The Truth About US Stock Investing from Shigeshin Kawada: "U.S. Stock Courses Trained by the Media" [Vol.42] Distributed April 11, 2022
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Truth about U.S. stock investment
［Vol.42］ Distributed on April 11, 2022
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Shigenobu Kawata's "Training in U.S. Stock Investing Through the Media"
***Table of contents***
Market Review
This Week's Pick-up Articles
Kawata's Stocks of Interest
Investment Tips
Walks
What the Ultra-We-rich Actually Do: "Private Investment Strategy"
Activity Information
New Project: How to Read Nikkei to Enrich Your Life
A project that picks up articles of interest from Nikkei Newspaper, which I have read for over 40 years since becoming a working adult, and comments on them. It is conducted every Saturday from 9:00 to 9:45 a.m. via Zoom participation.
Participation is free, so if you are interested, please apply onPeatix.
Below are a few article headlines covered last Saturday
Online Salon "Asset Formation School Where Dreams Come True"
An online salon where everyone learns together and motivates each other to succeed in asset formation. It offers member-only seminars that convey content not fully captured by the popular mail magazine "Training in U.S. Stock Investing Through the Media" and lets you experience the魅力 of U.S. stock investing.
2000万円 Milestone Leader
Source: Financial Services Agency; Created by ExeTrust Co., Ltd. based on asset management simulations
*The numbers above are for simulation purposes only and do not guarantee future investment results. Also, fees and taxes are not taken into account.
How to read: assumed yield and target year
3–4% for 30+ years: wrap funds or balanced funds fit this
5–7% even 25 years: perhaps for stock funds outside the U.S.
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
Kawata's message is remarkably simple. To reach 20 million yen, have as much as possible of your surplus funds work efficiently. 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!
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1. Market Review (April 4 – April 8)
・Dow Jones Industrial Average -0.3%
・S&P 500 Index -1.3%
・Nasdaq Composite -3.9%
= Quick version =
With inflation containment in focus, long-term yields rose sharply. In the stock market, overvalued growth stocks were sold off, while financials and consumer staples rose on the buying side.
= A bit more detail =
The week was heavily influenced by interest rate movements.
Federal Reserve Chair Jerome Powell indicated on Tuesday that balance-sheet runoff could begin as soon as May, and that rate hikes could continue later in the year depending on circumstances.
The FOMC minutes released on Wednesday showed broad agreement on at least one 0.5% rate hike and balance-sheet reduction of $95 billion per month.
As a result, long-term yields rose to the 2.7% range not seen since March 2019.
In the stock market, overvalued growth stocks faced selling pressure, pushing Nasdaq down 3.9%, but financials and consumer staples helped support the indices, resulting in a small Dow decline.
S&P 500 Over the Past Year
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2. This Week's Pick-up Articles
A section where I select information useful for asset formation from the information I have obtained, rank it, and comment from a very personal viewpoint.
【1】TOYOKEIZAI ONLINEMeaningful? The complete inside story of the Tokyo Stock Exchange market reform's "complete骨抜き"4/4
"Meaningful? The complete inside story of the Tokyo Stock Exchange market reform's 'complete bone removal'"
In the Prime Market, about 1,840 companies, or 84% of listed companies, will slide over as they are. There are two major reasons why the TSE reform has largely stayed the same.
One is that the TSE lost control of reform discussions. The strong push for bone removal came from Chief Cabinet Secretary Suga (then) and officials from the Ministry of Economy, Trade and Industry, faced with political pressure; the Financial Services Agency had little desire to reform the TSE seriously.
Within TSE's management, several executives were passionate about TOPIX reforms, and among them Koichiro Miyahara was particularly enthusiastic. He disappeared from management after the major system outage in October 2020, which is cited as another reason reforms became bone-dry. Others argue that the reason reforms became bone-dry was the lack of resolve within JPX's management.
【Kawata Comment】
I don't invest in Japanese stocks, so it doesn't affect my own portfolio. In the text, a Financial Services Agency official, who was stopped by a member of the Liberal Democratic Party at the Diet, reportedly said: "If excellent young people take local jobs at prefectural offices, banks, or first-tier listed companies, the impact when those '1st-tier' companies are downgraded is much greater than you imagine."
Yes, this is Japan, so perhaps this is fine. It seems Japan never had a bold market reorganization as a starting point. It is natural that Japan remains as Japan.
