The Truth About U.S. Stock Investing from Shigenobu Kawasaki: "Training U.S. Stock Investing Through the Media" [Vol.10] Delivered August 9, 2021
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Delivering the truth about U.S. stock investing
Shigenobu Kawada's "A Stock Investment Course in the Media"
［Vol.10］Distributed on August 9, 2021
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*** Table of Contents ***
Market Review
This Week's Snapshot!
This Week's Featured Article
■ Daiwa Securities and SBI Securities earnings are neck and neck, ■ Platformers' share buybacks, ■ Will the tech stock rally continue, ■ Learning about money: US stocks, applying growth company fruits to long-term investing, ■ Working with President Tanaka of I Partners (7345)
Investment Hint: My Investment Journey — What are my investment results over the past 16 years?
Kawada's Walk: “Favorite places recently visited” and “Sakeiya Taichi’s remark that 'children should be born in high school/university years' — what does it mean?”
Detour: Tracing the sources of the “fate of U.S. stock gains” — the clash of capitalism
Upcoming Activities
Q&A: It makes sense that buying the S&P 500 continuously is important, but when prices drop sharply I hesitate to buy. What should I do?
2000 Million Yen Milestone Pace Setter
Source: Financial Services Agency; based on Asset Management Simulation by Exe Trust Co., Ltd.
*The figures above are simulations and do not guarantee future results. Fees and taxes are not considered.
How to read: Expected returns and target years
3–4% for 30+ years: wrap funds and balanced funds fit this
5–7% for 25 years: this might apply to non-U.S. equity funds
8–10% for about 20 years: this is a modest projection for S&P 500 gains
S&P 500 Performance Record (Dividend Reinvestment 1970-2021)
Achieve 20 million yen early with the right risk-taking
Kawada's message is quite simple. To reach 20 million yen, let your excess funds work as efficiently as possible. For that, it is crucial that each person understands the meaning of risk and reward correctly. Before reading the weekly newsletter, glance at this table to confirm the proper investment posture.
Now, start the countdown to reaching 20 million yen right away!
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1. Market Review (Aug 2–Aug 6)
Major Indices
• Dow Jones Industrial Average +0.8%
• S&P 500 Index +0.9%
• Nasdaq Composite +1.1%
— Quick Version —
It was a week of range-bound trading near recent highs, as the strong July jobs data supported gains for the Dow and the S&P 500 to new highs on Friday. Meanwhile, the Nasdaq Composite rose to a record high on Thursday as long-term yields rose, but then fell on Friday.
— A Bit More Detail —
Strong corporate results helped, but a cautious stance persisted. On Tuesday, orders for June factory and durable goods beat expectations, fueling optimism for an economic rebound and pushing the S&P 500 to a new high. However, the ADP employment report on Wednesday suggested a slower labor market recovery, leading to selling in economically sensitive stocks. Supported by lower long-term rates and solid earnings from individual names, the Nasdaq and the S&P 500 hit record highs on Thursday and ended the week higher as July employment data remained robust. Meanwhile, several Fed officials signaled potential rate hikes, and long-term yields rose on stronger-than-expected employment data.
S&P 500 over the past year
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2. This Week's Snapshot!
This is the segment where we share essential information you should know.
Last weekend, July employment data was released, and there are no major catalysts expected next week. So far, corporate earnings releases slated for next week are not expected to broadly influence the market. With vacation season in mind, even brokerages have released “summer reading” columns, reflecting a relaxed mood.
Among upcoming economic indicators, inflation figures are the most watched. The July CPI to be released on Wednesday is expected to be up 5.3% year over year (June was 5.4%), with the core index up 4.3% (June 4.5%). The Fed has said inflation is temporary, but if data significantly beats expectations, long-term rates could rise and growth stocks could come under pressure. Producer prices (PPI) will be released on Thursday.
The stock market tends to see buying at lower levels, and inflation and COVID-19 variant-driven economic recovery slowdowns are not major downside risks. Still, to address concerns about market overvaluation, the following arithmetic from Barron’s is worth noting:
To resolve overvaluation, either stock prices must fall or earnings must grow. Currently, S&P 500 earnings per share (EPS) is forecast to be just under $200. However, based on Q2 results and macro expectations, EPS could be raised to about $220 by year-end.
