I’m bullish onJapanese stocks. Yes, I sound dumb. Yes, I know that Chicken of the Sea is tuna fish. Yes, I know that Japan still hasn’t recovered from the recession of 1990. But Japanese stocks are more reliable and more fuel-efficient. (OK, OK, just kidding.)
Remember what Warren Buffett wrote in a _Forbes_ magazine commentary back in 1979: You pay a very high price for a cheery consensus. The corollary is that you pay a low price for a gloomy consensus, which is the case in Japan. Japan has the world’s cheapest stock market. The stigma of “basket case” Japan is the reason its stock market is so cheap. Without this stigma, Japanese stocks would be more expensive. Back in the late 1980s, the Japanese stock market was gripped by irrational exuberance, and large-cap stocks selling for 50-100 times earnings were common. The situation was similar to that of the recent US housing bubble, the Dot Con bubble of 1999-2000, and the Beanie Babies bubble of 1997. Back then, the popular perception was that the Japanese were taking over the world, had a “special cultural trait” that justified paying 50-100 times earnings for a stock, and were perfect at business management. Today’s perception that the Japanese are incompetent and hopeless is just as flawed as the past perception that the Japanese are superhuman.
The result of the Japan stigma is cheap stocks. According to Yahoo Finance, the WisdomTree Japan SmallCap Dividend ETF (symbol DFJ) is the cheapest diversified ETF at only 92% of book value and 5.56 times cash flow. All of the ETFs with lower price/book value ratios are heavily or completely weighted towards the industries that normally have low multiples, such as home construction and REITs. Even the Rydex “value” funds with lower multiples are biased towards these and other low-multiple industries.
Besides valuation, why did I choose DFJ over the other Japanese stock ETFs? DFJ is a small-cap ETF, and a small-cap company has more room to grow than a large-cap company. At the same time, the risk is limited by its diversification. Because no stock is more than 1% of the portfolio, this ETF is well-protected from company-specific risks. DFJ has low annual turnover (25%) and a reasonable expense ratio (.58%).
Why am I not buying specific Japanese stocks? I don’t know Japanese, and I don’t have access to the financial statements of Japanese companies. Although there are a few Japanese companies that trade on US stock exchanges, these tend to be the biggest companies with lesser growth prospects. These big-cap stocks have a larger following, and that greatly reduces the chance of finding an undiscovered bargain.
It is SO much more fun to be bullish than bearish. You get to deride anyone who disagrees with you as a cynical, faithless, wet blanket, worrywart Chicken Little gloom-and-doomer. Maybe I should go to Japan, tell everyone that I’m bullish on Japanese stocks, and label any Japanese citizens who disagree with me as unpatriotic. 
May 12, 2008 at 12:36 am |
Just bookmarked your blog (found via your Motley Fool posts). I like your style, and agree on the Japan points. I notice your MF post on Japan got no recs or responses — a great indicator that a bottom in sentiment is near, I think. I see no interest in Japan anywhere, for that matter, except by certain far-sighted writers. FYI, the resource of choice for individual stock research seems to be Japan Company Handbook. You can get it on amazon (not cheap though). And you can buy individual Japanese stocks through Etrade, although there is some worry about them as a going concern. Happy hunting!