【2】Nikkei NewspaperFusion of Capital Logic and Society: Senior Columnist Ryushiro Kojima4/6
Reforming the capital logic focused on shareholders, and corporations should distribute more to people and society—this is a theme gaining traction in the context of Prime Minister Fumio Kishida's "New Capitalism." But are "capital" and "society" so opposing?
UK: Tesco, a major supermarket preparing for July shareholders' meeting, is facing shareholder proposals calling for wage increases. In the U.S., movements such as "human rights audits" or "civil rights audits" are noteworthy, where external lawyers examine whether there is racism or harassment within corporate groups.
UK and the U.S. share mature stock markets and strong investor power. They are representative of what is called shareholder capitalism. In those places, stakeholder capitalism—paying attention to employees and suppliers—has been rapidly rising.
What we should envision is not the weakening of shareholder dominance. Rather, to accept many stakeholders as shareholders and ensure their voices reach companies and governments via markets. This fusion of capital logic and social issue resolution could be called "Shareholder Capitalism 2.0."
【Kawata Comment】
There is a rapid rise of "stakeholder capitalism" where the demands of shareholders and societal roles contribute to solving broader social issues beyond profit pursuit.
On the other hand, in Japan, the social meaning of business has long been highly valued. For example, the so-called "three-way satisfaction" (seller, buyer, and society) business model is said to be a prerequisite for enduring future ventures.
However, the rising moves in the U.K. and U.S. are primarily shareholder-driven. As noted in the text, "accept many stakeholders as shareholders, and ensure that various voices reach companies and countries via markets," which could be called "Shareholder Capitalism 2.0."
Most Japanese people probably do not have a mindset to accept each stakeholder as a shareholder. Rather, it might be managers who distance themselves from shareholders and use the corporate entity to voluntarily solve societal issues.
【Reference】
The figure below shows the difference between the shareholder capitalism and stakeholder capitalism as understood by Japanese people. In "Shareholder Capitalism 2.0," it is my understanding that stakeholders are practiced under shareholder capitalism.
【3】Nikkei NewspaperShort-term Investors: Guidance in the Fog Under Easing Policies4/6
Day trading and short-term momentum strategies that were effective under accommodative policy have started to struggle. There are funds reflecting this struggle.Sumitomo Mitsui AI Asset Management's "Tetra Equity"; when the S&P 500 declines beyond a certain level, they mechanically short futures, and they buy on certain rises. Positions are liquidated at the end of the day, representing a short-term momentum strategy.
In March 2020, during the onset of the COVID-19 pandemic, the market fell sharply, and the approach gained popularity for quickly capturing high returns. But since the beginning of this year, the net asset value has returned to pre-COVID levels.
Funds such as the "U.S. Stock Daily Trend Strategy Fund" and "Trend Catch Strategy Fund," known as so-called "trend strategy funds," proliferated after Tetra's success. However, currently, their NAVs have fallen across the board. With tightening financial conditions, investment targets are being screened, and short-term players are forced to rethink strategies.
[Kawata Comment]
The following is basic data on “Tetra Equity.” The management fee is 0.95%, not particularly high. The assets under management are 62 billion yen. Funds like this perform well in certain market environments, but the period is not enduring. Looking at the chart, the net asset value surged until around March 2020, shortly after setup, and since then has mostly moved sideways, with a downward trend since last summer.
In simulations before fund setup, performance looks good, but in reality, many times it does not, which is common in this industry. The managers may be young and scientifically minded, but may not have long industry experience.
The managers likely find market distortions with innovative thinking and unconventional methods, harvesting them to earn excess returns (above normal profits). However, with the passage of time, the distortions gradually disappear, which is the fate of this approach.
From the chart, the shelf life of this investment model might have been shorter than expected. Still, the manager may refuse to admit their losses. The asset management company has already gathered 60 billion yen, so that portion of trust fees will come in accordingly. If so, then perhaps the business is reasonably successful as long as performance is not so good that investors cash out and assets flow out. I pondered this while watching the chart.
Many investors in the wealth-building generation should simply not invest in such funds in the first place. If you must support them, I think one core satellite holding should be capped at about 1% of total assets under management.
If these 62.4 billion yen were managed in an S&P 500 ETF fund, Japanese savers’ assets would probably have grown a bit more. It’s truly regrettable that Japanese investors often lack risk-return balance in their investments.
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3. Kawata’s Noteworthy Stocks
This is a corner where we introduce stocks that Kawata has in his holdings and US stock information that caught our eye.
