It was just over three months ago when Japan experienced its worst nuclear disaster ever and the Nikkei 225 stock index plunged the most since the 1987 crash. Not exactly good times.
Yet despite the significant and well-known risks -- including an aging population, staggering debt, a generation-long recession, a recent debt downgrade, and the ongoing nuclear contamination -- the country's stocks have quietly begun to bounce back.
As noted this week in Barron's, iShares MSCI Japan Index (EWJ)
Though many strategists, including those from Merrill Lynch quoted in Barron's, now argue for cutting back exposure to Japan after the recent run-up, I believe the rebound makes the stocks objectively better buys now than they were back when the quake was daily news. Human instinct leads us toward snatching the quick profit, yet when an asset in our portfolio finally starts performing, one's response should be to maintain or add to it, not cut it back.
Broad group participation indicates a high-probability trade, making the near synchronous rise in small-cap funds like iShares MSCI Japan Small Cap Index fund (SCJ),
I'm the first to admit that a danger in stock-picking is falling in love and refusing to part with lagging investments because of an fear of losing money or of simply admitting we were wrong. We always look for a bullish justification to defend our choices for just few weeks longer.
Even experienced managers can get caught. Earlier this week Bloomberg noted how celebrated fund manager Bill Miller of Legg Mason (LM)
Because it's easy to become attached to a stock, weakness should be seen as an excuse to lessen exposure, not expand it. Stop orders placed just below March's lows will insure that in the event the trade doesn't turn out as expect, I can ideally escape before a loss becomes more serious.
Yet unlike even our own S&P 500 as of late, the Nikkei isn't retesting its lows. Rather, Japan's market appears to be finally regaining the momentum lost after March's disaster. As the country rebuilds, so could the profits of those who invest there. For now, I'm one of them.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in many of the securities mentioned.