Great Construction

Why Stock Prices Fall and
What Happens Afterward

     Recently stock prices have fallen from one half and one third to more than one tenth of what they were just a little while ago. Countless is the number of people who have sustained great losses and our hearts go out to these individuals. Of these unfortunates, some have become mentally unstable and even a few have committed suicide. It is indeed a disaster that surpasses the mere regrettable. Only a little while ago the popularization of the stock market was being touted in the press and on the radio, so there is really no excuse for the present state of circumstances. Trying to place responsibility for this tragedy is like the proverbial barn door, and the authorities should probably not be blamed because even they did not imagine that the market would fall to such depths.
     However, I saw this crash coming, and I warned a fair number of people. From last spring throughout the summer, I was frequently asked about the appropriate attitude to take about what will happen to commodity and stock prices, and each time, I answered that prices would soon fall so it would be best to sell as much as possible as soon as possible. I told people that by the end of the year stocks would be worth a fraction of their former price, and luckily or unluckily, my prediction was on target as the present situation shows.
     This prediction did not come from any revelation from God, but rather was based on common sense. Prices of general commodities rose because of the war, and when a war ends, prices naturally fall. What rises, falls, and what falls, rises. The market is like a swing, and the expression, “High mountains and deep valleys,” used by Japanese speculators, is quite apt. The only difference, however, is that the drop will always be faster than the rise, as Newton’s theory of gravity well illustrates. The time it takes to drop an object is faster than the time it takes to lift it.
     Let me give here one key to understanding stocks. The main purpose of stocks is to provide capital for large enterprises and projects, by having many people share in the risk. In some cases, this can be done by one person, but monopolies never generate enough interest. Even in the zaibatsu economy we had before the war when there were people who could finance one project by themselves, these people usually did not do so and arranged for capital by issuing stocks. These days, we have anti-monopoly laws and other controls, so the situation is more constrained than the prewar period. Thus, the stock market had to be opened up to the public. What I have described so far are all legitimate business practices. The aim of investing in stocks is to derive income from the dividends, and they are attractive because the percentage received is larger than that of interest from bank deposits and government bonds. Furthermore, investing part of one’s savings in economic development could be said to be one of a citizen’s duties.
     Investing for the purpose of receiving dividends is a legitimate business and social practice for which there should be hardly any loss. But for some, just receiving dividends is not appealing enough, and they wish to derive income from the difference that comes from buying stock at low prices and selling it at high prices. This is “playing the stock market” and it is fundamentally mistaken. If a project is undertaken legitimately, there should be no loss, and those who lose, lose because they have done something wrong. It is an illustration of the proverb, “Ill-gotten money is soon spent.” Even though one may temporarily gain through such means, eventually one will fail. The best proof of this is that neither the nouveau riche or stock dealers—even those in business for two and three generations—made money from playing the stock market in the present situation. They all lost, a fact well-known to those in the industry.
     Those who bought stocks while the market was good last year did so only with a mind to profiting from the difference in stock prices and did not think about dividends at all. These people were for the most part those without a deep knowledge of the market, such as salaried workers, widows, and those with small amounts of savings who indiscriminately bought up stocks. I thought this not only dangerous but truly terrifying. There were many stocks that gave good dividends at the time, but instead people were buying stocks that at the current prices were not even paying one percent per annum in dividends, so serious investors who were going for the returns from dividends would not touch these stocks. Those playing the stock market do not have patience, react to a drop in the morning, and get flustered. They will soon sell. Selling off stocks begets more selling, and before one knows it, we have a situation with low stock prices like that today. One thing to remember about this situation is that as long as the market has been around, once the bottom is hit, investors will start moving again and the downward motion will stop. Nowadays, however, we no longer have the big investors who could have performed that role, and the bottom still has not been hit. I am sure that recovery will need a long time.
     Stocks should only be bought by those with more than enough financial excess and who will be not distressed if the market takes a downward turn. Most people want to do things in a big way even though they lack the wherewithal. This is the cause of failure. When buying stocks it will not do to think only about rising prices and not consider falling prices. Not only with the purchase of stocks, but in all matters, planning should consider first the possibility of failure and then the possibility of success. What to do in case of failure should always be determined beforehand. In this regard, I remember this advice. Whether in business or anything, the matter at hand should not be primary in one’s thinking. One should always be able to just walk away from whatever one is doing. If so, one will never fail. The comment impressed me very much. Last year I wrote about the spiritual aspects of dealing in the stock market, so this essay is about the physical aspects.

Kyûsei, Issue 48, February 4, 1950
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