Truth about U.S. stock investment [Vol.48] Distributed May 23, 2022
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The Truth About US Stock Investment
［Vol.48］ Distributed on May 23, 2022
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Kawada Shigenobu's "Training in US Stocks through the Media"
＊＊＊Table of Contents＊＊＊
Market Recap
This Week's Picked Articles
Kawada's Stocks of Interest
Investment Tips
A Walk
What the Ultra-Wealthy Practice: "Private Investment Strategies"
Activity Information
Publication break: May 30 (no issue next week)
【From today: How to Read Nikkei to Enrich Your Life】
This is a project where, after reading articles from Nikkei Shimbun for over 40 years as a working adult, I pick out items that catch my eye and comment on them. 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 the titles of several articles covered last Saturday
Online Salon “Dream-Come-True Asset Formation School”
An online salon where everyone learns together and inspires each other to succeed in asset formation. It provides member-only seminars that convey content that the popular newsletter “Training in US Stocks through the Media” cannot fully cover and lets you feel the appeal of US stock investing.
Progress Creator of 20 Million Yen
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. Fees and taxes are not considered.
How to Read: Assumed Return and Target Years
3–4%: 30+ years for wrap funds and balanced funds
5–7%: around 25 years for non-US stock funds
8–10%: about 20 years, based on a modest rise in the S&P 500
S&P 500 Performance Record (Dividends Reinvested 1970-2021)
Achieve 20,000,000 yen with proper risk-taking early
Kawada's message is extremely simple. To achieve 20 million yen, let as much of your surplus funds work as efficiently as possible. For that, it's important that the participants themselves correctly understand the meaning of risk and reward. Before reading the weekly newsletter, glance at this table to confirm the correct investment stance.
Now, start the countdown to reach 20,000,000 yen right away!
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1. Market Recap (May 16–May 20)
＜Major Indices＞
・Dow Jones -2.9%
・S&P 500 Index -3.0%
・Nasdaq Composite -3.8%
= Quick Version =
Driven by retailers lowering their earnings outlook, concerns about corporate earnings rose and the market declined. Despite long-term yields falling due to fears of an economic slowdown, the decline did not help the stock market,Dow Jones fell for the 8th straight week, a decline not seen in about 90 years.
= A little more detail =
The momentum from the previous Friday's sharp rebound did not continue,global concerns about economic growth persisted, leading to an unstable start.
From a temporary rebound due to some favorable news such as decreasing COVID-19 cases in Shanghai,but due to major retailers like Walmart cutting earnings outlook,profit margins were pressured by rising inflation,and investors adopted a risk-off posture.
Subsequent weak economic data led to lower long-term yields,but worries about a slowing economy remained,and the market searched for a bottom through the week.
Ultimately,the Dow Jones fell for the 8th week since 1932, while the S&P 500 and Nasdaq also marked their 7th consecutive weekly declines since 2001.
S&P 500 Five-Year Chart
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2. This Week's Picked Articles
A column where I select, rank, and comment, from information I have gathered, information that may be useful for asset formation.
【1】Nikkei Newspaper History’s Stock Crash, Heading into a New Phase5/21
Dow fell 3% for the week, continuing a 8-week decline. Since 1896 the longest losing streak is 8 weeks, including this time; only twice before. The speed of the decline is among the fastest. The S&P 500 has fallen 18% from its year-to-date high as of May 19, the 96th trading day of the year. This magnitude ranks near the levels of 1932 (33%) and 1940 (20%).
Reasons for the decline are twofold
1) Supply-demand factors: Margin debt—the buy side of margin trading—stood at $772.9 billion (about 98 trillion yen) at end of April. The decrease from March was 3%. By contrast, Nasdaq Composite fell 13% in April, so the reduction was smaller.
2) Consumer trends: In May, selling accelerated. Through May 17, Apple was down 23% year-to-date and Nvidia down 43%, as individuals could no longer sustain margin purchases.
2) Recession concerns: Long-term U.S. rates rose to 3.20% on May 9, the highest since November 2018, then fell to 2.77% on May 19. If May ends below the 4/30 level of 2.93%, it will mark a six-month low for the month. With long-term yields falling, some note that stock selling is entering a new phase, suggesting that the primary driver of stock declines is shifting from rate worries to economic weakness.
