“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
WEEK IN REVIEW
There have been no changes to our Grahamian Value Classic list; one company has an update.
I. WEEK IN REVIEW
Notification of Late Filing: Servotronics, Inc.
Servotronics, Inc. filed an NT 10-Q on March 31, 2021 stating:
The Registrant is unable to file its Form 10-K for the year ended December 31, 2020 within the prescribed time period without unreasonable effort or expense because the Company needs additional time to complete its financial statements for the year ended December 31, 2020 and its independent registered public accounting firm will need additional time to complete its audit of such financial statements. The Registrant anticipates that it will file its Form 10-K within the fifteen-day grace period provided by Exchange Act Rule 12b-25.
The Company anticipates reporting net income of approximately $100,000 for the fiscal year ended December 31, 2020 compared to net income of $2,109,000 for the fiscal year ended December 31, 2019.
II. HIGHLIGHTS FROM THIS WEEK’S FIRESIDE CONVERSATION FEATURING MURRAY STAHL
A complimentary replay will be available at GrahamianValue.com in the coming weeks.
One of the problems was that in the euphoric times, a lot of major Japanese companies decided that they were going to bring their subsidiaries public. So, company A owns 100% of subsidiary B, sells 20 or 30 or something percent like that into the public market. Why did they do that? Lots of reasons.
You could compensate people with publicly traded stock — not their own stocks, but subsidiary stock. If you thought that the parent company was overvalued, the subsidiaries were even more overvalued; you could raise cheap capital. Sociological reasons were something like, there can only be one CFO and one CEO; if you have very qualified people, you want to keep them — so you’d make them the CEO or the CFO of the publicly-traded company, which is a subsidiary…
All that was ultimately dysfunctional. Because what did it do? It created a whole series of publicly-traded companies in Japan. They don’t trade a lot, they don’t have high valuations, there’s no reason for them to be public. I’ll give some examples so you can see what I’m talking about…but there are lots of these companies — and little by little, the Japanese government is making little steps, not big steps; it’s putting pressure on the companies to basically take these things private. And a number of them have already been taken private. It’s a small subset of what’s happened so far, but the process only started not that many months ago. So, we’re at the beginning.
— Murray Stahl, Co-Founder, Horizon Kinetics (Tuesday, March 30, 2021)
And maybe you can’t think of any reason why it needs to be a publicly-traded company…. the investment thesis is simply that [parent companies] would buy out minority interests – if indeed, they’ll pay a control premium. And you could debate what is a control premium: 25 percent, 30 percent, 35 percent, something in that range for the investment thesis for all of these companies, even though each one is unique in itself. But the investment thesis for all the companies is that it’s really kind of, for most of the cases, a bond substitute. You’re getting almost nothing on your money. These are Graham and Dodd value. The Japanese government is pushing the parent companies to acquire these. And if it takes two or three years, you can debate what the takeover premium is going to be — if it’s a control premium, you’ll get that. Most of these companies pay dividends, you’ll get that. In most of the cases, the dividends are higher than what you can get from a money market fund. And in the fullness of time, you’ll have a low risk portfolio non-correlated with markets.
…in the 1980s, when Japan was at its apex, I encountered a situation in Canada which really radiated from World War II that all the major American companies and a lot of British companies have publicly traded subsidiaries in Canada: General Electric Canada, Ford Motor Canada, Teledyne Canada, Campbell Soup Canada—you name it. Why did it exist? Because at the end of the Second World War the Canadian government felt that the American companies and to some extent the British companies can take over all industry in Canada. So, to prevent that they basically said that if you as an American company want to really do business in Canada, you’re going to have to set up a Canadian subsidiary, take 25 or 30% of the stock as it were, and sell it into the public market, and the Canadian people can participate in that, so Canadian investors can participate in that. They actually did that. There are all sorts of tax penalties against repatriating money to the parent companies back in America, so companies had no debt and the limit to how much growth you can have in Canada, there really wasn’t the outlet to the cash on the balance sheet. Not all of them had tremendous amounts of cash on a balance sheet, although some did. Anyway, there was no reason for them to be publicly traded other than this law that dated back some decades prior. Along came Brian Mulroney, the new Canadian Prime Minister—this is late 1980s—and decided that was not a sensible thing to do. So, he replaced the Foreign Investment Review Act with something called Investment Canada that basically effectively gave the permission to the American and the British companies too, Imperial Tobacco Canada, to basically buy up their subsidiaries — which is basically what happened; it was basically a three-year process.
