Dumping Aiful and Takefuji

On Friday I sold both of my Japanese consumer lenders -- Aiful (AIFLY/OTC) and Takefuji (8564/JP or TAKAF/OTC). Here are the dreadful facts:

I first bought Takefuji in April 2006, and subsequently added to my position twice for an average cost of $49.18. I sold the shares for $5.10 each -- a loss of 90% not factoring in dividends.

I bought Aiful's ADRs in June 2007 at $6.60. I sold them for 42 cents each -- a loss of 94% not counting dividends.

These have been terrible investments. And, to think, when I first bought Takefuji I told readers my worry was that it would be dead money for a very long time. Heck, dead money is preferable to permanent loss of capital any day.

And do you know what? Back in the day when I thought this sector had appeal, I ALMOST added a third Japanese consumer lender to my portfolio.

Anyway, I wanted to add the paltry proceeds of this sales to the portfolio's cash, which amounts to roughly 18% now. I try to make each new portfolio position a 4% to 5% holding, so I've got enough dough to make three nice-sized buys. I've got a list of candidates, so stay tuned for more stock picking adventures.

In the meantime, I've got a fair amount of egg to wash off of my face.

Comments

[Tariq]

John, given this experience -- does it change your perspectives on the prospects of investing in Japan? It always seems like a number of old school value guys (Whitman, Eveillard) are quite bullish on Japan, but the country just seems like a place where undervalued stays undervalued. I'm unsure of whether the corporations there have the kind of appetite that's necessary to thrive in a way that will translate into positive returns for shareholders or if they will just keep the status quo (a $0.50 dollar will stay a $0.50 dollar).

[Troy]

Just passing thru but having lived in Japan for most of the 90s and knowing their demographics -- the population of schoolkids today is roughly HALF what it was when I was FOB there in 1992 -- I'd say Japan Inc. is heading for terminal capital consumption and not formation.

The Japanese economy grew like gangbusters when its workforce was young, making babies, and rebuilding in the 1950s and 1960s . Now it's old and aging, and faces China churning out 100X if not 1000X the number of engineers.

I just don't see how Japan's going to compete this century.

[John]

@Tariq: No, I think my experience with Aiful and Takefuji is just that the consumer lender sector was a huge value trap. Since launching this blog I had a fine investment in Nikko Cordial, and predating the blog I've done well with some Japanese insurance firms. I think Japan is a stock-by-stock thing.

@Troy: I'm aware of Japan's aging population. I'd say it's a stock-by-stock thing, but the demographics are lousy, that's for sure.

[Sivaram Velauthapillai]

The Japanese subprime lenders have certainly been very poor investments. I'm still holding on but haven't followed them much.

Did you check out their latest financial statments, or did you just sell to free up capital and avoid further losses? The thing is that they are selling way below book value. Admittedly, book value has been unreliable and who knows how overstated the assets (and understated liabilities) on their books are--this is the problem with all financials, including American banks. I'm tempted to hold but we'll see...

[Sivaram Velauthapillai]

TROY: "I just don't see how Japan's going to compete this century."

I have a feeling that they are going to face serious political crisis at some point. Knowing human behaviour, someone or something is going to get blamed for all their problems. I suspect their political apparatus, with essentially one party ruling since the War (except for a short period,) won't survive in its current form.

Economically, I think they'll be fine. They'll be declining but still be wealthier and safer than rest of Asia for the next 50 to 100 years. It'll be sort of like Britain or Italy in the last 50 years. One could have wondered how either of these two could compete, and indeed they have been declining for centuries, but an average citizen there is far better off than other, higher growth, countries.

Investingwise, I have become more skeptical of Japan over the last few years. Initially I thought it was a great opportunity because it is a value investor's heaven. But the more I read, the more I realized that Japan is not capitalistic. In fact, it probably never was and never will be. This doesn't mean that you can't make money off stocks but it doesn't appear to be anything like America. I remember Warren Buffett saying that Japanese companies were very poor investments even when they were dominating the world in the late 70's and 80's. I think that is still true. Stockpickers who pick the good investments or macro investors who can time any rebound may do ok but otherwise, it's really tough.

[John]

@Sivaram: If my portfolio was 100% invested, I would have just held. But I think there are better companies out there, and at some point I'll be a buyer. So I figured I'd add a little (very little) to my cash since I had some cash to begin with.

Plus, the value pros who were in this sector have sold out as well (that may have to do with year-end tax loss selling, but I doubt it). Reverse-engineering isn't an end-all for me, but it has done me well over the years.

At this point, I doubt that holding or selling will make much difference if your losses are similar to mine.