this is the case with Japan currently where the P/E is still fairly high compared to the level at which other Western markets have historically bottomed. Time will tell...


----------



## rochish (20 Mar 2011)

Hi ringledman, 

Thank you for the link and for the insights. I appreciate it. 

Yes, I too have heard of that Japanese stock P/E's tend to be higher than those in Western markets. However, I'm not sure why this is the case (especially given that the expected growth rate of the Japanese market is not higher than that of its Western counterparts). If one considers that P/E is the price one pays for a dollar of earnings, why would one accept lower earnings from Japanese stocks over Western stocks, especially given the demographic profile of Japan and slowing GDP?

Warren Buffett said that the ROE's of Japanese companies tend to be very low and other sources have confirmed that Japanese companies are less shareholder friendly than Western companies (e.g., Japanese companies promise lifelong employment to workers). This makes it even more puzzling that investors would agree to give a higher P/E to Japan than to U.S. 

Would you mind sharing the name of the book on Templeton you're reading? It sounds interesting.

Thanks again, 

rochish


----------



## ringledman (20 Mar 2011)

rochish said:


> Hi ringledman,
> 
> Thank you for the link and for the insights. I appreciate it.
> 
> ...


 
Hi. I would argue that Japanese stocks have in the past displayed better earnings growth than in the West. Lean, competitive operators.

With regards to demographics and GDP growth I consider both of these irrelevant to the potential of Japanese equities. 

Japan is the first country to see a falling population. The people dying are not workers hence the effect on the Japanese export machine is zero. Likewise the effect of a falling population will be to reduce the burden on the government over the longer term. Likewise GDP per person will rise in a falling population as the manufacturing base remains the same or grows.

Also as Japanese own so few of their stocks an aging population reliant on their savings is highly negative for japanese government bonds but not so equities as they don't own many at all to start with! 

The majority of the market is currently owned by foreigners. If inflation hits and bond yields rise then the local population will buy Japanese stocks again, is the theory that Marc Faber talks of.

http://en.wikipedia.org/wiki/Demographics_of_Japan
Since 2007 the population has fallen.

Japan is a falling population as much as an ageing population. China has as big an ageing problem together with a huge imbalance between male/female to deal with over the next 20-40 years. 

In terms of GDP growth and equities. There is ZERO relationship between GDP growth and equity returns. absolutely zero. 
Actually there is a slight negative correlation. High GDP growth economies often have stocks already priced too highly. Whereas low growth economies are often ignored by the masses and therefore have better long term potential-

http://www.ft.com/cms/s/0/09d46286-fec3-11de-91d7-00144feab49a.html#ixzz1HBU6T5yx

_“Countries with high growth potential do not offer good investment opportunities unless valuations are low.”_

Starting valuation is the number one basis for the return on equities, not the future growth potential of an economy.

As to ROE being low, so I read but not sure the reasons why? 

The book is 'investing the Templeton Way'. its written by his niece. I thought it would be rubbish but its pretty dam good! 

It has a lot on the Japanese boom in the 80s which is good to compare the opposite extreme with today's situation.

If your sad like me, check out his old interviews on youtube. He's similar to Buffett, a really nice guy! 

On the issue of the P/E measure, the book says;

'if you rely on the P/E alone, there will be times when you cannot find value with this measure, but perhaps with another measure, such as the ratio of price to cash flow. For that matter, one cannot guarantee that your method for bargain hunting will not become obsolete [due to everyone adopting the measure, the book later says]'.


----------



## tyoung (20 Mar 2011)

*Fwiw*

[broken link removed]


----------



## North Star (21 Mar 2011)

Buffets view that Japan's recent fall represents a buying opportunity...

[broken link removed]


----------



## mainasia (21 Mar 2011)

Marc said:


> Warren Buffett said, “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting"


 
It's funny how Warren Buffett is always singled out for praise and it gives a nice intersection to this discussion about Japanese stocks. Let's imagine if Warren Buffet was Japanese for a second and had invested most of his stock in Japanese shares, even the value ones over the years? Would he still be an oracle? 
I'd say he lucky with timing more than anything else, riding the great expansion of American multinationals and stock market investment over the years.

I like the statement the most important point to start from is valuation, very true. We can see that India and China still have huge growth potential but their stock markets still swing wildly overtime. India's economy has never been so hot yet it's stocks have fallen significantly over the last year, China's haven't outperformed either.
China's domestic/service/internet stocks are the ones to focus on.


----------



## rochish (21 Mar 2011)

Thanks, ringledman. I agree with everything you noted.


----------



## joe sod (1 May 2011)

Chris said:


> But you have to also take exchange rates into account, as this has a huge impact in the case of Japanese investments in the last few years:
> 2007: Nikkei 18000 at EURJPY 160 = 11250
> 2011: Nikkei 10500 at EURJPY 115 = 9130
> 
> Personally I have not yet invested in Japan, but I am looking.



that is a good point, the strengthening yen cancelled a lot of the equity falls. I also have sympathy with that person who invested in 2007, i also had read alot of the articles at the time on now being the time to invest in japan. Who could have predicted the devastating earthquake. However faber is still recomending investing in japan, the thinking is that the massive spending needed to rebuild will finally break the deflationary cycle and will be good for japanese equities. On ringledmans point about a 20 year time frame, ithink that is too long, i think from 5 to 10 years time frame. Afterall we only live to 80 years and maybe only 40 years of investing time


----------



## joe sod (1 May 2011)

*ireland now looks like japan in 1993*

on another point ireland today looks like japan in the early 1990s, we have an overvalued currency and huge debts, prices in ireland will have to keep falling


----------



## Rory Gillen (5 May 2011)

On valuation grounds, there is a compelling case for Japan but, as experienced investors will know, it has been a value trap for years. Personally, I have decided to buy Japan only when it shows clear and unambigous signs that buyers outweigh sellers - best seen through technical signals. In that way, I hope to buy an uptrend knowing that if there is significant value there, the uptrend should be a long lasting one and missing the first 10-15% should not be overly concerning.

Rory Gillen


----------

