Investment Lessons I have learned from Japan

J. Reid Murchison III, CFP®
Senior Financial Advisor
Managing Partner

Have you ever had the experience of better understanding your own life; or your own business, industry or non-profit organization; or your own home country, city and state; or your own faith tradition, by being exposed to or in conversation with someone else’s?

I certainly have.  In fact, I can think of examples in all those areas listed above.  There is something about engaging with a person, a place, a history, an idea or a tradition very different from my own, that has given me new helpful perspectives on what is my own.  For me, in the business and investment arena, Japan has been one of those very different places that has taught me important lessons—some of which I think are worth sharing with you.     
That’s why I am thrilled to be writing from Japan. This is my fourth visit here. My days will range from business meetings to walking an old 110 mile Buddhist pilgrimage trail with Linda and two long-time friends who lived here for a number of years.

My exposure to Japan, both directly and indirectly, has confirmed several convictions for me.  Some of these you heard from me before:

The resiliency of the human spirit
The potential power of human enterprise
The importance of our individual and collective decisions
The destructive aftermath of investment bubbles
The flawed cracks in our human nature
I realize that I am no Japan scholar, have no direct business or investment experience in Japan and don’t speak the language. So, I claim no great expertise as I share my thoughts. Nevertheless, I hope you will find something of value in them.
When I was a young person in the early 1960s, “Made in Japan” was shorthand for cheap and low quality.  By my college years, “Made in Japan” was shorthand for value and great quality.

By the time I left college in 1976, Japan seemed like an economic miracle.  It had risen from ruins at the end of the Second World War to challenge America’s industrial preeminence.

Toyota and Nissan were clobbering US car manufacturers in the marketplace.  Japanese electronics companies like Sony had few if any US peers.

By the end of the 1970s a highly regarded Harvard professor, Ezra Vogel, could seriously title his study of Japan’s success in multiple arenas, Japan as Number One:  Lessons for America.  In a period of just three and a half decades, Vogel argued, Japan had made itself into the most competitive and effective industrial power in the world.  Dozens of books sought to shed light on how this small, natural resource poor island nation with just over a third of the US population had managed to transform itself so completely in such a short amount of time.
Confidence in Japan’s future would continue to grow throughout the 1980’s, with accompanying growth in the valuation of Japanese assets. By the end of the decade, around the time of my first visit to Japan, the value of Japanese stocks and real estate rose to mind-boggling levels.
To get an idea of how seemingly limitless was the view of Japan’s prospects, consider this:  At the end of 1989, Tokyo real estate per square foot sold for 350 times what real estate sold for in New York City.  Given the average price of Tokyo real estate at the end of that year, the land underneath the Imperial Palace was notionally worth more than all of the real estate in California.  And the Imperial Palace grounds aren’t that big—I walked around the exterior twice this morning, which wasn’t too hard since walking around it involved fewer steps than walking around Greenfield Lake in Wilmington.
The price bubble would soon burst.  But the bubble was indicative of how miraculous Japan’s rise from the ashes actually was. 

Reflecting on that miraculous rise gives me a deep appreciation for how resilient the human spirit can be.  A broken and defeated nation with a new governmental structure imposed by an occupying nation more than bounced back—it scaled heights way beyond what it had ever attained before.
Japan’s experience shows that there need be no such thing as permanent defeat or permanent decline.  Renewal, reinvigoration, revitalization are indeed possible because of the power of human enterprise. 

It is extraordinary what a group of people pulling in the same direction can accomplish. The key is almost always the quality of leadership.  Decisions make a difference.  Character makes a difference.  Those truths are so clear in the Old Testament narrative:  Good leaders mean good times for the people.  Bad leaders mean bad times for the people.

Can you imagine how different life would be in those parts of the world with so much suffering if their leaders put all their energy into improving the lives of their people rather than into lining their own pockets and/or destroying their enemies?

Of course, few leaders are all good or all bad.  I share Alexander Solzhenitsyn’s conviction that the line between good and evil runs through every human heart.  I know that is true for me.

As I admire how safe, clean, relatively nonviolent and reasonably harmonious Japan is, along with its low levels of income or wealth inequality and its high a level of socio-economic mobility, my fan-like wonderment is sobered when I remember how brutal Japan’s occupation of Korea and China was prior to World War II. 

My admiration is also sobered by remembering how unmoored from reality was Japan’s own self-conception at the peak of its stock and real estate bubble.  I referred earlier to how huge that bubble was.  When it burst, the negative consequences were huge as well—both for the Japanese people and for investors.