[The Japan Founders Index] illustrates the concept that I talk about a lot, the culture or the concept of the owner-operator. Somebody has their own capital at risk. It’s most of their money, and almost all the time they take it very seriously — and almost all the time, you get a really good outcome because people have no alternative but to take it seriously. So, it’s a different way of looking at Japan. I call it your attention and we’ve written on this subject. As I said, it’s not even an investment product, it’s just something that we have studied over the past.
GV: You shared observations about the history of Canada’s public markets and parallels to Japan today. Do you have any books or similar resources that you recommend to better understand this interesting wrinkle in financial market history?
That’s the interesting thing about Japan. The books that are really detailed don’t even get translated to English; they’re in Japanese. But I would say the first thing is, there aren’t really, there are no good, that I know of, English language books that will go through the history of Japan. So, I do recommend you just read autobiographies that are in English, and it will give you a sense of the people’s experiences as they lived it. The autobiography of Akio Morita who founded Sony, called Made in Japan. There’s another one who basically became the biggest Japanese publisher. I guess a lot of people have compared him to William Randolph Hearst, except he was far more successful from beginning to end. His name was Noma Seiji. His autobiography is called Noma of Japan. Anyway, that’s how I basically tried to acquire my knowledge from: autobiographies or actually meeting people. I don’t think there are any real good histories of these companies.
GV: When examining the set of present opportunities in Japan, how do you think about time horizons?
I don’t think you need a long time horizon. I would use 24- to 36-month time horizon for Japan. And there are a lot of reasons for that.
One of the reasons is that so uncharacteristic has been the Japanese monetary policy of the last 10-20 years. Japan is this unbelievably indebted country; it was once the exact opposite. I think the Japanese national debt, government debt, is something like 200% of GDP. They can carry it because the interest rates are basically zero. But there’s limits to how far you can push that, and I think they’re pushing it about as far as you possibly can. That’s one reason.
Then there’s another reason, and really it has to do with modern manufacturing and modern technology. We talk a lot about sustainable manufacturing. Take, for example, something as ubiquitous as your smartphone — your iPhone, or whatever. You wouldn’t believe how many unusual materials are in your smartphone, neodymium for example…
And Japan, because it’s a small place, they don’t really have a place to dump waste. They really had no choice but to figure out sustainable production technologies, and people have to co-exist with modern investing. That’s not actually true of other companies, so of other countries. So, I think the pendulum is rapidly swinging back to Japan, and I think there’s going to be something of an industrial renaissance in Japan. Not because there’s always high tech happening; it’s just because they just mastered the art of sustainable production. They just know how to do it. It’s not so easy to figure it out — and even if you figured it out, it’s decades to apply the experience.
Important Message for All Readers: The editorial team of Grahamian Value does not maintain accounts with, or receive compensation from Horizon Kinetics or any affiliated entities thereof. We are not brokers or investment advisors, and do not presently manage outside capital. Any information herein should not be regarded as a promotion or endorsement of Horizon Kinetics or its products or services. We do, however, independently believe that Horizon Kinetics' thought process and approach to certain market opportunities are intriguing and (on merit alone) deserve deliberate, focused attention.
III. WEEKEND WATCHING
Courtesy of Talks at Google: Warren Buffett has said, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read.” Howard Marks is the Co-Chairman of Oaktree Capital Management. He is known in the investment community for his memos to clients which detail investment strategies and insight into the economy. He treats investing as equal parts psychology and finance, and his book The Most Important Thing provides uncommon sense for the thoughtful investor. (Uploaded March 29, 2015)
IV. WEEKEND LISTENING
Courtesy of The Money Maze Podcast (hosted by Simon Brewer and Will Campion): In this episode we have the rare opportunity to talk to Sir Chris Hohn, one of the world’s most successful hedge fund managers, benefactor of the largest children’s charity (CIFF) and now agitator against corporations who are failing to properly address their climate change transition plans. (March 11, 2021 episode date)
h/t to Joe Koster’s Value Investing World (which we highly recommend!)
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Harry Sauers and Shai Dardashti are co-editors of Grahamian Value and, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.