Medtronic Ticker: MDT Medtronic plcTicker: MDT
Overview (about 100 words)
Medtronic, founded in 1949, is a major medical device company. It develops and manufactures heart and vascular devices, surgical instruments, nervous system devices, diabetes-related devices, and more, and sells them in over 150 countries worldwide.
What makes the company attractive
A balanced product portfolio and geographic reach
Medtronic engages in various medical devices through internal development and through acquisitions. Notably, in 2014 it acquired Covidien, a Dublin-based company, which laid the foundation for current product lines (the registered headquarters is in Ireland). As a result, its balanced product lineup is sold globally, and it has strong brand power for devices like pacemakers, supporting long-term expansion of the business.
(Figure 1: Medtronic by segment revenue mix, FY2022 Q3)
(Figure 2: Medtronic by geographic revenue mix, same)
(Figure 3: Endovascular heart rhythm systems)
Steady performance and cash flow
Against this background, long-term results have been solid, though the company was affected by the Covid-19 pandemic. Elective procedures deemed lower priority than infectious diseases were delayed, resulting in a 0.2% year-over-year revenue decline in the company’s most recent quarter (FY2022 Q3, period ending Feb 2022).
Nevertheless, due to strict cost control and despite higher R&D expenses, profitability rose and net income increased.
With a low debt ratio and a healthy balance sheet, and ample free cash flow returned to shareholders, the company has paid dividends for 44 consecutive years. Recently, it announced a quadruple increase in quarterly dividends for May or June.
(Figure 4: Adjusted results for FY2022 Q3)
(Figure 5: Medtronic’s long-term goals)
Long-term targets include internal revenue growth of 5% per year, EPS growth of 8%, continued long-term R&D spending, and a 10% annual return to shareholders.
Undervaluation
Despite these strong fundamentals, the stock price in 2021 faced a correction. The causes included Covid-induced revenue declines and FDA warnings on some products.
As a result, the price-to-earnings ratio dropped below the market average, briefly below 18x. It has recovered to around 20x, still slightly below the market average.
However, the FDA warnings are not viewed as severe by many, contributing to the stock’s recovery backdrop.
Risks
There is a risk that stock prices react to renewed spread of a new COVID variant, FDA warnings, or lawsuits from patients. If such events are avoided, under the current rising-rate environment, investors may focus on solid near-term performance.
MDT basic data (Source: Company data, Yahoo! Finance)
(As of April 8)
Stock price $112.47
Market capitalization $150.88 billion
Total revenue $31.79 billion
Expected P/E 19.19x
Trailing yield 2.20%
Headquarters: Dublin, Ireland (U.S. HQ in Minneapolis, Minnesota)
Listed: April 1960
Stock chart: 5-year
Chart provided by TradingView.com
(This section is intended solely for general information and does not constitute an offer to buy or sell any securities.)
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4. Investment tips
This column covers not only “investment methods” and “stock picks,” but also “interesting indicators or statements” and “developments in society and politics.”
This time, we present a contribution from Makoto Okura, whom you may know from our company’s YouTube channel series “US Stocks 40-Year Investment.”
S&P 500 and Nasdaq-100 range assumptions
A bear market in the US stock market
This year, after hitting highs at the start of the year, the US stock market fell sharply by mid-March due to rising long-term interest rates, high inflation, Russia’s invasion of Ukraine, and commodity prices such as crude oil. Then, when the Fed raised rates, there was a strong rebound (Figure 1).
Figure 1: S&P 500 trend
Previously, the 10-year stock market cycle was described as consisting of four phases: bull market, correction, earnings growth, and bear market (Figure 2). Based on this concept of the four phases of the stock market, since November last year when the Fed began tapering, the stock market has been transitioning from a bull market to a correcting market.
Figure 2: The four phases of the stock market
In a correction, market volatility rises as monetary policy stance changes, and until valuation multiples such as P/E compress to a degree, the market tends to drift lower. Therefore at the start of the year we predicted, “The US stock market this year will have high volatility over the year and won’t end flat.”
Figure 3 shows the performance of the S&P 500 and Nasdaq-100 (QQQ) from the start of the year to the end of March. They fell from the start to mid-March (S&P 500 down 12.5% as of March 8; Nasdaq-100 down 20.03% as of March 14) and then recovered. Despite unexpected factors like higher-than-expected inflation and the Ukraine conflict, the stock price movement so far has been generally within expectations (returns and risks are all in USD).
