Maui native bets against trends in investing

By Deborah Adamson
Advertiser Staff Writer

Maui native Irwin Yamamoto, a soft-spoken 48-year-old bachelor, comes across as cheerful and agreeable. But when it comes to investing, he's anything but conciliatory.

YAMAMOTO

Recently, Yamamoto sold all his stocks and sits 100 percent in cash.

It's true to the contrarian's nature, since stocks have soared from the start of the Iraq War in mid-March. The Dow Jones Industrial Average has climbed 9.4 percent, the Standard & Poor's 500 has risen by 12.6 percent and the Nasdaq Composite Index has soared 18.5 percent.

"Considering how far we've come in such a short time, usually that (rally) cannot be sustained," he said.

But Yamamoto won't sit on the sidelines for too long. He's waiting for the market to drop five to 10 percent or more, which he thinks could happen soon, before considering nibbling at stocks again. Right now, the market outlook is grim.

"There is no evidence we are rebounding economically," he said. "Business is not investing in capital expenditures. Consumer debt is high. Corporate profits are slightly up but it's all due to cost cutting."

Yamamoto also sees an intense round of stock selling by corporate insiders — executives and directors. These are the people who know what's going on in the company. If they're selling, an economic turnaround could be faltering, he said.

Meanwhile, stocks still are expensive. When bear markets end, companies in the S&P 500 trade at 10 to 12 times earnings, he said. That means their stock prices are 10 to 12 times greater than the company's annual earnings per share. At present, companies are trading at an expensive 30 times earnings, he said.

"I can't find bargains now," said Yamamoto, a value investor, meaning he looks for companies with assets that exceed the value of all their shares.

When he first became interested in investing, Yamamoto gravitated to the value strategy because "it made common sense logic." If a company was worth $20 a share based on its assets, he'll happily snap it up for $10 in a down market.

Value investors search for stock bargains. Growth investors, on the other hand, don't focus as much on price but rather a company's prospects. Whatever price they buy at, they expect the company will grow and its price will rise.

Contrarians tend to be value investors, because they look for out-of-favor companies whose stocks have been beaten down.

One of his best stock picks was Telefonos de Mexico, which he says he purchased for 12 cents per share and sold for more than $30 in the 1980s. At the time, investors stayed away from Mexico because its economy was near collapse due to higher interest rates, rising inflation, massive capital flight and high foreign debt.

"I'm a contrarian. If Mexico would ever come back economy-wise, the telephone company would come along," Yamamoto said.

But buying at a low comes with its own risks — a faltering company could get sicker and its stock could fall even lower, or to zero.

That's what happened to Yamamoto's purchase of Homestake Mining in the mid-1990s. At the time, gold traded at $400 an ounce, down from an all-time high of $850. He believed the stock would recover as the yellow metal rebounded. But gold continued to fall to about $250 an ounce, taking the stock down, too. He says he bought at $12 and sold at $6.

Yamamoto tries to limit his losses by focusing on companies with little or no debt, a load of cash on its books compared to industry peers, and that enjoy a leading market share, brand name or niche. He also prefers mid-sized companies, which have a potential of being acquired.

"They'll have staying power," Yamamoto said.

He also looks for companies whose stocks are at 52-week lows.

After making his purchase, Yamamoto sits patiently and waits. It takes time for a company to improve operations and business, but he is content to wait until it does. That's how he minimizes losses.

"I guess I'm just stubborn," Yamamoto said, with a laugh.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.