Bank of Japan making a killing on Japanese Stocks?

There have been multiple articles in the newspapers and segments on the news lately about how the Bank of Japan (Nichigin) has been making a tidy profit on the Japanese stock marker.

BoJ has been buying Japanese stocks for some time for various reasons, so it's no surprise that they own a lot of domestic stocks. It also shouldn't be surprising that they make a profit doing this, if these stocks are making a profit overall - but the profit that BoJ has been making is larger than would be expected.

Why? It's simple, they have a daily budget which they spend each day to buy stocks - but on days where the market has dropped a significant amount in the morning, they raise their daily budget for buying stocks and buy more than average in the afternoon. In other words, they buy more stocks when stocks are on sale. This lowers their average purchase price.

If you and BoJ own the same stocks, but they bought them for less, then obviously they will have earned more of a profit than you.

The question is: What can you learn from this as an individual investor?

Well, on average, getting into the market earlier is still a better strategy than waiting for prices to drop - but if you have a normal budget you invest per month, and you are also able to lower your disposable income in order to invest more in certain months, then perhaps you too can employ a similar strategy.

As an example, say you have a take-home pay of 40 man Yen per month, and you normally invest 10 man Yen. You technically could live on a tighter budget and invest 15 man yen. Financially speaking, you should invest 15 man yen every month then - but you don't want to be that austere all of the time. One thing you could do is invest 15 man yen whenever the market is at least 10% lower than it was at the start of last month, and 10 man yen the rest of the time.

Implementing a daily system like BoJ would be more complex, time consuming, and depending on your fees, not worth the effort. Depending on your situation, you might define your cash to stock ratio as a range, say "I want to be 20-30% in cash", and start the month with 10 man in cash. That means that using the 30% number, you plan to invest 7 man in stocks over the course of the month. Every day, you invest 2,333 JPY. On days where the market went down in the morning, you invest 2,666 JPY instead. Again, emulating the bank's approach assumes free real time trades are possible.

Doing this with individual stocks would be incredibly dangerous since it may well mean your are pouring money into companies sliding towards bankruptcy - but doing it with the market in general isn't a bad approach.

The more important takeaway, however is probably that there is no need to run when market drops. If you feel the need to sell, then your cash position wasn't large enough in the first place, so rather than selling, you should start saving more in cash each month until you are in a position where the market dropping 50% overnight wouldn't bother you that much. Stocks might offer the highest return, but being able to sleep at night is important as well, and panic selling can erase any gains you might have had. The best asset allocation is the one that keeps you in the market and lets you sleep at night.