As a longer-term view, productivity improvements suggest EPS could reach $300 by 2025, according to strategists. Applying the long-term average price-earnings ratio of 20 over 30 years, the S&P 500 could reach 6,000.
In reality, markets tend to rise as earnings grow before EPS hits $300, so there may be sharp pullbacks along the way. Yet, ultimately it comes down to corporate profits, and if U.S. companies continue to grow earnings, there is little to worry about. For long-term systematic investing, pullbacks provide opportunities to buy more, so there is no reason to fear overvaluation.
Additionally, as we move into the second half of the next week (Aug 16 onward), statements might surface ahead of the Jackson Hole Economic Symposium (Aug 26–28), so this week may be the most relaxed period to prepare for that event as well.
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3. This Week's Picked Articles
A section that selects and ranks information useful for asset formation from what I have found, and comments with my very personal views.
【1】Nikkei NewspaperMajor securities reduce reliance on stocks; fund wraps are being focused on8/3
In the results announced by 19 major domestic securities firms for Apr-Jun 2021, 12 posted increased profits or turned profitable. The strong sales of fund wraps, which manage clients' funds in investment trusts, were a major factor.
Dependence on brokerage trading fees decreased, while sales fees for investment trusts (funds) rose by 65%, contributing to earnings. The net asset value of publicly offered funds reached about 157 trillion yen as of the end of June, a new all-time high for the eighth consecutive month. Compared with a year earlier, this was up 30%. As assets under management increased, trust fees and wrap fees also rose, stabilizing earnings for each company.
■ Relying on fund wraps places too large a burden on customers
To break away from a revenue model easily swayed by stock market movements, brokerage firms are pursuing revenue sources that can reliably cover fixed costs. The strategic product is fund wraps. This product has been discussed repeatedly, but it has problems such as high fees, difficulty comparing performance across firms, and that the average performance isn't particularly high.
It's frustrating that you can easily boost investment efficiency by combining only the S&P 500 index and cash according to an investor's risk preference. Still, understanding the simple fact that asset formation can be achieved with just the S&P 500 index and cash or U.S. Treasuries seems to be a fairly high level of financial literacy.
It's worthwhile to read to understand, but you don't have to buy these products. The following are for your reference.
What is Fund Wrap? Mechanics and differences from investment trusts | Warabina Kawaraban
What is Daiwa Fund Wrap? | Fund Wrap
■ Daiwa Securities and SBI Holdings' earnings are closely matched
By the way, this article originally analyzes the earnings announcements of major brokerages. Looking at the numbers, what stands out to industry insiders is that Daiwa Securities, which ranks second in operating revenue and net income, and SBI Securities, the largest online brokerage, are closely competitive. This is a kind of tectonic shift in the industry.
■ The ideal image for major traditional brokers
The future of face-to-face securities sales will be about pursuing asset-management–oriented business. To transition to that future—indeed to the natural state that should exist—the approach to customers should be:
① Honestly tell them that the key to asset formation is U.S. equities,
② Explain the advantages of passive ETFs or index funds tracking major U.S. indices like the S&P 500,
③ Admit that short-term stock trading and theme-based funds do not help asset formation,
④ Collect a management fee of about 1% of assets in a transparent manner as the business model for these “honest advices.”
This seems to be the thorough path.
■ Realizing it is extremely difficult
From outward appearances, the big brokerages seem to share this ideal in their minds, but putting it into practice is not easy. It would require completely denying the advice they have given to clients so far, which would be self-injurious—profitwise. Moreover, if they did that, their profits would suffer, and morale among employees would fall, leading to being overtaken by old-school competitors. Is that not the likely scenario?
■ Is there reform without pain?
Is reform possible without pain? Perhaps it means employees are treated unfairly. However, I do not think it implies that you can stop telling clients what is right. If employees are overprotective, it may eventually rebound on the company. The U.S. securities industry has reformed with pain, under shareholder pressure and M&A, creating tension among stakeholders. It is frustrating, but Japan does not seem to be moving that way.
