Small Cap Investing in Japan: Highlights #investing #japan #stockmarket
So today’s topic is about the small cap investing in Japan. There’s a lot of opportunity in the small and midcap space for us to pick good investments from. One of the reasons is that the small cap anomaly which is a general term referred to in the industry to indicate the fact that smaller listed companies tend to be a market that is inefficient. Hence a place where you can find a lot more bargains. Japan has historically been considered by most foreign institution and investors as a peculiar market. Japan also tends to be the cheapest market overall within all developed markets. This also makes it a good place to find bargains. So some Japanese companies have business units that have made losses consistently for nearly a decade which is quite rare to see in a foreign company. Traditionally management in Japan are more focused on the risk factors, the downside risks and the ability to survive economic downturn much more than they are worried about the return on invested capital. Ever since the corporate governance code was introduced in Japan in 2015, slowly and steadily corporate governance in Japanese companies have been improving and this has been a very good driver for the domestic market. If a company is a small cap and it already has a relatively high operating margin, there’s a very high likelihood it is providing a service or product that is very differentiated from what is available in the market and has a competitive advantage. So small cap companies that are doing extremely well tend to be ones that are providing transformational products to the market. They may be trying to disrupt an existing industry or they may be trying to create an industry from scratch. So it’s important to pick the right industries or should I say it’s important to avoid the wrong industries. Healthcare services is a growth industry in Japan. It has its own challenges and you have to look at these challenges especially coming in the form of government regulation but overall this is an industry that we know is going to grow. The next key aspect we want to look at is the balance sheet and the overall financial health of the company. As I mentioned earlier in Japan, even small caps tend to be a lot more conservative. But when it comes to small caps, cash is king. Management makes a huge difference. So you want to make sure that the management is capable, smart, hardworking, and shareholder friendly. But when you find a company that is trading at very high multiples, what it means is that your future projections for the growth rate of that company has to be more accurate. If you are to generate acceptable levels of returns because the market is also predicting that the company is going to have very high growth rates.
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