Buy and Hold Investing: Lessons
from Japan
In
the 1980s, “Japan Inc.” was a popular term used to describe the
strength of corporate Japan and the country’s economic system. Volumes
of books were written on why the Japanese economic system should serve
as a model for other countries. By the start of the 1990s, Japan
entered into a stagnation that has lasted for over twenty years.
Click
here to view a larger version of this chart
The
length of Japan’s stagnation has likely surprised even the most bearish
of Japanese observers. Many investors have made rational and well
thought out cases for shorting Japanese bonds. The basic premise has
been that the country will have to inflate its way out of its debt
problems or default. So far, Japan has managed to beat the odds.
However, in August 2011, Japan did receive a debt downgrade from
Standard & Poor’s. What is not mentioned very often is that
there is a new “Japan Inc.” emerging in which Japanese corporations are
more transparent in their governance and more shareholder friendly than
ever before.
For
Japan’s stock market, it has been a long steady decline since it
peaked in 1989. The interesting fact that emerges from looking at the
data on the Japanese index is that despite it having fallen from 39000
to 8000 over the last 22 years, Japan has experienced many rallies over
20% and some that were over 50% in magnitude.
It
can be argued that the “Japan” of this decade is Europe. Only there
never was a preceding “Europe Inc.” Europe’s economy as a whole has
mounted a lethargic response to the challenges of competing in a
globalized environment. Perhaps no country symbolizes Europe’s
stagnation like Italy. Since 1961 to Q1 2012, it has averaged an annual
GDP growth rate of only 2.7 percent. By comparison, Canada managed to
grow at an average of 3.34 percent annually for the same period.
Financial
markets around the world have been experiencing a “lost decade” where
stock markets have been range bound. As the chart above shows, in some
countries, the markets have not been range bound – they have been in a
long period of decline that has lasted for over a decade.
Increasingly,
some are questioning the “Buy and Hold” mantra that was
so freely espoused in the 1990s during a nearly two decade old bull
market. These long term bull markets were accompanied by books such as
“Dow 36000” and “Stocks for the Long Run.” It is easy to see why “Buy
and Hold” and indexing were so popular during a time when markets
seemingly only went up. During a secular bull market, investors pay
ever increasing multiples for corporate profits causing stocks to rise.
Today, it is the opposite and valuations are being compressed.
What
investors need to realize is that secular (long term) bear markets have
arisen throughout history and follow secular bull markets. This time is
no different. But like every other secular bear market, it will end as
investors give up and vacate stocks for bonds and other income
investments – regardless of the fact that bonds at these levels simply
do not add up as a rational response.
According
to data from the Investment Company Institute (ICI), since January
2008, about $409 billion has flowed out of equity mutual funds while
about $895 billion has flowed into bond mutual funds in the US. Income
has become a focus for most investors whereas in the 1990s it was an
after-thought. Currently, 40% of the S&P 500 companies and much
of the S&P/TSX 60 is yielding more income than bonds while
trading at fairly attractive multiples. The same way that those who
ignore history were wrong about “Buy and Hold” – there will come a time
that “Buy and Hold” is the correct response. It is not yet
that time but equities are attractive, bonds are expensive and yet the
investment crowd continues to shun equities.
Pacifica
Partners inc - Capital Management
Navigating
a Sea of Opportunity
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