【Kawada's Comment】
The chart compares margin debt with the S&P 500. Margin debt rises as stocks rise. As stock prices fall, selling pressures may ease debt somewhat. However, there is no clear correlation between margin debt and market capitalization.
Below are the declines and durations of notable past bear markets. This pullback has fallen 18.7% from the S&P 500's high on Jan 3 of this year, over 5.5 months. Although not shown on this chart, the speed is comparable to 2020 and 1987. If the decline remains under 20%, resulting in a reversal, future references to this chart may vanish.
【2】The Wall Street Journal Soaring crude oil prices: similarities to the 1970s3/9
Soaring crude prices: similarities to the 1970s
When oil prices double or more within a year, bad things tend to happen. This overlaps with U.S. recessions in 1974, 1980, or 2001.
Best to compare to 1974 or 1979–81, but the future trajectory derived from those times would be entirely different.
1973–1974: Oil embargo by Arab countries led to inflation and a dramatic hit to the S&P 500, which fell 43% over 12 months, marking a severe drop since the Great Depression of the 1930s.
There are both favorable and unfavorable factors today. Positive: the U.S. economy’s resilience to oil shocks has strengthened markedly; shale oil expanding U.S. production and improved energy efficiency are cited.
Negative: like many other investments, stock prices are much more expensive than then.
Long-term crude price (logarithmic chart since 1961)
【Kawada Comment】
This time, stocks have fallen sharply, especially growth stocks. The decline is as steep as during the COVID crisis, financial crisis, and IT bust. Before, during oil shocks, there were big drops. The article compares the current decline with the oil shock period. Related data are listed below.
As of last Friday, Nasdaq-100 was down 28.6% from its all-time high, exceeding the COVID crash drop of 28.0%. By comparison, during COVID the S&P 500 fell 33.9%, and this time through Friday it has fallen 18.7%.
S&P 500 Log Chart
S&P 500 Chart (1959–1979)
The drop from November 1968 to June 1970 was caused by Vietnam War-related inflationary pressures: demand rose while government debt issuance increased, causing high inflation. Long-term rates rose above 10%, and stock prices fell sharply.
The drop from December 1972 to September 1974 was due to the first oil shock, inflation rising, and aggressive rate hikes by the Fed. The market recovered the 1972 high only in July 1980, taking nine and a half years.
Past CPI annual rate changes show large increases in 1973–1974.
Nasdaq Composite Monthly Declines
The Nasdaq Composite, founded in 1971, fell in 10 of 12 months in 1973 and again in 1974. Those two years were a time of great hardship. This year, from the start of the year to March, there were declines in all but March; if May also declines, it will be four consecutive months of negative performance, dealing a heavy blow to investors.
Now, the combination of high oil prices and inflation is unlikely to persist during previous long periods of interest-rate declines over the last 40 years. This time, it is becoming a reality. The market's biggest concern is how long and how strong this inflation will endure. Although the economic structure differed then, factors such as oil, commodity price hikes, and supply constraints are fueling inflation expectations.
【3】Nikkei Newspaper "No Central Bank Put" U.S. Stock Market: 8 Weeks of Decline Since Great Depression5/21
“Shiller P/E”: as of year-end, S&P 500 was in the high 30s, the highest since the IT bubble around 2000.
After the IT bubble, rates were cut from early 2001, with rate cuts continuing through mid-2003. During 2015–2016, the pace of rate hikes slowed during the China shock. In late 2018, amid U.S.–China tensions, rate hikes stopped and cut again the following year.
The late Paul Volcker, who assumed office in 1979, fought inflation with aggressive tightening even at the risk of slowing the economy, earning the nickname "Inflation Fighter." Fed Chair Powell, in a May press conference, said, "I greatly respect Mr. Volcker. He acted with the courage to do what he believed was right."
[Kawata Comment]
Shiller P/E: An index devised by Nobel Prize-winning economist Robert Shiller, also called the CAPE ratio. It is a type of indicator that measures whether stock prices are overvalued or undervalued, calculating the price-earnings ratio using real earnings, which are the inflation-adjusted average of earnings per share over the past 10 years.
Red boxes indicate periods of rate hikes
After rate hikes began, stock prices fell notably during the 1980s oil shocks and high inflation
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3. Kawata’s Stocks of Interest
This is a corner where we introduce stocks that Kawata is holding or that catch our eye while reviewing information on U.S. stocks.
