Divestor

When I have tolerance for it, I browse the Canadian Money Forum. There are a staple of regulars there, some that know what they are talking about, and some that sound like they know what they are talking about, but don’t. Then there are the batch of people that don’t know what they are talking about. It is a surprisingly good indicator of retail sentiment, especially in the younger age category (who presumably don’t have access to millions of dollars of capital and can’t move markets, but would generally be indicative of the mentality of higher risk-taking individuals).

A large misconception I see concerns dividends. I will state the misconception:

Misconception: Dividends add value.

They do not. Dividends represent a direct transfer of cash from the company to the shareholder.

Sometimes dividends subtract value, when the consequences of taxation are considered. In Canada, the eligible dividend tax credit mostly eliminates the penalty of double-taxation for non-registered accounts. In the USA, qualified dividends receive preferential tax treatment, at least until December 31, 2012 with existing legislation.

A mistake that retail investors make is that a higher dividend yield means the company should be more valuable.

I noticed with amusement (courtesy of MaoXian‘s links) of some commodity trading company advertising the fact that they have cots in their offices, just in case if the market has a meltdown while sleeping – presumably they will be there to liquidate their risk.

Just in case if the link becomes broken, I will post the images:

I note with curiousity that this person’s desk has five screens, plus one screen on a notebook, plus huge billboards with coloured text display. There is enough room on the wall for a static painting depicting a trading pit. Other images of desks of “stereotypical traders”, especially those working at home, seem to concentrate on having as many flat panel displays as possible, presumably to alleviate themselves from having to get enough sunshine for the day because they can glow with the light from their screens.

I don’t know how such a setup actually improves decision-making ability. Throughout my life, I have made most of my investing decisions sitting in front of my “trusty laptop”, which has evolved from a 15.4″ screen to a 17″ screen. Most of the trades I create are done in the late evening, and I most often get up later than the 6:30am Pacific Time market opening to see what happened. My style is significantly different than trader-types: I don’t really care about the intraday charts of stocks other than just as a curiousity. I also do not sleep with my computer.

Obviously it would be stupid to be a chart-trader working off of a 10″ netbook, but there has to be a point of diminishing return before there is just simply too much screen real estate in front of you and your actual decision-making ability becomes blurred with all the junk that is presented in front of you.

There is a quote on the commodity trader’s website:

Last Friday when corn made a limit move before the sun had come up and most brokers had brewed their first pot of coffee, an entire world of million-dollar opportunities came and went. For this very reason, we’re seeing a dynamic shift in the names and faces that are most successfully monetizing these markets. And it’s tremendously gratifying to see hard workers rewarded for their efforts across a more level than ever playing field.

Making the most money you possibly can from these markets, indeed, requires a whole new level of dedication. And given the great many friends and acquaintances I’ve made after-hours on Twitter, I realize that a lot of traders are quickly discovering this reality. And they’re cashing in on it every day. Along the way, they’re lending credence to the famous quote from Elbert Hubbard: “Folks who never do any more than they get paid for, never get paid for any more than they do.”

This might be true, but do you really want your portfolio manager to wake up to an alarm generated by the computer and then having to make a snap trading decision while you’re still shaking off the cobwebs from REM sleep? For some it might work, but for me, I prefer less dramatic techniques to extract money out of the marketplace.

Quite a few sites, including Geoff Gannon, have mentioned that Japanese stocks appear to be quite a compelling value at the moment, especially in wake of the damage done by the earthquake. Another site, run by Sivaram Velauthapillai, has a breakdown of stocks that have traded in the past year, and after the earthquake. Larry Macdonald also touches upon the issue of Japanese equities.

In fact, you can simply look at the Japanese Yen currency chart and see that people have been piling into the yen, which would suggest that capital is being moved into the country at a rapid pace:

And when looking at the company in the centre of it all, Tokyo Electric Power Company (JP: 9501), they have been hacked down from about 2100 yen per share to 800 yen today – their traditional range over the past 5 years has been roughly 2000 yen to 4000 yen a share. One would think they are a compelling value without even looking at any financial statements.

