Coal Into Diamonds

The Hosomichi strategy is constructivist. I aim to create value for employees and shareholders alike by advocating for best practices in both capital allocation and operations. In my experience, if a company continues to invest in a low-return business, it is bad for everyone. It is impossible to raise pay for workers if the customers are unwilling to pay much beyond the cost of raw materials, and naturally shareholder value is also impaired.

While creating shared value can be accomplished in either a friendly or adversarial manner, I prefer friendly. But friendship is a two-way street. Thus our stance is largely dependent on whether companies are open to improving.

This strategy is not groundbreaking. Identifying undervalued and inefficiently managed companies is easy. Catalyzing change is hard.

Pressure + Time = Change

Pressure, consistently applied over time, turns coal into diamonds. I believe the same is true when engaging with companies. My approach is to consistently push for best practices.

However, unlike with geology, my time horizon for change is slightly less than a billion years.

I see consistent patterns in Japanese small cap companies that lead to sub-optimal outcomes for investors: bloated balance sheets, misaligned incentives, low employee engagement, lack of governance from independent directors, unfair relationships with customers and distributors, insufficient finance and strategy know-how, and others.

I am not an expert in these domains. But as a former journalist, I do have skill in unearthing relevant experts who can help leverage their knowledge for the benefit of investee companies. 

Demanding Accountability: Investor as Personal Trainer

I consider my role as an investor as akin to a personal trainer. The trainer is not a fitness genius. Whatever training secrets they have can be learned in 2 sessions. So, what is their value?

Without a personal trainer, visits to the gym become inconsistent and efforts plateau. The trainer’s role is to demand “one more rep” when you’re ready to quit. He holds you accountable. Bodybuilders know that the only reps that build muscle are the ones done at the point of exhaustion.

Hosomichi is not smarter than the management or other investors. Instead, I see my role as telling the company “You can do better,” when management is prone to inertia. Providing accountability is our added value.

In Japan, the tendency towards inertia among companies has been reinforced by a lack of shareholder oversight. Without a "personal trainer" pushing them, organizations tend towards bloat and complacency. I see it all the time. Management avoids change because it is painful and requires effort.

This gap between the status quo and potential is exactly why the opportunity in Japan remains so attractive.