Guest Post: Trading Japanese Stocks

Not so Talked About Investment Options I Tried (Part Two)

Today’s guest post is the second one from Leonard Loo, an entrepreneur and author based in Japan. He sent me an email a few weeks ago asking about whether he could sponsor a post on the site about his new book. As you know, RetireJapan does not run ads or paid content, and normally I would just delete unsolicited pitches. However, his email was really polite and well-written and I ended up buying Leonard’s book to check it out. It’s a good read and I was interested that it talked about social lending and day trading, two forms of investing I am less familiar with. And so the guest posts last week and this week were born. Take it away Leonard 🙂

I had always likened trading stocks to gambling because one can never know whether the price of a certain stock will go up or down. However, after gaining a new perspective that stock trading is a “non-zero-sum game” because of a friend, I began experimenting with trading individual stocks.

When I started, I used Matsui Securities because it was the first online securities broker I discovered to charge no fees when the amount traded in a single day is 100,000 yen or below. (I eventually opened accounts with Rakuten Securities and SBI Securities, which I later discovered to also offer no fee options for trading up to 100,000 yen. This effectively increased the amount I could trade in one day to 300,000 yen.) Having no fees was important because I didn’t want to lose money while I was still learning.

Most of the readers here would probably already know this but, for Japanese stocks, one tradeable unit is usually 100 stocks (based on experience). Thus, in order to be eligible for the single-day no-fee trading, I had to limit the stocks I buy to those priced 1,000 yen or below (1,000 yen x 100 stocks = 100,000 yen).

Now, just because a stock was priced under 1,000 yen didn’t automatically mean that I would buy the said stock. If the company whose stock I own went bankrupt, there is a big chance that I would never see the money I used to buy that stock ever again. Therefore, to ensure that I only trade stocks that are safe, I personally screened and reviewed the businesses and finances of more than a hundred companies until I made a list of twenty or so stocks which I had deemed safe.

I would then look to repeatedly buy and sell the same stocks, again and again and again. Since it didn’t cost me anything to buy the stock, even if the price of the stock only went up by 1 yen, I would have already made 100 yen therefrom (since I have 100 stocks, an increase of 1 yen in price results in 100 yen in gains). As I mentioned in part 1, the interest I get for having 1 million yen in my savings account is 10 yen per year. Here, with a single stock increasing its price by 1 yen, I would have already made 10 times more than that. And it probably wouldn’t have taken an entire year.

I decided to go with this strategy because I wasn’t confident in my ability to choose the right companies that would grow over the long term. In case they didn’t, my money wouldn’t have grown, and it would have been too late to make amends. What I am sure of is the market being volatile; that stock prices would fluctuate on a daily basis. Therefore, as much as possible, I buy a certain stock when the price of the said stock is down relative to the past few weeks/months, and sell it once the price has increased (I don’t have a fixed rule on how much I wait for the price to increase but I usually sell after the price of the stock is +10 yen, which is equivalent to 1,000 yen in gains if I own 100 stocks). In case the price moves in the opposite direction and goes down, I just hold on to the stock for the time being.

In my case, I put in 1.5 million yen of my excess savings (i.e., money which I don’t plan on using any time soon) for trading stocks. By repeatedly buying and selling the same stocks, I made approximately 10,000 to 20,000 yen per month, which would translate to 120,000 to 240,000 yen at the end of the year (or 8% to 16% ROI). However, as I usually have a big percentage of the 1.5 million yen in cash, I think using 1 to 1.2 million yen would have also yielded the same amount per month.

I would like to note here that this ROI only takes into consideration realized gains, that is, after I had sold the stocks and turned them into cash. I don’t take into consideration any unrealized gains or losses because those can appear and disappear in the blink on an eye. Thus, even if my stocks were so far into the negative, as long as I don’t sell them, those negative amounts will not be set in stone. In any event, since I only use my excess savings to trade stocks, leaving them in the red for months or even years poses no problems for me.

I hope the foregoing is sufficient for you to understand the basic strategy I employ when trading stocks. If there are things you would like to clarify, or if you have suggestions to improve on the strategy, please let me and the other readers know in the comments below.