I will not be investing in Japan. One of my basic investing rules is not to invest in countries that do not have English as their primary language. I very rarely make exceptions to this. The other reason is that I do not think my vantage point across the Pacific Ocean gives me any better advantage than somebody domestic – Japanese traders are just as active as well as everybody around the planet. It is very difficult, culturally, to tell what the true impact of this disaster will be in terms of domestic sentiment – you can generally only get that impression by being there.

The Japanese government also has severe issues concerning its finance and being able to maintain the standard of living of its citizens. I do not get the impression that investors have sufficiently priced in hidden risks concerning the outcome of this disaster – what if this is earthquake is the trigger to a sovereign debt crisis in Japan? Is a 200%+ debt-to-GDP ratio not low enough to have people a little skittish about giving the government another $500 billion to clean up the mess? Note that 5-year credit default swaps in Japan are now at around 1.25%!

Although looking at charts of utility companies dropping by 2/3rds may seem like there is value, I will be letting this one pass by. I am sure there is huge opportunity, but being able to dig through the necessary information to make rational investment decisions in individual equities in Japan is not something I can do. One might considering investing in an index fund, but investing in index funds is not my style of investing – it will not produce outsized gains. In fact, in the longer run, domestic Japanese consumption could be taking a bigger nose dive than what most people expect.

There is too much unknown risk, which is why I am standing on the sidelines.

Although the trigger of this recent trend down in the markets feels like it stemmed from the Japanese earthquake, it appeared to start with the civil unrest in Egypt.

The Nikkei today is staging a comeback – up about 6% after yesterday’s panic volatility that took the index a further 20% down before bouncing back. International traders presumably are mining their selections of Japanese equities. I will provide a list of directly (from the NYSE and NASDAQ, although Interactive Brokers clients have direct access to Japanese equity markets):

Company Name	Symbol	Sector
ADVANTEST CORP	ATE	Electronic Technology
CANON INC	CAJ	Electronic Technology
HITACHI LTD	HIT	Producer Manufacturing
HONDA MOTOR CO LTD	HMC	Consumer Durables
INTERNET INITIATIVE JAPAN INC	IIJI	Technology Services
KONAMI CORP	KNM	Consumer Durables
KUBOTA CORP	KUB	Producer Manufacturing
KYOCERA CORP	KYO	Electronic Technology
MAKITA CORP	MKTAY	Consumer Durables
MITSUBISHI UFJ FINANCIAL GROUP INC	MTU	Finance
MITSUI & CO LTD	MITSY	Distribution Services
MIZUHO FINANCIAL GROUP INC	MFG	Finance
NIDEC CORP	NJ	Producer Manufacturing
NIPPON TELEGRAPH & TELEPHONE CORP	NTT	Communications
NOMURA HOLDINGS INC	NMR	Finance
NTT DOCOMO INC	DCM	Communications
ORIX CORP	IX	Finance
PANASONIC CORP	PC	Electronic Technology
SONY CORP	SNE	Consumer Durables
SUMITOMO MITSUI FINANCIAL GROUP INC	SMFG	Finance
TOYOTA MOTOR CORP	TM	Consumer Durables
WACOAL HOLDINGS CORP	WACLY	Consumer Non-Durables

Very quickly mining the selections above (which generally represent global large-capitalized Japanese companies), Kyocera appears to have decent value, with similar valuations to the old-school technology index.

However, investors should be cautioned that they are not nearly out of the woods yet – the civil disruptions in Northern Africa and the Japanese earthquake could be the trigger to a prolonged downslide in the markets. It is very difficult to determine whether now, a moment of relative uncertainty, is a good time to jump in, or whether the markets will reward the patient.

I’m choosing to be patient. My portfolio has been extremely defensive and I continue to wait with a large amount of cash and cash-like instruments that are uncorrelated to the woes of the equity marketplace.

Some might argue that the damage has all been priced in – my guess is that there will be damage to the market beyond the immediate economic impacts of geopolitical uncertainty and natural disasters that we have seen over the past month.