Lifelong Investor (translated)

“What we are doing in the fund is investing, but it was necessary to fully commit to being a manager of a company that manages other people's money. The original goal of pursuing the ideal state of the capital market and the requirement from investors for the maximum return sometimes conflicted, creating a significant dilemma. As a manager of the fund, I could not ignore returns just because I wanted to stick to my beliefs. I suffered greatly from my personality, which does not want to compromise on my beliefs, and from being in the position of being the manager of this fund. Now I am investing using only my own assets, not managing other people's assets, in order to be able to follow my beliefs to the fullest.”

“After I started investing and became a major shareholder, I met with the president of Tokyu Hotels and had several meetings at the Akasaka Tokyu Hotel. I was seriously considering acquiring all the shares of Tokyu Hotels both through additional fundraising with the fund and personal borrowing, aiming to delist it and make it a private company of the fund, and so I proposed this. When the fund’s shareholding approached the ownership percentage of Tokyu Railways, the president of Tokyu Railways then requested to "have a talk." It seemed that the president of Tokyu Hotels was a senior executive from Tokyu Railways, and was unable to make major management decisions.”

“In 1988, the management of RJR Nabisco announced the MBO, encouraged by an investment bank's proposal. It later came to light that there was a secret agreement with M&A advisors that about two billion dollars in rewards would be given to the seven managers (themselves) if the MBO succeeded, and external directors also expressed support for the MBO. However, because the purchase price offered was too low, Mr. Kravis of KKR, a veteran LBO fund, angrily declared, "He intends to snatch RJR Nabisco at a cheap price!" and immediately announced a competitive TOB. Naturally, this TOB was hostile, but since it was offering a higher price than the MBO proposal, external directors had no choice but to approve it. As a result, KKR acquired RJR Nabisco for about twenty-five billion dollars in an LBO. This incident demonstrated that once a company is put up for sale, potential buyers come forward, and it gets sold to the highest bidder. In other words, the mission of a company is to maximize shareholder value. This acquisition amount was the highest in history at the time and was titled "BARBARIANS AT THE GATE" in books and movies. Mr. Kravis of KKR, a pioneer of hostile takeovers, became my role model.”

“At its core, investment is, "putting resources, not limited to capital but possibly also human resources, into something based on the expectation that it will yield returns in the future," and investment always involves risks. However, there are investment opportunities where the relationship between risk and return is not balanced. Identifying these and investing where the return is greater than the risk is what investors do. I refer to this relationship between risk and return as "expected value." If the expected value is not high, there is no financial sense in investing. Being able to accurately assess this is a condition of a good investor.”

“Even with conservative estimates, the criterion is for the IRR to be above 15%. It might sound like I'm seeking a very high return, but IRR is not a multiplier of how many times the investment amount can be recovered. Since returns received during the investment period are also considered in the calculation, shorter-term projects tend to have higher figures.”

“For a company, money is like blood in the human body. If the flow of blood is hindered, it adversely affects the overall health. Whether companies invest for growth or investors put money into new ventures, it is crucial that the flow of money is smooth. Despite this, many listed companies in Japan had a lot of unutilized money saved up. Utilizing these "idle assets" is a critical issue in corporate governance from a shareholder's perspective, and it became my life's work.”

“When the fund started, my consulting work for the Tokyu Group had ended. This time, upon reviewing the Tokyu Group as an investment case, Tokyu Hotels, a subsidiary of the group, turned out to be very appealing to the fund. Therefore, after making a formal proposal to Tokyu Railways, I began buying shares of Tokyu Hotels. At that time, Tokyu Hotels had a market capitalization of about ten billion yen, but the real estate it owned in Akasaka alone was worth about five hundred billion yen in market value terms. Because of the presence of a major shareholder, Tokyu Railways, which owned 20% of the shares, the liquidity of the shares was low and the stock price was left undervalued.”

“I started investing in stocks myself when I was in the third grade of elementary school. One day, my father placed a stack of 1 million yen bound with a band and said, "Shosei, you always ask for allowance, but I can give you 1 million yen now. However, this will be your allowance until you graduate from university. What will you do?"”

“When assessing the inherent risks of an investment, qualitative analysis is more important than quantitative analysis. It's about grasping the personality and characteristics of managers and business partners, rather than judging numbers and metrics. Therefore, through discussions, we confirm each other's thinking and management policies, what issues might arise, whether we can overcome conflicts through discussions, and whether we can have a calm discussion in the final stages if the project does not go well.”

