Truths about U.S. stock investment transmitted [Vol.47] delivered May 16, 2022
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The Truth About US Stock Investing
［Vol.47］ Distributed on May 16, 2022
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Shigenobu Kawada's "Training in U.S. Stocks through the Media"
*** Table of Contents ***
Market Recap
This Week's Picked Articles
Kawada's Stocks of Interest
Investment Tips
A Walk
A Short Break: "FA Perspective"
What the Ultra-Wealthy Practice: "Private Investment Strategy"
Activity Information
【Practical from Today: How to Read Nikkei to Enrich Your Life】
A project that picks up and comments on articles from Nikkei Shimbun, which I have been reading for over 40 years since entering the workforce. It is conducted every Saturday from 9:00 to 9:45 a.m. via Zoom.
Participation is free, so if you are interested, please apply onPeatix.
Below are several article headlines covered last Saturday.
Online Salon "Asset Formation School Where Dreams Come True"
An online salon where members learn together and inspire each other to succeed in asset formation. It offers seminars for members to experience the appeal of U.S. stock investing that cannot be fully conveyed by our popular newsletter "Training in U.S. Stocks through the Media."
2000 Million Yen Milestone Pace Maker
Source: Financial Services Agency; Created by ExeTrust Co., Ltd. based on asset management simulations
*The above figures are purely simulations and do not guarantee future investment results. Fees and taxes are not taken into account.
How to Read: Expected Return and Target Year
3–4% over 30+ years: Wrap funds or balanced funds do this
5–7% even 25 years: Perhaps with non-U.S. equity funds
8–10% about 20 years: Considering the modest rise of the S&P 500
S&P 500 Performance (Dividends Reinvested 1970-2021)
Achieve 20,000,000 yen early with proper risk taking
Kawada's message is remarkably simple. To reach 20,000,000 yen, have as much of your surplus funds work as efficiently as possible. For that, participants must correctly understand the meaning of risk and reward. Before reading the weekly newsletter, glance at this table and confirm the correct investment posture.
Now, start the countdown to 20,000,000 yen right away!
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1. Market Recap (May 9–May 13)
＜Major Indices＞
・Dow Jones -2.1%
・S&P 500 -2.4%
・Nasdaq Composite -2.8%
＝Quick Version＝
From rising long-term yields driven by inflation concerns, markets started down as long-term rates rose; but when the CPI surpassed expectations on Wednesday, large-cap tech stocks fell further, then rebounded toward the end of the week as rates cooled and valuations looked attractive.
＝A Little More Detail＝
Against a backdrop of stubborn inflation fears, long-term yields briefly rose to the 3.2% area, which pressured markets.
Subsequently, while long-term yields fell below 3.0%, fears remained due to aggressive rate hikes, the Ukraine war, and China lockdowns, which capped gains.
CPI for April rose 8.3% year over year, core CPI +6.2%, exceeding expectations, signaling persistent tightening; growth stocks, led by large tech, were heavily sold.
However, with the decline in long-term yields and import prices in April coming in below expectations and flat month-over-month, suggesting inflation may have peaked, a renewed rally occurred on Friday due to valuations having become more attractive.
S&P 500 Chart One Year
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2. This Week's Picked Articles
A column that selects information useful for asset formation from my sources, ranks them, and provides very personal commentary.
【1】Nikkei ShimbunShift focus from financial income to financial assets 5/13
Two cautions when introducing policies to increase financial income:
First: Do not exacerbate inequality. Household assets in the top decile earn about 60% of interest and dividend income, a share that has risen over five years, meaning the wealthy have the advantages.
A mechanism to help the working generation form assets using equities is essential. Raise the NISA contribution limit and make the system permanent to broaden the “from saving to asset formation” trend.
Second: Don’t seek short-sighted solutions. If the solution merely tells the elderly who hold two-thirds of Japan's 2 quadrillion yen in financial assets to withdraw deposits and buy stocks or mutual funds, I cannot agree. Alongside working-age asset growth measures, we need rules for guardians to manage assets and corrections to the fair value at inheritance of securities, enabling the elderly to hold securities longer. (Tomohito Nojiri, Finwell Institute)
Kawada's Comment
Prime Minister Kishida spoke in London's City, advocating a “new capitalism” and urging a shift from savings to investment to realize a doubling of asset income through the expansion of NISA and other measures to move savings into asset management.
This article reflects Nojiri's proposal in response to that. I have no disagreement with Nojiri's views, but I think asset owners should take bolder market risks to increase their assets and then more actively contribute those assets back to society.
