American Consequences - June 2017

haven’t always been popular. You might remember that during the dot-com boom of the late 1990s, investors would pile into companies that were announcing a stock “split.” That’s when outstanding, sometimes by 100%, by simply exchanging one of your shares for two new ones. Share splits don’t change anything about the business. It doesn’t make the company more valuable in any way. The share price should simply fall in half as the company’s shares outstanding double. But back then, investors believed that simply making the stock more affordable would lead more investors to buy it... and that alone would push the total value of the stock higher. a company increases the number of shares Today, however, most people are investing through exchange-traded funds (“ETFs”). Many of these funds are structured according to various indexes. And some of these indexes are “price-weighted,” meaning that the capital is allocated according to nominal share price .

to split their stock to gain the attention of investors are now not splitting their shares for the exact same reason. And in Japan, that kind of investment rationale has been taken to an extreme... In Japan, the central bank is the “greater fool.” Japan’s central bank – the Bank of Japan – has been buying around 3 trillion yen ($30 billion) worth of stocks via ETFs each year, radically warping the equity market. The Bank of Japan focused its buying on ETFs that were structured according to the Nikkei 225 index, which is a “price weighted” index, much like the Dow Jones Industrial Average. Again, in a price-weighted index, the larger the nominal share price, the larger the allocation in the index. Fast

That is, some people are investing, knowingly or unknowingly, into stocks simply because the nominal price is high . They’re not buying because the business is undervalued.... or because it pays a good dividend... or because it’s growing fast. They’re buying simply because the nominal share price (which conveys zero information about the relative attractiveness of the investment), is a very large number compared its peers and thus is more likely to attract subsequent capital. Said another way, the “greater fool” is more likely to buy a big nominal share price stock over any other stock. Thus, the same kinds of management teams that used

A Price Only a Central Banker Would Love Fast Retailing's share price is around 10-30 times higher than its peers Fast Retailing 37,000 yen Aoyama Trading 3,960 yen United Arrows 3,425 yen Adastria 3,060 yen Nishimatsuya 1,178 yen

18 | June 2017

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