The Truth About U.S. Stock Investing from Shigeshin Kawada's "American Stock Investment Course Trained by the Media" [Vol.29] Delivered January 3, 2022
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The Truth About U.S. Stock Investing
Shigenobu Kawada's "Training in U.S. Stocks through the Media"
［Vol.29］January 3, 2022
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*** Table of Contents ***
Market Review
This Week's Pick Articles
【US-China confrontation, how should Japanese companies respond? A talk with Fast Retailing's Yanai】【Room for upside in large tech stocks】【Musha Research Strategy Brief (No.297)】
Kawada's Stocks to Watch
Investment Tips
Kawada's Walk
Activity Information
Q&A Corner
Out of Print Day: January 31 issue
2000-Man Yens Achievement Pace Setter
Origin: Financial Services Agency; Based on asset management simulation prepared by ExeTrust Co., Ltd.
※The figures above are simulations and do not guarantee future investment results. Fees and taxes are not included.
Reading Guide: Assumed returns and target years
3–4% for 30+ years: wrap funds and balanced funds fit this
5–7% would still take about 25 years: for non-U.S. stock funds, perhaps
8–10% about 20 years: a modestly optimistic view of S&P 500 gains
S&P 500 performance record (dividends reinvested, 1970-2021)
Reach 20 million yen early with proper risk taking
Kawada's message is extremely straightforward. To reach 20 million yen, let as much of your surplus funds work efficiently for you as possible. For that, participants must correctly understand the meaning of risk and reward. Before reading the weekly newsletter, glance at this table to confirm the correct investment posture.
Now, start the countdown to achieving 20 million yen right away!
Online Salon “Formation of Assets When Dreams Come True”
This is an online salon where everyone learns and motivates each other to succeed in asset formation. It offers member-only seminars that convey content beyond what the popular newsletter “Training in U.S. Stocks through the Media” can cover, and lets you experience the appeal of U.S. stock investing.
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1. Market Review (Dec 27 – Dec 31)
・Dow Jones +1.1%
・S&P 500 Index +0.9%
・Nasdaq Composite -0.1%
＝ Quick Version ＝
In the first half of the week, reports of strong year-end demand and reduced concerns about the Omicron variant led to buying in economically sensitive stocks, with the S&P 500 and Dow reaching all-time highs on Wednesday. Thereafter, during the thin year-end trading, there was a small pullback.
＝ A bit more detail ＝
Strength in economically sensitive stocks early in the week was aided by reports of strong year-end demand from Mastercard and higher crude prices; the reduced fear of the coronavirus increased risk tolerance, helping the S&P 500 and Dow to new highs. However, long-term yields rose due to weak bond auctions and the direction of macro policy for 2022, which weighed on growth stocks, causing Nasdaq to lag.
There were no major economic releases afterward, and as year-end approached and market participation waned, trading was light. Some buys emerged into the new year, but fears over new surges in infections kept declines modest as the year closed.
S&P 500 over the past year
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2. This Week's Pick Articles
A section that selects information useful for asset formation from what I have gathered, ranks them, and comments with a very personal viewpoint.
【1】 Nikkei NewspaperUS-China confrontation, how should Japanese companies respond? A talk with Fast Retailing's Yanai
2021/12/29 19:00
The US-China confrontation continues.
“It seems they are in conflict, but in reality they are not in conflict. American financial capital flows into China, while many U.S.-made products (e.g., Apple) are manufactured in China. China’s exports to the U.S. are also increasing. Economically, the U.S.-China relationship is working well.”
What should Japanese companies do in the midst of US-China frictions?
“Japan should realize that it has nothing inherent to rely on. Therefore, it must earn globally. It should attract global talent and send Japanese people out into the world. It cannot survive as a non-open country.”
“During the COVID-19 crisis, Japan has become quasi-isolated, making it difficult for high-skilled IT professionals to enter. If aging and shrinking exports persist, Japan may increasingly become a country of outbound workers, leaving the domestic market full of elderly.”
Why has Japan been stuck in a long-term stagnation?
“There is no hunger. Even though stable employment no longer exists, people think there is a career path as if a rail line exists.”
“Small and medium enterprises need more vitality. Japan protects SMEs too much. We should pursue ways for them to stand on their own without over-regulation.”
