Noriyuki Morimoto's Blog
Aging Shochu and the Essence of Investment
Feb 25, 2019
There are many things in the world whose value rises over time. For example, shochu becomes more expensive as it ages.
Suppose I am a producer of shochu whose annual shipment is worth 100 million yen. I’m hoping to get out of ordinary low-priced shochu and switch to products aged for 10 years. The simplest way for this is to stop shipping for 10 years and resume with the aged products 10 years later. However, then my sales would be zero for 10 years, and I can’t make a living.
So, as I’m currently breaking even, things would work if I can finance the annual expenditure of 100 million yen including living expenses: 1 billion yen in 10 years.
If I borrow 100 million yen at an interest rate of 7% per annum for 10 years, and repay the principal and interest at once, the lump sum amount is about 200 million yen. That means that even if I pay a 7% interest rate, if I can sell the 10-year-old product at least twice the original price, there is value in the business.
Generally, business makes sense as long as the expected value of the asset price growth rate exceeds the growth rate of the debt. And whatever functions as a business generally can be constructed as a target for investment.
No bank would lend up to 1 billion yen, under conditions as favorable as lump sum repayment of principal and interest, to a small shochu producer with annual sales of 100 million yen, with shochu as collateral without applying an assessment rate.
Enter the investment fund. If the price of shochu is more than doubled in 10 years, the fund would be able to return 7% or more to its investors.
The source of investment returns is the profit of time. Because time increases value, the investor must buy time. To buy time is fund procurement as seen from the shochu producer's point of view, and provision of funds from the perspective of the investor. Investment is to give the profit of time. And the price of time is the rate of return.
Chief Executive Officer, HC Asset Management Co.,Ltd.
Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (Tokyo Office) in 1990, where he was Director & Consultant for 13 years. His responsibilities also included Benefit consulting and Financial Services consulting. Prior to joining Watson Wyatt, he was responsible for foreign fixed income investment, asset allocation and investment strategy at Mitsui Life Insurance Co., where he managed assets for the company’s variable life products and group annuities as a fund manager. He spent 2 and half years in London managing fixed income assets. He started his investment career as Japanese equity analyst at Mitsui Life in 1983. Bachelor of Arts (Philosophy), University of Tokyo (1981)