“[Richard Rainwater] didn’t want anything just undervalued. He wanted it undervalued with an opportunity attached to it. He wanted the guy he was negotiating with to be pretty beat up. Rainwater had a keen instinct for the big picture. He’d identify his idea and put the right CEO in place. ‘Find the guy’, Rainwater preached. ‘Don’t try to be the guy.’”
— Kenneth A. Hersh (2011)
WEEK IN REVIEW
One company returns to our Grahamian Value Classic list.
We proudly announce our next Grahamian Value Fireside Conversation, featuring Murray Stahl of Horizon Kinetics.
I. WEEK IN REVIEW
This marks our twenty-second consecutive week with no new additions to the Grahamian Value Classic list of companies.
II. CONTINUED CONTEMPLATION ON JAPAN
We understand that Michael Burry owns a collection of Japanese public equities, several of which are traditional net-nets with strong individual histories of profitability.
As noted last week, a number of Michael Burry’s Japanese holdings appear to meet the criteria for “Portfolio 4” of the 1981 study by Joel Greenblatt, Richard Pzena and Bruce L. Newberg — that is, public equities which trade at a meaningful discount to liquidation value, are profitable, and often have P/E multiples no greater than five. In our experiences, such public market valuations — when observed in multiple local instances — may indicate a generalized undervaluation of underlying local businesses.
On a broader perspective, we note the viewpoints below of Horizon Kinetics (with emphasis added) —
Periodically, but very rarely, an investment opportunity in a non-U.S. stock market arises because of a regulatory or cultural change unique to that nation and to that time. It cannot be recreated anywhere else, not even on Wall Street. It typically has the character of some industry or sector that was artificially constrained for a long period of time, until the regulation or limitation outlived its usefulness or the economic distortions it created began to interfere with other policy goals. By their nature, these instances are characterized by deeply discounted valuations of the companies in question. They also are characterized by an active value realization catalyst, namely the regulatory and policy change. That makes them high-return, low-risk possibilities and also, being so idiosyncratic, uncorrelated with other asset classes. Such a process is occurring now in Japan. Japan has become of increasing interest to activist investors. They are attracted by the almost singularly low valuations and high cash balances of the publicly traded companies there. These reflect generations of cross-ownership arrangements between corporations as a defense against takeovers, as well as a proliferation of publicly listed subsidiaries that served a corporate culture of lifetime employment. It made for very inefficient operations and low returns on capital. Ownership structures are opaque, and managements have not been accountable to shareholders for capital allocation decisions, performance, or information disclosure. These practices were in fact successful: the incidence of hostile acquisitions in Japan is very, very low. Beginning several years ago, the government determined to revitalize the private corporate sector, including forcing publicly traded companies to gradually tear down the barriers to change they had built up. Since 2013, year by year, additional regulatory directives have been enacted, ranging from the inclusion of outside directors on corporate boards, to tax law changes, to a change in the market structure of the Japan Stock Exchange. These effectively place both pressure and financial incentives on public companies to eliminate their publicly traded subsidiaries, either by spin-off or by acquiring them. The government’s efforts are clearly bearing fruit, with corporate restructurings on the rise, along with hostile takeovers and the incidence of parent companies acquiring subsidiaries.
A recent rule change at the Tokyo Stock Exchange can seriously impact the listing status of both a parent company that has subsidiary and cross-holding ownership, and the subsidiary itself. This rule change has a time component to it that is intended to play out over the coming year or so. Accordingly, we expect the rate of corporate restructuring activity to accelerate. In every market, there are swathes of inefficiency. Sometimes it is information- and analysis-based, and often it is the liquidity divide – as between large companies and those of insufficient scale to interest institutional or activist investors. There are almost 4,000 listed companies in Japan, hundreds of listed subsidiaries, and a wealth of return-on-research-effort possibilities. In that regard, our Japan team, my colleagues Aya Weissman (co-Portfolio Manager and Director of Asia Strategy) and Utako Kojima (Portfolio Analyst), have been engaged in company-specific research and novel strategy development for a decade.
— “Another Uncorrelated (Temporary) Asset Class – Japan Special Opportunity Strategy,” Horizon Kinetics Q4 2020 Market Commentary (January 2021)
From our arm’s length (and armchair) perspective, Horizon Kinetics believes that Japan may present an area of opportunity that falls into Richard Rainwater’s investment framework of something that is both cheap and “with an opportunity attached” — which is distinct from simply being cheap in-and-of-itself.
As a complement to these weekly digests, we are excited to introduce Grahamian Value Fireside Conversations — a series of live online events featuring prominent thought leaders we respect and admire, exploring the application of Grahamian values adapted to present circumstances, rooted in a margin of safety. This conversation series is primarily intended to add further context and commentary, layered on top of quality pre-existing research that has piqued our interest. Importantly, Grahamian Value Fireside Conversations are solely educational endeavors that are not intended to provide individual stock pitches or be regarded as investment advice. We intend — in a manner that is both dignified and sophisticated — to explore processes, frameworks, and (where appropriate) decision trees. In our view, with frictionless data, there’s an abundance of information and a scarcity of knowledge; we hope, through these conversations, to add to a marketplace of knowledge.
Following a most insightful discussion on Thursday, March 11, 2021 with Nicholas E. Radice, we are proud to announce our second Grahamian Value Fireside Conversation with Murray Stahl — Chairman, Chief Executive Officer, Chief Investment Officer, and Co-Founder of Horizon Kinetics.
Advance registration is required to participate.
“[Richard] Rainwater had a keen instinct for the big picture. He’d identify his idea and put the right CEO in place. ‘Find the guy’, Rainwater preached. ‘Don’t try to be the guy.’”
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
IV. WEEKEND LISTENING
Courtesy of Capital Allocators Podcast, hosted by Ted Seides (twitter): David Baran and Kazuhiko Shibata are the co-founders of Symphony Financial Partners, a twenty-year old Asia-based manager of $1.3 billion in assets. Symphony focuses on deeply undervalued companies in Japan, with a long-bias, constructive engagement strategy to work closely alongside willing management teams to see intrinsic value reflected in the share price. Our conversation covers their early careers in Japan, the country’s employee first, shareholder last culture, the resulting disconnect of corporate activity and share price, and the formation of Symphony to invest in the few companies willing to close the gap over time. We then walk through their investment process, including the challenges of taking advantage of what appears incredible value on paper, offering friendly advice as a key component of due diligence, conducting research, and structuring portfolios. We close with a discussion of corporate governance and the necessity of a long-term perspective to thrive in Japan. (February 8, 2021 episode date)
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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.