Figure 3: S&P 500 and Nasdaq-100 performance from January to March
Assumed ranges for S&P 500 and Nasdaq-100
While I stated that the movement so far has been largely within expectations, let’s examine the expected return and standard deviation (risk) for S&P 500 and QQQ in more detail. If we rephrase “the US stock market this year ends up flat” as “the expected return of the S&P 500 this year is at best 0%,” the risk is 15.02% (standard deviation, annualized, from 2000-01 to 2022-03). Using these figures, the range for S&P 500 from year-start to year-end is shown in Figure 4.
Figure 4: Expected range for S&P 500
In the chart, M is the central path (real stock prices do not move straight along this path), M±SD are paths deviating by one standard deviation from the expected return, and M±2SD deviate by two standard deviations. Here, since the expected return is 0%, M is flat across the year.
From this chart, the actual movement of the S&P 500 this year has largely traced near the lower bound of M−2SD (two standard deviations below the center). This implies the S&P 500 has moved near the lower end of the range one would typically expect this year, with the worst early-year drop of −12.50% also near or above M−2SD (Note: the probability of moving below M−2SD is about 2.5%).
A similar analysis for Nasdaq-100 is shown in Figure 5. For convenience, we also assume the Nasdaq-100’s expected return to be 0% per year. The risk is 23.26% (standard deviation, annualized, from 2000-01 to 2022-03). The Nasdaq-100 shows a movement largely similar to the S&P 500, with the worst drop of −20.03% near or above M−2SD. In other words, Nasdaq-100 also fell to the lower bound that should be expected.
Figure 5: Nasdaq-100 expected range
In conclusion
The stock market declines from January to March this year are statistically not abnormal. Rather, these declines are precisely what investors should anticipate if they are willing to take on risk. If you cannot endure such declines, then you are probably taking on too much risk.
In particular, Nasdaq-100 has about 1.5 times the standard deviation of the S&P 500. If you add 2x leverage to Nasdaq-100, you take three times the risk of the S&P 500.To continue asset management, it is important to: 1) understand how much risk you are taking, and 2) keep portfolio risk within what you can tolerate.
【Makoto Okura】
From Ehime Prefecture. Graduated from Osaka University, Faculty of Economics (1984). In 2005, earned a PhD in Economics from Saitama University Graduate School of Economics. Worked at Citibank, N.Y., CitiTrust Trust Bank, Societe Generale Trust Bank (now SMBC Trust Bank). In addition to pension and public funds for institutional investors, also engaged in wealth management for high-net-worth individuals at a private bank. In 2017, established EagleCapital Co., Ltd. in Kyoto’s Higashiyama. CFA Charterholder; provisional member of the CFA Society Japan.
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5. Walkabout Corner
◇◇Recent shops visited,movies, museums, books◇◇
~巻 by Kaneki Kumakura
This is a contribution by Kaneki Kumakura, a former securities man and a voracious reader.
A phantom investment guidebook?
A report published on June 3, 2019, caused a great stir, as you may recall.
Financial Services Council Market Working Group report “Asset Formation and Management in an Aging Society”
About the publication of the Financial Services Council “Market Working Group” report
The sensational coverage in newspapers, magazines, and TV stemmed from this report.
While headlines emphasized the “two million yen shortfall for retirement,” the point was essentially “long-term asset formation to protect your own future!”— a government edict turning citizens away.
On the other hand, in the private sector, companies are saying “we can’t take care of you any longer—do side jobs or whatever is needed!” This is driving a shift away from lifelong employment and corporate family norms toward precarious working arrangements.
“Do not ask what your country can do for you; ask what you can do for your country.” Kennedy’s famous maxim becomes a loud message in a nation where state and individual roles are inverted, which is quite natural in some contexts.
The report’s outline includes a “Life-stage considerations” section, with three key points for the active years:
● Recognizing the effectiveness of early asset formation
● Stable asset formation through small amounts, long-term, regular, and diversified investing
● Considering a money plan suited to oneself
The shock to citizens who were suddenly faced with such homework was immense.
As a result, bookshops overflowed with investment manuals of varying quality, and unscrupulous financial products and agents proliferated.
Practically, individual investors who must navigate this confusing world must decide which investment guides to follow. In the United States, perhaps due to national character, there are excellent explanations about investing to enjoy retirement and a rosy retirement life, which are used in investment education and asset management.
