Big in Japan
I don’t know much about investing. I’ve generally felt that the twin pearls of wisdom that you can’t beat the market (and shouldn’t try) and then equities go up in value over the long run were good enough for me. Recent events, have, however, drawn my attention to the sad case of the Japanse stock market that appears to call at least one of these principles into question:
Megan McArdle wrote yesterday:
The Nikkei peaked at 38,915.87 on December 29, 1989. For years, it’s been a watchword warning to people who say “in the long run, stocks always go up”; in the past two decades, it has struggled back towards 20,000 several times, but never anywhere near its former peak. Today, it went even further, falling to a 26-year low. The yen has been strengthening fast against the dollar and other currencies, which is very bad news for Japanese exporters.
But, really, where does this leave the idea that stocks go up in the long-run? The weird thing about it is that though one knows Japan has had some rough economic times, the situation hardly seems as cataclysmic as the stock trends make it out to be. It’s not as if the country’s been bombed into smithereens or suffered wars and revolution. People aren’t starving in the streets. Japan’s citizens continue to enjoy some of the highest living standards in the world. They’re number eight on the UN Human Development Index. They’re ahead of France, Germany, Italy, and Spain in per capita GDP. They have the longest life expectancy in the world. In the greater scheme of things they’re doing fine. And yet the stock market — not so much.
65 Responses to “Big in Japan”
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October 28th, 2008 at 3:31 pm
that figure for the nikkei is similar to the high for the Nasdaq..gonna be awhile before we ever get close those heights again. When we do, there will probably be more in the way of fundamentals, rather than exuberance, to support it. Lastly, the Japanese stock market, particularly with cross ownerships and the active intervention by METI, is a bit different than our own capital markets.
you should be dollar cost averaging into your spdr, that way you can at least ameliorate the nausea the accompanies panicking markets.
October 28th, 2008 at 3:33 pm
I can think of three things: 1) the Japanese stock market was fantastically overvalued in 1989. We’ve never had a bubble that came close. And 2) stock markets don’t reflect how things are now, but how they are expected to be in the future. Japan is a country with an aging population and close to no immigration. It’s actually shrinking. And 3) the Japanese economy is extremely bad at allocating capital. Companies tend to carry huge cash balances, the keiretsu system is inefficient, interest rates are nil, etc.
October 28th, 2008 at 3:35 pm
I’m even less of an expert than Matt, but didn’t I read somewhere that Japan has a bizarre and backwards banking system that successive governments since the ’90s have been unable to reform? Well didn’t I?
Japan, being a conservative and entrenched political culture, hasn’t found the popular will to make the radical changes everyone knows they need.
October 28th, 2008 at 3:43 pm
“In the greater scheme of things they’re doing fine.”
I don’t know enough about Japanese society to know how big an issue this is there, but in the US, this absolutely would be a disaster of epic proportions. The ability for people to retire is based on investments that, for most, consist of stock investments and equity they build up in their house.
If you have a 20 year period that results in a drastic decline in the value of stocks, then people cannot retire. That’s not just an issue of people getting to take it easy. That means that the number of people trying to get work is far larger. That means that many younger families will spend their money supporting their parents rather than saving themselves, destroying their chance for retirement. We really are talking about a complete economic upheaval. What kind of policies would the public be screaming for in that kind of world?
October 28th, 2008 at 3:43 pm
Up until the 1920s, stocks were nearly irrelevant. Corporate bonds were the main investment.
Old old fashioned ways:
Stocks rarely increase in price. Corps payout their profits in dividends. Corps finance growth from retained earnings, with the express permission of the stockholders, who sacrifice their dividends.
Bought RCA in 1928, realized a capital gain, IIRC, in 1965. Buts that’s fine, RCA was a decent company for those forty years.
The catastrophe was probably the early 80s Reagan tax changes, when corps were almost forced to change priorities to jacking up their stock price by whatever means possible.
I think it may go as far back as Adam Smith. When corps can finance growth from sources beyond retained earnings, the economy is in trouble.
October 28th, 2008 at 3:44 pm
The third piece of wisdom you’re missing is “the market can stay irrational longer than you can stay solvent”. Since your personal time horizon is 20-30 years, that’s probably not a problem, though the US had a long-run bear market from 1929-1941, from the late ’60s unti mid-Reagan, and we may be in the middle of one now.
And as I recall, the equity premium is really a US equity premium.
October 28th, 2008 at 3:44 pm
Japan’s citizens continue to enjoy some of the highest living standards in the world. They’re number eight on the UN Human Development Index. They’re ahead of France, Germany, Italy, and Spain in per capita GDP. They have the longest life expectancy in the world. In the greater scheme of things they’re doing fine.
