Every stockmarket investor’s dream is to be catapulted back in time to the beginning of one of the great bull markets. Imagine being in the US in 1993 with full knowledge of how the tech bubble would pan out or in 1920 with the same knowledge of that bubble.
What about being alive in 1710, knowing exactly how the South Sea Bubble would happen or, at this point, even being able to go back just to 2009 and with a better understanding of how quantitative easing would work its magic on the US market? Just think of the riches.
But if there is one pre-bubble market I’d like to be transported back to just a little more than all the others, it is Japan’s. I’d be quite keen to arrive there in the 1950s or 1960s just to witness the astonishing speed of economic growth.
Then, driven by its carefully built exporting machine, the country grew at an average annual rate of just over 9% throughout the 1950s and 60s; it managed to hit its pre-war GDP level by 1955 and had a few stunning years (1959 to 1961) when, on the Bank of Japan’s numbers at least, it grew at over 15% a year.
There were worries of course — in the early 1960s, the governor of the Bank of Japan, Masamichi Yamagiwa, wrote a note in which he fussed about over-capacity in the iron and steel industry, about the lack of infrastructure investment (it seems bizarre now, but back then the Japanese weren’t spending enough on roads, harbours and the like), and the clearly utterly terrifying possibility that Japan would be forced into a little trade liberalisation (Japan has never been that into this).
But still the economy soared — GDP rose at 8% a year for the rest of the decade, and the rest of the world started to get a little nervous.
Here’s the thing, though: for the purposes of getting rich (which, let’s face it is the real point here), there wouldn’t have been much point in going to Japan in the 1950s and 1960s. That’s because the stockmarket more or less ignored the economic growth: look at a chart of the market since the 1950s and you will see a gradual, but not particularly interesting rise in the market until the early 1970s.
Then everything changed. Growth fell to an average of a mere 4.2% for the 1970s (most of which was taken up with a nasty slump and an awful lot of miserable economic soul searching) and the 1980s. But the stockmarket suddenly soared. It rose fourfold in the first decade and then tenfold in the next.
By 1985, Japan’s stockmarket had returned its brave investors 20 times more than the US market had, and, in an extraordinary demonstration of just how mad markets can go, when the first tranche of Nippon Telegraph & Telephone was privatised in 1987, it sold for a price/earnings ratio of 270 times, and a market capitalisation that made it more valuable than the entire German market — something that can’t have much pleased the Germans.
You may be wondering why. It was partly down to the fact that companies rarely make high profits during expansionary phases; those pour in later, when the costs of all that growth are paid off.
It was also partly due to the way that over-excitable international investors suddenly appeared. You’d have been hard pushed to find a foreign fund manager in all of Japan in 1965. By 1985, you had to squeeze through seven layers of gaijin [foreigners] to get to the bar of even the most rubbish of joints in Roppongi, Tokyo’s nightclub district.
And it was partly down to Japan’s monetary policy. For more on this, I firmly recommend Princes of the Yen by Richard Werner. In a nutshell, the stockmarket went berserk, because, in 1971, the Bank of Japan over-reacted to the US suspension of the gold standard by “printing money aggressively” to force down the yen and to pump credit into the banks. The same happened in the 1980s: “Japan simply printed money and bought the world,” says Mr Werner.
This all brings me to China, where growth is collapsing; where the stockmarket has doubled in a year into that collapse; where foreigners are hugely underweight the market despite it representing the second-largest economy in the world; where a programme of liberalisation is under way; and where the Chinese are all for printing money.
How’s that for rhyming history? You may say that China is different — its economy is a debt-ridden disaster and its corporate governance is awful. I’ll fully accept both. But Japan’s economy was pretty awful in the 1970s (hence the soul searching), and its treatment of shareholders was nothing to write home about either. Dividends? Pah. Buybacks? Pah. Independent directors? Who needs ’em?
Japan managed to have a brilliant bull market that culminated in one of the greatest bubbles of all time without even the teeniest little nod to shareholder value, or indeed any value at all. China may well do the same.
I’m not suggesting you go overboard investing in the Chinese stockmarket. Any market in which a million trading accounts are opened every two days and which has gone up 100% in a year is worth viewing with some suspicion.
But I am suggesting — as I first did a year ago — that you invest a little of your gambling fund on a ten-year view: if the Chinese market follows the Japanese and you can cope with the volatility, there’s a good 800% to go. Just a punt.
Finally, a word on Alliance Trust. I wrote about this a few weeks ago and keep being congratulated on how moderate I was in my advice. I didn’t mean to be moderate. So let me be a little more clear.
If you own shares in Alliance Trust and are voting in the AGM next week, I think you should vote for the new directors that the US hedge fund Elliot has found for you, because the current board appears weak; the trust’s performance is unsatisfactory; and because its management is too expensive.
Look at it like this: Alliance’s chief executive was paid a sum equivalent to 0.05% of Alliance’s market capitalisation in 2014 (the all-in cost of the trust is 0.6%). You can buy an international exchange-traded fund for 0.08% (that’s not just the computer’s salary, it’s all the costs). And over all-too-many timescales, the tracker would have done at least as well.
• This article was first published in the Financial Times.