Decision of relatively high and low prices
In the US stock market, indices like S&P500 are getting over the historical high prices. One of my friends asked me whether the current situation was a bubble beyond doubt. In reality, it is not a bubble but it reflects the US economy. I would like to explain why I think so. In Japan, the Nikkei index hit the historical high price in 1989 around \39,000. Currently the Nikkei index is approximately 1/3 of the historical high price. In the USA, the NY Dow was around 3000 points in 1989; however, it has reached to over 16000 points which is almost 5 times higher than that in 1989. It is very easy to understand why Japanese investors feel that there is a question about the US stock prices because the US stock indices are 5 times higher and 1/3 higher than those of the Japanese in 1989.In comparison with 1989 and 2013, the US economy in 2013 grew to 3 times more than that in 1989. However, the Japanese economy in 2013 grew around 15% more than that in 1989. When it comes to the population of both countries, the Japanese population has not increased a lot. However, the US population has an approximate 25% increase. It is expected that the American stock market has grown a minimum three times more than that in 1989 in the light of these points. In addition, Japanese companies' profitability continues to decline because of the deflation over the last 20 years. However, the US corporate operating profits are improving over the past 20 years owing to the continuation of inflation in the US. Hence, we can easily understand why the US stock market is not relatively expensive compared to the market in Japan.In fact, it is difficult to say that the US stock market is not relatively more expensive than that of the Japanese market because the PER (Price earning ration) of the US stock market is 18 times more than its market value which includes future expansions compared to the Japanese PER which is 15 times over its market value. Nonetheless, we can say that the Nikkei PER of 60 times over the market value in 1989 was abnormal.Most of the Japanese investors are tend to decide whether it is a bubble or not based on how many times the stock prices are higher than the old prices. It is a common mindset among Japanese investors simply when the pricing is 3 or 4 times more than the past, it would be a bubble. However, we can comprehend that the US stock prices are not always so expensive considering these economic facts. As for the evaluation of individual stocks, we can say the same about the stock indices. In Japan, it is a fact that we value the stock prices just from the book value of the companies and the growth evaluation is not always reflected. It is very difficult to decide whether it is a right or wrong evaluation based on the prices of share whether these company would grow in the future or not. It is natural that the Japanese economy has not grown over the past 20 years. Of course, we are able to understand that more corporations have grown in economically growing countries and even mature companies also have grown as the economic grows at the growth rate of the country.Mr. Warren Baffet, famous as a fund manager, always decides to buy stocks after assessing the future value of companies even though their prices are relatively higher. Coca Cola's and McDonald's share prices ware relatively expensive when he bought those shares in 1988. However, it is true that he decided to buy those stocks considering their future global growth. He believed that those companies would grow in the future and that prices are relatively cheap if their growth would continue in future. Baffet is a great investor who does understands these points of view. It is understandable that American companies are always bought at higher prices. It is natural that the current PER is 15 times over the market value in Japan and that of the US is 18 times over its market value. The market value of the US stocks are around 2000 billion dollars, the Chinese market value is 370 billion dollars and the Japanese market value is 368 billion dollars at the end of 2012. The Chinese GDP caught up and overtook the Japanese GDP in 2012 and the market value of Chinese stocks also surpassed that of the Japanese. Normally, it is told that the nominal GDP vs. the market value of each country is around 1 to 1. It is true that the market value of each country reflects the current situation of each country. The US stocks market value is 1.2 times higher than the US nominal GDP for reflecting the future growth of the economy and the Japanese shares market value is 0.9 times higher than the Japanese nominal GDP, reflecting minor future growth of the Japanese economy. As I have explained in this essay, it is very important to understand the background of those phenomena in order to succeed in investing in equity markets. People continue to study or learn everyday if you can judge from these kinds of view points.