However, the average salaryman’s financial assets at retirement are likely only in the tens of millions. With that, they cannot afford to take market risks to aggressively grow financial assets.
The wealthy should take risks boldly
Therefore, the ones able to actively contribute wealth to society are asset owners with assets of hundreds of millions or more. This group should actively take risks and wisely grow their assets.
In doing so, avoid structured notes and frequent trading of high-flying stocks, and mostly increase steadily through index funds and ETFs that track the S&P 500.
To the wealthy: take risks correctly and boldly, grow your assets, and give back to society generously!
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3. Kawada's Stocks of Interest
A section that introduces stocks Kawada holds and other U.S. stock information that I find noteworthy.
This Week's Stock
Tesla Tesla, Inc.
Overview
A company that manufactures and sells electric vehicles centered on EVs. In addition to producing finished vehicles, it owns production facilities for lithium-ion batteries necessary for EVs and engages in solar energy business such as solar panels.
What Makes It Attractive
Rapid market expansion
In Tokyo, Teslas on the roads are increasingly common, suggesting EVs are entering a genuine mass adoption phase. It is forecast that global EV sales will exceed 8 million in 2022 and could rise to about 40 million by 2030.
Factors behind these outlooks include improving battery performance, lower running costs, government policies addressing environmental issues, new entrants including traditional automakers, and the expansion of charging infrastructure to alleviate range anxiety. Further, future price reductions are expected to boost market growth.
Among these factors, the expansion of charging infrastructure is crucial. Just as the internet spread rapidly with improved networks and regions, a positive loop of infrastructure expansion → EV sales growth → further infrastructure expansion seems to be approaching.
(Figure 1: Tesla Model X)
Strength as a Leading Company
Tesla accounts for about 20% of the EV market. The appeal of the EV itself, brand power as a leading dedicated manufacturer, and first-mover production capacity contribute to its high market share.
The EV itself is attractive to users for appearance, interior, and cost, and for producers, fewer parts than internal combustion engines (roughly 30,000 parts reduced to about 20,000) lowers production costs, giving Tesla an advantage over traditional automakers.
Tesla’s challenges include scaling production to meet demand, but in addition to the U.S., Shanghai already operates its largest plant, and new plants in Berlin and Texas are progressing smoothly, marking the start of full-scale production.
(Figure 2: Tesla's factories – operating and planned)
(Figure 3: Body production of Model Y)
Already profitable with significant upside
Tesla, founded in 2003, has moved beyond R&D and prototyping to establish a mass production system. It sells directly to consumers rather than through dealers, setting it apart from traditional automakers.
After turning a net profit for the first time in Q3 2018, it achieved annual profitability in 2020. Unlike startups, it is now in a phase of business expansion.
(Figure 4: Revenue by volume – millions of units; 12-month moving average)
(Figure 5: Net Income and Adjusted EBITDA – millions; 12-month moving average)
(Figure 6: Operating Cash Flow and Free Cash Flow – millions; 12-month moving average)
Target stock price for 2026: $1,600
In addition to the market expansion, assuming Tesla's market share remains constant, future sales are expected to exceed 6 million units by 2026 from about 1 million units in 2021. Tesla's gross margin on EVs is about 30%, which leads to market estimates that earnings per share in 2026 will be about $55. Currently, the price-earnings ratio (PER) is about 60x, but even if it halves to 30x, the target stock price would be around $1,600.
Risks
The relationship between Tesla as a company and its CEO, Elon Musk, is more tightly linked than in ordinary companies, and Musk's words and actions have a significant impact on Tesla stock. Related to the ongoing Twitter acquisition, Musk's sale of Tesla shares and the surrounding speculation affected the stock price.
Although prices have fallen from highs, they remain perceived as high. Tesla, a leading growth stock, may experience more volatility in its price movements for this reason as well. In terms of long-term fundamentals, increased competition from other companies could erode profitability.
(Figures 1–6 are from company materials)
TSLA Basic Data(Source: corporate data, Yahoo! Finance)
(As of May 13)
Stock Price $769.59
Market Capitalization $7,797.3 billion
Total Revenue $62.1 billion
Expected PER 61.73x
Expected Yield N/A
Headquarters: Austin, Texas
Listed: June 2010
Stock price chart is 5-year
Chart provided by TradingView.com
(This section is intended for general information only and does not constitute an invitation to buy or sell any securities)
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4. Investment Tips
In this section we write not only about “investment methods” and “stock introductions,” but also about “interesting indicators and statements” and “social and political movements.”