By the way, Daiwa Securities' highest-ever profit was in 2013. That year surpassed the peak profits of 1989’s bubble period. At that time net profit exceeded 160 billion yen. Check it in the articles. Daiwa Securities’ 2013 annual net profit highest in 24 years (14/04/30)
【2】Nikkei NewspaperShare buybacks led by U.S. tech; Apple to spend 8.8 trillion yen this year as the largest; finance also expanding, supporting higher stock prices8/7
This article is based on data from 401 S&P 500 constituents that were available since 2017, compiling share buybacks. The scale of buybacks in 2021 is projected at $632.6 billion (about 70 trillion yen), not reaching the pre-pandemic $687.7 billion in 2019, but up 37% from 2020.
■ Buybacks by platform companies
Apple's buyback for 2021 is expected to be a record around $80 billion (about 8.8 trillion yen). Alphabet’s buyback is expected to be 2.4 times vs 2019, Facebook’s is 3.5 times. The four big tech firms including Microsoft total $165.3 billion (19 trillion yen), about 26% of the 401 major companies.
Apple is preparing to issue about $6.5 billion (roughly 700 billion yen) in corporate bonds. In the past, funds raised from bond issuance were used for buybacks.
■ Capex by platform companies is not large
Funds used by high-tech companies like Apple for software development are small relative to manufacturing capex. In 2017, the capex of the four major tech firms was in the low hundreds of billions of dollars, similar to buybacks. In 2021, capex was a little under $80 billion, roughly half of buybacks.
■ A growing revenue model (increasing returns)
Economic law of diminishing returns is well known. By contrast, these platform companies are “increasing returns” models. With little investment or cost, profits rise more, and buying back shares with extra money becomes a driver of stock price increases. This makes shareholders even richer and widens the gap with others. This is a real and worrying development.
This is a market fundamental that cannot be avoided in market economies. So how can people like us, with no large fortune, escape this misfortune? Buy U.S. stocks! That is the only defense. Buy U.S. stocks to join the ranks of small capitalists.
＊ Law of diminishing returns
This law states that when more workers are added to a fixed land, output per person decreases. Originally used in agriculture, it now represents that increasing one production input leads to decreasing per-unit output. In other words, marginal productivity of inputs falls. In contrast, the law of increasing returns appears in industries with large-scale production where profits rise with less input. .
【3】Nikkei Veritas, Front Page“Tech stocks, will the party continue?”8/8
The article examines risks of the U.S. stock market by citing GAFAM (the five platform giants) whose earnings announcements recently moved stock prices.
As with notes like “Amazon’s July 30 earnings caused an 8% drop, Facebook also fell after results,” the tone emphasizes that U.S. stocks are overvalued and risky. They cite triggers for market sell-offs: ① overvaluation driven by growth expectations outpacing expansion, ② tapering of monetary stimulus, ③ Biden administration’s regulatory environment against large tech.
For Japanese investors who are not typically familiar with U.S. stocks, this may be convincing. But U.S. stocks have climbed in various phases; to me this reads as déjà vu rather than novelty.
■ If GAFAM were one company
The forward-looking P/E for this period is 32x, with a market cap of about 1021 trillion yen and expected earnings of 32 trillion yen, numbers that seem enormous. The Tokyo Stock Exchange's market cap is 735 trillion yen, and the estimated profits of all listed Japanese companies are about 44 trillion yen.
This article is fine to read, but not to take at face value. The author appears not to have bought U.S. stocks seriously. Therefore the message is “U.S. stocks are risky.” Stocks do fall, but interpreting U.S. stocks through a Japanese mindset is unwise.
GAFAM five-year chart
【4】Nikkei NewspaperMoney learning: Use the fruits of growth companies for long-term U.S. stock investment8/7
In Saturday's Nikkei, the “Money Learning” column features an article that surprisingly aligns with the same purpose as this newsletter.
It discusses the charm and practical methods of investing in U.S. stocks, and its overall content is basically affirmative. I did not expect to see this in the Nikkei. The gist is:
・First, an investor who started monthly investments in an S&P 500–tracking fund since summer 2019, and achieved about 40% return on a principal of 3 million yen.
