Munehisa Homma – Father of Japanese Candlesticks by Mutiara Damansara

Munehisa Homma -  18th Century  Japanese Value InvestorIn this Japanese name, the family name is “Homma”. Munehisa Homma (Munehisa Homma Honma Munehisa) (also known as Sokyu Homma, Sokyu Honma) (1724-1803), was a rice merchant from SakataJapan who traded in the Dojima Rice market in Osaka during the Tokugawa Shogunate. He is sometimes considered to be the father of the candlestick chart.

Until about 1710, only physical rice was traded but then a futures market emerged where coupons, promising delivery of rice at a future time, began to be issued. From this, a secondary market of coupon trading emerged in which Munehisa flourished. Stories claim that he established a personal network of men about every 6 km between Sakata and Osaka (a distance of some 600 km) to communicate market prices.

In 1755, he wrote (San-en Kinsen HirokuSan-en Kinsen Hiroku, The Fountain of Gold – The Three Monkey Record of Money), the first book on market psychology. In this, he claims that the psychological aspect of the market is critical to trading success and that traders’ emotions have a significant influence on rice prices. He notes that this can be used to position oneself against the market when all are bearish, there is cause for prices to rise (and vice versa).

He describes the rotation of Yang (a bull market), and Yin (a bear market) and claims that within each type of market is an instance of the other type. He appears to have used weather and market volume as well as price in adopting trading positions.

Some sources claim he wrote two other books ( Sakata Senjyutsu SyokaiSakata Senjyutsu Syokai, A Full Commentary on the Sakata Strategy) and ( Homma Sokyu Soba Zanmai DenHomma Sokyu Soba Zanmai Den, Honma Sokyu — Tales of a Life Immersed in the Market) – From Wikipedia

The “god of the markets”, Munehisa Homma, ran a managed futures CTA hedge fund in the 18th century. His fund performed outstandingly for over 50 years. His main writing, “The Fountain of Gold”, is the best “how to invest” book ever written. His trading ability enabled his family office to become the largest land owner in Japan. They later diversified into the business which makes sense if you own vast tracts of flat land in a mountainous region.

Munehisa Honma’s net worth was over US$100 billion in today’s money. Some years he “took home” more than the equivalent of US$10 billion so it’s curious why pundits are excited about the “news” that John Paulson received “record” pay of just $3.7 billion. Fair “salary” for the over $12 billion he generated for clients that they would not OTHERWISE have. Like Homma, Paulson’s hedged client portfolios. REAL hedge fund managers focus on achieving returns to monetize their talent and build wealth. Shorting subprime was NOT the greatest trade ever. Good but not greatest. “Ever” means since 2002? Recency bias yet again. Honma’s short sale of rice futures in 1789 was far more profitable than Paulson’s “big” credit short.

There’s a fountain in the main garden of Homma’s house as a reminder of the source of wealth. As befits many successful hedge fund managers, Homma was an avid art collector. He also advised the world’s first sovereign wealth fund. Though rice was heavily traded and analyzed in those days, such liquidity did NOT produce an efficient market. He figured if he worked hard to develop competitive informational and analytical advantages he could extract alpha out of other traders, regardless of whether futures brokers themselves were bullish or bearish or prices were rising or falling. That’s a TRUE hedge fund. Any firm needing a bull market to make money is NOT a hedge fund.

Note for the long only luddites: the GREATEST trades tend to be shorts. Hedge fund “pioneer” Alfred Winslow Jones did not “invent” hedge funds. He invented the term but not the philosophy. Munehisa Homma was investing for absolute returns two centuries earlier. By 1755 Honma already knew that psychology and the IRRATIONAL actions of participants NOT economic logic drove markets. Behavioral finance isn’t new, it’s 253 years old.

Full article here –  Mutiara Damansara