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characteristics of the industries and the sources of structural change? Who were the players and what was the distinguishing ‘personality’ of each? What were its earnings drivers and how were those changing against the industry backdrop? Finally, where did that mean the numbers were going and what were investors missing?

      From Fish Cakes to Computer Numerical Control (1988–1995)

      Anyone who has ever eaten a California roll at their local sushi place is familiar with surimi. But you have probably never given a thought to where the white, flaky ‘imitation crab’ meat comes from. I hadn't either until one day in 1988 when I was given my first assignment as a new equity analyst at Nomura Research Institute to analyse one of the top Japanese fishery companies. The pelagic fishery industry had been one of the major industries in Japan in the early twentieth century, and most companies made significant profits from it. After the 1960s, given the international pressure to ban whale fishing, fishery companies had to seek other sources of profit. Surimi, the fish cake, was a promising next pillar of profit growth.

When I was assigned to research the company, my supervisor told me to collect 50 name cards from the company before I started to write the report. It was not easy to come up with reasons to meet that many people in one company, hence I had to study thoroughly the company's products, its organizational structure, production, marketing, research and development (R&D), and financials. I read many books regarding corporate management and studied its competitors. By the time I had collected 30 name cards, I found that the relatively new innovation of the ‘Surimi Ship’ was the source of its future growth, and I was fascinated by the concept. Surimi is made out of cod fish, but the fish does not keep its freshness for long so the company decided to set up a surimi production factory on board, processing the cod fish while the ship was returning from the trip. Although it was a significant capital expenditure burden for the company, the differentiated technology gave it a sustainable, profitable business. To study the technology and its patents, I needed to visit the National Diet Library and the Ministry of Agriculture, Forestry and Fisheries several times in addition to company interviews (the internet did not exist then!). I felt I did almost everything an outsider could do to study the company. The only thing I thought I missed was to actually board the surimi ship, which the company politely declined when I asked.

Although profitability of the surimi business could be influenced by fluctuations in price, I had a strong conviction that the company had a structural competitive moat in its profitable surimi business. Hence, my confidence level in my earnings growth forecasts for the company was very high. I am still thankful to my supervisor who pushed me and allowed me to go as deep as possible to learn about one company for my first assignment as an equity analyst. As I was so junior at that time, I had less expertise in translating this extensive knowledge of the fishery company into a smart investment idea. As my first encounter with a company as an equity analyst, I learnt many invaluable lessons. Spending so much time researching one company gave me a real sense of how a large corporation operates in the real world, such as how various organisational functions work, how the chief executive officer's (CEO) strategy is cascaded down, how financial budgets are determined, the motivations of employees, and whether conflicts of interest exist between divisions, and different layers of leadership. As analysts become more senior and become busier, they tend to see a company as a stock or a financial instrument (an important perspective for investors), but it is helpful for analysts to remind themselves of the human elements behind the financial figures. Even now, more than 30 years later, when I think about the potential behaviour or decision-making process of a large company, what I learnt from this initial company analysis provides me with a benchmark of my thoughts.

      After the fishery industry, I was assigned to cover the capital goods industry. I absolutely loved the sector and visited companies that manufacture products such as bearings, fire engines, tractors, industrial pumps, heat exchangers, knitting machines, and automated diaper assembling equipment. Every company had its own history and a strong sense of pride in its product. As such, when I showed my sincerity and eagerness to learn about their business, they were very generous with their time. I learned new things every day and even started to like the smell of machine oil. I still remember the factory head of a major bicycle parts company commenting that they supplied some critical car parts to a top automotive company with only minimum profit. Although the company was the dominant player in the bicycle parts industry globally and very profitable, they kept the less profitable car parts business to keep up with ‘major league’ manufacturing technologies. The company is still the dominant player in their field today.

I sometimes made a terrible stock call. One day I found an interesting short article about ‘low-cost CNC’ in a machine tool industry magazine. Machine tools are used to curve metals into various shapes and are often called ‘mother machines’ because they produce core parts of other machines. There were many machine tool companies globally at that time, but the key component, CNC (computer numerical control: a dedicated computing unit and servo motors to control positioning of metal cutting tools), was largely supplied by one Japanese company. This CNC maker was highly profitable and had a disproportionate share of the industry profit pool while its customers, the machine tool makers, were suffering from low margins and significant earnings volatility. The magazine article talked about two start-up companies in California that had launched a substantially lower-priced CNC system operated by personal computers. I was very excited to read the article because those companies could totally reshape the machine tool industry structure through technology innovation.

      My boss was generous enough to send me to the US West Coast to meet the founders of those private companies. Although I did not have an engineering background, I had studied CNC enough to hold a sensible conversation with them, and they took me seriously. The technology seemed to be legitimate and had a good track record of initial customer wins. The manufacturing facilities were modern and organized. I went back to Japan and cross checked what I had learnt with several industry engineers. Their feedback was generally favourable. So, with due diligence, I wrote a fairly pessimistic report regarding the future profitability of the dominant CNC company. I was completely wrong. The low-cost CNC stayed as a niche product and the dominant CNC company continued to grow their business very successfully and profitably. I learned a painful lesson. I was too excited about the initial idea of a dramatic shift in industry dynamics and did not pay enough attention to the multiple reasons why the incumbent had been so strong.

      This was probably a typical case of ‘confirmation bias’. I loved the story of small start-up companies potentially winning against a dominant large company and was almost unconsciously wishing such a market share shift to happen. So, I probably unconsciously selected to meet engineers who also wished the same result. Given the importance of the topic, I really should have solicited views from a more diverse group of experts.

      Not Just a Japanese Tourist – Becoming a China H-share Analyst (1996–1998)

During my days as a backpacker in the mid-1980s, I spent about two months travelling around China when there were hardly any cars and thousands of bicycles on the street even in large cities. I was fascinated by the culture and people in this enormous country and felt the strong potential of the economy. Needless to say, I would never have predicted the country would come so far in terms of economic development. While I really enjoyed covering the capital goods industry where Japan had a very strong presence globally, I was looking for an opportunity to go to Hong Kong to get closer to Mainland China. At that time, most equity research activities related to Mainland China were done in Hong Kong. I went through extensive Mandarin language training for several months to prepare for the move. In 1996, the firm moved me to Hong Kong and I became the first equity analyst covering China H-shares with a Japanese passport. Back then, the concepts of an equity market and equity research were still in their early stages in Mainland China. Most listed companies at that time were state-owned enterprises and when I visited a power equipment company, my first interview as a China H-share analyst, the CEO gave me a 45-minute uninterrupted speech in response to my first simple question. By the end of it he hadn't answered my question either!

Despite some challenges, visiting countless number of companies and talking to management was an extremely

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