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As we enter September, we start an important company visit season being pre-H1 results and before the highly volatile fall season where upgrades and downgrades become more prevalent (again, please see last month’s report for some background as to why). While we’ve only had a handful of meetings so far, little has changed. Our datapoints continue to suggest very high uncertainty into the back half of the fiscal year, especially with industrials and tech. As always, we are not chasing bad datapoints; they come to us all on their own. And this is despite the fact that the Topix Machinery Index is the 5th best performer year-to-date (among the 33 industry indexes). This is after Iron & Steel, Mining, Transport Equipment (which is autos and auto parts), and Wholesale Trade (mainly the large shoshas that Mr. Buffett likes so much). So, this is essentially saying that commodities are in favor, i.e. the market likes the global macro economy. Not only am I not a macroeconomist, I’m even less knowledgeable about commodities so I don’t have a strong view (or at least not an educated one). But the datapoints I mentioned in the June monthly are continuing their similar trend but just add an extra 2 months to it whether it be negative orders in machine tools or machinery parts or cardboard boxes. Admittedly, the slowdown has waned a little, notably in the US and Europe. And tech commentary seems to be “it’s not getting better yet, but probably won’t get any worse.” Ironically, Japanese tech stocks have begun to underperform this quarter.

 

In either case, we don’t chase trends but think about allocations 12~18 months out. And neither the fundamentals nor the valuations suggest that we should alter course now. Our trailing 12-month turnover has broken 30% annualized (or less than 3% a month) and, during the last 3 months, has only averaged 6% annualized (or 0.5% per month). We are keeping busy, monitoring everything we can, but trading exceedingly little.​

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I look forward to how the world might look post Labor Day weekend as we enter the busy season of the year.

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Masaki Gotoh

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“Some men just want to watch the world burn.” – Alfred Pennyworth, played by Sir Michael Caine, English Actor, in Dark Knight, explaining the Joker (Heath Ledger) to Bruce Wayne/Batman (Christian Bale).

As I’m sure you’ve all read so many times, I love watching movies. In addition to Disney+, Hulu, Netflix, Amazon Prime, DAZN (a sports channel), Apple TV, and dTV (a Japanese streaming channel), I still buy 4K/UHD Blu-ray discs (but only for the best-of-the-best action movies like The Lord of the Rings). I also buy a lot of used DVDs for about 100 yen each … these tend to be older movies I have a minor recollection of from the past or some unknown movie that piqued my interest after watching some random clip somewhere. The problem, however, is that I don’t have time to sit down and watch a new movie. On weekends, when I’m not with my kids, I’m usually reading a book. On weekdays, I simply don’t have any time and, even if I did, I’m usually too tired to watch a new program for 2 hours. I tell myself, someday, when I’m old and retired, I’ll drink my collection of Champagne sitting in the cellar, read my stacks of books that I still haven’t read, and watch the piles of DVDs lying around my house. The truth, though, is that I don’t plan on ever retiring from investing as long as I’m functional, which means that when the time comes when I’m not, I won’t be able to drink the Champagne, read the books, or operate my DVD player; I realize it’s just an excuse for my oniomanic compulsion, but I suppose we all have a vice or two.

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I do have a lot of trouble “turning off” from work after the kids are asleep and the house is quiet. Without a distraction, I’ll start watching US news channels or open up Bloomberg, which might’ve been helpful back when I used to trade long-short but now, it simply adds to my frustrations, especially as I continue to believe fundamentals and stock prices are out-of-sync. At least I don’t wake up in the middle of the night to open Bloomberg and see what the US is doing like during my long-short days (or at least, not as frequently). And so, I end up watching a movie I’ve seen a dozen times so I don’t have to “think” (and open one of the cheaper bottles of Champagne … to be precise, my wife leaves in the fridge 1~2 bottles of wine that I am allowed to open when she’s not with me which, obviously, will be the cheaper ones). So, the movie usually ends up being an action or sci-fi flick on one of those streaming channels above. While I don’t want to “think”, I still prefer a bit of suspense and darkness (despite knowing exactly what’s going to happen next) rather than a happy-go-lucky comedy. This is true in general but probably more so this year.

