Why does Oriental Land keep being bought? Getting to the essence of the "beauty contest"
This Week in the Stock Market Recap
The stock market climbed significantly this week. From about 20,600 yen in the early part of the week, it surged to 21,200 yen (+ about 600 yen). The previously feared downturn seems like a false alarm.
The factors driving the rise arethe agreement that the U.S. and China would resume trade talks in October. Considering the declines up to last week as a deterioration in bilateral relations, this is a rebound. Observations of calming Hong Kong protests and the reduced likelihood of a hard Brexit in the UK also supported the stock price rise.
However, the more you look at it,it seems like a scene we have seen many times this year. U.S.-China talks have oscillated between collapse and restart, moving stock prices up and down. This increase is not out of that same range.
At the moment, signs of an economic slowdown are approaching step by step. There are no reports of improvement in China’s production activity, which had slowed sharply since the end of last year.China’s PMI (Manufacturing Purchasing Managers’ Index) remains below the threshold of 50.
※ A reading below 50 indicates deteriorating business conditions.
That’s no surprise, because with U.S.-China trade relations so unsettled, corporate leaders cannot commit to expand investments. Some moves to relocate production to countries like Thailand or Vietnam are visible, but moving production bases in high-tech industries is not an easy task.
Now the world economy is tightly interconnected,so if China’s economy slows, waves will eventually reach Japan and then the United States. The U.S. economy is currently resilient, but it may simply be waiting for the downturn to come in sequence.
Why Oriental Land Co. keeps rising
In the face of persistent uncertainties, why are stock prices rising? It’s becausemoney is overflowing in the world. Thanks to ongoing monetary easing since the Lehman Brothers collapse, the world’s money is plentiful and has nowhere to go. When short-term profitable news like “Fed rate cuts” or “easing U.S.-China relations” appears, money rushes to it immediately.
The key here isthe keyword “profitable-looking”. It’s not just anything; money floods into stocks that anyone would regard as attractive. For institutional investors, such stocks are familiar and easier to explain to involved parties. It’s exactly the world Keynes called“beauty contest” (※).
（※）The game where the person who chooses the “most popular beauty” is deemed to have chosen the correct outcome.
For example, Oriental Land Co., Ltd. (4661), which operates the Disney Resort, is continuing to push its high prices higher.
So should we buy Oriental Land too? I don’t really agree with that.
Oriental Land’s P/E ratio is about 80. This might be understandable for a startup whose business is just taking off, but Oriental Land is an established firm, especially in equipment industries. It’s hard to imagine profits growing enough to justify this P/E.
Benjamin Graham, Buffett’s mentor, offered the following words.
The stock market is a voting machine in the short run, and a weighing machine in the long run.
In other words, in the short term there is a beauty-contest aspect as described above, butin the long run it reflects the value of the company.
Beauty contests require reading others’ minds. This is very delicate, and there’s no guarantee of always getting it right. That’s why success rates in short-term trading are low for everyone.
On the other hand, the value of a company on a longer horizon can be inferred to some extent by examining its business and finances.At least, you can judge whether something is over- or under-valued right now.
Therefore, we should look for companies’ value and steadily buy those priced lower than that value. Results may not come quickly, butthe longer the time passes, the more reliably results will come. This is the essence of long-term investing.
Acting in haste leads to failure. The key is “buying absolutely underpriced stocks at relatively cheap times”
In current circumstances,those who rush to ride the rally tend to fail. Stock prices go up and down, so there is no need to buy when prices are rising.
Moreover, what happens if you grab a rising stock with a high P/E just as it peaksand it instantly climbs further?
As P/E ratios rise, people become more susceptible to psychology. When market conditions are favorable, they can rise easily, but the opposite is also true, andduring market declines, they sink sharply.
Human psychology is curious—when prices rise, people ignore P/E; when they fall, they suddenly worry about P/E and loudly declare “overpriced!”
The speed of a decline is rapid, so trying to sell at that moment often fails. Especially for those of us who don’t sit in the market all day, this is even more so.
What we should do is the exact opposite. In other words, identify stocks that appear undervalued including growth prospects, and buy them only when they drop momentarily.
I call this the“buy absolutely underpriced stocks at relatively cheap times”.
For example, when a stock like Oriental Land falls to a P/E of 20 and then drops 5% on a momentary basis, that is precisely the time to buy.
To implement this,consistently monitor good stocks, wait patiently without rushing to buy, and only buy when they fall; the big buying opportunities will be limited to about two to three times per year.
Even I sometimes feel the urge to regret not buying earlier as this rise continues. However, this“hurry” is the root of investment mistakes.
There is no need to hurry to become rich. Even if you miss a chance, it will come again. Sticking to the principles faithfully is the only reliable way to steadily grow your wealth.