Japan’s economy has experienced anemic economic growth since then.  Livelihoods have suffered.  Employment stability was greatly eroded.  For owners of Japanese stocks or real estate at the very end of the 1980s, the negative consequences have been of a scale unlike anything we Americans have ever experienced.

The average price of a Tokyo apartment is still below where it was at the end of 1989.  Japan’s stock market as measured by the Nikkei Index is still almost 20% below where it closed on December 29, 1989—still under water after nearly 34 years. Until very recently, Japanese stocks paid out only meager dividends in the meantime.
Asset bubbles are dangerous.  Their bursting unleashes great harm, as we saw with the bursting of the housing bubble back in 2008.  And the bigger the bubble, the greater the danger.
The big difficulty navigating asset bubbles is that one never knows how big the bubble will get nor how long it will last before it bursts.  Back home in the U.S., we consistently underestimated how long our low interest rate bubble would last. 
What bubbles do we see now?  While we worry about the valuations of the giant tech darlings driving the U.S. stock market, we think the biggest bubble likely to affect the global economy and global markets is likely Chinese real estate—a bubble we think has likely begun a long, slow deflating process.  China way over-built, especially for a country facing population decline, and especially outside its largest most dynamic cities. In those more dynamic places, real estate prices were bid up to stratospheric levels. Exactly how that will play out we’re not sure.  But we will be paying close attention.

In closing, I am grateful for the opportunity to spend some time in this part of the world.  I have been reminded that the resiliency of the human spirit and the power of human enterprise are always reasons to be hopeful about the future.  I have been reminded that the darker parts of our human nature are always reasons to have our eyes wide open.  I have been reminded how important it is to keep euphoria in check.  I have been reminded how consequential decisions can be—especially decisions made by leaders.
I have also been reminded how fortunate I am to have such a great group of eight colleagues back in the office while I am away—and how fortunate I am to have such wonderful clients who have entrusted us with the care of their assets.  Thank you all!

Past Newsletters 

New Era - Winter 2023

I made my first stock investment when I was twelve, in the fall of 1966.  My maternal grandfather had always given his grandchildren a little cash on their birthdays.  He thought by age 12 I should become acquainted with the stock market as both a key pillar of a future investment portfolio and as a lens through which to learn about business, commerce and free enterprise.  The only requirement was that I had to pick out the stock, and then persuade him why he should buy that one for me.

I was a born saver, having been entranced ever since I could remember with tales of the Great Depression.  (At some level, I have been preparing for another ever since.)  So, I naturally saved my allowances, Christmas and birthday gifts, and the money I earned by cutting lawns in the neighborhood.  By the time I was 14 or 15, I had built up a nice little savings account.

Around that time, probably in 1968, my father tried to convince me to put those savings to work in the stock market.  As hard as it was to build that little nest egg, I was reluctant to do so.  Then he made me an offer I could not refuse.  He said if the amount I invested was worth less by the time I graduated from college, he would make up the difference (an offer that would be highly illegal for us to make to anyone).  I couldn’t lose, so I agreed, and began to talk with his stock broker about what companies to buy.  At times, it looked as though his offer had led to great gains, but when I graduated from Chapel Hill in the spring of 1976, my father owed me.  After all those years, the total investment I made, all in good companies, was worth less than when I started.

In fact, the stock I bought at age 12, General Electric, was worth little more when I was married in the fall of 1981, fifteen years later.  How could that be?

I will be eternally grateful for the experience of those early investing years.  They taught me that successful investing takes great patience, and sometimes nerves of steel.  Markets don’t always go up, and don’t always bounce back quickly when they go down.  But historically, over time, good businesses grow, increase their profits and raise their dividends.

Although the U.S. stock market, as measured by either the Dow Jones Industrial Average or the S&P 500 had essentially zero growth in value in the fifteen years between 1966 and 1981, in the subsequent forty years it has grown over 35-fold—and that’s before including dividends.

My married life has coincided with an incredible market run, interrupted at times by steep bear markets (1987, 2000-2002, 2008/2009, 2020) many of which led to halving the value of portfolios.  $10,000 invested forty years ago in the Dow would be worth more than $350,000 today, even if you spent all the dividends—and your combined dividend from last year and this year would be more than the total amount invested at the beginning.  They key is that you had to hang in there during the tough times.

During my senior year at Chapel Hill, I also worked as a traveling salesman to open up a new territory for our family wholesale and hardware distribution business, J.W. Murchison Company.  That was a terrific learning experience.  I knew little about the nearly 20,000 items we sold, and did not know a single one of our prospective customers in the half dozen counties I covered.  However, I found that if they could count on me to show up every two weeks—often without getting a single order, and if I really listened to what they needed, those prospects would eventually become customers; they entrusted me with fulfilling part of their inventory needs.