“Recent Market Overview”
As of Thursday morning last week, the S&P 500 index had fallen 19.6% from its record high and entered a bear market. It then rebounded, with the index rising 4.3% from its Thursday morning low to Friday's close. The high-flying ARK Innovation ETF rose 24% in the same period.
Continuing from the previous issue, we want to check points for a volatile market.
S&P 500 five-year chart
As of last Thursday, it had fallen 19.6% from the January 3 high.
Nasdaq 100 five-year chart
From its record high on November 19 last year to last Friday, it fell 25.5%.
On May 12 (Thursday), the Nasdaq Composite experienced over 2% volatility three times.
Top 10 by market cap: comparison of pre-COVID highs and current prices
Apple, Microsoft, Alphabet, and Tesla remain well above pre-COVID highs, while Amazon, Meta, and Visa are down.
Major indices' performance since April 1 this year
The deeper orange (green) indicates greater declines (rises). Recently, Nasdaq volatility has been intense. Will last Friday's gains signal a bottoming-out?
Nasdaq 100 index: history of large declines
As of last Thursday, it had fallen 27.9% from its peak, well exceeding the 22.9% decline seen in late 2018.
Bearish Morgan Stanley lowers stock price forecasts
Morgan Stanley's Michael Wilson issued a report last week forecasting the S&P 500 at 3,900 by end of June 2023 (latest 4,023). The prior forecast for late 2022 was 4,400, but a weak market is expected to continue into early 2023.
He notes that “the market is not pricing in a slowdown in corporate earnings.” Currently, S&P 500 EPS for 2022 is expected to be up 10% year over year at $227, and up another 10% in 2023 to $250, both records. Wilson argues earnings growth will be in the single digits, and with the Fed's rapid rate hikes slowing the economy and higher costs, market expectations may be too high.
S&P 500 forward PER as of May 13 close: 17.2x. Having fallen sharply since the start of the year, it is nearly at the 10-year average of 16.9x. However, if EPS under the denominator falls short, the market still looks overvalued.
April Strategist Forecast
As noted above, Morgan Stanley's forecast for the S&P 500 at end-June 2023 is 3,900.
AAII Weekly Survey
In the investor survey, the share of bulls vs. bears for the next six months shows extreme bearishness. Investor sentiment is very poor. Since 2006, such weakness has only been seen during the financial crisis and in late 2015 to early 2016.
These sentiments typically tighten at market bottoms. How will the next survey (May 18) come out after last week's decrease in bearishness?
AAII: Market Sentiment six months ahead
CNN also provides market information
In this crash, while researching, I learned for the first time about CNN's Fear & Greed Index, which shows extreme risk aversion.
Valuation (PER) has fallen significantly
From over 21x at the end of last year to around 17x now, approaching the long-term average near 15x.
Bear markets do not last long
Recently, memory recalls a 34% drop in about a month in 2020. Prior declines trace back to Black Monday in 1987 (34%).
This time from the peak on January 3 to last Thursday is about 18%, not even six months has passed. If this continues, could 1961 or 1966 patterns resemble it?
During the 2007 financial crisis, the market held several times before bottoming in March 2009, ultimately dropping 56%. I hope this time will not be the case.
This week’s spotlight
During this decline, stock valuations have cooled. Going forward, we will look for indicators confirming whether inflationary pressures have peaked. This week, releases include the housing market index on Tuesday, retail sales, housing starts on Wednesday, and the leading economic indicators on Thursday.
The market remains quite bearish. After such a prolonged decline, will bottom-fishing on Fridays persist? This is worth watching.
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5. A Walk Corner
◇◇Recent stores visited,movies, museums, books section◇◇
～Kumakura Tsuneki’s Episode～
Contributed by Kumakura Tsuneki, a former securities man and a book lover.
SprinkleComprehensive records of the Kawai couple’s large-scale purchase/ Chugoku Shimbun “Betrayal of the Moneyed Politics” team
Toys: Dialogue with Anri Kawai / Kenichi Tsune
“In a democratic country, the people can have government only to the extent of their level.”
I had many such aphorisms in mind, and after searching, I learned the above is a saying by Konosuke Matsushita.
It is nothing but ignorance, and I am ashamed.