“Today, I live in Singapore, a place deeply connected to my father. From the late seventies to the eighties, my father spent half of the year in Singapore. He became an external director of the second largest conglomerate in Singapore, the Hong Leong Group, and engaged in joint investments in Asia. Mr. Quek Hong Pung, the founder of the Hong Leong Group, was my father's best friend. Now I am close with his son, Mr. Quek Leng Beng, as families. When I was arrested in 2006, Japanese weekly magazines rushed to interview Leng Beng. He answered straightforwardly, "Our families have been close since our parents' generation." I was very pleased to hear that.”

“While deviating slightly from the topic, when I go out to eat with my family, we often play a "meal cost guessing game". It's a very simple game where each participant has to guess the cost of the meal when visiting a restaurant. Each family member must declare their estimated value with at least a 500 yen difference from other participants, and ultimately, the participant whose estimate is closest to the actual amount wins a prize. When we play this game as a family, including me and the kids, we first look at the menu and try to remember the prices of not only what we order but as much as we can. Then, just before paying for the meal, we decide the order by playing rock-paper-scissors, and each of us declares our estimate of the total cost of the ordered meals. Here, there is a rule that the declared estimated amount must be at least five hundred yen different from the other participants. So, it's not just about declaring what you think the amount will be; you can also impose certain constraints on the estimated amounts of those who declare after you, based on the amount already declared by others and the amount you declare. Therefore, each participant considers how far to set their estimated amount from others to increase the chances that their estimate is closer to the actual amount. I believe it's a good opportunity to make children think about the balance between the cost of things and the quality of food and service, and considering how much I expect and how much others might expect helps lay the foundation for deriving more accurate expectations in the future.”

“Another important duty of an investor is to monitor and oversee the operation of the invested companies. Investors entrust operators with the business management to maximize returns on their investments. Therefore, overseeing whether management is proper is a significant role.”

“"Money is lonely; it wants to gather and play together, so it comes together more and more."”

“My parents gifted me 110,000 yen every year until I entered university, and continued to buy stocks in my name. The reason for the 110,000 yen was that, at that time, gifts up to 100,000 yen were tax-exempt. With 110,000 yen, a 1,000 yen gift tax was required, leaving a tax record. This made it easier to prove it was my property in the future. The total amount of the gifts was about 2 to 3 million yen, but the value of the stocks they bought for me, which included companies like Mitsui Real Estate and Kintetsu, was about 20 million yen, I recall. Copies of these fractional stocks still exist, along with proofs of the tax paid on the annual gifts.”

“Perhaps struggling to respond, my father suddenly looked very disgruntled, a memory that I still recall. Soon after, he sold the factory and seemed to have made a decent profit. Later, there was a restructuring in the Hong Kong Flower industry, and Ray Ka-shing, one of the world's wealthiest individuals, consolidated about twenty small factories, further amassing his wealth. If my father had continued to hold his shares, he would have made enormous profits. I remember he occasionally told me, "Because you meddled, I missed out on making a fortune."”

“To accurately assess the expected value, one must consider not only numbers but also the quality of the management of the investment target, the situation of the world, and various other factors.”

“My investment strategy is thorough value investing, focusing on companies whose market capitalization is lower compared to the assets they hold. Often, such companies might be experiencing management issues. When I try to address these problems from a shareholder's perspective, I'm criticized as a "vulture fund." This is quite regrettable, and I have spent years trying to gain understanding. However, being naturally impatient, when my points aren't understood or when I receive evasive answers to my questions, I have a tendency to speak only to the point or become harsh in tone. At the core, I just want to be understood, but due to my poor communication method, the public perception of me remains negative as I'm often told "it's not what you say, but how you say it."”

“The second point, fundraising, is of great significance for listed companies. By issuing new shares, they can raise a great deal of capital from the people who purchase these shares. The methods for a company to raise funds are twofold: 1) raising funds directly by issuing new shares, and 2) indirect financing such as borrowing from banks. Yet, upon examining companies that are actually listed, many have not engaged in raising capital by issuing new shares, a form of direct financing, for many decades. These are companies that do not need to raise funds because they either have ample cash or do not need to invest in facilities, or they have sufficient borrowing capacity from banks. Such companies are not leveraging the benefits of being listed.”

“The corporate balance sheet accurately represents the trajectory of the company to date, and the capital policy it aims to achieve. It should directly reflect the mindset of the management, such as what policies they have for accumulating cash, whether they return retained earnings to shareholders, or keep them as internal reserves. However, after speaking to many executives, I realized that most companies simply continue the management policies from the past without any specific policies of their own. This included dividend policies that ensured stable annual payments and borrowing practices based on the longstanding notion of 'avoiding it as much as possible because that's what has always been said.'”