Plus they spend a lot of their R & D on robots. Which is awesome.
October 28th, 2008 at 3:46 pm
it took 25 years to recover what the DJIA lost in 1929. but it did recover.
October 28th, 2008 at 3:48 pm
The Japanese are probably the best-dressed people in the world today. They’ve replaced many of the ugly buildings they put up after WWII with beautiful buildings.
One secret to Japan’s success is that their elites feel utterly tied to Japan’s long run success — so few of them speak another language and their xenophobia means they don’t feel at home in any other country. So they don’t feel they can always “Take the Money and Run” if their policies send their home country down the toilet. Instead, the Japanese elites feel they and the Japanese people are all in it together for the long run.
October 28th, 2008 at 3:49 pm
Here’s a bit of contrarianism: perhaps Japan is showing that financial growth and cultural/social health can be decoupled.
One day soon we’re going to have to figure out how to give up our growth addiction.
October 28th, 2008 at 3:49 pm
Matthew, it’s not hard to be somewhat more informed. Look into P/E10.
October 28th, 2008 at 3:53 pm
“The third piece of wisdom you’re missing is “the market can stay irrational longer than you can stay solvent”. Since your personal time horizon is 20-30 years, that’s probably not a problem, though the US had a long-run bear market from 1929-1941, from the late ’60s unti mid-Reagan, and we may be in the middle of one now.”
Yuperoo.
The “long run” that market almost always go up in is 30+ years, not 20 years.
If you’d bought a stock index in 1929, you were still underwater in 1956, IIRC.
—–
And FWIW, the reason the equity premium “puzzle” isn’t really a puzzle is that if equities didn’t offer long-term outperformance over bonds, no one would ever buy equities, given the risk of getting caught in a 20 year bear market where taking your equity out results in losses.
The equity premium is the reward you get for risking weathering a long bear market.
October 28th, 2008 at 3:53 pm
TH is correct that the 1989 peak of the Nikkei was a point of titanic overvaluation. But in looking at the Japanese stock market, it is important to remember that Japan experienced deflation for a good part of the 1990s, such that the inflation adjusted price of the Nikkei at its recent highs would be somewhat closer to its historic peak. More importantly though, as Nicholas says, the time horizon for this kind of thing is long. Finally, on the equity premium puzzle: its an international phenomenon, though the literature on it has focused more on the US than other countries, and its about the comparative performance of stocks and bonds, not the absolute performance of stocks. So to see if there was an EPP in Japan during the past two decades, you’d need to have some data on bond returns.
October 28th, 2008 at 3:54 pm
define “long run”
October 28th, 2008 at 3:57 pm
I like the point about the connectivity between financial growth and overall wellbeing. After all, there were surely some happy, well-adjusted cavemen before we invented money, right?
October 28th, 2008 at 3:58 pm
how do you define “long run”? there’s always more time (unless you’re iceland and your country gets dissolved)
October 28th, 2008 at 4:00 pm
and then equities go up in value over the long run were good enough for me.
The long run, Matthew. My great-great-grandfather made a lot of money because he bought stocks low during the Depression (it helped that he had a lot of money to start with). He held onto them for the twenty years or so it took for things to recover. At which point those stocks were worth a lot of money (minus the companies that went bankrupt). It sounds like you take ‘equities go up in value in the long run’ to mean ’stocks always go up’ which they don’t. (The same thing applies to real estate: someone who bought a house in 2005 will probably be waiting at least a decade and probably two to get their money back.)
The other thing, of course, is that one should buy low and sell high. When everyone is buying stocks, and values are headed to the moon, you shouldn’t be buying.
Somebody point out that most of the gains in any (secular) bull are made on five or ten trading days. On the flip side, most of the losses are lost on five or ten trading days. The tricks is to either be really patient (like rich people are) or to be in the market on the up days, and out on the downs.
If you will recall, you’ve brought this up before, and I said (last year?) that you needed to be prepared to wait at least a decade to recover if you weren’t going to sell out. Bad news: it’s going to be a bit of a wait, sorry.
max
['You'll live, promise.']
October 28th, 2008 at 4:02 pm
“Since your personal time horizon is 20-30 years, that’s probably not a problem, though the US had a long-run bear market from 1929-1941, from the late ’60s unti mid-Reagan”
Well, given that we’ve had separate 30 year and 25 year bear markets (stocks don’t beat inflation) over the past century, I think it certainly would be a potential problem given that time horizon…
October 28th, 2008 at 4:09 pm
As others have noted, Japanese companies, in the main, rely upon bank financing rather than capital markets. That is to say, most companies don’t give a fig about their stock prices and so the stock market remains a chiefly speculative arena. Westerners pay attention to it because we pay attention to our own stock market, not because it’s actually important to the health of the Japanese economy.
