The Truth About U.S. Stock Investment by Shigenobu Kawada: "U.S. Stock Investment Course Trained by the Media" [Vol.34] Distributed February 14, 2022
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The Truth About U.S. Stock Investing
Shigenobu Kawata's "Training in U.S. Stocks through the Media"
［Vol.34］ February 14, 2022 distribution
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＊＊＊Table of Contents＊＊＊
Market Review
This Week's Picked Articles
【The Entanglement of U.S. Politics and Inflation: Readiness for the Unknown Era of Rate Hikes】【Easing Border Measures to End Autarky (Editorial)】
Kawata's Noteworthy Stocks
Investment Tips
What the Ultra-Wealthy Practice: "Private Investment Strategies"
Kawata's Walk
Activity Information
Q&A Corner
Achievement Pace Set at 20 Million Yen
Source: Financial Services Agency Based on Asset Management Simulation by Exe Trust Co., Ltd.
*The numbers above are simulations and do not guarantee future results. Also, fees and taxes are not considered.
How to Read: Assumed Returns and Target Years
3–4% for 30+ years: Wrap funds or balanced funds fit here
5–7% may take 25 years: for non-U.S. stock funds perhaps
8–10% around 20 years: a conservative look at the S&P 500 performance
S&P 500 Performance Record (Dividends Reinvested 1970-2021)
Reach 20 million yen early with proper risk-taking
Kawata's message is incredibly simple. To reach 20 million yen, have as much of your excess funds work efficiently for you. 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 20 million yen right away!
Online Salon “Asset Formation Where Dreams Come True”
This is an online salon for learning and mutual inspiration to help everyone succeed in asset formation. It offers member-only seminars that convey content not fully covered by the popular newsletter “Training in U.S. Stocks through the Media” and lets you experience the appeal of U.S. stock investing.
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1. Market Review (Feb 7–Feb 11)
＜Major Indices＞
・Dow Jones -0.9%
・S&P 500 -1.8%
・Nasdaq Composite -2.2%
＝Quick Version＝
In the first half of the week, rising rates paused and buying resumed, but in response to January's consumer price index at about a 40-year high and a rise in long-term rates, the market fell sharply on Thursday and declined further on Friday due to concerns about Russia's invasion of Ukraine.
＝A Bit More Detail＝
In the early part of the week there were no major economic releases, but due to strong results in 10-year Treasuries, rates paused their rise and traded cautiously with some buying.
However, the CPI for January released on Thursday rose 7.5% year over year, the highest since February 1982. With the CPI release and remarks from Federal Reserve officials, expectations grew that monetary tightening would accelerate, and the rate futures market fully priced in a 0.5% rate hike for March.
Long-term rates also rose above 2% for the first time since August 2019, which soured sentiment, especially for growth stocks, leading to a sharp market drop. On Friday, geopolitical concerns from Russia's invasion of Ukraine increased risk aversion, selling across the board.
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2. This Week's Picked Articles
A corner that selects and ranks information useful for asset formation from what I have gathered, with my very personal commentary.
【1】Nikkei NewspaperThe Entanglement of U.S. Politics and Inflation: Readiness for the Unknown Era of Rate Hikes2/11
Central banks around the world have struggled for years to raise prices, and now face the opposite trial. The United States is facing inflation at a 40-year high, and Fed Chair Jerome Powell signaled a likely rate hike in March.
■ What happened in 1994 and 2004 when hikes were made before elections
Since the 1990s, before major U.S. elections, there were only two instances of rate hikes by the Fed: 1994 and 2004. The Biden administration would not want a repeat of 1994, which was an election year under a Democratic administration (Clinton).
Under Greenspan, the Fed continued rate hikes from February to August 1994 to curb inflation. In November, in the first midterm election of that administration, Democrats lost control of both chambers to the Republicans.
2004 had a different development. It was an election year with Bush (43) aiming for reelection, and the Fed raised rates in June, August, and September, yet Bush still won.
In both the 1994 and 2004 hikes, inflation rose in the 2–3% range. The current 7% inflation under President Biden is an exceptionally strong inflation pressure.
