May was another volatile month with the Nikkei 225 starting strong, rising as high as +6.7% MTD before falling back to +0.9%, yet ending the month +11.9%. The 1650-name TOPIX was, naturally, less volatile vs the Nikkei but still rose as high as +5.2%, fell to +1.7%, and closed +6.2%. Compare that with the S&P 500 whose respective figures were +4.1%, +2.0%, and +5.1%. And, like last month where the index leaders were concentrated in just a few names, it was even tighter this month. The top 6 names accounted for 75% of Nikkei 225 returns (vs 7 last month) and 10 accounted for 90% (vs 13 last month). In TOPIX, the top 16 names (less than 1% of index constituents) accounted for 75% and 25 names (1.5% accounted) for 90%. The N/T ratio has hit yet another all-time high driven by, of course, AI.
 
But the definition of AI has expanded to include companies like Ajinomoto, the maker of monosodium glutamate used as a flavor enhancer in soups and vegetables but is also a monopoly producer of ABF insulating film for semiconductors, and Toto, best known for their high-tech toilets (there’s a great South Park episode based on their toilets), but also produces what are called electrostatic chucks used in cryogenic etching tools for 3D NAND manufacturing. Recently, Palliser Capital argued that Toto was “the most undervalued and overlooked AI memory beneficiary” which seemed to have initially annoyed the CEO, but their presentations have since highlighted their tech business. Ajinomoto helped drive the Nikkei 225 earlier in the year while Toto, also a Nikkei 225 constituent, rose +41.5% in May (we own a small position in our diversified portfolio, but their tech business was meant to be optionality, not the primary stock driver). Neither business lines are new nor unknown, but I find it amusing that they’ve both become highlighted as AI stocks in news outlets across the world.
 
We traded very little this month as we absorbed earnings results which were largely positive, though I felt that the stock action did feel somewhat weaker among the SPE names such as Advantest, Disco, or Daifuku, all of whom are undisputed leaders in their field, notched strong numbers, provided upbeat guidance, and yet fell after results closing the month down, although this is after a massive run in 2025 and early 2026. Conversely, the MLCC names had huge returns in May despite all guiding below consensus (I highlight MLCCs as, for some reason, they are all Nikkei 225 constituents and, collectively, contributed about 20% of the index performance). It feels like there is a small shift among tech hardware to the laggards (although Kioxia clocked another +75% return after nearly doubling in April while Softbank briefly overtook Toyota as the largest company in Japan on June 1).
 
While we have continued to reduce our hardware exposure in place of software names, our collective technology exposure drove our best monthly performance since inception in both our concentrated and diversified portfolios (I include tech-driven machinery among that exposure). While I am somewhat comforted by the fact that it was not only tech that drove our outperformance, I also cannot deny the fact that tech industry exposure was still the primary reason.
 
And, admittedly, that does keep me on edge, not because they are working, but because they are working so fast and hard which means they are trading well above their normal band, some several standard deviations above. I appreciate that this theme is pretty much the only game in town (the other being defense stocks although they have actually done poorly recently), especially given the global macro uncertainty from the two wars (and the potential deepening oil crisis ahead), Japan-China tensions, and rising global rates, not to mention the unpredictability from the White House. I’m sure others have flagged this, but it feels eerily like 1999 with markets being driven by a handful of names along with a huge IPO pipeline and rate hikes ahead in Japan, UK, and the EU while expectations for the US have reversed in just 3 months. I recently read that retail options activity in semiconductor names has exceeded that of the meme stock craze, yet another potential signal of the late stages of a bull market.
 
So, I try to remain liquid, accelerating the hardware to software switch among our less liquid names first rather than those that have risen the most. Also, we’re more proactive in adding non-tech names where applicable. It’s funny that I feel less comfortable when the portfolio is working … I guess the value-side in me is still alive and well.

​

Masaki Gotoh​​​

​

===

 

​​“The law is reason free from passion’” – movie quote by Elle Woods from Legally Blonde, referencing Aristotle’s passage from Politics (Book 3, Chapter 16).
 
I’ve always had a very strong interest in the law. I’m not quite sure where that interest arose as I don’t know any lawyers and the only class I took remotely close was a 1st year poli-sci undergraduate class. But my first choice for graduate school wasn’t actually business school, but it was law school. I later realized that I had barely saved enough money for 2 years of business school, much less 3 years for law school (or 4 years for the joint program which was my first choice), so I gave up my goal to become an international lawyer and chose the relatively cheaper B-school route. I did take the LSAT anyway, just to see how I’d do (and, not to pat myself on the back, I remember scoring very well). Even now, I actually enjoy going through contracts or discussing compliance and SEC/FSA regulations. I like to be closely involved in all legal aspects of our business, probably to the annoyance of our legal counsel. If any of our readers decide to partner with us, you’ll find that I personally will be on the other side of your legal team when we negotiate side letters, for example.
 