While return on investment in most Japanese companies has, over the last 15 years, been terrible, real economic growth has also been terrible. If you argue that the stock market in 1989 was overvalued by half, given the deflationary pressures and readjustment to actual valuation, the stock market is probably about right.
October 28th, 2008 at 4:12 pm
Japan is suffering from demographic problems, of course, but unlike the stupider governments in Europe they’ve been smart enough to realize that they can’t solve their problems by importing immigrants and then watching as their country falls to creeping Islamization.
Hopefully one of these days they will wise up, ban abortion, encourage procreation, and then their birth rate will stabilize.
October 28th, 2008 at 4:14 pm
Steve Sailer has a great point- the Japanese upper classes, for all their faults, are at least not cosmopolitan scumbags like the elites in many other country. They know that if Japan falls, so do they, and so they are actually concerned about the Japanese people.
October 28th, 2008 at 4:16 pm
One could also invest in stocks that pay dividends, and, of course, individual stocks are always going up or down on their own, whatever the trend of the index they’re on does.
October 28th, 2008 at 4:17 pm
tom waits reference?!
October 28th, 2008 at 4:28 pm
Seems like the natural lesson is that stocks go up in the long-term when averaged over major world wide indices.
October 28th, 2008 at 4:28 pm
And Petey once again chimes in with the completely irrelevant point that if you spent all your money investing at the record high right before a long bear, it will take a long time to recover to that point.
October 28th, 2008 at 4:29 pm
I should have added “and let’s hope the next decade doesn’t make us doubt that fact” to my comment.
October 28th, 2008 at 4:35 pm
If you bought in the Icelandic stock index a year ago you’re 93% down now (96% in euro terms) and even that is optimistic since trading in some companies is still suspended. Might take you a while to break even.
October 28th, 2008 at 4:42 pm
“And Petey once again chimes in with the completely irrelevant point that if you spent all your money investing at the record high right before a long bear, it will take a long time to recover to that point.”
Well, it certainly seems a relevant point to those operating on the assumption that they are basically 100% guaranteed of seeing their investment in stocks go up in value over the next 20 years since “stocks go up in the long run”.
And it’s not just an issue of “what if you’d bought in September 1929 or in summer 1965″. There have been many, many points over the past century where you’d have spent well more than a decade under water after buying in the US market.
Just look at the Japan chart. If you’d bought a stock index there at any point in the past 25 years, you’d be underwater today. It’s not just a matter of if you’d bought at the 1989 record high.
Stocks are the best investment there is over the long run, but the “long run” is longer than many seem to imagine.
And directly to your issue, I’d say my point seems as relevant as a point can be, given Matt’s post.
October 28th, 2008 at 4:46 pm
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2102rank.html
A nitpick, but Japan does not have the longest life expectancy in the world.
October 28th, 2008 at 4:52 pm
If your definition “the long run” is thirty years, do we really have a large enough sample of “long runs” to be able to make any sort of valid claim about what “always” happens in them?
October 28th, 2008 at 4:53 pm
Steve Sailer said: “One secret to Japan’s success is that their elites feel utterly tied to Japan’s long run success — so few of them speak another language and their xenophobia means they don’t feel at home in any other country.”
Complete nonsense. English is mandatory in Japanese higher education. Most of the Japanese “elites” can speak English conversationally. Go ask directions from any salaryman in the business districts of Tokyo- their English might be better than yours.
October 28th, 2008 at 5:02 pm
“And it’s not just an issue of “what if you’d bought in September 1929 or in summer 1965″. There have been many, many points over the past century where you’d have spent well more than a decade under water after buying in the US market.”
Here’s another data point: if you’d bought broadly into the US market at any time between the late 50’s and early 70’s, you’d have been significantly underwater in the early 80’s. (The market indices are not inflation adjusted.)
That’s not an issue of buying in right before a crash. It’s an issue of buying in before or during an era of underperforming equity markets. And those eras are more common than folks seem to understand.
October 28th, 2008 at 5:10 pm
“If your definition “the long run” is thirty years, do we really have a large enough sample of “long runs” to be able to make any sort of valid claim about what “always” happens in them?”
Humans have had functioning markets for a few centuries now. So, sort of.
That said, I wouldn’t put the chances of a broadly based stock portfolio beating inflation over a 30 – 40 year time frame as being 100%. But it’s probably a 95% bet.