■ How to control the demon of inflation
Inflation is indeed a heavy burden for the Biden administration. In the midterm elections, the political wind is likely to blow against efforts to curb price pressures.
【Kawata’s Comment】
With the midterm elections in November approaching, the Biden administration faces a difficult situation. The table below highlights the relationship between elections and rate hikes since 1990.
FF rate hikes and subsequent stock market movements since the 1950s are shown in red
FF rate hikes and subsequent stock prices
After guiding rates higher, there is a period with negative impact on equities. This time, a March hike is almost certain, and the probability of a 0.5% increase is higher than the previously expected 0.25%. Please also review the 1994 and 2004 cases.
Movement of the S&P 500 during rate-hiking phases
【2】Nikkei NewspaperEasing Border Measures to End Autarky (Editorial)2/10
Restrictions on cross-border movement severely undermine Japan's appeal and national power. It is time to revisit the border policy that lacks rationality as a COVID-19 measure.
【Kawata's Comment】
Among major newspapers, Nikkei has begun publishing editorials that are critical of the border policy. Last week's newsletter featured a translated article from the Financial Times, and now the editorial makes the stance clear.
Publishing an editorial carries significant weight. It suggests that Japan's business community judges the current situation to be problematic. However, public reaction may differ. Reactions from everyone may be evenly split, but it is notable how politics (and administration) will respond.
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3. Kawata's Noteworthy Stocks
In this section, besides Kawata's holdings, I introduce stocks in the U.S. market that catch my attention.
This time again, from Barron's January Roundtable feature on U.S. investment weeklies. The "Roundtable" is a highly watched U.S. investor feature where ten market experts discuss markets, economy, and society before presenting stock recommendations.
This Week's Stock
Adobe Ticker: ADBE Adobe Inc.
Ticker: ADBE
OverviewA leading image editing software company. Its products include PDFs and Acrobat Reader for viewing, along with many other software and cloud offerings like Photoshop and Illustrator that support printing design and video editing/production.
Why Adobe is魅力 (Charming)
Adobe possesses the world's premier digital media software assets, categorizing its operations into three clouds: Creative Cloud, Document Cloud, and Experience Cloud. Each aims to unleash creativity, improve document productivity, and accelerate digital workflows respectively.
Adobe's business categories
In short, the appeal for Adobe lies in a rapidly expanding market.As society moves toward cloud computing and digitization, digital media and digital document creation are no longer mere fads; for many companies, spending on marketing and technology makes these tools essential and irreplaceable.
Among them, it holds an exclusive share in many digital media production fields. The result is an increase in revenue from software licenses (especially subscription-based sales) (Figure 1), higher profit margins (Figure 2), and increased cash flow (Figure 3). And it returns those profits to shareholders through share buybacks (Figure 4).
And to maintain this position, it actively conducts R&D, and also acquires companies with strong technologies.
（Figure 1, increase in sales = subscription (blue portion) grows at 24% annually）
（Figure 2, as sales grow, profit margins rise）
（Figure 3, operating cash flow grows at 22% annually）
（Figure 4, as buyback amounts expand, the number of shares decreases）
Risks
There is a possibility that the market share temporarily declines due to new software launches by emerging software companies. Also, acquisition costs and marketing expenses may temporarily accumulate. If investors focus on this, there is a risk of temporary overvaluation selling due to valuation concerns. Nevertheless, given the rapid overall market growth and many products with overwhelming market share, there is no concern about long-term growth in sales and profits.
ADBE Basic Data (Source: Company data, Yahoo! Finance)
（As of February 11）
Share price $473.97
Market capitalization $233.3 billion
Total revenue $15.79 billion
Estimated P/E 35.59x
Trailing yield -----
Headquarters: San Jose, California
Listed: August 1986
Stock price chart: 5 years
Chart provided by TradingView.com
（This column is intended for general information purposes only and does not solicit the sale or purchase of any specific securities）
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4. Investment Tips
This section covers not only “investment methods” and “stock recommendations,” but also “interesting indicators or statements” and “social and political movements.”
