On the fifth day, at dawn, look to the East

I’m trying not to write about how excessive the current rally is all the time, because people said that in 1995, and 2015, halfway through epic bull markets. So maybe I’ll just be really wrong, which would be annoying. Thankfully, the balanced approach is still rational and reasonable and performing pretty well.

But today I want to dive into my first ever investment, Sony Corp.

I think there are some huge questions that investors don’t think about, or take for granted.

Like, why do we invest? What’s it for? What’s our time horizon? When should we sell? Why do we sell?

When I left school, I took a year off and worked a bunch of jobs.

In a school, a restaurant, and as ski instructor.

By the end I had my first ever savings, and so too, my first ever desire to do more than just spend it.

I wanted to invest.

My reasoning was that I would splurge it all wisely when I got to university, and so I’d invest half of what remained for the duration of my studies, hopefully leaving me with a nice little graduation present at the end.

This gave me a focused investment horizon of three years. This was something of a blessing really – because I hardly ever even looked at it.

The great challenge of all investors is when to buy, but it is matched by knowing when to sell.

There are famous stories about the chap who spent 10,000 bitcoin on a couple of pizzas almost a decade ago, which would now be worth $97,427,700.

Or, there’s Ronald Wayne, the forgotten third founder of Apple, who sold out of his 10% stake for $800. Total.

A 10% stake in Apple is worth $149 million today.

Even his contract, naming him as a co-founder in 1976, was re-sold for $1.59 million recently after he’d sold it for $500 on a whim in the 90s.

Selling is hard.

You hear those stories and it makes you want to hold forever, just in case.

Or, you might be like a lot of people and sell far too easily, at the first sign of trouble or because you’re happy with a 100% or 200% in a few years.

But luckily, young and unaware of these things, I had a three-year time horizon.

I bought Sony.

I liked Japan, and knew a little bit about how it was down in the dumps from an investment perspective because of its major crash in the 1990s from which it had never recovered, and after which global investors learned to shun it after years and years and years of bad performance.

But for whatever reason, I was a difficult child. I liked arguing with people, playing devil’s advocate, trying to prove people wrong.

And I wanted to go with a company I knew and liked, so I plumped for Sony.

To be totally honest, I read up a little on the company, and a little on Japan – but overall knew next to nothing.

Part of the reason I invested was to learn.

Taking that stake led me to read much more regularly about the country and the company.

I learned about value investing, and why Japan was so cheap on many metrics.

I learned about the three arrows of Abenomics, why people hoped they would improve things and also why they weren’t quite doing as well as hoped.

I learned about Sony too. I found that whether I spoke to friends who liked photography, music, or gaming, they all recommended Sony – for cameras, speakers, everything.

Sony was creating an Apple like interdependence for its devices – where you could play a Sony game based on a Sony film on your Sony gaming console on a Sony TV, listening to a Sony artist on your Sony speaker, sending photos to your friends on your Sony phone taken on your Sony camera. You get the picture…

Sony covered the millennial generation’s desires pretty thoroughly. And by the sound of it, it was steadily restoring consumer faith in the quality of its products.

I also learned that it had new management, which was more modern, less attached to loss-making legacy divisions and more committed to shareholders, and as a result was returning to profitability.

I bought at around $20 in 2014 and sold for around $50 in 2017. The profits paid for me to take my first investment qualification in the summer after graduating – and then flew me to, you guessed it, Japan.

Source: Yahoo Finance

It was a beautiful combination of a technology stock – which was trying to lead the way in terms of VR and image sensors for phones and driverless cars and cool stuff like that, but was also a contrarian, turnaround value play.

Even after rallying up to its pre-coronavirus highs, it still trades on a price-to-earnings ratio of around 14x, and has seen profits grow strongly over the last five years.

As you can see from the below chart, it tends to track pretty much in line with its average forecast earnings growth (NTM stands for next twelve months), with some brief interludes:

Source: Koyfin

Just recently, it has diverged – the share price has rallied, while earnings projections fell quite sharply in Q1 of 2020. Which will revert first – earnings forecast or the share price? Which drives which? It’ll be an interesting answer either way.

Sony has plenty of cash on its balance sheet, which is a common story in Japan but the opposite case to most of corporate America.

It’s a more complicated picture now because the wider market performance is so euphoric, but Sony is an example of the benefits of looking to Japan, should Mr. Market offer us a nice discount again soon.

This article was titled “On the fifth day, at dawn, look to the East”.

It’s what Gandalf the White says to Aragorn in The Lord of the Rings: The Two Towers.

It’s beautifully appropriate, as Gandalf appears with reinforcements, though not until right at the last available moment.

He appears just as the men of Rohan have given up, and are riding out into the mass of orcs to die. They are the last bulls, finally capitulating, the signal that the bear market is over.

And it’s at that moment that Aragorn sees the first light of dawn, and looks up to the hill and sees Gandalf with the lost riders of Rohan, here to save the day.

He looked East, and when the time comes and the last bulls have capitulated to the next bear market, that will be a good time for investors to look in that direction as well.

All the best,

Kit Winder
Editor, UK Uncensored

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