・Long-term performance can beat fund managers in index funds, supported by Warren Buffett’s words about long-term gains being powered by the growth of the U.S. economy, referencing this investor’s actions.
・An analysis by Professor Tsutomu Fujita of Hitotsubashi University and a strategist at Sumitomo Mitsui DS Asset Management that “the best innovation-driven economy sustains long-term growth,” and the long-term upward trend in U.S. corporate growth remains intact.
・Notes about risks such as Fed tapering, geopolitical risk, and exchange rate fluctuations.
・A proposal by an independent financial advisor (IFA) for a balanced investment: 50% in U.S. stocks, 30% in cash, 20% regionally diversified with Japanese stocks.
・The article also lightly mentions specific brokerages for index funds or individual stock picks.
・Tax considerations, such as NISA handling, loss offset with Japanese stocks, and dividends, are noted.
FX risk is not a major concern in the long term, but the article does not overemphasize risk either. If it includes ETF expense ratios, I wish it would also discuss FX fees; overall, it is well-structured.
I would like you, newsletter readers, to read this as well. If you have questions, please ask in the Q&A section.
【5】Nikkei NewspaperI-Partners' President Tanaka: “I want to be the CFO for my clients”
I-Partners Financial (7345) went public on the Tokyo Stock Exchange Mothers on June 23, with an IPO price of 3,120 yen and the first price of 9,880 yen. As of August 6, the stock price fell to 4,275 yen.
President Junji Tanaka previously worked at Daiwa Securities, Merrill Lynch Japan Securities, and since 2002 served as an IFA, establishing the company’s IFA platform in 2006. IFA stands for independent financial advisor affiliated with a financial product intermediary. The number of affiliated IFAs grew from 9 in March 2009 to 187 in March 2021, and 226 planned for March 2022.
Assets intermediated by the company are projected to grow from 124.3 billion yen in March 2020 to 240 billion yen in March 2022, with about half due to stock market gains and the rest from contributions by IFAs. Tanaka says the growth potential is large because in the U.S., IFA representatives account for over 40% of the face-to-face channel, while in Japan IFAs constitute only about 6% of registered employees.
■ I know the up-and-coming George
I used to work with Junji Tanaka (referred to here as “George”) at Daiwa Securities Kyoto Branch. Four of his同期 were assigned to Kyoto, but the other three quit shortly after joining, leading the head office to suspect problems with the branch's development methods. My impression is that even before he began selling, he had a decisive attitude to succeed.
Corporate Information | I&P Financial (AIPF)
Later, I moved around domestically and internationally, while George went on to join a foreign firm to sharpen his sales skills. We occasionally met, but we did not have much business contact.
Time passed, I became independent and started a business. George also started an IFA corporation and expanded its scale.
I, who was interested in Japanese people's asset formation, thought that the IFA system might be the key to Japanese asset formation, especially thinking that Rakuten Securities’ “Managed Accounts” could transform Japanese brokerage sales. I wanted to know the current situation, so I registered as IFA at George’s company for about half a year. I was stationed at the Higashi-Ginza branch, and although I had zero clients, I could observe the IFA work and sales methods.
Now that George’s company has gone public, I’m delighted that a friend who used to roam Kyoto for the same branch is now a publicly traded company. George, keep it up! But maybe ease up on the smoking?
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4. Investment Hints
This column writes not only about “investment methods” and “stock picks” but also about “interesting indicators and statements” and “social and political movements.”
My Investment History
S&P 500 Long-Term Chart, Log Scale (1945/12-2021/6)
Red frame indicates my investment period
■ 16 Years of Trial and Error
In the late 1990s during the IT bubble, I invested mainly in U.S. tech stocks. After the bubble burst, I suffered big losses and threw everything around 2001. Yet from 2005 I began to think, “There is no other choice but U.S. stocks!” and restarted investing.
Main milestones on the ETF-centric path
2005–2007: Focused on individual stocks; by end of 2006 there were 17 individual stocks; no ETFs
2008: Lehman shock; crash to the bottom! Also then, only individual stocks.
2009: Many solid stocks drove a sharp recovery, outperforming the index.