Relative performance of Dow Jones Industrial Average and the S&P 500
As a representative US stock index, the first that comes to mind is the Dow Jones Industrial Average (DJIA). However, for core-satellite investing, I prefer the S&P 500 index over the DJIA for the core portion.
In the February 6 issue of Barron’s Digest that I edit, there was an article comparing the performance of the DJIA and the S&P 500 and discussing the most recent constituent changes.
The gist of the article is
DJIA performance has lagged behind the S&P 500 in recent years. This may be influenced by the August 2020 constituent changes.
Also, Alphabet ’s stock split (1 for 20) is viewed as a move possibly aimed at the next index reshuffle.
What are the other potential new entrants? (“Barron’s Digest Weekly, Why Alphabet, Nvidia, and Others Belong in the Dow Jones Industrials,” 2/6 issue)
Dow Jones Industrial Average comprises large-cap stocks
The S&P 500 also consists of large-cap stocks, each with a market cap of around at least 1 trillion yen. The 500 constituents’ total market cap accounts for almost 80% of the entire US stock market’s market cap.
Dow Jones Industrial Average constituent changes
Constituent changes are made every few years to reflect shifts in US major industries. While there are no fixed numeric inclusion criteria, decisions are made based on the following considerations:
DJIA inclusion considerations
- “Company reputation”
- “Sustainable growth track record”
- “Investor interest”
- “Representative of a sector”
- “Company founded in the US and headquartered in the US”
Note that this index is price-weighted, reflecting price movements of the 30 constituents, unlike capitalization-weighted indices like the S&P 500.
Higher-priced stocks contribute more to the index, resulting in weights dominated by UnitedHealth Group , Home Depot , Microsoft , and McDonald’s , which together account for about one-third of the index’s weight.
Dow Jones Industrial Average constituent dates
Relative performance of DJIA and S&P 500
Below, I divided the S&P 500 by the Dow Jones average to chart relative performance. The chart spans a very long period.
Generally, from the postwar era to the early 1980s when inflation ended, the S&P 500 led. From around 1981 after inflation subsided to the period before the financial crisis, the DJIA led. However, in the late 1990s dot-com bubble, the S&P 500 outperformed. After the financial crisis, the S&P 500 again led for most of the period.
Now, the most recent DJIA constituents changes occurred in August 2020. The three constituents shown in the table below were replaced.
August 2020 three-stock replacement
Since the prior replacement, the replaced-out stocks’ price performance was strong and the newly added stocks dragged the index down.
Exxon Mobil: stock price doubled
Salesforce: stock price down 15%
Pfizer: though removed just before approval of the COVID-19 vaccine, stock price rose 40%.
Stock price performance of replacement stocks since August 2020
The performance of the removed stocks was strong, while the newly added stocks underperformed.
Stock charts for the August 2020 replacement over 5 years
Performance other than Salesforce is not particularly remarkable.
Market-predicted Alphabet and other potential Dow entrants
Market candidates besides Alphabet include
NVIDIA (GPU maker)
Meta Platforms (formerly Facebook)
Investment firm Berkshire Hathaway
NextEra Energy (renewable energy leader)
etc.
Excluded candidates
In connection with this, the exclusion candidates include
Travelers Companies
Dow Inc.
among others.
DJIA additions and exclusions: charts for the past 1 year and 5 years
Summary
Relative performance of Dow Jones Industrial Average and the S&P 500 is quite close in the very long term, though they diverge reasonably on a 10-year horizon.
Even so, it feels somewhat mysterious that the 30-stock DJIA and the S&P 500 show so little divergence in performance over such a long period.
Your questions are
1) If you pre-load stocks that seem likely to be included in the DJIA, can you profit from it?
2) Is it okay to use the DJIA core for the core-satellite approach?
1) is sometimes discussed in Barron’s Digest, but while there is some popularity before inclusion, it is not guaranteed to directly affect stock prices.