*It is important to note here that RetireJapan does not recommend trading stocks as a main investment strategy. We believe most people should buy low-cost, diversified index funds and hold them for the long term (this is also much less work than researching individual companies to trade). Trading can be fun, interesting, and (sometimes) profitable, but we recommend doing it with a small portion of your total assets (if at all) and never with money you can’t afford to lose completely.

21 Responses

  1. Interesting – I was unaware that those companies allowed trading for amounts under 100,000 JPY fee-free. Do you have a list of all the companies you tried, or just those 3 (and do they still allow it)?

    And of those 3 you mentioned, is there one you prefer and why (usability, stock analytics, etc)?

    As an aside, I just posted on the forums about Rakuten allowing their Super Points to be used for purchasing stocks or investment trusts. Is that something you have looked at?

    1. Just these three. Although from the time I wrote this to the time it was posted, a friend of mine told me about Okasan Online Securities, which allows up to 200,000 yen fee-free trading (https://www.okasan-online.co.jp/cost_comparing/).

      I mostly use Rakuten Securities when deciding which stocks to buy and sell. It’s easy to see how the prices of the stocks are moving using their 気に入り (my favorite stocks) function. Aside from this, I don’t really use much of the other features.

      I have read about the point program of Rakuten. However, I have not looked into it, so no info I can provide there, sorry. >_<
      (As an aside, I like to use my Rakuten points to buy McDonald's hehe)

  2. “…to repeatedly buy and sell the same stocks, again and again and again.”

    In the US, there is something called a “wash sale rule”. Does Japan have a similar rule? If so, how has that affected your trading?

    1. The fear of possibly having done something illegal without my knowledge made my heart skip a bit. Haha.

      Anyway, I looked up the “wash sale rule” – since it only applies to selling at a loss, it’s not applicable to my strategy. I keep my trading simple – buy stocks (hopefully at a low price relative to the next few days/weeks), then sell at some point higher than the price I bought them. If there’s nothing to buy or sell, I just let the day pass without doing anything.

      As for Japan having the “wash sale rule,” it appears that they do. I found the following (check under Q1): https://www.jpx.co.jp/english/regulation/ensuring/preventing/manipulation-faq/index.html

    2. Regarding whether or not there is a “wash sale” rule in Japan, there is a (poorly-described) rule that prohibits multiple trading in the same security within one day, especially towards the close of the day, at least according to my Nomura contacts. Interesting, there is no wash sale rule that prohibits you from selling a security for a loss, buying it again a few days later and still realizing the capital loss. At least that was my understanding when I asked about how quickly I could re-open a position that had been closed to get the capital loss.

  3. Sounds quite hard work for ¥20k per month. You need to scale somehow to make it worthwhile.
    Furthermore your big risk is a broad market selloff. I’d suggest putting in some stop loss protection but even then you’ll have some gap risk.
    With a stop loss in place your basically buying at the strike call spreads for free (or at the least very cheaply) since you don’t have transactions cost, which is nice.

    1. Other than the initial research of choosing companies, it takes me very little time to choose which stocks to buy and sell (the max would be around three stops on the subway which I usually waste away by surfing the net anyway so might as well get money out of it).

      Thanks for the advice! Let me look into it. I’m not sure what is defined as a broad market sell-off but I have experienced seeing the value of my stocks go down as much as -220,000 yen within a few days. I just waited it out and now I’m back to around -70,000 yen. But since I already had realized my gains by doing what I outlined above, overall I am up by about +110,000 yen for the year.

  4. Thank you Leonard for sharing your experience.

    To Ben, I think that this piece does not have its place on your site or at least not in this format. It advocates the exact opposite as to what you usually describe as a sound long term investment strategy.

    One of the basics of passive investment, that you recommend on retirejapan, is that it beats actively managed funds on the long term. If you do not believe this to be the case anymore then you should completely revise your site.
    However what Leonard is doing is short term active trading at the individual stock level with, it seems, very little stock analysis and risk management and poor tracking of the returns.

