On December 29, 1989, the Nikkei Index in Japan hit an all-time high of 38,957. Today, over three decades later, the index trades at 29,174. That is a 1% annual decline for a thirty-year period for a total loss of 25% on a nominal basis. If we took into account the prevailing rate of Japan’s inflation, the index would need to be at 61,880 today just to break even such that the actual purchasing power loss has been 53%.
It has been a totally astounding long-term bout of underperformance. If someone in Japan had to make any type of lump-sum investment in December 1989 to provide for a lifetime of support, the results would have been disastrous as even a withdrawal rate as low as 4.5% would have meant that the money was extinguished within 11 years.
The good news, I suppose, is that most investors do not make singular lump-sum investments but still, even an investor who dollar-cost averaged into the Nikkei Index since December 1989 would have only earned 1.3% annual returns with dividends reinvestment over the lengthy time frame.
I keep the experience of the Japanese stock market in mind when I see things like Cathie Wood’s projection that Tesla will hit a price of $3,000 per share in 2025 coupled with Wall Street Journal features on investors making a lot of money with Tesla stock right now.
Investors in Japan probably thought they were doing pretty well in the 1980s when the index rose six-fold in an eight-year stretch. Then, the forces of valuation began to exert themselves and thirty years later the overvaluation is still being burned off.
With low interest rates and a hope for a better economy, there are many American stocks and investments trading at ridiculous prices. It can be easy to join in when a particular investment is going up, up, and up, particularly over a period of years.
But the lesson is that you cannot discard investment discipline. Bubbles and froth occur. Those who invested in the Nasdaq in 1999 didn’t break even until 2014. The Nikkei index in Japan still has not recovered from its December 1989 highs. Look for and purchase assets trading at valuations that you could justify to an early 1990s or early 2010s audience. That is where the future outperformance resides.