2) It’s mysterious why the DJIA and S&P 500 don’t diverge much in performance, but that may be hindsight. I think you should choose the S&P 500.
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5. What the ultra-wealthy actually do: private investment strategies
Hiroshi Ikawa, who specializes in sales support for IFA, explains investment strategies used by the ultra-wealthy in a concise way for everyone.
This first installment outlines the overview, advantages and disadvantages of the “private investment strategy” used by the ultra-wealthy.
What is the “Private Investment Strategy”
It uses four investment products for asset management. Private-type products are designed for wealthy individuals and professional investors. In other words, private means financial products that are generally not publicly disclosed.
Private Equity refers to unlisted stocks, and broadly encompasses all investments related to private companies (or businesses) not publicly traded.
Structured Bonds are tailor-made bonds, including full-order collateralized bonds and bonds linked to specific businesses or indices.
Private Funds are private placement funds that raise money from a limited set of investors and operate the business with restricted eligibility.
Private REITs are privately offered real estate investment trusts under the Investment Trusts Act, i.e., non-listed REITs.
Ultra-wealthy combine these financial products skillfully for asset management.
The four pillars
Benefits of the Private Investment Strategy
1. High yields
Private investment products are typically private, non-public offerings. Since there is no advertising or sales promotion, these products can reduce unnecessary costs, allowing relatively high target yields. While the long-term return of the S&P 500 is about 7% per year, many private investments aim for around 10–20% per year.
2. Low correlation
Financial instruments are affected by financial markets. Private investments are exposed to market effects, but their correlation with the stock market is low. For example, mutual funds that include stocks are diversified and often portrayed as lower risk, but they still decline when overall stock markets fall. Private investments are designed to be less influenced by overall market movements, enabling institutions like wealthy individuals and pension funds to preserve assets over time.
3. Rarity
As noted later, these are private products not generally accessible to all. There are limited slots. For example, even if there is a private equity allocation slot, pre-IPO shares are few, and openings are usually only a few tens of millions of dollars; it’s typically a first-come, first-served situation, and relationships with sellers are important. So scarcity can be advantageous for performance.
4. Private investments’ disadvantages
1. Not always available to buy
The scarcity means you can’t buy when you want. Private equity, especially smaller-sized offerings, often fill up quickly once a round opens, and timing is unpredictable. Sometimes a round appears suddenly and sells out the same day, reflecting strong demand from investors.
2. Low liquidity
Public stocks and mutual funds can be sold whenever markets are open, but private-type products are not so flexible. Structured bonds generally can’t be sold until maturity; private equity may be illiquid for years until the underlying company IPOs or is acquired. Avoid investing funds you may need urgently.
3. Some high-risk products exist
Some professional investors take high risks, focusing most of their portfolios on stable investments and allocating only a few percent to high-risk private products for yield. Such high-risk private products do exist and can yield big gains or big losses.
In subsequent installments, I will introduce the strategies underlying endowment management and discuss each investment product in more detail.
Private Investment Strategy: Benefits and Drawbacks
[Hiroshi Ikawa]
Investment Techniques to Become Ultra-Wealthy
President and CEO of Winviser Co., Ltd. He worked in asset management consulting at SMBC Nikko Securities at branches in Ibaraki, Fukuoka, and Tokyo, and later marketed financial products for the ultra-wealthy.
After moving to an independent financial advisor (IFA) firm, he advised ultra-wealthy asset management and, to contribute to Japan’s financial industry, established a support company specialized in IFAs.
Currently, while supporting IFAs, he also provides a third opinion on asset management to individual investors based on his own experience.
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6. Kawata’s Walk
◇◇Recently visited stores,movies, museums, books◇◇
(Closed)
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New Series“This is Perfect! All about Asset Formation Using US Stocks”
Introduction
We are publishing a series covering the basics of asset formation. The overall structure is planned as follows.