This Week’s Stock
Western Digital Western Digital Corporation
Overview
A storage equipment manufacturer that produces hard disk drives (HDDs) and flash memory products, with products deployed across cloud data-center services, enterprise client offerings, and consumer-oriented products.
What makes the company attractive
Industry consolidation and market expansion
HDD manufacturers once numbered more than 40 for PCs in the 1990s, but after cycles of evolution in PCs and economic fluctuations, the industry consolidated to three companies by 2012. In 2020, the global HDD shipment share was Seagate Technology (42.7%), Western Digital (37%), Toshiba (20.3%) (Tech Research System data).
As a result, the image of “many players competing on price with thin profit margins and weak financials” is a thing of the past.
Moreover, the notion that HDDs are for PCs and that SSDs are stealing market share is not an accurate view of the current landscape. Demand from cloud-focused data centers and other cloud businesses has surged.
From another angle, there is growing demand for “nearline storage”—data storage that connects to the internet when needed, distinct from online storage always connected to the internet, and offline storage like USB drives.
(Figure 1: Cloud business dramatically changing the HDD market)
Against this backdrop, Western Digital’s HDD segment revenue has shifted away from low-margin consumer and enterprise segments toward a cloud-centric business, a trend likely to continue.
(Figure 2: Changes in demand sources)
Improving Profitability and Financial Strength
With these fundamentals changes, WDC’s profitability has improved. One indicator of operating profitability is EBIT, and ROCE (return on capital employed) has risen about 4 percentage points over the past five years.
(Figure 3: Improvement in profitability profile)
With stronger profitability, the financial position has also improved, leading to lower long-term debt and reduced leverage. Leverage has already fallen to investment-grade levels.
(Figure 4: Strengthened finances; debt reduction (left) and reduced leverage (right))
Undervaluation and Shareholder Return Expectations
The market may not have fully priced in these industry and company transformations. The price is lower now than five years ago, and the price-earnings ratio is in the low-6x range, well below the market average.
Focusing on this undervalued state, Elliott Management, a activist investor, recently acquired 6% of WDC stock and has urged the company to separate its HDD and NAND businesses. The NAND business centers on SanDisk, which WDC acquired in 2016; while the acquisition was $16 billion at the time, WDC’s current market cap is about $18 billion.
Elliott estimates NAND’s value at $17–20 billion, and if correct, spinning off NAND would give shareholders the HDD business for free.
Also, the company has been suspending dividends since February 2020, but if profits strengthen and a dividend resumes, it could lift the stock price.
Risks
Even though the industry has evolved, competition remains intense. Also, as it is affected by the broader economy, a US or global recession could lead to weak performance.
Additionally, a broad sell-off in tech stocks could pull WDC down.
(Figures 1, 2, 4 are from company materials; Figure 3 from earnings materials; ExeTrust created)
WDC Basic Data (Source: Company data, Yahoo! Finance)
(As of May 20)
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4. Investment Tips
In addition to investment methods and stock introductions, this corner covers indicators, statements, and social or political developments that catch our attention.
This time, contributions from Makoto Okura, a familiar figure from our company’s YouTube series “40 Years of U.S. Stock Investment.”
American Stock Long-Term Investment Supporter
[A Quick Review of Systematic Investing]
“We started systematic investing, but American stocks keep falling,” “An inverted yield curve signals recession,” “Many people say to invest cautiously,” “The gains we expected are shrinking,” “The profits aren’t growing as much as expected,” etc. Many beginners who started dollar-cost averaging in U.S. stocks may worry whether to continue.
Let’s revisit dollar-cost averaging. For asset formation, the obvious answer is “the long-term dollar-cost averaging.” It means investing a fixed amount at regular intervals. When prices rise, the purchase price goes up and the amount bought decreases; when prices fall, the purchase price goes down and the quantity bought increases.
This makes dollar-cost averaging a contrarian approach. Interpreting it advantageously, when prices rise your unrealized gains increase, and when prices fall you can buy cheaper and in greater quantity.
[Just Getting Started]
Regarding the investment horizon, I have proposed in Kawata’s YouTube channel “Thank You American Stocks” a “40-Year Investment,” and you should consider doing it over at least 10–20 years.
