Wednesday, February 20, 2013

Why I Own Riken Keiki

I feel investing is a learning and evolutionary process. When I started this blog I thought of myself as a conservative value investor. In the last six months I have evolved into a more aggressive and independent investor. I am now willing to go into less covered areas of the market, in particular small caps. In the meantime I have found a small subculture within the blogging community that covers these cases. On my blogroll on the left you'll see a list of such blogs.

My first smallcap purchases were McRae Industries and Globus Maritime six months ago. Over that period, they have been a mixed bag (+10% and -30%). However, six months is too short a time to tell anything.

The next stock that I found is Riken Keiki (7734:TSE). Riken Keiki makes devices that detect hazardous gases. Its products are mostly for industrial purposes. The company has a long history going back more than 80 years. The company has a market cap of about $130M USD. The company is consistently profitable. Its current PE is less than 10 and it pays a 3% dividend. Riken Keiki is also a net-net company, meaning its current assets exceed its total liabilities.

So the reader may wonder what is the catch? I certainly want to know, if there is one. But I cannot find any so far. In fact, I found the entire Japanese market is full of such profitable net-net small caps that trade at very low PE multiples. I have been following many outstanding investors of today to see what they are doing. For this I really recommend Wealthtrack. Wealthrack is a gem of a financial news show that you can get on youtube. A common theme of several Wealthtrack guests -- what the host Conseulo Mack calls Thought Leaders -- is that Japan is an undervalued market. I agree.

But I admit, I don't know too much about what this company makes. I cannot even access their reports in English. And I don't read Japanese. Based on advice given here, I used to decipher their quarterly reports, which is a far from ideal solution.

My strategy on Japan is to make my own basket of Japanese small caps, starting with Riken Keiki. I am not really trying to stock pick but to take advantage of a inefficiency of the world markets. I believe this opportunity comes because too many people have been burned from twenty years of recession. I know that people have said Japan is a good investment for much of the last twenty years, and have been proven wrong. But from my judgement, I feel this is the time to invest in Japan.

I feel judgement is a huge factor in investing. Judgement is not quantifiable, but someone like Buffett has it in spades. My feeling in part comes from Benjamin Graham. Back in the 1930s, in the heart of the great depression, he wrote articles that listed many companies that are selling for less than their net-net value. And I thought, wow, if only I can get in on such opportunities now. But surely today, in our more efficient markets, such opportunities are impossible, or are they? The investing world today is more liquid than ever and it is very volatile. Two recessions in a decade proves the latter point. I thought about it and reasoned that in such a big investing world, surely some market somewhere is undervalued at any given time. So it just may be possible that the situation Benjamin Graham describes happens very often, maybe now, maybe Japan!

As I mentioned in a previous post when I first thought of being aggressive with small caps. Buffett's thoughts greatly influenced me to this path. He often talks about the great deals he found in the 1973 recession. He compared the depressed Korean market from about ten years ago to that time, like 1973 is the gold standard for an undervalued market. I can just imagine him saying Japan is like that today. The recent decline in the yen helps also. I believe that opportunities, like bubbles, crop up more often than we think. It is just hard to recognize an opportunity at the time.


  1. I started going to small caps because of getting burnt too much with large caps, despite having smaller chances of big gains there. When I read about A.W. Jones, the creator of the first hedge fund, I was reconfirmed about the validity of my new strategy (long undervalued) and felt more confident to continue in this path.

    By the way, Congratulations! 7734 started going up since you wrote this. You're +20% on top of what you had then. Too bad I can't get japanese stocks on my broker...

  2. Thanks, I think the gains are partly because of the Japanese market as a whole.

    I'd have to disagree with your sentiment towards large caps. I feel their day is coming soon, they are just going through a temporary phase (read my most recent post).

    good luck