What Worked in 1904 Japan Works Today on the ASX

After the obligatory three years in uniform, Tokushichi Nomura went into the family business.

He was general manager of his father’s money changing shop. And business was good.

For a long time, currency traders didn’t have the yen on the radar. A lot of transactions didn’t go through the banks. So there was an opportunity. There was room for money changing shops like the ones Nomura worked at.

But in 1902, banks began to expand their reach. They started handling more transactions and more money.

That’s why Nomura decided to take his father’s business in a different direction. He decided to focus on his first love: stocks.

In 1904, Nomura transformed the money change shop into a brokerage house. Japan’s stock market was raging ahead.

When he was younger, Nomura had seen how war (the Sino-Japanese War) could fuel industrial expansion. And the positive effect it had on stocks during times just after war.

He was too young to take advantage of the bull run several years earlier. But in 1904, Nomura had another opportunity.

Japan declared war on Russia. And Nomura had his brokerage business up and running.

This time, he was ready to make a fortune…

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How was Japan’s market similar to the ASX?

While helping others join in on a rising market, Nomura would not miss out himself.

He would profit on almost every investment he made. Despite his early success, Nomura didn’t believe he wDoas infallible and kept his nose in detailed research.

He only bought stocks he believed were mispriced and valuable.

In time, as stocks kept rising, it became harder and harder for Nomura to find decent investments. He compared his findings on Japanese stocks to others around the world.

The conclusion he came to was that the Japanese stock market had become grossly overvalued. Things were too frothy in Japan. The stock market rally had gone too far.

Investment analyst, Jamie Catherwood continues the story:

On a dime, Nomura sold all his stocks (at a profit) to fund his new investment: a large short position on the market. These ‘shorts’ would profit if the stock market fell.

Unfortunately for Nomura, however, his fellow investors did not share this bearish outlook. Each day, the disciplined investor watched with agony as the overvalued stocks continued to climb higher. For just as Nomura’s short positions made money if the market declined, he lost money if the market went up.

Margin calls started pouring in as Nomura’s positions began to plummet.

When creditors came to his office seeking repayment, Nomura hid under his desk to avoid confrontation. He even hired an enclosed rickshaw to transport him through the Tokyo side streets so that no one could watch his movements.

Despite the financial and emotional toll, Nomura doubled down and purchased additional short positions. While many of his peers were swept up by the bull market euphoria, Nomura was grounded by his empirical research showing that stocks were overvalued.

To others, however, Nomura appeared to have gone mad. Why did he insist on continuing his failed bet against the market?

I’m sure you might have had a similar experience.

Maybe you bought a stock and it immediately went in the opposite direction. You did the research…you understand the business…so why are you now holding a losing position?

Often, when this is the case, the best course of action is to zoom out…

Facts trump feelings when investing

Take a look at the chart below.

Had you seen this stock in December of 2002 would you have bought it?

Or maybe the better question is, had you owned this stock since 1999, would you have sold it long before the lows of 2002?


MoneyMorning 19-11-18

Source: Bloomberg

[Click to open in a new window]

If your answer was yes (and many did sell the stock at the time), you would have missed out on one of the greatest gains the ASX had to offer.

The chart you see above is of REA Group Ltd [ASX:REA], owners of the realestate.com.au website.

Of course, this doesn’t mean all investments will work out when left to their own volition. REA Group is a great company. And there’s a good reason why the stock has been climbing for so many years (earnings keep growing).

Like Nomura, you need to study the market and the businesses you invest in. Even with detailed research, you’ll end up picking a few losers.

It’s something you’ve got to accept.

But if your facts and reasoning are correct, you’ll more than likely end up a stock market winner.

Circling back to Nomura, he didn’t cut his losses. He doubled down on his bet and asked a friend for a lifesaving loan.

With just a little more cash from his friend, Nomura could hold onto his short positions just that little bit longer.

Two days later, his conviction was finally rewarded. The market saw what Nomura saw.

Japanese stock began to decline, slowly. Then within months, the market ripped down 88%.

You shouldn’t make ‘bet the farm’ investments like Nomura. If it had taken just a little longer for his thesis to be proved correct, he could have lost everything. But you should carry out detailed research on any stock you own or would like to own. That way, you’ll have conviction when waiting for the market to see what you see.

Facts trump feelings,

Härje Ronngard,
Editor, Money Morning

PS: If you’re interested in looking for more ASX-listed multi-baggers, check out these three stocks our small-cap expert, Sam Volkering, believes are must-buys.


Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. There are two questions Harje likes to ask of any investment. What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Money Morning readers 5 days a week.. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home among Matt’s incredibly exciting income plays.


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