What era are we living in? Part 1 of 2
Autonomous Japanese people and essential asset formation for independence, Part 1 of 3
Is the stock market only in the US? Part 1 of 4
Differences between US and Japanese stock cultures
Key features of the US market you should know
Recommended investment strategies – Core-Satellite investing –
Core investment strategies
Satellite investment strategies
What should you buy
Sources and investments
5. Key features of the US market to know
Long-term trajectory of the S&P 500 and near-term medium-term outlook
Continuing from the last piece, we consider the long-term trajectory of US stocks and mid-term outlook based on the contributions from Makoto Okura, familiar to readers of the “40-year US stocks investment” series on our website.
① Long-term trajectory of the S&P 500
Figure 1 shows the 51-year trend of the S&P 500 from December 1970 to December 2021 (log scale on the vertical axis; price index at month-end excluding dividends).
During this period, the S&P 500 rose at about 8% per year. Including dividends, you could add roughly another 2% to that.
Also, the S&P 500 largely stayed within a channel centered on an 8% trend line, within roughly ±30% up or down. The only major deviation occurred during the late 1990s dot-com bubble period.
Looking at 51 years of data on a log scale may make the trend look smooth, but note that events like the 1970s oil shocks, the dot-com collapse starting in 2000, and the 2008 Lehman shock caused declines of more than 40% from prior peaks (drawdowns).
Figure 1: S&P 500 51-year trend
② Focusing on the post-Lehman period…
Next, in Figure 2, we examine the period from the market bottom in February 2009 (month-end) to December 2021, about 13 years. While the prior 51-year rise averaged about 8% per year (left), the most recent ~13 years grew at about 12% per year (right), indicating a faster pace. As a result, by December 2021 the S&P 500 was near the upper end of its long-term channel.
This is likely due to the growth in EPS of S&P 500 constituents and a substantial rise in valuation (P/E ratio) from around the low-10s in February 2009 to about 21x by December 2021. Prices are a product of EPS and P/E, and during this period both factors contributed positively.
Figure 2: S&P 500 13-year trend
③ No excessive optimism, but no need for pessimism
So how should we proceed? If the US economy continues to grow, long-term EPS should keep rising. This year’s S&P 500 EPS growth is expected to be around 9%. As supply chains repair and pent-up demand materializes, sustainable profit growth should be achievable in the near term.
On the other hand, with the Federal Reserve normalizing policy, further expansion of the P/E multiple is unlikely. If long-term rates rise as monetary normalization progresses, P/E may gradually contract.
Looking at the period after Lehman, especially in recent years, the US stock market has performed well. However, a 12% annual return is exceptional; a mid-term pace of around 8% could be more realistic.
As long as corporate earnings grow, there is no need to become bearish on US stocks. Being optimistic is likely necessary to participate in the US stock market, but given valuation revisions, it may be prudent to temper expectations and adopt a cautious stance regarding returns.
In short, the US stock market will rise, but the pace will slow. What happens in the end is anyone’s guess, but a prudent stance—expecting market upside but not counting on it—might be best.【Okura Makoto】
Okura Makoto, from Ehime Prefecture. Graduated from Osaka University, Faculty of Economics in 1984. Earned a PhD in Economics from Saitama University in 2005. Worked at Citibank, N.A., Citi Trust & Trust Bank, and Societe Generale Trust Bank (now SMBC Trust Bank) before establishing EagleCapital Co., Ltd. in Kyoto/Higashiyama in 2017. Engaged in asset management for institutional investors such as pension funds, as well as private banking for the wealthy. CFA charterholder and certified member of the Japanese Securities Analysts Association.
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7. Upcoming Activity Info
◇ February 15 (Tue) 20:00– S&P 500 appeal explained! Wealth-building using US economy 2022, hosted by Monex Securities
◇ February 22 (Tue) around 8:15 AM (telephone interview) Nikkei CNBC
◇ March 2 (Wed) 11:00 Stock Voice
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8. Q&A Corner
(Closed)
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★Disclaimer
◆The information provided in this newsletter does not constitute recommendations to buy or sell stocks, bonds, funds, ETFs, or sectors, and investment decisions are the responsibility of the subscribers. We do not provide any warranty or guarantee.
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