    I might sound harsh but I think that these are dangerous advice for people who have been recommended this site and do not understand the basics of financial risk/return; and add no value for those who do.

    1. Hi Petronius

      I understand where you are coming from, but I decided to run this post because a) I found it interesting, b) it is not something we have talked about on the site before, and c) I hoped it would spark a discussion (as it has so far).

      It was my intention that the fact that this is a guest post and the disclaimer at the bottom would put it into perspective. We’ve run similar posts in the past (the cryptocurrency stuff, the gold post, etc.) because I don’t see RetireJapan as a rigid, dogmatic place but rather somewhere where people can share information , learn about things, and get advice.

      Just in case it is not clear I do not think this is something most people should consider doing 🙂

    2. Thank you for the feedback about my strategy!
      I’d like to point out that I focus on studying the fundamentals of the companies whose stocks I trade. Since the fundamentals are sound, then I believe what I do carries little risk. I trust my own judgment. ^_^
      As for tracking returns, I track my realized gains using a spreadsheet; that’s why I could easily answer Tenai’s comment above. 🙂

    3. I agree fully. I also don’t understand how Ben can find it interesting, since it is really nothing new. Not that I think it is a bad strategy but timing the market and buying individual stocks per se are what his blog advocates to avoid. Moreover there is no discussion of the long term ROI, which is also again the very point of his blog.

      Ben in your comment you said you wanted it to spark a discussion. Its not like there is no huge online and offline discussion globally on individual stocks vs funds, timing the market vs regular investments etc. Its really nothing new. So it adds nothing to the discussion, but dilutes the message of your blog.

      I have nothing against the writer. I too buy individual stocks but I am just not sure what this article has to do with this blog.

  5. These three companies (Matsui, Rakuten and SBI?), how are they when it comes to non-Japanese speaking residents of Japan?

    Do they require that you respond to a phone call in Japanese, as Mr Tanaka wrote in a previous post?

    1. In my experience, I remember receiving a phone call from Rakuten because they wanted to clarify something about my personal information. For Matsui and SBI, I don’t remember receiving any phone calls from them (but this was already a while back so my memory could be wrong). 🙂

  6. Thank you for the interesting post Leonard. I’ve been swing-trading equities and FX for many years now as a hobby – with mixed results – and it’s always nice to hear other traders’ ideas. I can’t say I’m an expert but I do have some long-term experience of what works and what doesn’t, so I’d just like to point out my thoughts on your system, if that’s OK.

    __The good points__
    1. Trading live with money you can afford to lose. This is much better than trading in demo, or trading uncomfortably with larger funds or higher leverage.
    2. Keeping fees and commissions to a minimum. The shorter time frames you trade, the more important this is. Trading costs often kill an an otherwise decent system.
    3. Buying on dips. This works well, until it doesn’t. Usually the trend is your friend, and it can be very profitable to buy the dips of a long-term uptrend, which most of the equity indices have been in since 2009. But some pullbacks are just the start of a much bigger one, and it can be hard to tell which kind you’re in until it’s too late.
    4. Know the fundamentals. It’s good that you’re choosing companies that have a higher chance of success. With trading it’s all about getting as many probabilities on your side as you can.

    __The bad points__
    1. Taking small wins and large losses (on paper at least). This is the exact opposite of what you’re supposed to do, which is “cut the losers short and let the winners run”. It’s easier doing it your way and it works 9 times out of 10 if you go with the trend. But that 10th time it doesn’t work will wipe you out. I’ve seen it happen many times on the trading forums over the years.
    2. Not managing your risk. The key skill to every successful trader is to manage risk first and profits second. This means knowing how much you’re willing to lose on each trade, then using a stop loss order to take you out if you were wrong. Your strategy is simply to ride it out. But how long will you be able to stomach the loss for? And how deep can it go? If you’d bought the Nikkei about a year ago when it was above 24000, then you’d still be holding a loss even now! And would you have survived the drop to 19000 at the end of last year? A lot of equity traders thought this was the start of the crash, and sold around then. In hindsight it wasn’t. But holding a deep loss can be very bad emotionally and not many traders can do it. Hence the stop loss precaution.
    3. Understand the price drivers. Price always moves for a reason, even if it’s a short-term technical reason such as a stop loss run or hunt for liquidity. But usually it’s a fundamental reason, and this is probably the main reason why part-time traders find it hard. As well as analysing the companies (or instrument) in the first place and getting in synch with the market (not an easy job) before you even place the trade, you then have to constantly analyse the news feeds and data releases to understand why price is moving as it is. Only then will you understand if this is just a normal healthy pullback and the trend will soon resume; or if this is a game-changer that will probably result in a deeper correction or even a trend change. Without this knowledge and skill people are basically trading in the dark.