Suppose you started a 20-year plan to invest 10,000 yen per month via dollar-cost averaging in January 2021. The total planned contributions over 20 years would be
10,000 yen × 12 months × 20 years = 2,400,000 yen
As of now (May 2022), you have contributed 17 times, so total contributions so far are
10,000 yen × 17 months = 170,000 yen
Compared to the planned total,
170,000 yen ÷ 2,400,000 yen = 0.0708…
So only about 7.1% of the funds have been invested. If you planned for 30 years,
170,000 yen ÷ (10,000 yen × 12 months × 30 years) = 170,000 ÷ 3,600,000 = 0.0472…
Thus the portfolio is at most a little over 5% built.
[Is it okay in a crash?]
Perhaps the stock market decline is not the end, and currency rates could move toward yen strength. If so, what would you do? After investing 170,000 yen, you could suffer substantial losses from here. It’s never pleasant for your hard-earned money to shrink.
Therefore, consider a scenario around the Lehman Brothers crisis—commonly called a once-in-a-century crisis—where A starts investments just before the crisis peak (late Oct 2007) and B starts at the bottom (late Feb 2009) (see Figure 1). Compare A’s and B’s profits as of Oct 2017 (exchange rate effects not considered here; the investment periods are not the same by design).
Figure 1: S&P 500 movements around the Lehman crisis
A endured a very tough time before prices hit bottom. He surely thought many times, “I shouldn’t have started this dollar-cost averaging,” whereas B likely felt relatively comfortable.
So, what happened to their profits? Intuitively, one would think B would do better because he avoided the Lehman shock. But as Figure 2 shows, when B started at the bottom, A already carried a large unrealized loss; in the end, A’s unrealized gains were larger.
Figure 2: Revenue differences from timing in dollar-cost averaging
For B to outperform A, he would have needed to invest the funds held at the bottom at a lower average purchase cost than A. But with uncertain future prices, such a feat is not feasible. Especially when the market is near its bottom, price volatility is high, making even professionals hesitant to place new or additional investments.
Therefore, the right approach is to avoid trying to time the market, start investing as soon as possible, and once started, continue the plan steadily without overthinking.
[In Conclusion]
Warren Buffett, known as the investment god, said in a CNBC interview during a period of great market volatility in 2016:
“I would tell [investors],don’t watch the market closely,” …
In other words, please don’t watch the market too closely (author’s interpretation). Many investment blogs and YouTube channels provide daily market commentary. The information they offer may be useful for trading. However, if your investment goal is “to build wealth for the future,” you must remember that continuing the systematic investment is the key.
[Makoto Okura]
From Ehime Prefecture. Graduated from Osaka University, Faculty of Economics, in 1984. Earned a Ph.D. in Economics from Saitama University Graduate School of Economics in 2005. Worked at Citibank, N.Y., Cititrust Trust Bank, and Société Générale Trust Bank (now SMBC Trust Bank). In addition to pensions and public funds for institutional investors, also engaged in asset management for high-net-worth individuals in private banking. In 2017, established EagleCapital Co., Ltd. in Kyoto/Higashiyama. CFA charterholder. Listed member of the Japanese Securities Analysts Association.
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5. Walking Corner
◇◇Recent shops,movies, museums, book edition◇◇
— Makoto Kumanokura's Contribution —
A former securities man and avid reader, Mr. Kumanokura's contribution.
Adult Bookshelf: Mr. Soaku’s Walk / Iso Moto
Tokaido Shinagawa-juku — Iso Moto Essays
Soaku Essays: Mountain Dwelling in Prose, Soaku Collection / Iso Moto
There are stories of fleeing in passion, drifting in deep despair, or dedicating oneself to revolution, yet there are also many tales of finding joy in daily life as ordinary people.
For example, diary literature, travel literature, and the recently popular walking-city literature (maybe) each attract many readers, and their popularity in our confused modern times can be seen as a reasonable realization of civic sense.
In modern Japanese writers, there is Nagai Kyofuu’s monumental “Danshōtei Nichijō” (A Life of Fragments) in diary literature, Kaneko Kōshun’s “Malay Archipelago Journal,” Odai Minoru’s “I’ll See Everything,” Hideo Kitamura’s “Dokutoru Manbō Kōkaiki” (The Mysterious Voyage), Sawaki Kōtarō’s “Midnight Express,” and in walking-city literature there is Ikegawa Masateru’s “When I Walk, I Want to Eat Something,” Kawamoto Saburō’s “Just a Short Walk,” Nishimura Kenta’s “A Tokyo Insider,” and the wildly popular “孤独のグルメ” (Midnight Diner) to mention? They all belong here, too.