2010: About 30 individual stocks; rules-based mechanical trading likely used.
2011, 2012: “Am I really this mediocre?” This period lagged behind the S&P 500 and Nasdaq-100; a stock expert advised reducing holdings.
2013: Realized I could not beat the index. Then adopted ETF core & satellite strategy. While the S&P 500 outperformed, I still could not beat Nasdaq-100.
2014: ETFs 60%, Individual stocks 40%. Lacked tech exposure which caused a large lag to Nasdaq-100.
From 2011 onward, Nasdaq-100 underperformed for four consecutive years.
2015, 2016: Individual-stock performance waned; overall mediocre. Nasdaq-100 underperformed for six years in a row. Questions about the manager's ability (to begin with)!
2017: ETF mainly QQQ with a few individual stocks. Finally outperformed major indices across most measures.
2018: Strong through summer; autumn crash caused chaos; individual stocks fell badly and performance was terrible.
2019: Cutting out bad individual stocks improved performance; outperformed Nasdaq-100 after a long time.
2020: In February–March, the crisis during the pandemic hit; I reduced risk, then returned to full position by March 23, but could not keep up with Nasdaq-100’s 47.58% year-to-date rise. It felt like retribution for the prior overconfidence.
2021: Since Nasdaq-100 heavily features QQQ, early-year performance lagged Russell 2000 and Dow at times, but recently rose; only S&P 500 ahead. Satellite holdings performed well, slightly beating Nasdaq-100.
■ 16-Year Track Record? Pretty decent.
From 2005 to this year is 17 years. My track record has been better than the S&P 500 during this period. In other words, over this span I should have beaten Berkshire Hathaway and most large-cap funds. The tough opponent is Nasdaq-100, which I still struggle to beat.
By the way, to beat the S&P 500 over the long term, you need various elements. If in the next 10 years (or 5) you beat the S&P 500 on a cumulative basis even not every year, that would be amazing. Please give it a try. However, many people do not record performance accurately; they remember only when they won, which is dangerous. I personally record in Excel every day.
Yearly returns (Dow, S&P 500, Nasdaq 100) 2005–2020
Annualized returns of major indices (2005–2021 end of July)
Dividends not included in the above performance
You can verify the S&P 500 performance at this URL.S&P 500 Return Calculator, with Dividend Reinvestment
Tips for those who still want to beat the S&P 500
＊ Do not engage in unnecessary actions (i.e., avoid short-term trading of individual stocks, which usually hurts performance)
＊ Do not evaluate performance based on a single year (target annualized return of around 10% over multiple years)
＊ Market timing investing (I’m not good at this. If you are good, your risk-reward improves.)
＊ Continue additional investments (Dollar-cost averaging) to provide mental ease.
＊ Hidden trick? Leave Nasdaq-100 ETF QQQ, where world’s top players gather. But only those with real confidence or strong conviction can rely on this, which is the kind of investor I am.
＊ If aiming for a draw: Leave S&P 500 ETF alone
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5. Kawata's Walk
◇◇Recent favorite shops◇◇
XEX Tokyo Salvatore Cuomo Bros. - Daimaru Tokyo / Italian, teppanyaki [Ikkyu.com Restaurant]
■ High School Classmates Mini-Reunion
Three classmates from high school held a mini-reunion; one of the women’s husbands, who was also a classmate, passed away earlier this year. Now that vaccination is complete, we held a small memorial gathering for him.
The rule was “buffet style, 100 minutes, no alcohol.” Given the times, we wore plastic gloves and masks to pick up foods. It felt like a self-service dining hall, but the unease faded.
From the window you could see Tokyo Station’s brick facade and high-rise buildings on the Marunouchi side. With good weather and few guests, it was a pleasant time.
As it was our first gathering in a long while, everyone wasn’t done talking. So we lingered at the Ikeda Coffee on the same Daimaru 8th floor for another two hours of conversation.
■ Worries of our generation
When we gather, we naturally discuss population decline in Toyama, our homeland, and our own health. We lament or resign that our married children remain single. Looking back, why did our generation marry and raise children so early in life?
