Thinking Points

  • US-based fund manager Brian Grosso shares his thoughts on Japan after his first visit in late June 2018.
  • Cheap stocks is what got Brian started in Japan several years ago, but prices have appreciated considerably since.
  • For aspiring international small cap investors, Japan is a good first market, thanks to its lower risk of outright frauds.

If you enjoyed last week’s post about my visit to several Japanese companies with one of my clients, you’ll like this one better. Today’s post will be from my client’s perspective. Here, we have a quick interview with US-based fund manager Brian Grosso.

 

Interview

Introduce yourself! – where you’re from, what you do, how you got into investment management, etc.

I grew up and am still currently based in the beautiful Hudson Valley of New York approx. 2 hours north of NYC.  I’m 24 and have been investing for 6 years.

The Hudson!

I stumbled on investing like many others.  I read an article about Warren Buffett and jumped down the rabbit hole, immediately reading some of the classic investing tomes and researching online and that hasn’t stopped since.

My development was driven by reading books, managing my personal account, and organizing and sharing my thoughts in Seeking Alpha articles throughout college.

After college, I briefly had a NYS-registered RIA firm and now work for a family office managing a sub-account investing in equities.  I also spend time selectively identifying promising, young, emerging managers of all stripes – not just in public equities – to deploy capital to.  If you are a young and promising person, please connect with me on LinkedIn.

 

Can you elaborate on your investment research process – how you decide which companies to research, what you look for, and how you decide which companies are worthwhile investments.

I look far and wide for cheap stocks and am willing to endure illiquidity and information scarcity in opportunities.  I try to value the stock right away and my research and management of time is very price-driven. Among famous investors, I have been most heavily influenced by Peter Cundill and Walter Schloss.  I also just read Jim Roger’s book Investment Biker and suspect that will have a lasting impact.

 

What were some of your takeaways from Peter Cundill, Water Schloss, and Jim Rogers?

 

  • “There is always something to do.”
  • Buy cheap stocks
  • Look globally and understand the culture

 

I’m tempted to ask what your best investments were, but that’s no fun. What were some of your worst mistakes?

A huge recent mistake of process that is on my mind and relevant to Japan is getting comfortable with an arbitrary assumption, starting to use it more and more in my process, and then accepting it as governing the future and ceasing to think.

For example, I started assuming 3 years as the expected time it would take value to be unlocked on some Japanese stocks. In hindsight, that was way too aggressive for the companies I was/am looking at and I think the future will bare that out.  3 years is probably quite reasonable for US large caps, maybe even conservative. In small cap land, more accurate. But in illiquid, small cap, family controlled, 100 year old companies with a record of terrible capital allocation (70% of assets are cash in market with negative interest rates) and no recent signs of improvement at the company, 3 years is absurd.  I’m thinking more like 8-10 or perhaps never, which of course is the painful truth if you’re endowed to the stock through a lot of research or ownership, but the goal is to arrive at truth and good returns, not avoid mental pain.

 

Which markets do you invest in?

I invest globally within the limits of market access – it’s hard to actually get access to every market. India is a really tough one for instance. Japan was my first market outside the US.

 

In the US, investors are well-protected. It seems Japan is moving in that direction as well. Are there any precautions you take when investing in Japan or other parts of the world?

Probably not enough but there are many indicators one can use to assess the people involved such as executive and board compensation on an absolute basis and as a % of earnings, revenue, and market cap, capital allocation, dilution history, etc.

 

What got you looking into Japan?

3 years ago half of net nets globally were Japanese stocks and if you did any sort of screen for cheap stocks, half the names in the results were Japanese.  Price led me here and I hope to always follow the trail of where the bargains are.

 

Are there any markets that you are paying closer attention to recently?

I am fascinated by and think there is major opportunity in much of Asia as the new investing frontier.

 

After visiting Japan and meeting with several companies, have your thoughts toward the Japanese market changed at all? If so, in what way?

My thoughts have not really changed.  I think the trip and meetings were more confirmation of where my thoughts had been going which is a bit more cautioned optimism.  While Japanese stocks are cheap, they are far less cheap than they were several years ago and the key thing is capital allocation.  While capital allocation is improving as evidenced by the rising dividends and repurchases and other more anecdotal evidence, a seachange won’t happen overnight and investors need to handicap how long it will take for “the value to be realized” on a case by case basis.

 

It was one short week in Japan, but did you have any sort of culture shock? Notice any differences in business culture between the US and Japan? General patterns in the way Japanese managers think?

I had “anti-shock” I think.  It was my first time outside the US and I guess the first time you visit another country there is this wonderful feeling that everyone should experience that “these are human beings too leading basically parallel lives to those in my home country.”   There are definitely big differences in the business culture but that wasn’t as much of a shock. Our first night walking toward Akihabara I remember noticing that man and his daughter entering their apartment, likely after walking home from school. Or the many subway trips with people with headphones in and dazed eyes.  It could just as easily have been Manhattan. In No Reservations, Anthony Bourdain said he wished more people had passports.  After this trip, I feel the same, and for all human beings, not just investors.

 

Any advice for fund managers and individual investors wanting to invest in Japan or internationally for the first time?

Japan is a good first market because it is easily tradable at Interactive Brokers and while capital allocation can be pretty terrible, I have not observed any outright frauds among Japanese small caps so I think the risk of getting sucked into a bunch of frauds or scams is much lower than, say, Hong Kong.  Other than that, just get started.

 

Reach out to Brian

Like Brian mentioned earlier, he not only manages money, but is also on the lookout for young and promising managers. You can reach out to him through LinkedIn or fill out the Kenkyo contact form here and I’ll be sure to forward your message to Brian.

Brian!

Author: Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.