Value investing - Finding stocks of interest.

[UnderscoreEX]

Thanks to all the help I have received here in the last few months, I have set myself up on a good path with Nisa with Emaxis-Slim(S&P500) and even some additional investing in the fund outside of the Nisa payment because of the recent dip. On top of the monthly payments to Nisa, I will have quite a lot more money to invest and rather than just putting it into the same Emaxis fund, I wanted to get starting into value investing (or "Rule #1" investing by Phil Town, which I have recently read).

At the moment I'm still learning and starting to research some companies for the future, but I am not sure the best approach for someone in Japan. For those who do individual stock investing, how you go about finding companies of interest? I was thinking of checking my Rakuten sec account ranking list for ideas but that didn't really help because the top ranking options were mostly index funds. Ideally, I would find a list of possible companies, start researching and have a plan ready for when the price drops later. I have a lot of free time and this looks like it would be a good exercise in business analysis at the very least.

Also, do you have any advice on buying national or international stocks (I'm not American, if that helps). I would imagine Japanese stocks are better (in regards to taxes and fees) but would limit how deeply I can understand the company. This might be a stupid question but it's something I wondered as most investment advice is given as if you are an American in America.

Let me know what you think and thanks in advance.

[RetireJapan]

You could follow https://mobile.twitter.com/CacheThatCheque

He posts about Japanese value/dividend stocks.

[beanhead]

You could follow https://mobile.twitter.com/CacheThatCheque

He posts about Japanese value/dividend stocks.

This chap is interesting too.
https://undervaluedjapan.blogspot.com

One disadvantage of Japanese stocks vs US is the 100-stock minimum purchase. This forces the price up so that there aren't so many companies available for less than 100,000yen.
With US stocks you can just buy a few at first, so if you make any mistakes, there is much less pain.

Value investing is basically finding bargains that no-one else realizes are under-priced, isn't it? I have read Ben Graham's book twice, and still don't think I have the time, effort or inclination to do the necessary research. That is why my individual stock portfolio is small, and will remain so. I don't think I can ever predict the next Tesla or Fast Retailing or whatever.

[UnderscoreEX]

Thanks for the advice. I will give these guys a follow and see what I can find there.

You could follow https://mobile.twitter.com/CacheThatCheque

He posts about Japanese value/dividend stocks.

This chap is interesting too.
https://undervaluedjapan.blogspot.com

One disadvantage of Japanese stocks vs US is the 100-stock minimum purchase. This forces the price up so that there aren't so many companies available for less than 100,000yen.
With US stocks you can just buy a few at first, so if you make any mistakes, there is much less pain.

Oh, I didn't know that.
That is not a big issue for the kind of investing I will be doing so I am ok with that.

Value investing is basically finding bargains that no-one else realizes are under-priced, isn't it? I have read Ben Graham's book twice, and still don't think I have the time, effort or inclination to do the necessary research. That is why my individual stock portfolio is small, and will remain so. I don't think I can ever predict the next Tesla or Fast Retailing or whatever.

It isn't about picking the winners or predicting the a big change in a company. It is more about knowing how overvalued some stocks can be compared to the actual value of the stock as a slice of the company. Real value vs speculative value. Knowing that, the strategy would be to:

1) Find solid companies with a good track record of stable growth over 10+ years,
2) Calculate a rough estimate of the 'actual value' of that stock (ignoring the higher price it is right now).
3) Simply wait until something happens that causes the market to drop the price of that stock well below the pre-calculated value above (with an additional margin-of-safety) and fill your cart with the bargain stocks.
4) Wait for the market to rebalance and the price to return to the normal value, as it always does for a solid company with proven success.
5) Sell.


So my plan now is to start researching some companies and prepare for the something to happen to them, but i'm just not finding a good way to discover stocks.

[mighty58]

It isn't about picking the winners or predicting the a big change in a company. It is more about knowing how overvalued some stocks can be compared to the actual value of the stock as a slice of the company. Real value vs speculative value. Knowing that, the strategy would be to:

1) Find solid companies with a good track record of stable growth over 10+ years,
2) Calculate a rough estimate of the 'actual value' of that stock (ignoring the higher price it is right now).
3) Simply wait until something happens that causes the market to drop the price of that stock well below the pre-calculated value above (with an additional margin-of-safety) and fill your cart with the bargain stocks.
4) Wait for the market to rebalance and the price to return to the normal value, as it always does for a solid company with proven success.
5) Sell.


So my plan now is to start researching some companies and prepare for the something to happen to them, but i'm just not finding a good way to discover stocks.

All fine in theory, and attempting to time the market in this way is what many value investors attempt to do, but you're making a lot of huge assumptions that need to be true in order for this to work. Such as: the "actual value" has not already been priced in and the market is mispriced ... the market writ large has not discovered said price discrepancy ... the market will always rebalance to "normal value" ... that being a "solid" company will always be accurately reflected in stock prices ... you can estimate what "actual value" should be in the first place ... and I could list more.

Value investors have not done well over the last two decades partly because the plethora of information out there makes it is harder and harder to "discover" these hidden gems, which was more possible in the pre-internet era when information was harder to access. And another reason is because increasingly, the fundamentals of a company aren't necessarily reflected accurately in the stock price, and vice-versa, with companies with a lack of solid fundamentals being massively overpriced.

So if analyzing companies in this way is your hobby and something you enjoy doing (and it sounds like it is), and you're investing with a small portion of your account (and it sounds like you are), then by all means go for it, it could be fun. But don't bet the farm on this strategy ... thinking you can outperform the reams of professionals who do this day in and day out as their full-time job, and still can't manage to pick the winners and losers with any consistency, is just folly. For as long as I've been in Japan, I've heard foreign investors talk about the value to be had in the Japanese market. I'm sure it's there, especially when the metrics are compared with US companies ... but when things stay undervalued for two or three decades, when exactly is the market supposed to go back to "normal" pricing?