Six months after graduation, I decided it was time to pursue my twin dreams of either making it to Broadway, or making it to Wall Street, or both.  So, I moved to New York City in the fall of 1976.  I patched together several part-time jobs (photographer’s sales rep, photographer’s assistant, nightclub waiter, and happy hour bartender at a home for the elderly) while interviewing for entry-level investment positions and auditioning for off-off Broadway plays.

After various tests and multiple interviews, the head of the Kidder Peabody Park Avenue office offered me a job, coupled with an unusual piece of advice.  He said, “I am going to offer you a job as a trainee investment broker, and I am going to suggest you not take it.”  He said, “You’re 22 years old with limited business, investment and life experience.  Why would anyone seek your investment counsel, or have any good reason to trust your investment judgment.”  He went on to say, “I think you will ultimately succeed, but you will have so much more to offer clients if you get some broad business experience under your belt first.  So, the job is yours if you want it, but I would not take it if I were you.”

I thought about his most unexpected offer for a few minutes before responding.  “You’re right,” I said.  “I would not tap me at this juncture to invest my money.  Why should I expect anyone else to hire me.”

Thankfully, I did not have to wait long for an offer to get that broad business experience—and to become a part owner of a growing business in short order.  An advertising agency started by a seasoned executive and his wife in Chapel Hill (in the house in which James Taylor grew up) had recently opened an office in New York to better serve their largest client, The Wall Street Journal.  With me on board as a trainee who knew nothing about advertising and marketing, the staff grew to five:  the founding couple, an art director and a production manager (this was two or more decades before everything would become digital).  

My first week or so on the job was spent reading a stack of books I found placed on my desk.  Sometime in the first couple of months the wife was hospitalized for a few weeks with a serious illness. I was charged with keeping the office running, and I was dispatched several times to make presentations to our clients at The Wall Street Journal, Barron’s and a host of foreign business publications that Dow Jones represented in the US.  It was a baptism by fire.  

Within a year or so, our creative work caught the attention of the investment firm made famous—some would say infamous—by Michael Milken, Drexel Burnham Lambert.  We were one of a couple dozen agencies to which they had sent a Request for Proposal (RFP).  I did a crash study of the investment banking and brokerage industry, and was presented as the account executive who would be responsible for their account.  We knew we were up against tall odds.  Fortunately, Drexel had hired a Harvard professor who had written what had become by then a business classic, Marketing Myopia. He told Drexel they should look for one thing—quality of mind.  

Drexel Burnham Lambert hired us.  I became a part owner of the agency.  And we began to grow.  We helped introduce one of the earliest versions of cell phones.  We introduced Jaegermeister and Rioja wines to the U.S. Market.  We had a lot of fun, and I learned a ton.  Eventually we grew to a 30-person staff before I persuaded my wife, Linda, that we should move to Wilmington with our six month old baby so I could join the family business that I thought I had left behind eight years earlier.

I thought Wilmington would be a great place to raise a family.  I wanted to experience running a business with my father who was—and is—one of those exceptional people who truly leads with love, never with fear.  I wanted to learn how to do that.  And I wanted to help the company to which he dedicated so much of his life deal with some tough strategic issues.

It was a bigger change than I had imagined.  Instead of selling ideas, we sold merchandise—nearly 20,000 different items, hundreds, maybe thousands of which became obsolete every year. Instead of C-suite clients, our customers were mostly small, not well capitalized mom and pop businesses.  Instead of a college educated staff, including more than one PhD., we employed dozens of less educated folks. Instead of a relatively simple, business model with dependable cash flow, we had a much more complex business, with millions of dollars of inventory, receivables, payables; many customers who could never pay on time; and a hundred employees, two dozen of whom were scattered around the mid-Atlantic and Southeast. Rather than competing against dozens of other ad agencies we had two major, and larger competitors, who seemed like mortal enemies.

I learned a lot.  After five years of work on our strategic challenges, with some notable successes and gains in market share, I decided that the best strategic move would be to sell the company to one of our two competitors, both of which had approached us with their interest.  The family, including my father, wholeheartedly agreed.  

The better offer appeared to be from our largest competitor, ten times our size, publicly owned and audited by what was then a Big Eight accounting firm.  I agreed to run the business as a competing subsidiary for three years.  All seemed to go as planned until the parent company discovered a year-and-a-half later that it had been the victim of massive internal fraud.  Instead of earning healthy profits, it was losing as much as it was reporting to have earned.  Instead of a strong balance sheet, it was insolvent.  

