Tokyo, Japan - It’s been a rough start to 2010 for some of Japan’s top executives.
Toyota Motor Corp’s management has been in damage control mode, out to protect its now-tarnished brand. The global recall for its sticking accelerator pedals has meant hundreds of millions in lost revenue but more importantly, battered the automaker’s reputation for reliability and quality.
But Toyota is just the latest Japanese corporate icon to lose its way.
A few weeks ago, Japan Airlines executives were feeling similarly uncomfortable, though for a different reason. Japan Airlines filed for bankruptcy, one of Japan’s largest ever corporate failures. The airline collapsed under a mountain of debt, accumulated by ballooning pensions and unprofitable flights.
They’re two very different companies struggling with two very different problems. But analysts agree what they do share is getting too big, too quick, and losing focus of the basics.
Tokyo based financial advisor Timothy Kirkwood says it’s a path that Japanese companies have taken as they’ve expanded globally. In Toyota’s case, it was so focused on cost cutting while becoming the world’s #1 automaker that it lost focus, like making sure the accelerator wouldn’t stick.
“There has been some outward looking management that’s enjoyed the global consumer spending boom in the good times. But they were overexposed to the downside. That’s what’s causing the problems in Japan right now,” said Kirkwood.
But he follows that up with the strong belief that if there will be a company that can recover from being overexposed, it’s Toyota, a well-run company with years of a proven brand.
It will only happen, though, as long as Toyota’s boardroom takes a hard look at itself and gets back to basics.
It’s perhaps the strangest opening of an academic paper on investing – a fall 2008 article cowritten by a Yale University finance professor and editor of the “Journal of Portfolio Management” that begins by recounting a scene from HBO mob drama, “The Sopranos.”
Tony Soprano, head of a New Jersey mob family, turns to his lieutenant Silvio Dante and says, “Sil, break it down for ‘em. What two businesses have traditionally been recession-proof since time immemorial?”
“Certain aspects of show business and Our Thing,” Sil replies.
As the authors of the paper, “Sin Stock Returns,” wrote: “Viewers of this HBO series knew what Sil meant. ‘Certain aspects of show business’ meant the adult entertainment that was often seen at Tony’s strip establishment, the Bada Bing Club, and ‘Our Thing’ meant organized crime, which involves many activities that exploit the vices of frail humanity.”
The researchers at Yale University and Stetson University put Tony Soprano's thesis to the test – not by examining organized crime, but by examining the historical returns of businesses that are considered morally suspect: alcohol, tobacco, defense, biotech, gaming and adult services. They examined 267 companies in 21 international markets from 1970 to 2007.
What did they find? The average annual return of the companies was about 19 percent, while the average stock market produced a return of just under 8 percent.
Gaming industries had the best return of 33.5 percent a year, followed closely by defense (33 percent), biotech and tobacco (both 22 percent), adult services (18 percent) and alcohol (about 13.5 percent).
No industry is full proof. For example, in the most recent downturn, the Vice Fund – a mutual fund which buys stocks in alcohol, tobacco, aerospace defense and gaming industries – fell 42 percent in 2008, mainly out of fears casinos were expanding too fast and taking on too much debt.
Still, if you have the moral stomach for this sort of investment, ‘This thing of ours’ might be the thing for you.
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