My favorite movie genre is courtroom dramas. 12 Angry Men, Witness for the Prosecution, A Few Good Men, Presumed Innocent, The Verdict, Erin Brockovich, The Insider, My Cousin Vinny, Primal Fear, and, of course, the John Grisham novel adaptations like The Firm, The Pelican Brief, The Client, The Chamber, A Time to Kill, The Rainmaker, and The Runaway Jury (a bit of trivia, Gene Hackman was in 3 of them). And these are probably just the famous ones. There are many hidden gems like Class Action, True Believer, Michael Clayton, Criminal Law, And Justice for All, Scent of a Woman, and The Devil’s Advocate. I’m sure I’m missing several from this list, but if it’s not here, I’ve still probably seen it and most likely own it too (I own the DVDs for all of the above). 
 
The one movie that is missing is Legally Blonde. Being brought up in your typical, Gen X, alpha-male environment in the ‘80s, I couldn’t bring myself to watch it. But recently, the opportunity presented itself. My son Leo’s childhood friend had joined an acting group and twice a year, they perform an adaptation of a movie or play. So, our family went to see her in a musical adaptation of Legally Blonde. She’s still one of the youngest in the group so her part was minor, though, trying to stay unbiased, I thought she sang and danced better than over half of the group and deserved a more prominent role. But, while I hadn’t intended to bring up Leo like I was, he seems to have developed an aversion for overly feminine movies and clearly was not enjoying the musical. However, Louis, my younger son who is much more balanced, was thoroughly enjoying it. I, too, now being older and similarly more balanced, found it very entertaining. And so, Louis, my wife and I decided to watch the movie and, despite its ridiculous setting, was a lot of fun (though very different from the list above).
 
At the end of the movie, the main character Elle Woods, after winning over Harvard Law School, claims in her valedictorian speech that “passion is a key ingredient to the study and practice of law”.
 
My wife (whose previous boyfriend before meeting me was a lawyer) says that I would’ve made a terrible lawyer because I am too passionate about everything. Maybe that’s why I enjoyed the movie more than Louis or my wife. Because I, too, believe passion is important in many “logical” professions, whether it be the law where, admittedly, I am hardly an expert, or finance where, conversely, I can say that I probably know a little more than a layperson (and certainly more than my wife’s ex-boyfriend).
 
Most stoic PMs whom I know have or had been very successful. Like the law, the impassionate, logical reasoning keeps the objectivity of the investment philosophy which had been translated into a strict investment process from deviating. The law, like a stock, doesn’t care who you are, how important you are, or what kind of mood you are in. The written law or the developed investment process is unbiased and pure.
 
But is finance truly reason free from passion? I suppose the Chicago School of Economics would say so, believing markets are efficient. And for short-term events, I would tend to agree that markets operate rationally which is probably why I believe strongly logical PMs are particularly successful with very short-term strategies. Taking that analogy to the extreme, the ultimate dispassionate PM is likely a computer program (though I’ve given an example where quants models were proven to be terribly wrong).
 
As I’ve mentioned in past monthlies, I’ve never been a proponent of the efficient market hypothesis (which may be why I chose a marketing school like Kellogg over Chicago). I’m a strong believer of behavioral finance … haven’t we seen “irrational exuberance” in the past? And what about the Minsky Moment of 1998 or 2008 (both of which I experienced firsthand)?
 
And I think Japan is a further anomaly, whether it be the law or finance. Strictly speaking, Japan is a society governed by the Rule of Law. However, Japanese rules and regulations have a strong element of natural law where cultural norms are presumed to be understood. These unwritten rules (more like guidelines) create a type of relational governance where consensus and informal pressures guide actions through an assumption of heightened morality. For example, it is considered shameful to resort to legal proceedings since settlement based on good faith is expected.
 
The legal system itself leaves much discretion to officials such as the strong power wielded by prosecutors, particularly when deciding whether to indict and with what charges, a decision that is protected from external oversight (which is why conviction rates are over 99%). Many of the rules and regulations are purposely ambiguous to allow for discretion (as an example, the length of interrogation without legal counsel cannot be over an “unreasonable period of time” which allows for quite a wide interpretation).
 
Financial regulations and guidance are equally ambiguous. They often assume that providing intent should suffice and how it is translated in practice is left to those being regulated to formulate their own compliance procedures. This ambiguity often works. I often have difficulty explaining to a Westerner why “comply or explain” works rather well in Japan. Conformity through societal pressures is commonplace in business including finance. Many business deals, especially among smaller firms, are agreed via gentlemen’s agreements and contracts are purposely left vague to allow for irregular circumstances.
 
Without passion, none of this would work. Investing does, of course, require analytical reasoning and a structural framework. But when it comes to long-term investing, I believe it additionally requires passion. There is no conceivable method to accurately predict future events through reason and structure alone. We can study, analyze, and make very educated guesses. But ultimately, it is about belief – belief in the business, belief in the culture, belief in the people. And how can one truly believe without passion? In my view, a successful PM investing in a business for the long-term needs passion in addition to reason.
 
“It is with passion, courage of conviction, and strong sense of self that we take our next steps into the world, remembering that first impressions are not always correct. You must always have faith in people. And most importantly, you must always have faith in yourself.” – movie quote by Elle Woods from Legally Blonde.
 
PS: You’ll note that most of the courtroom movie suggestions above are about lawyers who are strongly passionate portrayed by actors such as James Woods, Al Pacino, Gene Hackman … I think you get the picture.
​