October 28th, 2008 at 5:11 pm
To the extent that the inflation of stock price, ooooooops, I mean increase in value of stock prices, has been the metric used by the financial elites and the Fed to judge economic performance, and it’s a huge extent, is the extent to which we have been screwed. So do the math. We are really really screwed.
Economies produce wealth by investing in enterprises which return real profits on an ongoing cash flow basis. Check out Adam Smith. The American economy was hijacked by those holding to the idea that wealth is created by the inflation of asset values. That inflation was mostly brought about by using leverage to bid up said prices. Case in point, residential real estate.
We don’t need no stinking DOW 36,000 to have a good economy. In fact a DOW 36,000 would entail millions of homeless wandering the land and troops in the streets.
October 28th, 2008 at 5:16 pm
No.
The oldest index in the world, the Dow, is only 112 years old. In that short time, we have seen indexes of major markets that do not outperform inflation over periods as long as 30 years. The idea that you’re always better off investing in stocks when you’re young and switching to more predictable investments later is not necessarily right. Absent good reason though, it is probably your best bet.
October 28th, 2008 at 5:23 pm
“The oldest index in the world, the Dow, is only 112 years old.”
Financial markets long predate the invention of indices, and folks have made some educated guesses about market performance pre-Dow…
October 28th, 2008 at 5:46 pm
Re Matthew’s comment ” I’ve generally felt that the twin pearls of wisdom that you can’t beat the market (and shouldn’t try) and then equities go up in value over the long run were good enough for me ”
——————-
Both pieces of wisdom are utter bullshit. Both of these “pearls” are put out by stock jobbers trying to unload shit onto the gullible rubes.
Everything has a season — and usually those seasons are long enough in time that you don’t have to jump onto the train until the trend is evident.
October 28th, 2008 at 5:46 pm
Is this true? You’d have less capital than you started with, but you would have a bunch of dividend payments. (Unless Japanese companies don’t pay dividends?)
October 28th, 2008 at 5:47 pm
The long term performance of stocks is only better than bonds if you buy stocks with good dividend yields. Something nobody but smart long term investors care about any more and there are damn few of those kings of stocks around anymore. Instead we had among other things corporations spending hundreds of billions of dollars buying back their own stocks at price far above where they are today.
The DOW and S&P are bogus because they constantly throw out the losers snd add new winners. While stock buyers in theory can do the same they never quite do in a timely manner.
Stocks in aggregate inflate along with increases in the monetary aggregates. You don’t have to be a doctrinaire Austrian School or Milt Freidman follower to get this. Milt however was polite enough, or cunning enough to know which side his bread was buttered on, not to ever mention it.
MZM today’s broadest monetary measure has been flat for the entire year. Because of the Ponzi nature of the financial system being just flat has had devastating consequences.
October 28th, 2008 at 6:24 pm
Japan does not need a stockmarket, they have no shortage of capital; America not so much. Don’t believe the US can achieve a Japan-like Depression-Lite where markets and banks are destroyed but the average person does not suffer much (in fact most Japanese being savers are quite happy with deflation)& unemployment on grows slightly. The Us will have a much harder landing.
October 28th, 2008 at 6:51 pm
“Is this true? You’d have less capital than you started with, but you would have a bunch of dividend payments.”
Given the steepness of the drop in the index, it seems pretty clear that you’d be underwater today including dividends if you’d bought anywhere between 1987 and yesterday – with the possible exception of if you’d bought right at the previous low in 2003, if the dividend rate is high enough.
(Of course, the truly curious are free to find the dividend rate of the Nikkei, download the historical price data, and run it all through a spreadsheet to prove what seems true to the eyes…)
October 28th, 2008 at 7:17 pm
Nobody’s mentioned (unless I’ve missed it) the currency angle that Megan briefly rerefenced. If the yen has appreciated throughout that period, the nominal decline would be moderated.
October 28th, 2008 at 8:15 pm
We’ve actually had some pretty long stretches of time in which the US stock market has not gone up. I blogged on this a couple of days ago at http://jonti.org/speculations/the-stock-market-how-long-is-the-long-run
It seems pretty clear to me that the long run is longer than 30 years, which means that it too long to count on in terms of your own retirement. If you happen to catch a good 20 year period and end up timing the market just by chance, then you’re in good shape. But it seems like it could just as easily be the other way around — all the money you save between the ages of 30 and 50 could end up being plowed into a stock market that falls over that 20-year period.
October 28th, 2008 at 9:25 pm
That equates to price deflation, and that is a very dirty word in this country.
October 28th, 2008 at 9:30 pm
They’re ahead of France, Germany, Italy, and Spain in per capita GDP.
And their quality of life is crap.
