Monday, January 23, 2006


Livedoor foudner and momentary celebrtiy Takefumi Horie has been remanded in custody by Japanese authorities, along with cohorts Ryoji Miyauchi, Osanari Nakamura and Fumito Okamoto. Former Livedoor executive, Hideaki Noguchi, would probably have joined them had he not committed suicide last week. All rather bizarre and macabre. Should we be surprised? And what should we think of the Japanese market following these events?

Given the choice between investing with "celebrities" such as Mr Horie, and what I might call the silent substance of the Ian Cumming & Joseph Steinberg variety (Leucadia National), I would chose the latter. This is not because I am hostile towards (or jealous of) celebrity-ism, but simply because the I believe that real profits are most effectively pursued quietly and diligently so as to not attract undue attention, parasitic hangers-on, or the wrath of jealous folk, regulators, etc. Celebrity does have its usefulness in business (free media coverage, development of larger-than-life reputations, obtaining finance etc.), but I believe that it's practical limitations outweigh them.

These are not theoretical comments. I have never, it must be said, owned a share of Livedoor, it's frighteningly-monikered predecessor, "Livin'On The Edge" or any of it's affiliates, nor have I ever been tempted to do so in the slightest way. I have never understood why their business or method of business agglomeration should make money commensurate with their price, and so always saw it as dramtically over-valued. The combination of which typically makes me ignore it completely or, perhaps, look for a placce to short it. Call me "old-fashioned", but why-oh-why would any sensibly minded investor contemplate ownership of a company calling itself "Livin on the Edge"? I thought this was precisely what companies and investors were looking to avoid! Unless of course you are Kurt Cobain, and we all know what happen to him (though I must admit that after seeing the laughable antics of Courtney Love, his demise may have been related).

I have some sympathy for Mr Horie insofar as I myself was once rebellious too. Like Horie, I spat at authority and "the establishment". My path took me through youthful encounters of street demonstrations, Marxist economics and politics before settling upon a more balanced path of enlightened self-interest (as opposed to the unmitigated, unrepentant selfishness of Ann Rand). For Mr Horie (and his contemporaries), Japanese corporatism and society is incredibly stifling to someone creative and youthfully-energetic. But even a rebel would be wise to learn that there is wisdom and there is foolishness when it comes to choosing one's battles. And this would be especially true for someone living on the edge (or over the edge as it now appears) of that grey line between right and wrong, and legal and illegal. "Don't break the law when you're breaking the law", a mentor once advised me, and Mr Horie would have been wise to contemplate it. That is just prudence. But taking everything together - his abashed greed, irreverance, desire for celebrity based upon ostensibly shaky business foundations leads me NOT to compare him with Icarus, but rather with Roy. Roy the replicant, of Blade Runner fame, that is. Why Roy? Because Roy was the best, most brilliant, and strong, of all the replicants that Dr Tyrrell had designed and manufactured. He was the prodigal son. Yet, immortality was out of Roy's grasp and not an option. Roy demanded to meet his maker and demand an explanation as to "Why" to which Dr Tyrrell replied "Roy...the light that shines twice as bright burns for half as long...."

But should we infer something more from this affair? The stock market in Japan has expanded dramatically in the past half-decade. There are nearly 4000 listings now, up from approximately 3000 in the late 1990's. This is even greater when one considers that number of mergers, bankruptcies, delistings. Like Mr. Horie, many of these newly listed companies are perceived as representing "new japan". Creative, energetic, growth-oriented, iconoclastic unlike the stifling old consensus-built corporatocracies that were emblematic of Japan's post-WWII economic might. Investors and speculators alike have sought out these companies and pinned blue ribbons upon many in the form of vastly inflated share prices making them, in aggregate, extremely over-valued by any normal and conventional metric - even taking into account their perceived (and likely) growth potential.

Warren Buffet is often ridiculed for his dinosaur-like approach to evaluating and valuing growth and new businesses. His definition of growth is parochial: it must be tangible and not ephemeral. It must near or present, rather than distant. Even then, he will not pay over the odds for growth potential. This may be open to criticism, but since Berkshire is primarily HIS money, he has earned the luxury. This may seem flippant, but it highlights an important distinction: there are few principals investing their own money at these prices in this new gaggle of emergent growth companies in Japan. There are indeed Japanese domestic speculators risking borrowed funds in a desparate, frenzied, day-trading attempt to strike it rich. And there are agents - money managers (I hesitate to use the word investor) who will risk a dollar of someone else's money on an over-valued new idea for reasons that less-than-fiducariary. And then there are game players who are attempting take advantage of structural SNAFU's to [temporarily] profit. These include small floats, limited marginability, limited short-selling, low liquidity, and possible but unlikely growth scenarios that give an investment manager "plausible deniability" when justifying to overseers precisely why he is holding a 5% position Piece-o-shite Co. Ltd and why he has bought more of it for his growth, value, and hedge funds alike - at higher and higher prices.

In 2000 and 2001, there was a substantial wash-out in both expectations and prices that left many such neophyte listings trading at pennies on the dollar, and their shareholders, subtantially poorer. Most of the companies survived and many have grown admirably. I am less bearish on the companies thesmelves than I am about investor expectations in respect of these companies and the prices of the share of such companies. To the prudent, Livedoor should mark the point at which the liquidity and internet bubble #2 took it's first hit. It's effect may be short-lived and specific to internet companies since it may be viewed as idiosyncratic since fraud and criminal activity often is. But the wise will use any subsequent positive reaction to bail on any like exposure. For the next shot will be more substantive and will probably reflect a failure in reality, of certain expectations that up until now have been inflated with hope and liquidity, to live up to their billing.

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