The Week That Matters (18-22 Nov, 2024)

"Space is an inspirational concept that allows you to dream big" Peter Diamandis

Podcast

Apologies for the shameless plug, but please find the first Discuss the Tape Podcast with Steve Allan, a Silicon Valley veteran. Steve really knows his stuff. The author got less nervous as it went along. As always, please like and subscribe.

This week we will have an experienced Japanese PM on the show, who will explain what opportunities he is seeing in Japanese equities. It will be a great podcast as he will have just got back from Japan!

A Victory Lap

This newsletter made the case recently that Japanese content would be a booming industry in the future. To be fair, it already is quite large. Japan's content industry has an export value that is not that far off from Japan’s steel industry!

Two events happened this week to make the author feel confident that he is prospecting in the right field:

• Sony announced it is in talks to buy Kadokawa, an anime business! The author expects to see much more consolidation like this going forward. The opportunity is not lost on global private equity firms (Blackstone etc.)

• His favorite Japanese growth stock, recommended in this newsletter on the November 8th, reported blow out numbers. V-Tubing is booming and 5253 Cover is dominant. Will it list on Nasdaq?

Separately, the author has also made the case that the opportunities in Japan for private equity are similar to what they were like in the US in the 1970s/1980s, an argument recently articulated by none other than KKR’s Founder, Henry Kravis. Interestingly, 5842 JP Integral, the only listed private equity firm in Japan, reported robust numbers.

Sticking with Japan, the author is working out what bets he will have on for 2025. The author believes that three companies, which are on their knees, will either be saved by the Japanese government (strategically important industries) or become a focus for activist investors. The author will write about them in a couple of weeks once he has finalized his research. In the meantime, he includes one stock at the end in the broader content sector that even Benjamin Graham, Warren Buffet’s mentor, would have got excited about. Yes, what Graham referred to as “net net” companies still exist in Japan!

SPACE: Public vs Private

The author hopes to get a note out on the Japanese space industry mid-week. He is increasingly getting more bullish on the vertical. He has been spending time on ways to play it around the world (Space X represents nearly 40% of the value in DXYZ, for example). He believes it will become a huge theme next year amongst Japanese retail investors and there are some great Japanese related names.

Japan’s space exploration industry has a history going back to the 1950s! What the author finds interesting is it has never focused on putting a flag on the moon or a different planet like the old Soviet Union or the USA did. Instead, it has leveraged its expertise in robotics to develop technology to mine asteroids! (Yes, this stuff sounds fantastical!) Surely the person who extracts minerals from out of space will become the first multi-trillionaire? Does money mean anything at that quantum?

The author admits he is late to the party. He stupidly dismissed all the space tech private opportunities he saw over the last few years. He thought Silicon Valley was just desperate for another narrative to funnel money into like fintech. But he’s not sure it matters missing the early days of this theme. He will never have “pioneer” bragging rights, but perhaps, it will be like getting bullish on bitcoin at $10,000. You will never be able to claim to be an early adopter, but you can still make a lot of money.

What the author finds interesting is space development used to be a state-driven project, as we saw with the US Apollo program and the Space Shuttle. Private companies only began to take the lead when NASA began the “COTS” program in 2006, which outsourced the transportation of cargo to the International Space Station (ISS) to the private sector. This really is the origin story of Space X.

Interestingly, this week the bi-partisan US-China Economic and Security Review Commission proposed a Manhattan Project-style initiative to fund the development of AI systems that will be as smart or smarter than humans. It argued that public-private partnerships are key in advancing artificial general intelligence. The author expects many more private-public partnerships like this in the space field too.

It makes sense. Silicon Valley cannot compete with the Chinese approach to innovation on its own. We don’t like to talk about it much as we have embraced The Great Man Theory since Musk landed his rocket, but Tesla is kind of behind BYD in terms of EV technology and it’s not really leading self-driving, right?

This embrace of private public partnerships is interesting for three reasons:

1. It’s an admission that true innovation requires help from the government. We have seen that over the last 15 years the private sector is too short term to deal with the lengthy and highly uncertain innovation process. Think about how much money has been thrown at VC and think about how recent technological progress compares to previous eras of change. The truth is we don’t live in a particularly innovative age. Compare the steam engine or the heat transfer lamp with 5G for example.

2. We might be experiencing a renaissance of complex engineering. Space is hard. And the private-public partnerships, if done well, will get great minds working on hard things. We have not allocated capital to the greatest minds over the last 15 years. Instead, well-spoken kids from affluent backgrounds, who didn’t want a real job, have gotten all the spoils (Sam Altman?). The author is not sure government requires high IQ, functioning autistic people like Elon Musk to run it, but he is pretty sure such people are needed to move us forward in scientific and engineering realms.

3. Taxpayers must benefit. The spoils of any public-private partnership can’t just go to the shareholders of the company involved, or more likely, to the management team of the company. (Have you seen how the ESOP is structured at PLTR?) This is a crucial point and will be a test of whether we have truly entered an era of oligarchic, crony capitalism. If the government of any country is putting up real cash or other types of investment to make something work, it should benefit too. If the author is right, and we are on the cusp of massive strides forward, then the government should be able to earn a return that could reduce the public debt problem.

The last point might be controversial in this age of small government worship but it’s so obvious to the author. Generally, we shouldn’t be privatizing the wins but then socializing the losses. That’s not capitalism. Government has traditionally played a key role in innovation. Think GPS. Think the internet. Think Siri. Think Tesla. But did it get compensated enough for it?

Net Nets

Two things drove Warren Buffet’s performance in the 1950s and 1960s, before he met Charlie Munger. First, his father was a Senator. There is nothing new about Nancy Pelosi’s edge. And second, his mentor was Benjamin Graham, the Godfather of value investing.

Benjamin Graham came up with the concept of a net net stock in the 1950s. Net-net investing is a type of value investing where investors are looking for companies that have liquidation values higher than that of the value of their stocks.

Here's how it works:

1. Calculate Net Current Asset Value (NCAV): This is done by taking the company's current assets (cash, accounts receivable, inventory) and subtracting all its liabilities.

2. Compare to Market Price: If the NCAV per share is higher than the current market price, the stock is considered a net-net stock.

Graham argued that such an approach to investing offered a significant margin of safety. The trouble today is not many net nets exist in developed markets. The good news is there are still plenty of them in Japan. One company in the gaming industry is very close to being one and it’s starting to focus on growth!