Archive for February, 2009

This and That: Hunters becoming the hunted edition

February 27, 2009

  1. Derek DeCloet notes the plight of erstwhile acquirers of Canadian public companies — Xstrata, Rio Tinto etc. — and says Canadians will be glad to buy them back for a fraction of the acquired price.
  2. With stock markets relentlessly falling (again), some investors seem to be making rash bets. Jason Zweig cautions against making the investment equivalent of a “Hail Mary” pass.
  3. Mark Hulbert reports on a new study that shows that after accurately accounting for transaction costs, taxes, management and performance fees, it is hard, if not impossible, to justify active management for individual, taxable investors.
  4. Larry MacDonald blogged about his chat with Richard Deaves, a finance professor and author of What Kind of Investor Are You?
  5. Michael James finds it silly that a Wired magazine article (found here) blamed math as the root cause of the current credit problems.
  6. Preet continues the discussion on fee-only versus fee-based.
  7. Thicken My Wallet suggests checking your credit card statement for any premiums for credit balance insurance that you may not know you have.
  8. I haven’t even gotten around to opening a TFSA account yet. Four Pillars, on the other hand, is already thinking about TFSA transfer strategies!
  9. Million Dollar Journey featured a review of Pilgrimage to Warren Buffet’s Omaha and is giving away a copy of the book. You may also want to check out the author’s brilliant blog titled Jeff Matthews is not making this up.
  10. Canadian Financial Stuff digs up an interesting video from the National Film Board on the Mississippi bubble.

Have a great weekend everyone!

The lesson from Japanese Stocks

February 25, 2009


Any discussion on long-term stock returns inevitably turns to the unfortunate experience of Japanese investors who saw the Nikkei 225 tumble from the 38,915 it closed in 1989 to its current level of just above 7,500 nearly twenty years later. Stated in these stark terms without any context, the Japanese example appears to question the validity of buying-and-holding equities for the long run but appearances are deceptive.

Japanese stocks increased 100-fold from 1955 to 1990. Between 1986 and 1989, the Nikkei 225, a price-weighted average of stocks trading on the Tokyo Stock Exchange, tripled in value and stocks traded at unheard of valuations: 60 times earnings, almost 5 times book value and more than 200 times dividends. Nippon Telephone and Telegraph (NTT) traded at a P/E of over 300. The collapse from these dizzying valuation levels was shift and brutal — the Nikkei lost 38.7%, 3.6% and 26.3% over the subsequent years for a total loss of over 56% in three short years.

And as is common in bubbles, the “this time is different” arguments were common. Jeremy Siegel, relates the following anecdote in Stocks for the Long Run:

During his travels to Japan in 1987, Leo Melamed, president of the Chicago Mercantile Exchange, asked his hosts how such remarkably high valuations could be warranted. “You don’t understand,” they responded. “We’ve moved to an entirely new way of valuing stocks here in Japan.” And that is when Melamed knew Japanese stocks were doomed, for it is when investors cast aside the lessons of history that those lessons come back to haunt them.

The lesson to be drawn from Japanese stocks then is that valuations matter a great deal. Stocks cannot be expected to provide satisfactory returns if investors pay too high a price. It was true of Japanese stocks in the late 1980s, US stocks in general and tech stocks in particular in the late 1990s and will hold true in the future.

Keep faith in buy-and-hold

February 24, 2009


If you are tired of the endless chatter in the media questioning the wisdom of buying-and-holding stocks and comparisons to the Great Depression, you might find the following passage in the Introduction of The Intelligent Investor to be of interest:

There are no sure and easy paths to riches on Wall Street or anywhere else. It may be well to point up what we have said by a bit of financial history — especially since there is more than one moral to be drawn from it. In the climactic year 1929 John J. Raskob, a most important figure nationally as well as on Wall Street, extolled the blessings of capitalism in an article in the Ladies’ Home Journal, entitled “Everybody Ought to Be Rich.” His thesis was that savings of only $15 per month invested in good common stocks — with dividends reinvested — would produce an estate of $80,000 in twenty years against total contributions of only $3,600. If the General Motors tycoon was right, this was indeed a simple road to riches. How nearly right was he? Our rough calculation — based on assumed investment in the 30 stocks making up the Dow Jones Industrial Average (DJIA) — indicates that if Raskob’s prescription has been followed during 1929-48, the investor’s holdings at the beginning of 1949 would have been worth about $8,500. This is a far cry from the great man’s promise of $80,000, and it shows how little reliance can be placed on such optimistic forecasts and assurances. But, as an aside, we should remark that the return actually realized by the 20-year operation would have been better than 8% compounded annually — and this is despite the fact that the investor would have begun his purchases with the DJIA at 300 and ended with a valuation based on the 1948 closing level of 177. This record may be regarded as a persuasive argument for the principle of regular monthly purchases of strong common stocks through thick and thin — a program known as “dollar cost averaging.”

I ran the same study for rolling 10- and 20-year periods starting in 1970 using the total real (i.e. inflation-adjusted) returns of the TSX Composite, S&P 500 and MSCI EAFE indexes in Canadian dollars and some of the results might surprise you. Details will posted next week.