Congestion, pollution, cheezy little houses, no leisure time and nature is only a word in the dictionary.
Fuhgeddaboudit!
October 28th, 2008 at 10:32 pm
My God, Matt, did you just refer to a song by a good musician?
October 28th, 2008 at 10:41 pm
That old saw about the 25 (or whatever) year cycle ignores a major timing and (expected) salary/wage growth point.
For many people the early savings, however invested, will be pretty paltry over the initial earning years. Earnings rise with time, experience, and (theoretically) increased skill/experience/wisdom/suckingup.
That means the point when you are earning the most money is (if you are lucky) in the later years of your career. So a disproportionate amount of your savings is also in the later years. A bad investing decision (or market move) has a massively disproportionate effect precisely at the point where you are in a position to be putting the bulk of your money into savings for retirement.
October 29th, 2008 at 12:24 am
Most important they can still turn out a kick-ass anime series when they have to–though that’s gone done in frequency lately too…
October 29th, 2008 at 12:26 am
Japanese income inequality is much less than in the US, so even in a poor economy most people do OK.
October 29th, 2008 at 1:51 am
A few points
1) IMO the Japanese lost decade (really 20 years now) occurred only after a massive credit bubble led to a massive property bubble which made their stock market hugely overly valued. Then rather than accepting they had run a debt based economy and suffering the resulting mult-year contraction, the government pumped billions into companies and banks that were actually bankrupt. Even though individual consumers had money and savings the companies and banks were so buried in debt that it has been years of trying to recover. Of course if my understanding is right that means the US is f*cked.
2) If EVERYONE knows a given “fact” about an economic interaction it very possible the fact is no longer true. Especially if a group of people can make money of those who believe it to be true.
2) Much of the oft quoted growth in stocks occurred when the average dividend payment was 5%. It has been 2% and less for the past 8 – 10 years. Granted unsustainable bubbles gave the impression of economic growth and capital gains, but in terms of actually returning a share of profits to stockholders you get the sense managers have a different agenda. It is almost like managers and mutual fund companies believe a huge chunk of people will just buy stock and hold onto it.
October 29th, 2008 at 7:14 am
The stock market provides only a vanishingly small percentage of the capital to the system.
The only time stocks raise capitsal is upon issuance. Often IPO’, especially the big ones, are done by companies already quite successful who don’t need the money. The stock issuance is a way for owners and insiders of said companies to capitalize and turn into cash their holdings. Google did not need capital. The IPO made the founders and insiders absurdly rich. Ditto MS. Later it made them as rich as God. For the company it didn’t do a thing. No small company with a small weak balance sheet can possibly go public successfully.
Long ago going public was a somewhat important way for companies to raise capital. Those days are long gone and with it the very reason why public stock issuance was invented. Rather it is as I said a way for owners and insiders to capitlize themselves, not the company.
October 30th, 2008 at 12:34 am
I would estimate that a majority of the posts here betray complete ignorance of investing. You cannot buy the Dow or the Nikkei or the S&P 500 – they are statistical measures – the closest you can come is an index mutual fund which attempts to provide the same return as the index, minus expenses. Even still, most people do not invest by index but by some form of stock selection, which might perform better or worse than the index.
Furthermore, most index methodologies frustrate historical comparisons. The index does not reflect the returns on any actual portfolio of stocks held from 1989-2008 – the companies that run indices change which stocks are including and recalculate the index. The index does not include dividend returns, which represent most of the profit from stock investing. The index is calculated by a share-price formula rather than a measurement of investor returns.
The Nikkei index in particular does not include companies that you would strongly identify with “The Japanese Stock Market”, such as Nintendo, and uses the flawed price-weighted methodology rather than a market-cap-weighted or equal-weighted methodology – so a company that doesn’t split its stock affects index movement more than one that does.
Given that it’s not possible nor advisable to buy a stock index and burn any dividend checks, everything Petey has posted about is factually useless. It’s simply not true that stock investors in the US lost money from 1929-1956 or whatever crazy date you want to make up. If you include dividends and some additional funds committed during the 30s and 40s, people made out very well in this period. Furthermore, the two bad US bear markets were of course followed by years of immense prosperity and long bull markets. Comparing peaks to troughs on an index is utterly pointless, because no one invests all their money as a lump sum at the peak of a bull market, does nothing for 30 years, and then withdraws it all. There are lots of ways to smooth your returns – regular investment of new capital, periodic portfolio rebalancing, steady accumulation of safer assets as you anticipate future cash requirements, etc. If you want to believe that investing is nothing better than a loser’s game in the casino, feel free – I’ll be happy to buy your stocks cheaply now and sell them back to you at a higher price once investing is cool again.
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