Congrats on building this amazing portfolio... I like your approach of deep value but no melting ice cube. On the good growth high RoE I have build a good size position on Yamada and Murakami. Thanks for mentioning my personal blog..have a great year.
My main concern with such a huge Japanese allocation is the escalation of China-Taiwan. China is Japan's largest trading partner at 20% of total trade, so even if the conflict does not go hot, there are a lot of potential risks there.
I feel being short Taiwan might be better tail risk hedge since they are at much richer valuation and are IMO less likely to rally strongly if the tensions start to thaw.
Good point. I do think a tail risk hedge is prudent and Taiwain seems to have better risk/reward if tensions thaw, but I also think Chinese stocks get the Russian treatment (ie collapse to near zero regardless of fundaemtnals) if China makes a play for Taiwain. Not sure what happens to Taiwain. Depends I guess on if U.S. fights alongside them and if they can win.
It is kind of hard to say how exactly the stocks would trade in case of a conflict. The Russian stocks have recently rebounded close to their pre-war rouble values, the existing owners still own their shares but they got converted to the Russian listings of the stocks, which probably makes them inaccessible to trade for Western investors (and who know if they'll one day be stolen by some presidential decree). However, Ukrainian stocks (and stocks with Ukraine exposure) have suffered far worse since all the fighting in done on Ukrainian soil as even if Ukraine will eventually prevail the damage to infrastructure is immense. (Of course, the Ukraine stocks also price in risk of prolonged war, Ukraine losing etc.)
I feel similar case might happen in China-Taiwan hot conflict, with majority of the damage happening in Taiwan, not on Chinese mainland, leaving Chinese economy fairly intact except for the huge losses that the almost certain embargoes would bring. The question is what would happen to Chinese equities owned by Western individuals. The VIE structure certainly makes things trickier.
Very good point! Regarding the potential escalation of the China-Taiwan conflict, I have been thinking that most Western media portray it as almost certain to lead to war. But what if China manages to take over Taiwan without any military conflict? I believe this is the primary goal of China’s leaders. Of course, the critical question remains: how will the US behave in this situation?
I think chances of Taiwan and China peacefully joining in the near future is about zero. That is likely of course the ideal outcome both governments would prefer, but what happened in Hong Kong was a wake-up call to many Taiwanese who supported unification. China is unfortunately moving away from democracy.
Tax los selling 1758 was a mistake, it's up 8% today. Oh well! First trading day of Japan is a massive out performance for deep value. Nikkei down 1%, Topix flattish, but almost everything in my deep value portfolio is up strong.
Tohbu Network up 12% on 24x daily volume. Can't complain!
Altay - a question for you. How do you go about sourcing financial info for these companies? Disclosures for a lot seem Japanese only, and translation services (google translate etc) are of varying usefulness. Do you just take koyfin/etc. #s at face value? Or have a BB terminal or some other paid service? Cheers and congrats on the trades!
It’s interesting to note how the weak yen has been a boon for many Japanese companies by boosting their export competitiveness. However, the scenario could change dramatically if the yen appreciates by about 40%, as predicted by some macroeconomic experts. This appreciation would likely increase the cost of Japanese goods in international markets, potentially diminishing their global market appeal. Such a shift could adversely affect the revenue and profitability of export-reliant Japanese firms.
What are your thoughts on this? Do you foresee any additional impacts or have a different perspective?
Speculating on the FX is another layer to the trade. I've taken a currency neutralish approach by funding my purchases on margin with borrowed yen. Borrowing cost is tiny and it matches JPY assets (stock) with JPY liability (margin loan).
Exporters absolutely benefit a lot from cheaper yen, but my thinking is that many of these names are extremely cash rich already, so they shouldn't be hurt too much by strengthening yen, as I would consider it a massive win for many of these businesses to be worth $0 after net current assets!
There's a balance though, many companies have complained about soaring input costs due to raw material prices going up and weakening yen. I have no idea where the Yen is going though.
Congrats on building this amazing portfolio... I like your approach of deep value but no melting ice cube. On the good growth high RoE I have build a good size position on Yamada and Murakami. Thanks for mentioning my personal blog..have a great year.
Loved your thinking here!
Some of the net nets have hilarious names, e.g. the ominous “Human Holdings”
... wish there were equivalents to the Japan Company Handbook for other countries
My main concern with such a huge Japanese allocation is the escalation of China-Taiwan. China is Japan's largest trading partner at 20% of total trade, so even if the conflict does not go hot, there are a lot of potential risks there.
