Joel Tillinghast on investing in Japan

In the United States, every executive has been instructed that his or her top goal is increasing shareholder value.  When I bring up this idea in Japan, most businessmen (and in Japan, they are men) have no clue what I'm talking about.  Perhaps it's because employing armies of people and having a dominant market share bring more prestige in Japan than high profits.  Some argue that the Japanese are taking the longer view than American corporations.  Eventually, having a strong market share should lead to profits.  On average, though, Japanese companies earn lower returns on equity than other businesses around the globe.  Social ties and responsibilities are conceived differently in Japan.

"The nail that sticks out gets hammered down"; so goes the Japanese proverb.  If making too much money would make them stick out, they won't do it.  CEOs in Japan are paid much smaller multiples of the average employee's pay than CEOs in America.  Employees probably do feel greater loyalty to their company when everyone is more nearly in the same boat.  This might explain why politics is less polarized in Japan.  But today the "salaryman" system of lifetime employment really exists only at larger companies.  Many companies try to prevent being hammered down by holding large cash balances and avoiding debt.

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As an investor, I want profits that will keep sticking out and not be pounded down quickly.  The retail industry is where I've often found the un-Japanese desire to stand out, and these have indeed been stand-out investments for me.  Cosmos Pharmaceutical is a discount drugstore chain on Kyushu, a smaller island on the southwest corner of Japan, far away from Tokyo.  Cosmos offered very sharp prices to consumers by keeping a tight rein on operating costs.  It's selling, general, and administrative (SG&A) expense was just 14 percent of sales, an outstanding number.  Walmart, which also pinches pennies, spends 19 percent of sales on SG&A.

Cosmos was founded in 1983 by its CEO, Masateru Uno, and has grown rapidly.  Perhaps because Cosmos is in a less populated region of Japan, good store locations can be secured more quickly and at a lower cost.  Drugstores earn better profit margins on private label products than on branded products; Cosmos sells a lot of private label.  Cosmos turns its inventory over faster than the leading American drugstores, CVS and Walgreens.  The average life expectancy is four years longer in Japan than in the United States, so the population is aging.  This would seem to set up drugstores for strong growth, but the stock was trading at only ten times earnings in 2011.  Over the next five years, the stock soared sixfold, as growth continued and the P/E expanded.

~ Joel Tillinghast, Big Money Thinks Small (2017), pp. 91-93

Joel Tillinghast on financial companies

Financial companies are the jackpot for scam artists who want to get their hands on other people's money.  Clients routinely trust banks and brokers with their assets.  For each $1 billion of equity, most banks hold deposits and borrowings in excess of $10 billion.  An electronic record of a loan or security corresponds to another electronic or paper document, not a physical property.  Even if accountants view the physical collateral supporting a loan, they also need to know the other liens and contractual wording.  Often these documents are confidential.  The combination of opaqueness and other people's money may explain why many of the largest fraud cases involve financnial firms.

~ Joel Tillinghast, Big Money Thinks Small, p. 130

Joel Tillinghast on stock buybacks

Buybacks are most popular when companies are feeling flush, and those are often the moments when buybacks are least beneficial.  As the market was topping out in the third quarter of 2007, S&P 500 companies bought back $171 billion of stock.  A year and a half later, the S&P crashed to half its former value, and in the first quarter of 2009, only $31 billion of stock was repurchased.  This is disappointing not just because the timing of the buybacks was inopportune, but also because buybacks signal confidence in the company's value and outlook.  Cheer is most appreciated when despair is all around.  When I study some buybacks that turned out badly, I find that very few companies took the action because of a discount to intrinsic value.

~ Joel Tillinghast, Big Money Thinks Small, p. 117

Joel Tillinghast on focus

Successful people simplify their lives by focusing on the facts and actions that matter most.  If you don't, you will find yourself either on a hamster wheel or bogged down in trivia.  The trickiest part is staying open to new and contradictory information that affects your goals, while cutting out the clutter.  One test for noise is to ask whether a piece of information will still be useful in a year or two, leaving out plenty of fussy details about quarterly results.

~ Joel Tillinghast, Big Money Thinks Small, p. 61

Joel Tillinghast: avoid investing in the single largest stock in the S&P 500

Familiarity can work against investors.  If you continuously invested in the single largest S&P 500 stock by market value between 1972 and 2016, your compound returns would have been less than 4 percent, while the index earned over 10 percent.  A smiliar but smaller effect was seen with the ten largest S&P 500 stocks.

~ Joel Tillinghast, Big Money Thinks Small, p. 60

Joel Tillinghast on independent thinking

On the whole, students with high grade point averages achieve them through curiosity and diligence, but it's also possible to get high marks by gaming the system, sucking up to professors, and regurgitating whatever they want to hear.  In investing, where doing nothing often prevents blunders, a certain style of laziness is adaptive, but mental laziness isn't, and not thinking independently is absolutely toxic.  The entire game is about figuring out what others have missed.  The largest prizes go to those who think differently and correctly.  Some investing ideas will look stupid or crazy, and a few will be, but the alternative is mediocrity.  Depending on the results, you will be called courageous, or arrogant and foolhardy.  Don't be ashamed of error, only of failing to correct it.

~ Joel Tillinghast, Big Money Thinks Small, p. 41

Joel Tillinghast: "Every skilled investor I've met has been a curious and a lifelong learner"

Every skilled investor I've met has been a curious and a lifelong learner.  They read broadly and constantly.  For anticipating the future, it's more important to understand why things happen than what happened...  Curiosity needs to be balanced with skepticism.  Everyone needs a spam filter and a crap detector - some way of classifying and throwing away redundant or wrong information.  Things are often not as they seem in finance.  Be skeptical and willing to challenge ideas others take for granted.

~ Joel Tillinghast, Big Money Thinks Small, p. 41

Joel Tillinghast on speculation

Speculation, properly done, isn't gambling.  Like sex, speculation has a shady reputation but is universally practiced, often enjoyed and none of us would be here without it.

~ Joel Tillinghast, Big Money Thinks Small, p. 30

Joel Tillinghast on the traits needed to be a great investor

Investors often don't realize that there is a hidden cost for everything that normal persons desire: action, excitement, fun, comfort, social acceptance, popularity, and social exclusivity.  There's also shadow income from patience, boredom, worry, courage, pain, loneliness, being a nerd, and looking like an idiot.  The most expensive emotions are seeking comfort and panic, which induce unplanned purchases and sales.

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Almost by definition, the biggest mispricing will involve a glaring, hideous defect that popular opinion thinks cannot be overcome.  That's when your lonely, preferably well-researched conclusion that it either can be resolved, or isn't so bad, will be rewarded.  In principle, we would always buy understandable, well-run, durable franchises at bargain prices, but in practice the market must think that some element is missing.  On average, you are being paid for being a nerd and sorting out the true situation.  Even more, you are rewarded for the courage to act on an unpopular opinion that made you look like an idiot, provided it turns out to be correct.  Before then, there's endless pain and worry that, indeed, the crowd is right.

~ Joel Tillinghast, Big Money Thinks Small: Biases, Blind Spots, and Smarter Investing, pp. 23-26