Guest Post: Book Review

Investment as a Liberal Education: How to Join the Business Elite

I’m very pleased to have a guest post today from a new contributor, Richard Brash. He’s a seminary professor in Nagoya, and has written the book Smart Serendipity: The Essential Mindset Shift for Time-Rich Living.

Take it away, Richard!

It’s not often that I actually finish an audiobook. It’s a rarer day still when I listen to the same book twice! But Kazushige Okuno’s book『ビジネスエリートになるための 教養としての投資』（Investment as a Liberal Education: How to Join the Business Elite, 2020）had me reaching for the replay button.

Okuno’s book is more than just educational: he is entertaining, informative, hopeful, and at times delightfully iconoclastic. But is he right?

Regular visitors to RetireJapan will be familiar with the ‘passive’ approach to investing exemplified by buying and holding index tracker funds. I’d happily acknowledge that I find this approach rational and convincing. But Okuno makes a challenging and at least partly-persuasive case for a certain type of active fund management. He has certainly got me thinking.

Who is Okuno, anyway? As he introduces himself in the book, Kazushige Okuno is the Managing Director (CIO) of Norinchukin Value Investments. I had at least heard of The Norinchukin group (of which Norinchukin Value Investments is a subsidiary) before encountering this book: I was aware that they had an office in London when I worked in the City 15 years ago. But the name nōrin（農林 = farming and forestry）made me think they were some kind of agricultural co-operative. To be honest, I wondered what they were doing among the skyscrapers of London’s financial district. How little I knew!

The book is structured like a day at school: six ‘lessons’ and an ‘extra class’. In some respects, it’s pitched at a younger generation of readers, from high-school students upwards, who are just setting out on their careers. But there is plenty in here for all ages. Many RetireJapan readers would, I imagine, enjoy and appreciate most of the content.

Okuno argues that Japanese, in general, know too little about investment. As a result they tend to be afraid of it, confusing ‘investment’ with ‘speculation’. The difference here is all important: day traders, and anyone who dabbles in FX, commodities, or even – controversially – real estate is merely ‘speculating’. Okuno recommends that his readers cultivate the ‘mindset’ of an investor, recognising that when we invest we buy companies not share prices. As we take our first steps in investing for the long-term, we learn, experiment, make mistakes, and grow in experience. This is educational, fun, and should be reasonably profitable over time. Of course, none of this is new. It’s basically the value investment approach of Benjamin Graham, Warren Buffet et al, and it’s rooted in business acumen and common (if at times counterintuitive) sense. Over the long term, by and large, share prices reflect profitability. So select profitable companies. Buy. And hold.

For Okuno, the ultimate factor that determines what companies to buy is the presence (or absence) of a robust 参入障壁（sannyūshōheki = barrier to entry）which means competitors have no reasonable access to the same market. For example, Okuno writes at length about Coca-Cola, Nike, and Disney as examples of companies that have established insurmountable barriers to entry. This, above all other considerations, should ensure that these businesses will continue to be profitable. However, it’s not enough on its own: it must be combined with inevitable macroeconomic trends (such as population growth which opens up bigger markets) in order to be a reliable indicator of long-term business value.

Many a RetireJapan reader might want to counter: If it’s really possible to identify such companies, why do most actively-managed funds fail to beat their benchmarks reliably and consistently? Okuno says that this is quite simply because most of them (especially in Japan) don’t even try to. Managers match market share by industry type within an index and simply shift their allocations from one company to another in the same industry, forever fearful that they might fall so far below their benchmark that they lose their job.

So does Okuno think we’re wrong to buy index tracker funds? It’s not as simple as that. When it comes to the Japanese market, Okuno is decidedly negative. The Japanese population is in steep decline. With the exception of certain urban areas, the market for most businesses is shrinking. The only Japanese businesses worth buying are those that are strongly focused on overseas markets, able to tap into macroeconomic quasi-certainties and blessed with insurmountable barriers to competitor entry. And there are very few such companies. Not pulling his punches, Okuno says that long-term investing in funds that track the Japanese indices is a waste of time and money.

What about overseas? Interestingly, Okuno argues that the US economy is so strong and innovative that a fund which tracks the S&P 500 is, effectively, the world’s biggest active fund by default. That is because the S&P 500 is, to a large extent, self-selective of the companies that have the best long-term growth potential. So, Okuno would not necessarily urge us to ditch every tracker. Rather, his counsel is that, even if we do restrict ourselves to index-linked funds, we should make efforts to understand why we make such decisions, and to pick the right trackers. There’s no long-term future in tracking mediocrity.

But if the index-tracking investor ends up in more or less the same place as his active peers, what’s the point in all this ‘education’? Can’t investing be truly passive? In a sense, it obviously can, and that’s probably the great part of the attraction of index-linked trackers for so many of us. But in Okuno’s view, the investor who takes no notice of what companies she owns, and why she owns them, misses out: on a lot of fun, satisfaction, education, and personal growth. And her developing understanding gives her the best antidote to panic or hubris in market fluctuations, enabling her to stay the course.

I hope Japanese-speaking readers might give Okuno’s book a try. It’s nothing earth-shattering, perhaps. But it is a Japanese perspective on many of the questions and approaches that are often discussed by the RetireJapan community, and I’d say it’s worth at least one read-through… if not two!

Thank you very much, Richard. That does sound worth a read. I agree that young people need more financial education, but I am seeing a change in the university students I teach: up until this year they were pretty ignorant about financial topics (if eager to learn). This year I am seeing a lot more awareness of NISA, roboadvisors, index investing, etc. Progress?

If anyone else has a guest post inside them bursting to get out, please do drop me a line. We are always thrilled to run content from other people that might be of interest to the RetireJapan community.