Over the next year-and-a-half we slowly wound down our business, trying to help employees, many of whom had been with us for decades, find new jobs before being laid off.  It was the toughest business experience I have ever had.  And I felt responsible.

However, as is almost always the case with tough experiences, I learned a great deal.  I learned that you can’t always trust reported numbers—if something seems too good to be true it probably isn’t true (when Worldcom, Enron and Arthur Anderson imploded due to financial fraud and its repercussions, I was seeing something I had seen before).  I learned that there is no substitute for integrity; honesty is the bedrock economic virtue.  Without it, little else matters.  I learned that situations can change in a heartbeat, and, when they do, the only prudent course of action is to assess and accept what is, moving forward into the new reality.  When the world began moving towards Covid lockdown in late February of 2020, I knew we could not put our heads in the sand; we needed to deal with it as best we could.

As the wind-down of the family business progressed, I began to think about the future.  I came close to buying another business before what I can only call divine intervention changed the course of Linda’s and my life.  

We had talked on and off about two seemingly unrelated dreams.  One was to give our young daughters exposure to another culture like Linda had experienced growing up during her elementary school years in Japan.  The other was to engage in an extended time of theological study.

Linda was about to complete a Masters in Social Work, and felt that any work in that field would be enhanced greatly with a well-grounded spiritual component.  I was interested in a time of study and reflection around the desire to better align my Christian faith with my business life. I will never forget going to see one of our sporting goods customers a few days after the Grand Opening of his new store, where he credited his Christian faith for his success and where his pastor lauded him for being a “good Christian businessman”.  When I visited him a few days later, he laid out for me a plan to drive his toughest competitor out of business.  Shocked, I asked him how that fit with what he and his pastor had said at the Grand Opening.  He replied, “I go to church on Sunday, but Monday morning I am all business.”  He made me wonder, is that the way it has to be if one wants to be successful in the world of commerce?

Linda and I had pretty much given up on those two dreams when one November day we received a letter in the mail from the head of an Anglican seminary, Trinity College, in Bristol, England.  The writer of the letter said that the newly consecrated Archbishop of Canterbury had told him about us (we had met him a couple of months earlier through a dear friend who had been his seminary student, and told him about our dreams), and that Trinity would be delighted for us to visit in order to determine whether they could structure a year of suitable study for us, and to discern whether we might be called to spend a year with them in Bristol.

This was one of those bolts out of the blue that can only be explained as being divinely inspired.  It led to one of the richest and most pivotal years in Linda’s and my life together.  I wrote a dissertation on the topic, Do Business and Christianity Mix?  I enrolled in a doctoral program at the University of Bristol in the field of economic ethics.  I began work on a thesis looking at whether the heart of economic ethics from a theological point of view is working out the proper interplay between one’s own legitimate interests or welfare and the legitimate interests or welfare as others as seen through the commandment to love our neighbors as ourselves.  We prepared for our return to Wilmington, where I planned to find a way to provide for our family while carrying on my research.  

As I thought about various options, such as joining or buying a business, I thought back to my earlier interest in the financial markets—an interest that had never gone away.  It occurred to me that I now had the broad business and life experience my Kidder Peabody mentor suggested I get.  I thought I could make some time and money trade-offs in this field, and thereby find time for my academic work, knowing that I would not have to be setting an example for a hundred employees. And I thought it would be an arena where I could put to work the principles I was articulating in that academic work, and be of real help to people.  

Tests and interviews seemed to confirm that the investment and financial advising field would be a good marriage of my interests and my gifts.  When I returned to England to meet with my doctoral advisor, I also spent some time with the professor who had strongly encouraged me to seek ordination as an Anglican priest.  When I explained to him the route that I felt called to pursue, he said, “Well, I think you are called to be a financial pastor.”

I have never forgotten those words.  For me, they represent so much to which I aspire.

As it turned out, starting a new practice was more demanding—and satisfying—than I had imagined.  I also realized that having time to help coach our daughters’ soccer teams, time to participate in things like the YMCA’s Indian Princess program with them, and time to spend with Linda was way more important to me than pursuing another academic degree.

I also came to the conclusion that from a practical, real world perspective I had done most of the, theological research that I needed to do in relation to economic ethics.  At some level, the ethical bottom line in the economics sphere is fairly simple conceptually:  In the spirit of the commandment to love our neighbors as ourselves, it is to be as concerned about the welfare of others (clients’, customers’, employees’, suppliers’, the broader society’s as a whole) as I am concerned about my, or my family’s, own  welfare.

