Thinking Points

  • The first takeaway from my second Tokyo trip: Management Matters.
  • During the trip, there were two companies that highlighted the importance of management quality.
  • One company had no clear direction and the other commanded a confident go-getter tone.

The first trip was with a deep value oriented fund manager. The second trip was with a manager more focused on growth at a reasonable price (GARP). Not sure if he is up for an interview just yet, but if he is, you’ll see one soon! In any case, I have a few takeaways from this trip and would like to share them with you over the next few weeks. The first takeaway? Management Matters.

 

Management Matters

This one seems blatantly obvious. Of course, we all want to buy businesses that a ham sandwich can run. And ham sandwich businesses usually means sustainable profits (and plenty of deep sleep). But someone still needs to call the shots on capital allocation.

Now, it’s no secret that corporate Japan sits on piles and piles of cash. Figuring out what to do with this cash can mean the difference between being stuck in a value trap or compounding returns indefinitely. Needless to say, there’s a lot to be gained from sitting down and talking to the business managers tasked to make capital allocation decisions, even at a ham sandwich company.

What isn’t said in these conversations are sometimes just as important as what is said, and reading between the lines is helpful. During the week in Tokyo, we met with 10 companies, one of which I’ve written up in my newsletter and another that I wrote up for a premium article. I was excited for both meetings – one went really well and one was… awful.

 

Go-Getter Management

I can’t discuss which companies we met with, but I can speak in broad terms.

The company covered in my newsletter is a late stage startup with an established and profitable business model. The company is loaded with cash, but the meeting was an entire hour of “we might do this or we might do that, but we really have no targets or timelines and would like to leave everything open-ended”. Neither the fund manager or I had any concerns about how well the company would do over the next few years, but we both came out with a high level of conviction that the cash will probably just sit there indefinitely.

The other company is an established niche precision equipment manufacturer with proprietary machinery. Management was straightforward about focusing on driving profitability instead of focusing on top-line growth. And we got much more of  the “here’s what we’re going to do, how we’re going to do it, and what you can expect from us” throughout the entire meeting in a subtle, Japanese go-getter tone.

The companies’ price points were such that it’s unclear which company would perform better as an investment. With that said, there was an obvious winner in management quality.

 

The bottom line

Seeing a late stage startup with piles of cash and no direction, and then an established precision equipment manufacturer with decent capital allocation and clear direction was odd to say the least. If the idea of compounding your wealth without losing any sleep resonates to you, management quality can mean all the difference, even at a ham sandwich company.

Author: Kenkyo Investing

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

    2 replies to "Tokyo Takeaways (Part 1)"

    • Steve Yuan

      Interesting as always. It is the best to combine good capital allocation and industry expertise (precision equipment manufacturer in this case). I assume you haven’t discuss the name of this company throughout your post?

      • Clayton Young

        Hi Steve, thanks for reading and dropping a line! 🙂

        And you’re right! There’s nothing in this post that identifies the companies we met. I went to these meetings with a fund manager so I can’t disclose the names for several months.

        Cheers,
        Clay

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