That is indeed a risk. Perhaps a FXI or BABA put be a good hedge.
I feel being short Taiwan might be better tail risk hedge since they are at much richer valuation and are IMO less likely to rally strongly if the tensions start to thaw.
Good point. I do think a tail risk hedge is prudent and Taiwain seems to have better risk/reward if tensions thaw, but I also think Chinese stocks get the Russian treatment (ie collapse to near zero regardless of fundaemtnals) if China makes a play for Taiwain. Not sure what happens to Taiwain. Depends I guess on if U.S. fights alongside them and if they can win.
It is kind of hard to say how exactly the stocks would trade in case of a conflict. The Russian stocks have recently rebounded close to their pre-war rouble values, the existing owners still own their shares but they got converted to the Russian listings of the stocks, which probably makes them inaccessible to trade for Western investors (and who know if they'll one day be stolen by some presidential decree). However, Ukrainian stocks (and stocks with Ukraine exposure) have suffered far worse since all the fighting in done on Ukrainian soil as even if Ukraine will eventually prevail the damage to infrastructure is immense. (Of course, the Ukraine stocks also price in risk of prolonged war, Ukraine losing etc.)
I feel similar case might happen in China-Taiwan hot conflict, with majority of the damage happening in Taiwan, not on Chinese mainland, leaving Chinese economy fairly intact except for the huge losses that the almost certain embargoes would bring. The question is what would happen to Chinese equities owned by Western individuals. The VIE structure certainly makes things trickier.
Very good point! Regarding the potential escalation of the China-Taiwan conflict, I have been thinking that most Western media portray it as almost certain to lead to war. But what if China manages to take over Taiwan without any military conflict? I believe this is the primary goal of China’s leaders. Of course, the critical question remains: how will the US behave in this situation?
I think chances of Taiwan and China peacefully joining in the near future is about zero. That is likely of course the ideal outcome both governments would prefer, but what happened in Hong Kong was a wake-up call to many Taiwanese who supported unification. China is unfortunately moving away from democracy.
Since this post many of these names have done remarkably well. I have not sold any of these positions:
The #1 performer is now Terasaki Electric (6637) which went up from 1,779 to 2,420 and is now up 94.5% since my purchase.
Sanyo (5958) is up from 2,669 to 3,495
Kinki Sharyo (7122) is up from 1,748 to 2,271
Yamada Corp (6392) is up from 4,111 to 5,490
Fuji Sangyo (9906) is up from 2,389 to 2,678
Other names have increased as well, but these remain cheap.
Yamada (6392) has absolutely killed it since posting this. The position is up 80% now total. The JP portfolio has had a remarkable good January.
Tax los selling 1758 was a mistake, it's up 8% today. Oh well! First trading day of Japan is a massive out performance for deep value. Nikkei down 1%, Topix flattish, but almost everything in my deep value portfolio is up strong.
Tohbu Network up 12% on 24x daily volume. Can't complain!
Altay - a question for you. How do you go about sourcing financial info for these companies? Disclosures for a lot seem Japanese only, and translation services (google translate etc) are of varying usefulness. Do you just take koyfin/etc. #s at face value? Or have a BB terminal or some other paid service? Cheers and congrats on the trades!
Google translate works okay for me. onlinedoctranslator.com uses google translate, but does a better job keeping tables structured.
Solid year! Congrats👍
It’s interesting to note how the weak yen has been a boon for many Japanese companies by boosting their export competitiveness. However, the scenario could change dramatically if the yen appreciates by about 40%, as predicted by some macroeconomic experts. This appreciation would likely increase the cost of Japanese goods in international markets, potentially diminishing their global market appeal. Such a shift could adversely affect the revenue and profitability of export-reliant Japanese firms.
What are your thoughts on this? Do you foresee any additional impacts or have a different perspective?
Speculating on the FX is another layer to the trade. I've taken a currency neutralish approach by funding my purchases on margin with borrowed yen. Borrowing cost is tiny and it matches JPY assets (stock) with JPY liability (margin loan).
Exporters absolutely benefit a lot from cheaper yen, but my thinking is that many of these names are extremely cash rich already, so they shouldn't be hurt too much by strengthening yen, as I would consider it a massive win for many of these businesses to be worth $0 after net current assets!
There's a balance though, many companies have complained about soaring input costs due to raw material prices going up and weakening yen. I have no idea where the Yen is going though.
It would be crippling for exporters, but perhaps a slight boon to importers. I think this most of the cheap stuff are more of a domestic players.