In the spirit of the new commandment Jesus gives his disciples at the Last Supper, “to love one another as I have loved you,” and in his example as the Good Shepherd, it is to be a fiduciary in the truest sense, putting the interest of others before my own, not just on par with my own.

The task for me at that point, I concluded, was to put that understanding into action, to live it out as best I could.  So, I packed up the books and file folders of notes.  I have no regrets about that decision.  

I can’t say that I have lived up perfectly, or even imperfectly, to what I had come to understand to be my calling.  But I do believe my colleagues and I in The Murchison Group have made a positive contribution to our clients’ lives, and to one another’s lives.  I do believe we have built something special, something that deserves to be carried on beyond the tenure of any one of us.

That is why we have tried to recruit top-notch individuals of high character and varying ages, spending two-to-three years in conversation in several cases before deciding that we were great fits for each other.  

It is why we made the decision to couple the benefits of independence with the maintenance of all our working relationships with Wells Fargo Advisors Financial Network, the Wells Fargo Investment Institute and the Wells Fargo Private Bank.  We had long operated with a degree of autonomy, managing our own P&L, while remaining employees of Wells Fargo Advisors.  Now with The Murchison Group as its own independent legal entity, we are assuming an array of responsibilities previously handled by the mother ship in order to take advantage of greater flexibility and control.  This was a move with the long-term future in mind, and involves a longer-term commitment by me to both our Group and our clients.  

J. Reid Murchison III, CFP ®

Senior Financial Advisor
Managing Partner

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Almost all our client relationships are advisory in nature, and in most all cases clients give us discretion to act on their behalf.  Legally, this means that we are fiduciaries.  We are required—and committed—to put your needs and interests ahead of our own.  That is the way we want it.

On a practical level, advisory clients compensate us for all that we do for them by paying a fee based on the value of their assets under management, with no additional costs for transactions.  We think this helps avoid conflicts of interest.  As some say, it puts us on the same side of the table.  If we can help your assets grow, or help you lose less in down markets, our revenue will tend to grow.

Of course, one could argue that there is always some conflict about the level of those asset-based fees.  We have thought a lot about that issue.

We think cost matters.  Higher costs make it harder to deliver desirable long-term results.  Lower costs make it a little easier.  So, we have always approached pricing a bit differently than most business consultants suggest.  Conventional wisdom is to price one’s services as high as the market will bear—and in some cases to price one’s services above the market because people often gauge value by cost.  The old bromide, “you get what you pay for” is deeply entrenched in much of people’s thinking.  So there is often a tendency to think that higher cost means better service or a better product—even when that is often not at all the case.

We have taken a different approach.  We have sought to set fees closer to the lowest level we can and still operate a practice of the highest quality:  We want to provide attractive levels of compensation for our people so they will stay with us.  We want to invest in more than adequate staffing levels—we want to build in a margin of safety in order to be resilient during high stress periods; in order to avoid things falling through the cracks; and in order to foster a reasonable life/work balance for all of us.  

How have we been able to do that?  By thinking hard about what we spend money on and what we don’t.  

One of any business’s greatest costs is the sales and marketing cost of getting customers or clients.  We have spent next to nothing in that arena over the years.  Rather, we have built our business by word of mouth.  At the outset, Reid believed that if he could do a great job for clients, many would likely tell someone else about their experience, and some of those folks would inquire about becoming clients as well.  It has worked beyond his wildest dreams.

Some firms spend a lot of money appealing to people’s vanity or trying to impress them with lavish offices, lavish entertainment or lavish attention to things that don’t really matter in the long run.  We want a welcoming work environment.  We want our clients to know that they are very important to us, and that we appreciate greatly their loyal support.  But we see no need to go over the top for show.

Some firms are focused on generating the maximum monetary return in the shortest period of time for their top people.  We want to be reasonably compensated, and to build long-term value for our enterprise.  But we never want to be, or even appear to be, greedy.

Advisory accounts are not designed for excessively traded or inactive accounts, and may not be appropriate for all investors. During periods of lower trading activity, your costs might be lower if our compensation was based on commissions. Please carefully review the Wells Fargo Advisors advisory disclosure document for a full description of our services, including fees and expenses. The minimum account size for Advisory Programs varies.

Fees for Advisory programs include Advisory services, performance measurement, transaction costs, custody services and trading. Fees are based on the assets in the account and are assessed quarterly. The fees do not cover the fees and expenses of any underlying packaged products in the account.