Sunday, January 4, 2009

Post-bubble Japan

It hasn't been fun for domestic stock investors in Japan the past two decades. Most real estate speculators who bought 20 years ago aren't exactly thrilled with their returns either. A recent investigation of mine into the approximate price returns (i.e. non-dividend/non-yield adjusted!) on stocks, real estate, Yen cash, and the gold divided by the Yen index as a proxy for the Japanese gold price over the past roughly 19 years was quite telling to me.

To estimate real estate returns in Japan, I used the Japanese real estate index chart below, which I have seen somewhere in cyberspace (can't give proper credit). Please notice that this chart only goes up to 2006, so the calculated approximate return does not include the last two years' price action.

Anyhoo, this exercise yielded the following information:

To calculate the amount of money you would have after investing $100, I added in an assumption of a 3% dividend yield annually for the Nikkei over the past 19 years and I assumed a similar 1.5% yield on Yen cash. No dividends were used for real estate.

Domestic Japanese investors who got out of stocks and buried their money in CDs or gold bars 19 years ago can now buy 2 times as many stocks and 4 times as much real estate. Japanese stock investors' 19 year return is -20%!? Gold has acted almost exactly like cash/Yen over the past 19 year disinflationary and/or deflationary bust in Japan. The Japanese experience argues that bursting stock and real estate bubbles leading to a lasting deep recession (sound familiar?) can be a great environment in which to own gold. Gold also offers a foolproof insurance policy against a currency crisis.

Gold and its leveraged counterpart, gold stocks, are not always a good investment. But sometimes they are, dammit, and right now is one of those times. Once the Dow to Gold ratio gets back to one, I will trade most of my gold and gold stocks for general stocks and real estate. Until then, non-gold stocks are to be avoided, shorted or traded only. Buying and holding the DOW or S&P 500 right now for the long term would be buying and losing.

Wikinvest Wire