I believe the essence of such selections can be boiled down to three points:
(1) Creating household financial statements, financial strategies, and crisis management plans
(2) Maximizing human capital
(3) Developing Efficient-Market-Hypothesis index investments
As you may already know, the point is to manage your household finances, secure funds for life milestones and for emergencies due to illness or accident, maximize the remuneration from your current job, and, if possible, invest in market indices via financial products.
In this light, Japanese-exclusive systems like NISA and iDeCo are a reasonable reference for such guidance written in Japanese.
Now, when I first picked up such investment guidance books, I think it was around “Investment Strategy Mindset” by Takeo Kimura (Author).
This book was published in 2001 and has since seen revised editions in 2008 and 2010.
However, Kimura’s involvement in the Nippon Shinpan Bank incident led to a conviction, and the publisher Knowledge for Corp. went bankrupt in 2013, making the book something of a “phantom investment guide.”
The latest edition, “Investment Strategy Mindset 2010,” still contains some somewhat antiquated ideas like a “5-split portfolio” and a “20-stock self-portfolio,” and it lacks discussion of market-index investing, though it did include early ETF references.
Nevertheless, copies are widely available on Amazon and Mercari at surprising prices, which attests that readers still obtain and benefit from the book through word of mouth.
In Amazon and Mercari comments, many note that points (1) and (2) are described in detail, which suggests its continued relevance.
If you are having trouble finding suitable investment guidance, why not obtain this book on the used market and use it as a reference?
【Kaneki Kumakura】
Joined Daiwa Securities in 1980. Obtained an MBA from the University of Chicago Booth School of Business as part of a corporate exchange, and has lived in Singapore and Hong Kong, engaging in Asia-focused business.
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6. What the ultra-wealthy actually do: “Private Investment Strategies”
Hiroshi Ichikawa, who specializes in IFA sales support, shares in simple terms the investment strategies used by the ultra-wealthy.
We describe one such strategy: private fund investments.
A Private Fund is a private equity-like vehicle that pools capital from a limited group of investors to invest in a variety of assets, including equities, bonds, real estate, and more exotic targets like specific businesses, paintings, luxury cars, jewelry, loans, and even cryptocurrencies.
Specific investments are defined per fund, but the key benefit is that funds can be formed by pooling capital from multiple investors to access assets or amounts that would be unreachable individually.
Public vs private funds
Broadly, funds are categorized into “public funds” and “private funds.” A typical public fund is a mutual fund. Mutual funds collect money from many investors via financial institutions like brokerage firms or banks, and professional fund managers invest that money. There are many types of mutual funds, allowing you to invest in funds aligning with your preferences.
Public funds are characterized by “many types available,” “anyone can start with a small amount,” and “you can generally redeem at any time.”
A private fund is limited to a small number of professional or accredited investors (institutions and high-net-worth individuals). Since private funds are not open to all investors, they face fewer regulatory restrictions and can offer greater flexibility in investment strategies, including higher risk and higher potential absolute returns.
Private fund investments
Private funds raise capital from specific investors and invest it. The investment targets and methods vary by fund.
The most common type is a hedge fund, which invests in equities, bonds, and other assets and pursues high absolute returns through long and short positions and leverage.
Recently, funds investing in non-financial sectors have increased, such as those focusing on art (paintings), hoping for appreciation. Art, instruments, and other collectibles tend to hold value over time, but require substantial capital and expertise to invest individually.
Diversification of risk and variety of returns
Private funds can invest across various assets to diversify risk and pursue different returns, helping reduce the overall risk of a portfolio because their strategies are less correlated with traditional stock markets.
In private investment strategies, we prefer funds that invest in non-financial sectors, seeking returns not readily available through other financial investments.
However, private funds have relatively few deals, so if a financial institution offers a private fund, it is advisable to inquire about the details. If you need help evaluating, please consult us.
【Hiroshi Ichikawa】
Investment Techniques to Become Ultra-Wealthy
CEO of Winviser Co., Ltd. After working in asset management consulting at SMBC Nikko Securities at offices in Ibaraki, Fukuoka, and Tokyo, he marketed ultra-wealthy financial products.
After switching to an independent financial adviser (IFA) firm and advising ultra-wealthy individuals on asset management, he established a support company for IFAs to contribute to Japan’s financial sector development. He currently provides third-opinion asset management guidance to individual investors while supporting IFAs with his experience.
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7. Upcoming activities
◇ Stock Voice: Wednesday, April 20, 11:00
◇ Nikkei CNBC: Wednesday, April 20, telephone interview
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