【Kawada’s Comment】
I pulled out the passages from Yanai’s interview that I find convincing. It is fine for society to hold diverse values. Yanai has achieved astronomical success in business, so it’s natural some people may view him as greedy or ruthless. Jealousy is a common human reaction, and so is the inclination to call him “the logic of the strong.”
Nevertheless, from a business and global perspective, his view is valid regarding Japan. In particular, “There is no stable job anymore, yet people think there is a career path as if the rails exist.” I like this part the most.
【2】“Barron’s Digest”Big Tech Stock Upside This Top Strategist Says Big Tech Still Has Room to Run｜【WEEKLY】December 26, 2021
Q: Is the worry that inflation will hurt corporate profits unfounded?
A: Corporations have fixed costs that do not move with inflation. Data show that in the 1970s, profit growth matched inflation, and stock market gains aligned with profit growth.
The key to markets remains profits. It is reasonable to expect S&P 500 EPS to be around $240 for next year, with Wall Street consensus around $222.
Reference: S&P 500 constituent EPS by year
Current expectations for 2022 are around $222 per share, but there is potential for it to rise to $240.
S&P 500 constituent EPS by year
Q: How can profit margins be kept high?
A: Pricing power. The S&P 500 is unlike any other index in the world. Most importantly, the big tech firms—Alphabet (GOOGL), Apple (AAPL), and Microsoft (MSFT)—together account for about 20% of the index, and their presence is crucial. These business models cannot be treated as equal to others.
Q: These companies have remained winners for years; will they continue to be winners?
A: Oil's importance lasted 60 years. The data being called the “new oil” suggests that data will maintain its competitiveness longer than conventional business models.
Exxon Mobil’s long-term chart (1968–, logarithmic)
Since around 2005, the stock price has not risen
Q: Should investors buy these stocks on dips?
A: If you want to own the finest large companies, the S&P 500 index is the index composed of such companies.
Q: Overseas markets have lagged behind the U.S. in recent years. Should investors move funds overseas?
A: Except for ASML Holding NV of the Netherlands and SAP of Germany, there are no new materials that would make these regions’ tech companies more important than the United States.
Past 5-year relative chart: S&P 500, ASML, SAP
ASML’s lithography equipment is almost a world monopoly, and its stock performance has been outstanding. However, SAP isn’t that strong.
【3】Musha Research Strategy Bulletin (No. 297)
Market outlook for 2022 — Focus on the business models of Japanese companies that will carry the NEXT GAFAM
2021 also featured a tech defeat, a green defeat, a financial defeat, and a pandemic defeat, all in a parade of self-deprecating thinking. At this point, could pessimism be the extreme of despair?
In these 12 years, Japanese stock prices rose 4.37 times (annualized 13.1%). The likelihood of maintaining this pace is high. If so, the Nikkei average could reach 100,000 in 10 years, by 2031.
A growing extreme gap in wealth between pessimists and optimists. Critics of stock investing who denounce inequality should reflect on their own ignorance rather than denouncing politics or systems.
【Kawada’s Comment】
Respected Musha-san has roared again! I deeply respect his unwavering belief in awakening the confidence Japan has supposedly lost and in Japanese companies thriving worldwide and delivering fruit to investors.
What impressed me this time was“Critics of stock investing who denounce inequality should reflect on their own ignorance, not attack politics or systems.” It’s hard to say that so straight. I intend to convey the same message, but can’t say it as directly—namely, Musha-san is remarkable.
By the way, the following NISA accounts are steadily increasing. However, they have not yet surpassed 10 million accounts, so adopters are roughly one in ten. I’ve also heard that many accounts inside the allotted spaces are empty.
The amount invested over the last nine months was about ¥17 trillion. I’d like to see a figure that increases by a digit. Capital gains and dividends are tax-free. When this system started in 2014, I thought it was a gift to the nation. I hope all citizens will use this system well.
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3. Kawada’s stocks of interest
This is a section where I introduce stocks that Kawada owns or other U.S. stock information that caught my eye
This week’s stock
MSCI ＜Ticker: MSCI＞ (MSCI, Inc)
Overview
A major benchmark provider. Revenue comes from licensing income derived from assets managed around ETFs and from futures/options, plus fees for analytical services.