“After Black Monday on October 19, 1987, RJR Nabisco's stock prices had been languishing. Ross Johnson, the CEO, saw this as an opportunity and proposed the buyout to privatize the company, which triggered the acquisition. Originally, RJR Nabisco had a plentiful cash flow from its tobacco business, and its management indulged in luxury. With a dozen corporate jets and thirty-six employee pilots dubbed the "RJR Air Force," and even acquiring star golfers and football players known as "Team Nabisco," President Ross Johnson had even been paying consulting fees to companies where his company's directors served as CEOs and covered salaries of directors’ household staff with company funds, effectively making the company his personal property.”

“The first was Den Fujita, president of McDonald's Japan. He said immediately after meeting, "You're interesting, a hundred million yen is fine. I'll write you a check right away." Afterward, he frequently contacted me regarding various ventures including venture investments. However, after a while, the contact ceased. I later found out that he had been stricken with a serious illness and passed away without being able to meet him again. I heard that he had expressed a wish to meet me again and regret not being able to visit him.”

“The second was Seiji Tsutsumi, chairman of the Seibu Group. I dined with him several times, and in front of me, he was neither a business manager nor a novelist. He was truly a gentleman and advised me on various matters.”

“The third was Hiroshi Mikitani of Rakuten. I wanted to ask Mr. Mikitani about entrepreneurship, but he said, "I am in the midst of a trial and cannot guide you," so we could only discuss general public matters. When Mr. Mikitani sold his shares in Rakuten in 2005, I ended up buying them, becoming the top individual shareholder.”

“Around this time, another company I invested in was Sho-ei. Originally a raw silk manufacturer, with the decline of the market, they had repurposed their factory sites into shopping centers, effectively becoming a real estate company. The market capitalization was around five billion yen, but it was a debt-free company with assets worth about five hundred billion yen. Out of the assets, just the Canon shares they held were worth about two hundred billion yen in market value. Additionally, they owned numerous publicly traded stocks and real estates. It was a small company with about forty employees, with former managing directors and executive officers of Fuji Bank becoming presidents. In M&A Consulting, analyzing listed companies with various metrics, Sho-ei always appeared consistently within the top five as an undervalued company.”

“Going back to the basics, I want to think about what an investor is. Investment is about putting funds into stocks, businesses, real estate, etc., with the aim of making a profit. Investment can mean different things, including stocks, real estate, and bonds, and arguably, even lotteries and horse racing could be considered investments. An investor can be a shareholder in a corporation, a contributor to a fund, or an owner of investment property.”

“My investment style is to invest in things that are undervalued, have a high profit potential relative to the degree of risk, in other words, where the 'expected value' of investment is high.”

“For example, the calculation method for the 'expected value' when investing one hundred yen is as follows: -If there is a 20% chance it will become zero yen and an 80% chance it will become two hundred yen, then the expected value is 1.6 (0×20% + 2×80% = 1.6). -If there is a 50% chance it will become zero yen and a 50% chance it will become two hundred yen, then the expected value is 1.0. -If there is an 80% chance it will become zero yen and a 20% chance it will become two hundred yen, then the expected value is 0.4.”

“I make the final decision on whether to invest or not from three points that include risk assessment with "expected value" and IRR. Economically, the degree of risk in an investment should correspond to the degree of return, with higher risks bringing higher returns (high risk, high return) and lower risks bringing lower returns (low risk, low return).”

“The separation of investors and managers was formalized with the establishment of the British East India Company in 1600. The company adopted a model where outside investors provided funds for each voyage. In its first voyage in March 1601, 215 investors raised 68,373 pounds. The voyage was successful, and all sales were returned to the investors. However, returning all sales meant that new investments had to be solicited for each voyage. Therefore, from 1657, it switched to a model where only profits were distributed to shareholders, aiming for continuous operation, and adopting a general meeting system that allowed investors to participate in management, laying the foundation of the modern corporation.”

“The Italian Columbus, who discovered the American continent, was denied assistance by the Portuguese royal family for his voyage and departed with the support of the Spanish royal family. Columbus was thus a manager, with the Spanish royal family acting as investor. This set up Columbus' business plan of "aiming for the New World with this type of ship on this route", and the Spanish royal family agreed to invest in it. Agreements were made in advance about the distribution of profits, with Columbus receiving 10% of the profits from the admiralship territories if successful, gaining a share of the profits in proportion to investment in future voyages, and acquiring lifelong admiral rights to the lands discovered. Thus, as a manager aiming for India, Columbus reached the American continent in 1492 with the investment from the royal family. The spoils taken in the New World were returned to the Spanish royal family as dividends.”