Nevertheless, the great entrepreneur, Mr. Mitsui? No, Konosuke, driven by moral indignation, expanded the wings of civic education – PHP (Peace and Happiness through Prosperity) movement and the Matsushita Institute of Government and Economy – by his wealth, yet government officials of such caliber could still be produced at such a level; the above aphorism is strikingly ironic.
Both books feature the same figure, Katsuichi Kawai, a former House of Representatives member and convict, who is also a graduate of the Matsushita Institute (6th class).
What drew me to this case is, firstly, why in the current era of Reiwa does classic money politics of distributing cash survive?
Secondly, the portrayal of Kawai and his spouse Anri Kawai as central figures in this money-politics core.
This case has been widely reported and remains fresh in memory, but reading the local China Shimbun’s investigative reports “Sprinkle” which organized facts chronologically, and “Toy,” which focuses on Anri Kawai and her background and political activities, deepened my understanding when read in parallel.
The former pursues the case from the outside, while the latter delves from within, presenting voices of the characters. It is like confirming both sides of a coin.
Essentially, it is a pattern of political actors aligning through local bosses, city councils, prefectural assemblies, and national politicians, seeking votes by distributing money, a reimagined Taiko-Kakushin style case, as if political power is family business for leaders represented by Prime Minister Kishida. It raises concerns about citizens lacking a stake when they receive cash, with vague and self-serving interpretations of the law.
As for the individuals, Kawai Katsuyuki is abusive to his secretary and driver, and his remarks toward bureaucrats are contemptuous; he is a comic figure of strong authority with weak subordinates.
He tries to position his wife as a member of the National Diet to solidify their regional power, and his wife Anri uses both her roles as politician and wife to push her own ambitions; this joint criminal enterprise is further distorted by Anri’s unique character.
A figure who, though aspiring to politics, rises to the Senate with unclear goals and duties, shows no remorse or apology to the public after the incident, acting as a victim rather than a villain, a rare villainess and not a victim of a male-dominated system, but a reflection of the ego of a provincial girl gone astray.
In any case, reading both books makes clear that within inner circles, decisions are made by those in the circle according to their own logic and rules, creating multiple overlapping networks that form Japanese society.
If so, is realizing a society that listens carefully to the public, respects individuality and diversity, and helps each other a mere dream?
Furthermore, in the private corporate world, creating diverse talent, regional revitalization, and rebuilding an open, free international order—all these seem to be mere slogans as well?
The roots run deep.
【Kumakura Tsuneki】
Joined Daiwa Securities in 1980. Obtained an MBA at the University of Chicago Booth School of Business through corporate-sponsored study abroad. Through assignment to Singapore and Hong Kong, involved in Asian business.
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6. Quick Break: The Perspective of FA
A corner where financial advisor Ryuuichi Motohashi answers clients' questions about asset management.
Q:What is a “creative destruction company”?
A:“Creative destruction” is a term proposed by economist Joseph Schumpeter. In a business model where players compete for a larger share of the pie within conventional economic activity, it is difficult to expect the liberalization of old, rigid business practices or market expansion.
Thus, recently attracting attention are entities that could be called “creative destruction companies.” These are firms that raise productivity through reforms of internal corporate culture or older order and organization, provide new added value, expand existing economic spheres, or transform business itself into a completely different value system.
Creative destruction companies come in various types, such as “leading actors” who can change social norms and order through their activities, creating excitement, and “supporting actors” who contribute to improved efficiency and higher-quality services by supporting existing industries. Many of these originate from overseas startups, especially in technology.
In the United States, a symbol of capitalism and financial advancement, there have been theme ETFs that invest in creative-destruction companies with high growth potential, which at times enjoyed immense investor popularity.
Perhaps the ARK ETF series still enjoys popularity?
Given uncertain international affairs and economic trends, recently there is a reevaluation of the more grounded, near-term solid companies over distant-growth groups, but underlying this is a longing for heroes (disruptive companies) capable of creating new societies and industries.
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Here is the source book for this column.
Perhaps in 2025, I will be conducting video interviews via Google’s “Google Zoom,” commuting easily in Tokyo with Tesla’s “Robotaxi,” and staying in a preferred space at an “Apple Hotel” while traveling for work.
Of course, not limited to the familiar GAFA+M…
In the future, there will be plenty of hints about which industries and companies should survive by ingenuity!
Not merely “which companies to invest in to make money,” but also considering how future society will become more convenient and comfortable, this is a very useful book for thinking about the future society.