The author is introducing Iso Moto; I had heard of the name but only encountered his work in 2001 when, 40 years after his death, Misuzu Shobo published “Soaku Sensei’s Walk” as part of the “Adult Bookshelf Series.”
Soaku Sensei—searching the name yields descriptions like this.
Born August 17, 1883; died October 2, 1961
Literary critic and essayist. Real name: Kenichi
Born in Azabu, Tokyo; graduated from Tokyo Aoyama (now Waseda University) School of Letters, Japanese Literature
From 1932, taught at Waseda University as lecturer, later professor, in the Japanese literature department, and directed essay-writing courses.
Lost his home library in the air raids; evacuated to Shinshu. After retirement in 1954, taught at Azabu High School and Atomi University.
Excerpted from Wikipedia
One read, and I was completely captivated by Sensei Soaku’s refined and delicate essays, free of conflict.
The quiet time flowing under the sky of travel, the old streets of Tokyo, the movements of old friends, the unnamed people met in towns—each comes alive through Sensei Soaku’s writing.
His works rightly deserve the praise that they are “modest yet serene works that literati have quietly passed down.” (Commentary by Shinichi Tsurugaya on Soaku’s Essays)
Compared to his fame, obtaining his works used to be difficult, but now three volumes are easily found in bookstores, which is a sign of Japan’s publishing culture maturing and a true cultural asset.
[Kumura Kaneki]
Joined Daiwa Securities in 1980. Obtained an MBA at the University of Chicago Booth School of Business as part of corporate secondments. Worked in Asia across Singapore and Hong Kong, engaging in Asian business.
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6. What Private Wealth Do with “Private Investment Strategies”
Hiroshi Ichikawa, who specializes in sales support for IFA (Independent Financial Advisors), explains the investment strategies used by the ultra-wealthy in a simple way for readers.
In private equity investing, there are two common stages: seed/early investments where you directly invest in the company, and middle-to-late stage investments typically done through PE funds.
Many people may not be familiar with private equity or PE funds, but a less-known fact is that the main method used by PE funds is “blind pool” investing, where investments are not known to the investors at the time of funding.
Investment destination is not defined at the time of capital commitment
As the name suggests, blind pools mean investors contribute capital before knowing the exact targets. For stock investors who select specific investments, this may seem impossible.
However, in Japan, private equity funds commonly collect capital from investors first, then gradually allocate it to targets. Funds for pension funds, financial institutions, and ultra-high-net-worth individuals often operate this way, with minimum investments around 100 million yen.
This approach is also prevalent in private equity beyond PE funds, such as private REITs and infrastructure funds.
Advantages include the ability to move quickly without needing consensus among all investors, and the ability to mobilize large sums from many investors.
Disadvantages include the inability of individual investors to assess or reject specific investments.
“Targeted”
In contrast, target-type funds invest in clearly identified companies. For example, a fund that invests in a specific private company, such as “Fund to invest in Company A,” has explicit investment targets.
If you invest all in a single company, the effect for an investor is similar to directly investing in that company. It is easy to understand and makes investment decisions straightforward, so high-quality opportunities in target-type funds often sell out quickly.
There are also target funds that invest in multiple companies. In that case, returns and risks are diversified, but you can still focus on a specific theme.
From Blind to Target
When investing in private equity, a target-type fund is recommended over blind-type funds where the holdings are opaque.
I receive many investment proposals, but I think investments that are opaque or unclear should be avoided. However, for those who want to invest in a target-type fund because a particular bank is backing the investment, it may be suitable.
[Hiroshi Ichikawa]
Investment Techniques to Become Ultra-Wealthy
Winviser Co., Ltd., President. Previously at SMBC Nikko Securities, providing asset management consulting at branches in Ibaraki, Fukuoka, and Tokyo, then focused on marketing for ultra-wealthy financial products.
Moved to an independent financial advisor (IFA) role and began advising ultra-wealthy on asset management. Now runs a support company that assists IFAs and provides third-opinion asset management guidance to individual investors based on his own experience.
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7. Upcoming Activities
◇ Nikkei CNBC: Studio appearance on May 24 (host: Tsuyoshi Roku)
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