These differences in returns emphasize the importance of maintaining a
well-diversified world portfolio.The Japanese Market Bubble
The 1980 bull market in Japan stands as one of the most remarkable bub-
bles in world stock market history. In the 1970s and 1980s, Japanese
stock returns averaged more than 10 percentage points per year above
U.S. returns and surpassed those from every other country. The bull
market in Japan was so dramatic that by the end of 1989, for the first
time since the early 1900s, the market value of the American stock mar-
ket was no longer the world’s largest. Japan, a country whose economic
base was totally destroyed in World War II and had only half the popu-
lation and 4 percent of the land mass of the United States, became the
home to the world’s most highly valued stock market.
The superior returns in the Japanese market attracted billions of
dollars of foreign investment. By the end of the 1980s, valuations on
many Japanese stocks reached stratospheric levels. Nippon Telephone
and Telegraph, or NTT, the Japanese version of America’s former tele-
phone monopoly AT&T, was priced at a P-E ratio above 300. This com-
pany alone had a market valuation of hundreds of billions of dollars,
dwarfing the aggregate stock values of all but a handful of countries.
Valuations reached and in some cases exceeded those attained in the
great technology bubble of 2000 and were far above anything known in
the U.S. or European markets.
During his travels to Japan in 1987, Leo Melamed, president of the
Chicago Mercantile Exchange, asked his hosts how such remarkably
high valuations could be warranted. “You don’t understand,” they re-
sponded. “We’ve moved to an entirely new way of valuing stocks here
in Japan.” And that is when Melamed knew Japanese stocks were
doomed, for it is when investors cast aside the lessons of history that
those lessons come back to haunt them.^4
The Nikkei Dow Jones, which had surpassed 39,000 in December
1989, fell to nearly 14,000 by August 1992 and below 8,000 in 2002—a de-
cline worse than any experienced by the U.S. or European stock markets
since the great 1929 to 1932 crash. The shares of NTT fell from 3.2 million
yen to under 500,000. The mystique of the Japanese market was broken.CHAPTER 10 Global Investing and the Rise of China, India, and the Emerging Markets 165
(^4) Martin Mayer, Markets, New York: Norton, 1988, p. 60.