After graduating in 1998, started a career in the financial industry at Yokohama Bank. Later moved to UBS as a private banker. Soon after, the Lehman Brothers collapse shocked the world, and as a frontline salesman, gave up sales success and decided to become a Financial Advisor delivering orthodox asset management. After guiding a few clients, he started his own independent financial advisory business, studying overseas private banking and FA business models, and continually improving client experience.
Currently, as an independent financial advisor not affiliated with a particular financial institution, he specializes in private financial consulting with a focus on client values.
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7. Private Investment Strategies of the Ultra-Wealthy
Hiroshi Ichikawa, who provides sales support specialized for IFAs, shares investment strategies used by the ultra-wealthy in an easily understandable way.
Last time we discussed how to choose active funds. Some readers may wonder about active funds as well as index funds, so this time we will talk about active fund management methods.
Two main active fund management approaches
Active fund management can be broadly divided into two approaches: judgmental and quantitative. Neither is inherently superior; each has its own characteristics, advantages, and disadvantages. Here is a simple introduction to the two approaches.
Judgmental management
Judgmental management, also called discretionary management, is where a fund manager makes decisions personally.
For example, by analyzing a company’s financial health and performance trends, the fund manager decides, “This company will perform well and its stock price will rise,” and buys that stock. This is a common image of many funds.
Characteristics of judgmental management
Advantages include mobilizing the fund manager’s unique sensibilities, knowledge, and experience to achieve distinctive management. This is the approach used by famous investors such as Warren Buffett and renowned Japanese fund manager Hidetoshi Fujino.
Additionally, when reporting performance to investors, this approach can be persuasive: “We visited the headquarters and factories, met the management, and could sense the company’s魅力 and growth potential beyond the financial statements,” which is convincing to many people.
Disadvantages include heavy reliance on the fund manager and the difficulty of evaluating performance. A fund manager is a human; when they are sick or dealing with personal issues, it is not guaranteed they will always perform rational, calm analysis. Yet the market keeps moving and requires constant judgment.
Experience of the fund manager matters
Since 2013, the stock market has generally risen, aside from the late-2018 downturn and the 2020 COVID shock, offering a relatively clear market for stock investors (2022 has been volatile so far...).
Thus, fund managers who did not experience the 2008 Lehman crisis may be optimistic about stock investing and criticized for not knowing how to act during a similar price plunge. However, there is no end to opinions about what experiences are required.
Quantitative management
The other approach is “quantitative management.” Quantitative, derived from “Quantitative,” refers to employing sophisticated mathematical methods to analyze financial markets.
Investment using such methods is called quantitative management. For example, daily data for the Nikkei 225 is collected over many years; although movements may appear random, computers analyze data to find patterns, which are then used for investment decisions.
Characteristics of quantitative management
As a concrete example, analyzing the probability of rises on different weekdays may show that Mondays tend to rise more than other days, leading to a strategy like “buy the Nikkei on Monday and sell on Tuesday.”
In reality, it is not that simple; many analyses and verifications are needed, but it is a method that uses large data sets and statistical analysis to make investment decisions.
One major advantage of quantitative management is the ability to backtest with historical simulations. An investment strategy devised statistically can be defined by formulas like “buy when condition A is met,” and applying these formulas to past markets shows how it would have performed, even before one’s own birth.
High reproducibility in quantitative management
Even if a fund manager suddenly dies, others can execute the same strategy using the predefined formulas. Updating the strategy is needed, but unlike what exists only in a manager’s head, the strategy is codified in a formula, offering high reproducibility.
Some active funds deliver solid performance
In the finance world, you meet many fund managers. Active funds typically charge higher fees than index funds. Some perform worse than the index, some better; performance varies.
Nevertheless, there are active funds that consistently beat the index. There are financial service providers who specialize in such advice. You can choose funds yourself or rely on professionals in these situations.
【Hiroshi Ichikawa】
Investment Techniques for the Ultra-Wealthy
President and CEO of Winviser Co., Ltd. He worked in asset management consulting at SMBC Nikko Securities in various offices before marketing financial products for the ultra-wealthy.
After switching to an IFA (Independent Financial Advisor) firm to advise ultra-wealthy clients, he established an IFA-focused support company for the development of Japan’s financial industry. Currently, in addition to supporting IFAs, he provides third-opinion asset management for individual investors based on his experience.
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8. Upcoming Activities
◇ Stock Voice: May 18 (Wednesday) 11:00
◇ Nikkei CNBC: May 19 (Thursday) phone interview (Mr. Shigenobu Nanjo)
◇ May 24 (Tuesday) studio appearance (Mr. Horinouchi)
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