What makes the company attractive
Market share growth, profitability, and high entry barriers. “Market share growth” benefits from expanding benchmark assets under management. In simple terms, as the assets of funds that use MSCI indices as benchmarks grow, sales rise regardless of the asset management company. Recent ETF fund flows provide strong tailwinds.
In addition to existing indices, development of new indices also contributes to market expansion. Recently, ESG-related growth is particularly large, and MSCI stands out among peers for index development.
Profitability is very high, with EBITDA margin for the licensing income segment (adjusted earnings before interest, taxes, depreciation, and amortization), which accounts for about 60% of revenue, above 70%. This is related to the high entry barriers. Although there have been cases of asset managers selling products based on their own indices, there are few successful examples that challenge existing indices.
The advantages of rich historical data and trusted branding create large differences, forming a high barrier to entry that keeps margins high. By the way, MSCI stands for Morgan Stanley Capital International, and the rights were acquired by Morgan Stanley in 1986 from the Capital International Market Indices, which later evolved into MSCI through a joint venture with Capital Group (the issuer) and Morgan Stanley. These historical achievements are hard to surpass.
Risks
1) Competition from other firms, 2) Politics and regulation, 3) Decreasing managed assets. Regarding ①, price-cutting concerns exist, but due to high entry barriers, the impact is likely temporary and offset by market expansion. ② includes congressional pressure on index inclusion for Chinese A-shares and EU “Benchmarks Regulation,” but actual impact is not large. ③ reflects stock market booms and busts, but in the long term, with rising stocks and broader adoption of passive funds, the impact is short-term.
MSCI basic data (Source: Company data, Yahoo! Finance)
(As of December 31)
Stock price $612.69
Market capitalization $50.5 billion
Total revenue $1.70 billion
Expected P/E 55.6x
Trailing yield 0.59%
MSCI IR site for earnings trend as of Sep 2021
(From top left, clockwise: total revenue (million USD), adjusted EBITDA (same), free cash flow (same), adjusted earnings per share (USD))
Headquarters: New York, New York
Listed: November 2007
Stock price chart 5 years
Chart provided by TradingView.com
(This column is intended for general information only and does not solicit the purchase or sale of any specific securities)
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4. Investment Tips
This section covers not only investment methods and stock introductions, but also “interesting indicators, statements,” and “movements in society and politics.”
This year’s stock price points of focus
Consensus views of analysts and strategists
Optimists: S&P 500 to break through 5,000 (recently 4,766)
The stock market is expected to continue rising. By then, the S&P 500 will likely surpass 5,000, but with rate hikes, a correction (down about 10%) is anticipated in the latter part of this year. After that, it should recover and reach 5,000 by the end of 2022. There is hope that the novel coronavirus will shift from a pandemic to an endemic.
Pessimists’ basis
The expected operating margin of the S&P 500 lost momentum around mid-October last year. In the earnings season, companies warned of rising input costs and labor shortages.
【Kawada’s Comment】
Strategists’ comments are meaningful because they alert us to market focal points, but I don’t rely on their forecasts.
What should one rely on to face the market?
Belief in long-term U.S. stock growth
Market seasonality and anomalies
Interest rates and stocks
Geopolitical risk
COVID is no longer a stock market surprise
Below are several perspectives
Additionally, in the ongoing series “This is Perfect! A Complete Guide to Asset Formation Using U.S. Stocks,” the current issue discusses “Interest rates and stock prices” in the article “Episode 5: Features of the U.S. market You Should Know.” Please read this article as well.
① Seasonality
Annual chart synthesized from daily S&P 500 data over the past 20 years.
Beginning of year not particularly strong
② Presidential elections and stock prices
There is a correlation between the president’s term and stock prices. In the president’s second year, which is this year, stock prices are historically the lowest over the four-year term.
Stock price performance in the president’s second year
The gain rate is 2.9% for Republican presidents vs 5.6% for Democratic presidents (blue indicates Democratic presidents in the chart, red for Republican).
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New Series “A Complete Guide to Asset Formation Using U.S. Stocks”
Introduction
This time, we begin a series covering the essential basics of asset formation. The overall structure is planned as follows:
What era are we living in? Part 1 of 2
Independent Japanese and asset formation indispensable for independence — Part 1 of 3
Is the stock market only in the U.S.? Part 4 of 4
Differences in stock market culture between Japan and the U.S. Part 1 of 2
Features of the U.S. market you should know — Part 2
What is the S&P 500?
