VALUE: After Hours (S07 E12): Reflections on Japan: Investing Culture & Net-Nets

During their recent episode, Taylor and Carlisle discussed Reflections on Japan: Investing Culture & Net-Nets. Here’s an excerpt from the episode:

Tobias: Yeah. So, we were in Tokyo for a week and then Shanghai for a week. And interesting contrast I think between the two cities and the two investment styles in the two cities. I think it’s an interesting the way the energy of the cities matches the investment style a little bit.

Jake: Oh. Like, insane how they do that. It’s quite interesting to see how that manifests. One thing I wanted to start out with was I– The first observation that I really came away with was that you can’t get a sense of a foreign land I think without visiting it yourself. I was a little naive about that before– You could talk to lots of people and read the news, but I think it’s really not the same as seeing it close up for yourself. I think especially, I don’t think that I knew or that a lot of us in the US know what’s really happening in China unless you see it for yourself, especially.

Tobias: When you say that we are talking about China, because I think where you’d been to Japan unexpected?

Jake: Well, I think the part of Japan that was unexpected was that you knew it was going to be difficult to get management to do the capital allocation things you wanted to do to unlock some of those frozen and some might say bloated balance sheets. I think it’s going to be even harder than I thought it was going to be before seeing it up close.

Tobias: So, you’ve invested in Japan variously over the years. There was a net-net basket-basket from 2015?

Jake: 2011. Fukushima.

Tobias: 2011.

Jake: Yeah.

Tobias: So, everybody knows Japan has been in a bear market since 1993, earlier 1990? 1987?

Jake: It peaked in 1989, I think.

Tobias: 1989.

Jake: So, I think they just took that out what last year or something from 1989.

Tobias: So, they’ve been in this very long bear market. There have been a number of rallies along the way and there have been a number of these periods where it got very cheap.

Jake: Yeah.

Tobias: 2011, it was possible to buy a big basket of Japanese net-nets which is lots of balance sheet value, cash and so on trading at a big discount to the liquid portion of the balance sheet at a 2/3rd discount. How did that basket work out?

Jake: It worked out well. Like any typical net-net expectation where a few were clunkers, most did nothing and then a few really worked out well enough to carry the balance.

Tobias: The basic approach to.

Jake: Well, it is. It’s a power law driven outcome even though you’re starting off with equal aided, relatively junky. Although honestly the companies, they were low ROA, low ROE companies but they were all profitable. There was an R there. It could definitely be worse. I feel like a lot of times over the years trying to buy net-nets in the US and they would just be not only– Oh, they’d just be hemorrhaging cash too. So, you were like racing the clock it felt like to see if there was going to be an unlock.

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