We all seemed to settle down before age 30 without being forced. Seeing today’s trend of lifelong singles, we wonder how much values and behaviors change even among fellow Japanese when the next generation arrives. It is strange that just a little time can shift such beliefs.
In such a short period, significant changes in social norms could alter the behavior of those already on the cusp of young singles’ elderly life. Is it possible?
Amazon.co.jp: The Aging of a Single Person eBook: Chizuko Ueno
■ Stimulating proposals Taichi Sakaiya: “Do not think childbearing during high school/university is good; reconsider”
■ And then Taichi Sakaiya - Wikipedia proposes “Having children in high school/university”
I recall a provocative proposal by the once-cited Sakaiya Taichi: to create a social environment that supports childbirth and child-raising among high school and university students as a solution to Japan’s population decline. True enough, my grandmother started housework at 12 and married at 17; the first son was born when she was 20. That may have been normal at the time.
But with today’s wealth and education, we have learned that individuals should pursue their life goals with purpose. Even if population decline threatens national power, would high school or university students truly choose childbirth and parenting without consent? Even if they say they are willing, do they have enough life experience or judgment to be sure this is the best option? If you reflect on your own and your friends’ ages, you can imagine.
Sakaiya’s proposal is to “change the view that childbearing during high school or university is bad.” But if someone like Sakaiya says it, what is the true intention? Is it that population decline is such an unimaginable national emergency that a drastic stance is needed? Or is it just a call to have the courage to adapt social norms to changing times?
■ A hopeful Japan cannot sustain population without change
By the way, this is from more than 10 years ago in the Nikkei Economy Class. I remember reading: “Why doesn’t Japan’s birthrate rise? Because the young people cannot envision a bright future for Japan. The United States is different.”
What our generation can do is to work to make Japan a place where young people feel hopeful. To that end, I want to nurture many young people who can successfully form assets via U.S. stocks.
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6. Detours: Tracing the Source of “The Destiny of U.S. Stock Market Rise”
The Clash of Capitalism—“People’s Capitalism” or “Moneyed Elite capitalism”
Author: Branko Milanovic (Senior Scholar, CUNY Graduate Center, New York)
Excerpts
What determines the global economy's future is not competition between capitalism and other economic systems, but the competition between two models within capitalism: “liberal meritocratic capitalism” and “political capitalism.” If liberal capitalism evolves toward “people’s capitalism” and fails to address widening inequality, Western systems will approach China-style political capitalism of a money-power elite.
To fix inequality and realize the evolution toward people’s capitalism, tax incentives to encourage the middle class to hold more financial assets must be provided, inheritance taxes for the ultra-rich should be raised, the quality of public education improved, and political campaigns funded by public money. Otherwise, like political capitalism, a privileged minority will continue to reproduce elites into the future.
→ Foreign Affairs is an authoritative magazine on diplomacy and international politics. The author is a well-known economist who popularized the Elephant Curve, illustrating income growth discrepancies between high-income groups in developed nations and middle classes in developing nations.
※ “From 1988 to 2008, incomes of the high-income in developed nations and the middle class in developing countries rose sharply, while middle-income people in developed nations declined. The graph resembles an elephant’s trunk, hence the term Elephant Curve.”
■ Global trend toward persistent inequality
The report states that the world has become capitalist, with competition and ownership shared worldwide. China is categorized as political capitalism within capitalism, including Myanmar, Singapore, and Russia. In the U.S., the top 10% of the wealthy own 90% of financial assets, but even in American capitalism, once one reaches that position, the wealthy act to reproduce an aristocracy. Inequality’s entrenchment is intrinsic to capitalism; failing to address it leads to money-driven governance.
In Japan, less drastic inequality and entrenchment are more likely, but still not impossible. However, capitalism’s inherent traits can be distorted by laws and institutions, creating distortions that lead to “bad equality” or inefficiencies, such as stagnant labor productivity and a stock market that fails to meet investors’ expectations.
■ Japanese corporate long-term stable employment orientation and anti-stock-market management orientation are unchanging. In other words, always the “trunk of the elephant’s nose”
Recently, the government suggested urging companies to hire up to 70 years old. People want to stay together through retirement with a sense of community, which is the most familiar and socially stabilizing form of workplace life. It is clear that in Japan, corporate governance cannot be built on shareholder supremacy like in the United States.