    There may be other points, but again thank you for post and good luck with your trading.

    1. Thank you so much for the very detailed comment! I will certainly keep them in mind. ^_^

      I’d just like to point out that I manage my risk by spreading out my purchases and by only buying “cheap” stocks. Since I usually only have 100 stocks of any “cheap” stock (total max value of 100,000 yen), the maximum I can lose is this amount for any one. In your Nikkei example, I’d still be holding on to it since I would have only been down by 5,000 yen (going with the assumption that I only have one share of the Nikkei since I only hold one unit, i.e., 100 stocks, of any particular stock).

      I also note that I mentioned I usually have a large percentage of the money I trade with in cash. I now realize that this is also helps me manage my risk because in the event of a massive downturn, I have spare cash to still do the repeated buying and selling. While the rest of my money is “frozen” since they are in the red, I still have enough to trade with and make a profit in the meantime.

      I will make sure to study up more on point number 3 you raised under “The bad points” as I’m sure that can increase my potential earnings as well.

      Thanks again and all the best with your trading as well!! ^_^

      1. Thank you for your reply, Leonard. Yes, I’d overlooked the fact that most of your trading capital is held in cash, not stocks. This makes it easier to recover from a downturn, as you can effectively lower the entry price of a stock you already hold by buying another 100 units of it at a lower price. Eventually, as you say, the stock’s price should recover enough to allow you a graceful exit, possibly even with some profit. However, this strategy is not without risks:
        1) The company could become bankrupt – especially during a global recession – no matter how good you thought it was when you bought it.
        2) The price could drop much lower and for much longer than you expect, so eventually you are holding for example 400 units (because you bought it again three more times on the way down) at an average entry price that is still way above the current price and may take years to get back to. An example of this is if you’d started this strategy at the height of the bubble in 1989.
        3) You may run out of cash to keep buying the stocks at a lower price.

        So yes, there are risks. But that goes without saying. Active trading is inherently risky but the rewards are probably worth it for some people. And it’s fun for the most part, especially when you’re winning 🙂

        By the way, the Nikkei I was referring to was the index (N225), not a company. My point was that when the index drops, most individual stock prices drop too. And vice versa of course. So either you are winning on most of the stocks you own, or losing, all at the same time. It would be interesting if you could post the names/symbols of one or two of the companies you are doing this with, so I can compare their stock charts to the index. But no problem if you don’t want to.

        As for medium-term price drivers, central bank policies are the main one. The BOJ’s policy is very good for stocks, and is likely to continue. Also the FOMC and ECB are becoming more accommodative again. So that’s a positive price driver for world stocks. But the big one right now is the trade war, especially US-China but more recently also US-Europe. If things get worse (or don’t get much better) then some economists think that a global recession will be unavoidable.

        1. Thanks for the reply!

          I am aware of averaging down. I have decided to do it only once at most though; my own personal decision so that even if what you described happens, it won’t be that bad.

          About your Nikkei example, I was thinking about one share of an ETF of the Nikkei 225. Regarding posting the companies I trade with, I think it won’t be a good idea to do it on such a public space. Sorry!

          Yup, I follow the news every day. I also read whatever I can about what affects stock prices. 🙂
          (I usually pounce to buy stocks when news comes out about tariffs being slapped, the opposite of what most would do 😉 )