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Month: May 2013

Does Net-Net Investing Work In Japan? (#JNets, #valueinvesting, #Japan)

Does Net-Net Investing Work In Japan? (#JNets, #valueinvesting, #Japan)

If you took a look at the companies I purchased off my Japanese net-net (“JNet”) worksheet about six months ago, you’d probably conclude net-net investing doesn’t “work” in Japan, at least not over a six month period. The cheap, crappy companies I bought then are cheaper, still crappy companies today.

However, if you took a look at all the companies I didn’t buy from my list, you might get a different impression altogether. While there are a few companies of this group whose fundamentals worsened and/or whose stock price fell, most are up anywhere from 10-15% with several up substantially more, 30-50%. About 10% of the total list seems to have gone private as you can’t find financial info nor trade the symbol any longer, which in my experience in JNet-land typically means they received an MBO.

And if you look at an entirely different list of JNets I generated about two months ago (because all my original picks were no longer JNets), which I finished researching one month ago and which I failed to do anything about until yesterday, the story is even better (or worse, if you’re me). How would you like to see the top pick on your list closed up 25% the day prior and about 40% total since you composed your list? How would you like to see the average company on your list priced 15% or more higher from where you first researched it, meaning you could’ve locked in your 15% annual return for the year in a few months time?!

Once again, this list also had several symbols which no longer trade, presumably because they received buyouts or other going private transactions.

So, in the last few days I learned a few things about JNets:

  1. They “work”
  2. The “M&A activity in Japan, particularly in the small cap space, is a non-starter” claim, is a myth
  3. Even crappy businesses with cash-rich balance sheets are moving like hotcakes in Abenomic Japan
  4. The strengthening of the dollar against the Yen does impact your $ returns, but so far Yen prices on JNets have outpaced the move of the Yen against the dollar
  5. Contrary to my belief that I could take my time allocating idle capital in Japan, it now appears that time is of the essence

My old motto for JNets was, “Steady as she goes.” My new motto is, “Churn and burn” or “Turn and earn.” I’m going to be watching things much more closely than I had before.

To be clear, my experience so far has been frustrating, but it hasn’t been catastrophic as I suggested in my introduction. I have captured some of the windfall moves myself although I continue to have laggards in the portfolio, at least in dollar terms. Very few of the original companies I picked are trading lower than when I bought them, though some have not moved up enough yet to make up for the exchange rate loss. My first portfolio of JNets was bought when the Yen/$ rate was 79. It’s now almost 99 Yen to the dollar and I made my second portfolio purchase around 94 Yen to the dollar.

Overall, in dollar terms my first portfolio is up 5%, with one MBO and apparently another just recently as I found out the stock is up 43% with no ask but I haven’t found a news item explaining why yet. Several others traded above NCAV so I am culling them and putting them into new opportunities. I have not yet determined what the “secret formula” is for picking the JNets that will really take off– oddly, it was mostly the companies whose prospects seemed least fortunate that I neglected to purchase and was in shock to see their stock prices 35% higher or more. As a result, I plan on wider diversification and a more random strategy in choosing between “best” companies and cheapest stocks.

I’m sure many investors have done much better than 5% in Japan in the last half year, and many more have done better still in the US and elsewhere. This isn’t a contest of relative or absolute performance. This is simply an opportunity to settle the score and point out that yeah, Benjamin Graham’s philosophy is alive and well in Japan.