Why is the U.S. strong?
Recommended investment strategies — Core and Satellite Investing —
Core investment strategy
Satellite investment strategy
What should I buy?
Sources of information and investment
Episode 5: Features of the U.S. market you should know — Part 2
Interest rates and stock prices
■ Relationships between interest rates, exchange rates, and stock prices
As the economy continually improves and interest rates rise, liquidity demand remains strong, corporate earnings expectations rise, and investors shift from bonds to stocks. This is the typical flow where rising interest rates coincide with rising stock prices.
Nevertheless, rising rates can have negative effects. Higher borrowing costs can reduce capital expenditure, and housing mortgage rate increases can prompt consumers to postpone purchases, driving concerns about corporate earnings and stock declines.
■ Real relationship between interest rates and stock prices, past 40 years
U.S. Treasuries and interest rates
The U.S. bond market underpins world bond prices. U.S. Treasuries, as benchmarks reflecting economic growth, are central to this system.
In particular, the long-term rate benchmark, the U.S. 10-year Treasury, affects not only the bond market but also the stock, financial, and economic markets broadly. Short-term rates, also called policy rates, are determined by each country’s central bank, whereas long-term rates vary with supply and demand for funds.
■ U.S. 10-year Treasury yield (past 40 years)
Long-term rates have generally trended downward over the past 40 years.
10-year yield over the past 5 years
End-2018 2.686%, End-2019 1.919%, End-2020 0.916%, End-2021 1.512%
Policy rate: FF rate (since 1954)
Stock price movements in U.S. long-term rate rising phases
According to Souren Takata of Okasan Securities Global Research Center, based on 40 years of experience, there were about 18 episodes of long-term rate increases in the last 40 years. In 14 of those episodes stock prices rose, and in 4 they fell.
Takata’s Report analyzes the movements of long-term rates, FF rate, and stock prices over the following periods in a chart; please refer to it.
① Early 1980s, double-digit U.S. long-term rates
② Late 1980s, including rate hikes before Black Monday amid market overheating
③ Early 1990s, rate hikes after the real estate slump
④ Late 1990s, “baseless euphoria” and rate hikes
⑤ Early 2000s, rate declines after the IT bubble bottoming in 2003
⑥ Late 2000s, easing after the Lehman shock and rate reversal
⑦ Early 2010s, post-Lehman tapering
⑧ Late 2010s to present, rate increases into the post-COVID era
Takata’s 40 years of experience
“Even when rates fall in 2020, a stock-price rally in a 'good-market' is an exception caused by excess liquidity. Normally, stocks and bonds move inversely, and we are in a transitional period toward normalization.”
This time’s rate hikes
Currently, the policy rate (FFR) is expected to be raised about 10 times over the next three years. In the previous cycle, from December 2015 to December 2018, there were 9 rate hikes to 2.5%. Into late 2018, with the economy softening, the Fed remained hawkish and the S&P 500 fell 19.8% from its autumn peak to December 24.
How high will this rate-hiking cycle go? The current baseline scenario is three hikes this year and next, and two in 2024. Many experts think the upper limit is around 2%.
As for the U.S. 10-year yield, in the editor’s note for The Barron’s Digest, many strategists at the start of 2021 expected around 1.8–2% by year-end. Yet the current 10-year yield is about 1.5%, so those forecasts are “not reached.” In 2019 and 2020, similarly, the forecasts at year start did not reach the realized yields. By the way, end-2018 2.686%, end-2019 1.919%, end-2020 0.916%, as of 2021-12-31 1.512%.
The reason the 10-year yield does not rise much is said to be global structural issues such as developed nations’ maturity, aging populations, slowing productivity, and falling potential growth.
This year, with the FF rate guided higher, there will be upward pressure on short-term rates. If long-term yields do not rise in tandem with the improving economy, an inverted yield curve—where the 2-year yield exceeds the 10-year yield—could occur (though the likelihood is low). In most cases, such inversions have preceded recessions within 1–2 years.
