Oil, Japan & a lesson about trading on fear or tips

Japanese Nikkei 225 from 1984 to 2015:

A friend of mine moved his retirement “C” fund (common stocks, roughly the S&P 500) into the “G” fund (government bonds) two days ago, for two reasons:

1. Janet Yellin said maybe stocks were a little over valued
2. Jim Cramer had a negative outlook

My friend is paranoid that the U.S. might undergo a long term downturn like Japan after 1990.  There are several misconceptions in all of these attitudes and supposed “facts.”

First, did Japan really go down for 30 years?  From 1985 to 1987 the Yen doubled in value, and it has continued to rise ever since.  When the Nikkei 225 are viewed priced in USD (U.S. dollars) as in the chart above, it looks like their market shot up more than it really did.  And the purchasing power of Japanese shares did not go down as much as their market because of the rising Yen.  In fact, over the next 30 years the Japanese market only went down to the 1984-5 values a couple of times.  This chart does not even include dividends, currently running around 2%.  So Japanese investors were not severely harmed as my friend assumed.  Japan is not an exception to the relative safety of broad market investing.  And nothing prevented Japanese investors from holding index funds in other countries, which probably some did.

Now let’s address the two stimuli for my friend’s rash move, which he immediately regretted as the market surged ahead over the next two days following his emotional trade.  Yellin’s comment reminds me of a mild version of Alan Greenspan’s “irrational exuberance” comment in 1996.  The market corrected for about a day, and then surged straight up until sometime in 2000.  Those who invested in 1996 were never sorry, as even the dotcom bust did not take the market below their purchase values.  The current S&P 500 P/E multiple is 18, nothing like as high as the 80 or 90 in Japan in the 1980s, and it is paying nearly 2% dividends – more than any bank account and more than most government bonds.

I can never remember Cramer being right about anything, actually, and neither can anyone as far as I know.  There have been several articles about him.  He is a showman, and makes his living by arousing strong emotions.  But even as far as serious investment advice goes, do not listen to too much of it as you may be tempted to act.  Efficient Market Theory has never been proven wrong.  And it suggests that all information is already taken into account.  Trading on any particular piece of information is then “partial” information, and may decrease your odds rather than improve them.

There are two things you should worry about: (a) trading in an out based on emotion and accumulating small losses that erode your gains, and (b) owning focused bets rather than the whole market.  Industries can go away forever, like the horse and buggy.

That said, just the day before I had written to a few friends that “the oil trade is still on.”  The very next day it declined 3% on inventory buildup, and if they checked they probably had a good laugh and compared me to Cramer.  But oil is doing fine since then.  There is a divided opinion on oil.  I’m not just picking one analyst’s opinion because I think he is smarter.  Some of my oil focus is on British Petroleum, which makes money on refining and distribution when oil prices are low, and is still on the upturn from the Gulf spill (they won a right to appeal some payouts just today in the news).  There is a lot to be said for reversion to the mean, if one doesn’t bet it all on one company.  So in addition to the commodity itself through the OIL ETF, I have the exploration companies through the PXE ETF.  They are deferring capital expenditures not entirely because the price of oil is down, but also because the cost of drilling and fracking is declining even more rapidly, and by postponing their expansion a year or two, they’ll get twice as much oil for the money.  So I’m betting on a long term productivity trend in the U.S. oil industry.  I believe they are prepared to compete even at $20 a barrell, at which point Russia, Iran and Saudi Arabia will find they are making no money, just breaking even.

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