No-Bull Advice for a Bear Market

Back to Contents of Issue: May 2001

Veryan Allen gives us the straight dope on investing in Japanese securities.

by Veryan Allen

Last year, professional investor Veryan Allen gave us the straight goods on online investing in Japan. His report ("How to Invest in Japanese Stocks," page 44, April 2000) offered no-bull, nuts-and-bolts, how-to information for non-Japanese investors -- and generated megabytes of reader feedback. We asked him for a market update. -- The Editors

FIRST, THE GOOD NEWS. The year 2000 was a great year for investing in Japanese stocks. The indices staggered up for the first quarter and then, for the following nine months, did little but fall steadily. Traditional long-only investors were wrong-footed, panicked, and created superb opportunities for those savvy enough to watch the trend. Impossibly overvalued sectors of the market collapsed, and there was a constant supply of weak IPOs. Adding to the volatility was the fact that the world economy showed signs of following Japan into recession.

Now, the bad news. The year 2000 was a terrible year for investing in Japanese stocks. Most investors, institutional and individual, lost money -- in some cases, a lot of money. It didn't matter if it was a Japanese index fund or an actively managed mutual fund; almost anything that was long only and "invested" was a recipe for losses. And the supposed investment masters of 1999, many of whom racked up triple-digit gains during that year, were proven lucky, not skillful, as they gave back most or all of those gains during 2000.

• Ken Millennium,*
• GaijinInvestor,
• Technobahn Financial,*
• Yahoo Japan Finance,*
• Tokyo IPO,
* Site is in Japanese.

Trading stocks in Japan successfully is a complex business that takes many years to learn to profit from consistently. To make money in Japan you have to trade. This was true in the bubble years of the 1980s and is still true today. Try to maintain total flexibility and no emotional attachment to stocks. Try not to confuse the company with the stock -- they are often very different things. What you have read about "buy and hold" being the best strategy may be true elsewhere, but not in Japan.

Anyone investing in Japan must be disciplined about stop losses and money management. If I short a stock at ¥10,000 and it goes to ¥12,000, I buy it back no matter what; no second guessing, no emotion, no doubling up, and no yen cost averaging. Out. Period. If I buy a stock at ¥10,000 and it goes to ¥8,000, same response. A loss is a loss whether it is realized or unrealized. Japan finally brought in market value accounting this year; investors would be wise to do this regularly with their own portfolio.

I try never to make an investment decision while the market is open. I know which stocks I am interested in, and the prices at which I am looking to buy, sell, and close, in advance. It has often puzzled some of my clients that Sunday is a very busy day for me. Why? Because that is the day I review the previous week's successes (and mistakes) and map out in detail the strategy for the following week. Since I have already analyzed the situation and prepared for any market scenario, the following five days become much easier to navigate.

The number of brokers offering online trading continues to proliferate, yet with account growth leveling off, severe competition, and disappointing trading volume, there has already been some consolidation. It's a buyer's market, so prospective individual investors can use this rare leverage to their advantage. Several brokers allow trading by mobile phone. Commissions are low, and services are improving all the time; given the returns from Japanese mutual funds and bank accounts, it is not difficult to do better if you put in the time and effort required.

While information sources have increased, trading opportunities for a non-Japanese-reading investor to actually buy and sell Japan-listed stocks online have not changed much. All the main brokers only have Japanese on their sites. Some companies are attempting to offer a one-stop global stock-trading platform, which will include Japanese, so this situation may change. The number of information sources in English has grown, with various Web sites providing Japanese stock data. Apart from this magazine, the best source material remains the Japan Company Handbook published by Toyo Keizai. Although it is tough to profit from English-language stock trading and investing content on the Web, several new entrants are trying. Keep an eye open for,, and the Tokyo-Mitsubishi TD Waterhouse site (on i-mode).

In the past 12 months, various ideas have been put forth to get around some of the peculiarities of the Japanese stock market (which include high share prices, low liquidity, and minimum lot sizes). In my opinion, investors would be wise to proceed with caution in making use of these new instruments. They are all superficial measures that do not address the underlying causes of low levels of individual investment in the Japanese stock market.

This situation just emphasizes the urgent need for reforms in the Commercial Code and for companies to relax their stock trading minimums. The high price of some issues (though not so high any more) has led to some brokers offering deep, in-the-money covered warrants, allowing exposure to otherwise expensive stocks.

There have also been efforts aimed at breaking the minimum number of stocks per trade, including Minikabu and Pokekabu. Minikabu puts the orders together and executes them at the next day's opening price, while Pokekabu are dependent on a single market maker. Unfortunately, what investors gain in access, they lose in liquidity and flexibility.

Efforts to offer after-hours trading have started with Moontrade (Monex) and with some ECNs (Electronic Communications Networks). Brokers hope to increase revenue by allowing people to trade when they get home, but I doubt this will be a viable long-term business, both in terms of numbers of customers using the services and the competitiveness of the stock prices. Why trade at 9 p.m. Tokyo time when at 9 a.m. you have infinitely better price execution and liquidity, and all market participants are active? If you have a day job, enter your orders the night before or at lunchtime.

Japanese markets have proven again that they are markets for traders who can spot an opportunity, make some money long or short, and then move to the next deal. Japan operates by different rules, and to succeed, these rules have to be learned. This takes experience, practice, information, and consistent methods of processing large amounts of information.

Contrary to conventional wisdom, Japan is not as conservative as usually thought. It has reinvented itself many times over the centuries. Unfortunately, though, things usually have to get a lot worse before they get better. Whether the Nikkei goes to 4,000 or 40,000 over the coming years, opportunities to make money from Japanese stocks will occur every day.

If you don't like risk, there are plenty of places willing to pay you almost zero percent on your money. If you want anything higher you have to take stock market, foreign exchange, or credit risk. Since stock market risk is usually easier to manage and hedge than the other two, why not try it?

Veryan Allen is a Japan-based money manager. He can be reached at

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