[UnderscoreEX]

I don't want it to sound like I'm an expert because I'm obviously not. However, a lot of this seems to make sense.
The more I talk, the more I feel like I'm playing into the overconfident beginner trope. But I guess it will help in the long run if someone can show me how wrong I am before I do something stupid.

All fine in theory, and attempting to time the market in this way is what many value investors attempt to do, but you're making a lot of huge assumptions that need to be true in order for this to work. Such as: the "actual value" has not already been priced in and the market is mispriced ... the market writ large has not discovered said price discrepancy ... the market will always rebalance to "normal value" ... that being a "solid" company will always be accurately reflected in stock prices ... you can estimate what "actual value" should be in the first place ... and I could list more.

Those are all really important to understand of course. A drop in price could be the sign of the company future problems, for sure. The idea is to know that the company itself has not changed after the event (lost its competitive edge/ 'moat', lost its ability to make money etc) and that it will bounce back. Like last year when Facebook has some scandal, as they all do, and the price went from around $220 to under $150. If I'd done my homework before that, I might have found a buy price of under $160, for example. As soon as it goes to $150, I would jumped on it as the price is below my threshold.
I'm sure everyone believes FB will bounce back and, after It dropped irrationally low, it was back to $230 in 2 months (irrationally high).

Value investors have not done well over the last two decades partly because the plethora of information out there makes it is harder and harder to "discover" these hidden gems, which was more possible in the pre-internet era when information was harder to access.

Ill give you that. I can already see that it is incredibly hard to find good deals to buy. Everything seems overvalued and the 'actual value' of a stock is usually much much lower, to the point that it might have to drop 50% for it to be worth buying. But, I am happy to wait 5 years for a stock that I follow to 'go on sale' because I am only saving more money to invest during that time. The goal now is to find the stocks to keep an eye on for when they do go on sale.

[EmaxisSlim Cultist]

I think the language barrier will make it unrealistic for most foreigners to dive deep enough into the financials, reports, statements, and investors/earning calls to make a truly informed decision.

It will take a massive amount of time and energy just to attempt to beat the market.

I was listening to this podcast earlier, they discuss the value premium and whether truly is as significant as many investors think it is.
Podcast -> https://rationalreminder.ca/podcast/176

[beanhead]

But, I am happy to wait 5 years for a stock that I follow to 'go on sale' because I am only saving more money to invest during that time. The goal now is to find the stocks to keep an eye on for when they do go on sale.

What will you do with your money while you are waiting for your bargains?
The opportunity cost of that waiting period could be considerable.

If you are an expert with some kind of edge, you could of course beat the market with your approach. It is not easy to do it consistently over time, however.
Good luck with it.

[UnderscoreEX]

I think the language barrier will make it unrealistic for most foreigners to dive deep enough into the financials, reports, statements, and investors/earning calls to make a truly informed decision.

It will take a massive amount of time and energy just to attempt to beat the market.

I was listening to this podcast earlier, they discuss the value premium and whether truly is as significant as many investors think it is.
Podcast -> https://rationalreminder.ca/podcast/176

That is one of the things I have been worried about. Financials will be the easy part but the worry would be understanding management and the business structure as a whole. In that case, I could try to limit it to companies with a strong English focus (like Rakuten or similar companies).
I can still invest in American companies all the same, right?

What will you do with your money while you are waiting for your bargains?
The opportunity cost of that waiting period could be considerable.

I am still planning to invest in index funds as a safety, whether through Nisa or simply throwing in a bit more when the market dips.
but I don't know how I feel about putting all extra money that I save into index funds.

If you are an expert with some kind of edge, you could of course beat the market with your approach. It is not easy to do it consistently over time, however.
Good luck with it.

The more I talk, the more it sounds like I am missing something. If I am wrong, I would really want someone to tell me.

It seems like the 'expertise' people talk about is in picking the winners/losers in the markets. From my understanding, value investing doesn't require that ability. If Google's stock is 75% off one day, does it really require expertise to see that as a good deal?
Perhaps it's too uncommon for it to be a useful strategy, and that might be a legitimate reason it won't work. But, in theory, does it really sound that bad?

To get extra conspiratorial (brace yourselves ), it seems that index funds are about 30% of the market these days. With more and more people putting money into index funds, there is less and less people actively evaluating individual stocks (looking into financials, reacting to individual stock price changes etc). The more that giant index funds take up the market share, the more gaps there are for quick moving value investments to made. The more focus that is put on those funds, the less focus is given to the individual stocks.

[RetireJapan]

It seems like the 'expertise' people talk about is in picking the winners/losers in the markets. From my understanding, value investing doesn't require that ability. If Google's stock is 75% off one day, does it really require expertise to see that as a good deal?
Perhaps it's too uncommon for it to be a useful strategy, and that might be a legitimate reason it won't work. But, in theory, does it really sound that bad?

To get extra conspiratorial (brace yourselves ), it seems that index funds are about 30% of the market these days. With more and more people putting money into index funds, there is less and less people actively evaluating individual stocks (looking into financials, reacting to individual stock price changes etc). The more that giant index funds take up the market share, the more gaps there are for quick moving value investments to made. The more focus that is put on those funds, the less focus is given to the individual stocks.

The difficulty is that most of the stock market's performance comes from a handful of companies, on a small number of days. If you miss those companies or those days you also miss the bulk of the gains.

It will be interesting for you to compare how your indexes have done compared to your individual value stocks in a few years.

I do something similar with my indexes vs my dividend stocks. Indexes have made more money, for a fraction of the time (although I find dividends fun so I will continue putting ~20% of our portfolio into them).