Thus the typical worker’s position will likely be, globally, among the middle class at the trunk of the elephant that cannot move much. Given current Japanese mentality, people do not desire a highly unequal U.S.-style society, and a diverse society with many different people can be burdensome; thus many resist market-driven meritocracy, fearing short-term disruption to social order.
In short, they do not want to change anything during their lifetime. Unlike media narratives, this is probably the real sentiment of most Japanese. “Being comfortable” is more valued than “eternally improving society.” This restricts freedom of thought and action.
If so, relying on Japan’s corporate structures for lifelong financial planning will continue to become less reliable. Also, Japan’s stock market will not meet asset-formation expectations, and traditional media in Japan will not reveal the truth about U.S. stocks. Of course not. This is Japan—and the worship of shareholder supremacy does not fit Japanese culture.
■ In the end, the only reliable option is U.S. stock investing!
So how should we proceed with asset formation in the future? Without worrying about others’ opinions or being swayed by traditional media, focus on U.S. stock investing. The rest is repetitive, so I’ll skip it.
That is, for now as well, we should not be swayed by media influence. The best approach is to maintain or increase your holdings in U.S. stocks.
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6. Upcoming Activities
◇August 10 (Tue) 10:15 a.m. Nikkei CNBC
◇August 18 (Wed) 11:00 a.m. Stock Voices
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7. Q&A Corner
Questions (summary)
I understand in my head that continuing to buy the S&P 500 is important, but when prices drop sharply I hesitate to buy. What should I do?
Kawata's Answer
This time the question is how to face large declines in the U.S. stock market. I respect that the questioner has realized the importance of continuing to buy the S&P 500!
The fear that a surprise drop may erase prior gains makes people hesitant. I want to give you a push.
You may remember the IT bubble of 2000 and the Subprime crisis of 2008, each dropping about 50% from recent peaks, with large global impact.
Do you know how many times such a drop (over 30% from peak) occurred in the past? The correct answer is seven times, as shown in the table below. Before the IT bubble collapse, Black Monday in 1987 was one such drop; before that, the 1972–74 oil shocks were more like historical events for many people.
■ Past declines (since 1950)
How did the market change after crashes? The chart below shows S&P 500 movement since 1950. Ultimately, after crashes, the S&P 500 returns to an upward trend since it comprises strong U.S. companies. The S&P 500 is resilient even after big swings because its constituents are strong American firms with substantial market caps, a high free float (over 50%), profitable and sound finances in the latest quarters, and a listing period of more than one year.
■ The Japanese index and the S&P 500 differ
In the Japanese market, market cap over 1 trillion yen includes about 150 companies. For Japanese readers, once selected, a company rarely exits the index. The Nikkei 225 is chosen from around 2,000 TSE First Section listed stocks, but until 1991, replacements occurred mainly when a company dissolved due to bankruptcy or merger. Afterward, the practice shifted to removing illiquid stocks, and by 1999 only about 10 companies had changed.
In 2000, to better reflect the actual industrial structure, 30 stocks were swapped; many removed were low-priced, while many added were high-priced. From 2001 to this year, about 90 stocks were swapped, averaging 4.7 per year (out of 225), but many were due to mergers or corporate reorganizations; discretionary replacements averaged only 1.5 per year (0.65% of 225).
In contrast, for the S&P 500, from 2002–2018, about 23 stocks (4.6% of 500) were replaced on average per year. As in Japan, M&A or divestitures accounted for most replacements. About 4% of removals were due to bankruptcy or delisting. Notably, roughly 30% of removals occur when stocks no longer meet the criteria. This implies that only the strongest survive—the market self-cleansing mechanism works. From the 1957 inception of the S&P 500 with 500 companies, fewer than 14% remain today.
Now, another important point about the S&P 500's composition: the "economic core" is that the actual headquarters functions are based in the U.S. In other words, the S&P 500 captures genuinely strong American capitalism. While many Japanese view market fluctuations through a cyclical lens, understanding the essence of the S&P 500 reduces the need to fear the U.S. market's upward trend.
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