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Dark Knight definitely falls under one of my favorite action movies (“favorite” means the top 25 or so; I can never actually rank them). And, as I mentioned in one of my earlier monthlies (Aug 2019), I LOVE strong supporting actors, Michael Caine being a great example. According to IMDB, he’s been in 174 movies and TV roles and, of course, I’ve only seen a tiny handful of them. But looking back, they were all significant characters that help make the film, even if for a very small role. And despite being in a slew of movie genres such as action, comedy, suspense, and drama and as the hero, the villain, or just another character in a sub-plot, he made an impression regardless of whether the movie itself was good or bad despite rarely being the lead, and each role very different. Among his amazing performances, his role as Alfred Pennyworth was, in my opinion, the best.

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When I saw this quote, I have to admit, I reflected upon myself a bit. Am I waiting for a financial apocalypse? Perhaps I’m haunted by a dystopian view of the world? Certainly, when I think about movie series I enjoy, they all have some dystopian connotations whether it be, just to name a few, the Batman trilogy, the Matrix tetralogy, the Hunger Games trilogy, the Lord of the Rings trilogy, or the Terminator series (I can’t remember how many there were …). Many science fiction and adventure movies have such settings (think Blade Runner, Mad Max, or Akira to name a few). Similarly with suspense/thrillers, I tend to choose those with some evil undertones (think Usual Suspects, Se7en, or Silence of the Lambs). But, of course, they were also all just very cool movies with great actors, directors, writers, and special effects too. But admittedly, I remember movies with unhappy endings more than those that end happily. The director surely wanted to make us uncomfortable to keep it memorable for artistic reasons, and they’ve always done a good job with me as I do remember.

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Of course, I’m not actually yearning for a cataclysm. I want the world to be a better place and own businesses that can grow with it. I want our companies to produce products and services that I can be proud of (through a method that I would be happy to explain to my children), create new and exciting jobs, and, of course, expand corporate value, preferably at double-digit growth rates. And if that was what we were seeing when we talk to companies (right now), we wouldn’t be so pessimistic about the global economy (right now), and we wouldn’t think that many such stocks are overvalued (right now). And that is why I try to be a contrarian of our contrarian view. I’m actively looking for positive datapoints to prove us wrong. So far, I haven’t seen much except the excitement by sell-side analysts (admittedly, the US sounds much better relatively speaking but, then again, I’m not there so it’s all second-hand knowledge). In the long run, I believe in the markets. I couldn’t invest in stocks if I didn’t believe that. But I also believe that there are occasions when the market gets overly optimistic (and vice versa). When it does get excited, eventually, either the stock prices adjust down OR they just stay flat for a long-time and the fundamentals catch up to the stock prices (I do believe in economic growth in the long run; it’s just a little lumpy). As such, I don’t think I’m anxiously awaiting Armageddon.

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I used to say during my long-short days that “making 10% on a short felt infinitely better than making 10% on a long”. Now that I’m a long-only investor and can no longer short, the implicit contrarian nature of a value investor suits me, I think. So, given our defensively tilted portfolio and the current gap that we perceive between equity market valuations and actual fundamentals, if the equities markets were to burn right now, I don’t think I would mind so much. Still, I would much prefer a steadier convergence.

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I hope everyone had a great summer and I most definitely look forward to the cooler fall season. I look forward to seeing some of you in person in the coming months too!

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PS: Some other masterful Michael Caine performances were in The Man Who Would Be King (probably my second favorite), Miss Congeniality (I liked him a lot in this one too), Dirty Rotten Scoundrels, Deathtrap, A Shock to the System, The Fourth Protocol, the Now You See Me series, and On Deadly Ground (an awful movie but he played a great villain). Even his 1 or 2 scenes in Inception (also among my “favorites”) were memorable.

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