Sunday, July 12, 2009

A Long-Term Thought About Japan

The Japanese market has been beaten down so much over the last twenty years, it's going to have a huge long-term rally once the Japanese economy gets humming again. I'm not saying that said bull market will start next year, but it's likely to get rolling within a decade.

If there's a young Japanese stockpicker who yearns to be Japan's Warren Buffett, this is the perfect time to try out. Mr. Buffett got rolling during the great U.S. bull market of 1949-66, and found some incredible values early in his career. There should be lots of pickings for an orthodox Ben Graham approach, which is how Mr. Buffett started off.

I'm beginning to wish there were a Japanese value fund run on Grahamite principles...

[The above post was inspired by one at "Investing Obtusely," which pointed to a counter-zeitgeist initiative to liberalize banking in Japan.]


  1. Japan is certainly an ideal playground for Graham-type investors. I would argue, however, that Buffett-type investors probably won't do well over there. Buffett, in my opinion, is really a growth investor. It's hard to see too many growth opportunities in Japan, even if one thought the market would rebound somewhat.

    I'm not predicting this will happen to Japan but let's not forget that some societies decline. No one wants to talk about it and no one writes investing books on them but some countries or some companies may be cheap but they will continuously decline. Argentina was richer than Canada and almost as rich as USA (in some key metrics) in the early 1900's. Yet investors likely would not have done well. Would Buffett have done well in Argentina? I am not so sure.

    One of the key problems with Japan is that their companies are not shareholder friendly. Even though the shareholders own the companies, they are looked down upon. It's unheard of, for shareholders to mount a challenge against management or against widely held societal views. Returns on equity have always been terrible in Japan (Buffett once said that ROEs were bad even during the booming 80's). I always like to joke that Japan has succedeed with capitalism without somehow rewarding the capitalists. Unless they reform their system, it will remain that way. A Graham-type investor can probably capitalize on some severely undervalued asset but I'm not too sure about long-term growth of any company (other than some export-oriented ones.)

    The other bizarre thing about Japan is that they are the most technologically advanced country. They discover and develop products that never make it to USA or anywhere else. They really need to figure out how to commercialize these technology. That's probably their major long-term hope.

  2. Thanks for your comment, Sivaram. I have to admit that I didn't know about ROE levels even for successful Japanese countries, but I had an inkling about the status of shareholders there. I'm quite sure that a would-be shareholder-activist will get absolutely nowhere...

    ...and yet, Ben Graham himself described American shareholders as close to beign management's patsies in the 1940 edition of SECURITY ANALYSIS.

    If you're interested, the young Warren Buffett was profoundly Grahamite. You'll see so in this archive of his partnership letters:

    One balance-sheet analysis of a company, from the first 1963 report, was done using pure Grahamite principles - right down to the discounting of current assets by category. See pages 4 and 5 (PDF file)