Saturday, October 17, 2009 2 comments ++[ CLICK TO COMMENT ]++

Jean-Marie Eveillard on Japan

Thanks to GuruFocus for bringing this Bloomberg interview with Jean-Marie Eveillard to my attention. It deals with Japan, which I'm sure is of high interest to contrarians and deep value investors. Japan, for those living in the cave for a few decades ;), has been in a 20-year bear market. That alone should warrant a look from contrarians. It is rare for equity markets to go into such long bear markets in the modern era.

Nothing new in the interview but I always like to hear the thoughts of successful investors. Even if there are no new stock suggestions, I like to get a feel for their thinking. For instance, Jean-Marie mentions how he was in Japan an year ago and they seem slightly more open towards immigration.

I don't want to beat the horse to death, since I have repeated these points many times, but here are some reasons to be cautious of Japan:

  • Horrible corporate governance: Shareholders basically don't own the companies except in name (I might be exaggerating a tad bit but Japan watchers are probably nodding their head in agreement with me.)
  • Inefficient Businesses: As I keep repeating, Warren Buffett remarked about a decade ago how Japanese companies are very inefficient. He pointed out how, even during their peak when Japan Inc was taking over the world, they did not create much shareholder wealth. I look at the economy in a simplistic manner on par with how Adam Smith, Karl Marx, and others viewed it—namely, profits accrue to workers or capitalists or government—and Japan has basically been a so-called "capitalist" society where the profits never accured to capital owners. A really bizarre society.
  • Too Cyclical and Sensitive to a Strong Yen: Since I am not in the weak Yen camp, this is a big issue. I can see the Yen remaining strong, or even appreciating if the Renminbi's peg is removed, so the export-oriented Japanes industry will have difficulties. A large chunk of the Japanese econmy is made up of export-oriented businesses so it's not easy to invest if you are concerned about this. On top of this, as Jean-Marie alluded to, with respect to Fanuc, it's not clear how well the Japanese industrial companies will perform against Chinese companies.

Having said all that, I like Japan as an opportunity. I have been following it for several years now and the equity market has gone nowhere during that time. I invested in one Japanese company, Takefuji, a subprime lender, with horrible results (poor stock selection) but I'm still looking to invest. At some point a blind macro bet may be worth considering.


2 Response to Jean-Marie Eveillard on Japan

October 18, 2009 at 3:03 PM

I watched the interview as well, thanks for your take.
They do have a more favourable government in place, but I'm concerned with the shrinking work base, increasing elderly populace and dependence on energy as opposed to neighbors like Australia who seem to have it all.

Sivaram Velauthapillai
October 18, 2009 at 8:26 PM

What you have said are all true but their impact on your investing depends on the type of investor you are. If you were a contrarian or favour cheap assets then the reasons you mentioned will always be there. If it was the opposite, assets will not be so cheap.

As for me, although I point it out so that readers think about it, I'm not as concerned with issues such as the shrinking population, questionable government, and the like. A good busines,, bought cheaply, can overcome those issues. It's sort of like the value investing technique of investing in a good company in an apprently poor macroeconomic or industrial environment. Newspapers would have been considered terrible businesses in the 70's but Warren Buffett and others made a killing off them--even though some may have suggested the macro picture, with emerging television news, was going to kill the paper.

My main concern with Japanese companies is their corporate governance. Their ROE, my favourite metric but you can also use ROIC or whatever you like, is terrible. Japanese companies sit on too much cash, don't care about efficiency, and so forth. The apparent "cheapness" of Japanese assets masks this inefficiency problem. It's sort of like buying a gold mine where you can't take out the gold *DONT_KNOW*

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