Stock price movements in U.S. long-term rate rise scenarios (1980–2000)
Stock price movements in U.S. long-term rate rise scenarios (2000–2021)
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5. Kawada’s stroll
◇◇Recently visited favorite spots (movies, museums) ◇◇
Movie: Dark Waters
“In 1998, Rob Bilott, an environmental lawyer at a prestigious law firm in Ohio, receives an unexpected investigation assignment from a stranger.
The man, Wilbur Tennant, who farms in Parkersburg, West Virginia, claims his land was contaminated by waste from DuPont’s factory, killing 190 cows.
With only a thin thread of conviction, Rob seeks court disclosure of waste-related documents and, prompted by researching the enigmatic term “PFOA,” begins to realize the gravity of the situation. DuPont had concealed the dangers of a carcinogenic pollutant for 40 years, releasing it into the air and soil.
Eventually Rob files a massive class-action suit on behalf of tens of thousands of residents. But the legal battle against a powerful corporation tests Rob’s resolve as he pursues the truth….”
【Kawada’s Comment】。
Given the rising ESG sentiment, I found it quite interesting. DuPont provides local jobs, but the film paints it as a deeply villainous entity. Still, lawyers who take on such lawsuits are rarely rewarded.
Companies like DuPont are necessary in society, but their social costs are high. To enjoy the benefits of civilization, society must bear some costs. This film reinforces that shareholders must not demand only profits from companies.
Further references on the film’s content are available at
【Movie】Dark Waters: Trials around DuPont and the PFOA | Amy’s Blog
DuPont vs. S&P 500 relative stock prices (circa 1968–)
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6. Upcoming activities
◇ Stock Voice: January 5 and January 12 (Wednesday) from 11:00
◇ Nikkei CNBC: January 19 (Wednesday) 8:18 live call
January 25 (Tuesday) 10:15 guest talk
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7. Q&A section
Question
“NoriP has also failed in asset formation—what kinds of mistakes did he make? I’d like to learn from those as well.”
Background of this question
In my online salon “Dreams Come True: Asset Formation School,” NoriP (illustration) shared the essentials of asset formation. He is a native Japanese who lived in the U.S. for many years and recently returned to Japan.
“The awakening to U.S. stocks began when, in 1996, a Seattle-based financial advisor (an American) explained the retirement plan system. Since then, he has managed retirement funds with a 401k. At the same time, he learned the essence of U.S. stocks. From around 1996, he began investing, entering daily data in an Excel sheet—date, weather, temperature, stock indices, USD/JPY exchange rates—recording the total market value of his holdings and the fund’s value, and noting the main reasons on days with large fluctuations.”
Answer
NoriP likely hasn’t had major failures. He started investing in 1996, alongside his 401k.
Victory formula
① Timing of investment: In 1996, around the second year of the IT bubble, the S&P 500 rose about 20% each year until 2000 (see the annual gains table at the top of this newsletter).
② While learning, initially he stuck to Dow components only. In other words, he avoided high-flying or unfamiliar stocks. This humility and caution has been a key to asset formation success.
Investing in stocks is like running a business
Among the people around me, many analysts and fearless young people, and the older men who are used to ‘parabolic’ short-term trading in Japanese stocks, pay little attention to a company’s finances and business risks. I suspect NoriP’s risk-management instinct—developed through overseas projects at a major Japanese firm—prevented him from taking easy stock bets. He treats investing with the same seriousness as business, i.e., investing is not “false business” but “real business.”
③ Diligently manage positions daily with Excel. Not many people do this. I also manage with Excel; how about you?
Printing broker reports and binding them can be unwieldy. Instead, why not use weekly or monthly broker statements to record in Excel or a notebook?
It’s important to record how your assets move relative to major indices like the S&P 500 or Nasdaq 100. This helps you see whether your assets outperform or underperform the major indices.
In crude terms, people who merely react to price movements often underperform major indices. By tracking relative performance to the index, you become aware of your investment approach and fees.
NoriP’s strength lies in his deep understanding of American society and economic structure. As a result, he doesn’t casually reduce position sizes or risk, and his stock selection remains humble and prudent.
I’m truly grateful that NoriP connected with my “Morning Meeting” videos. I aim to discover and network people around the world who are awakening to asset formation and to foster a trend of asset management in Japan.
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