Shinise building generational businesses

In Morgan Housel’s latest piece on debt he describes the ‘Old Shops’ (Shinise) in Japan that have been around for centuries as a way to illustrate how to think more practically, and generationally, about debt.

Japan has 140 businesses that are at least 500 years old. A few claim to have been operating continuously for more than 1,000 years. It’s astounding to think what these businesses have endured – dozens of wars, emperors, catastrophic earthquakes, tsunamis, depressions, on and on, endlessly. And yet they keep selling, generation after generation. ¹

One of the common themes of each of these businesses, is holding high amounts of cash reserves, and taking on little debt.

He goes on to write , “I think this is the most practical way to think about debt: As debt increases, you narrow the range of outcomes you can endure in life.”

Taken to the (conservative) extreme, aka zero debt, yes you sacrifice returns. Alternatively, you are default alive and less vulnerable to variables out of your control.

It is difficult to think about using absolutely zero debt. There is a reason it is often called leverage. See Archimedes: “Give me a lever long enough and a fulcrum on which to plant it, and I will move the world”. It is an incredible tool if you know where the fulcrum is on which to plant your leverage. Without leverage, there is little risk.

This article came at a prescient time for me; As I plan for my next phase of personal growth and long term planning, I’ve also been reading “King of Capital: The Remarkable Rise, Fall, and Rise again of Steve Schwarzman and Blackstone”, which recounts the beginning of the LBO boom some of the early leveraged buyouts like Edgcomb steel at Blackstone, and RJR Nabisco at KKR, the latter which ended up losing several hundred million in equity due to an inability to restructure high interest debt.

Furthermore, the booming LBO business of the 80s all but came to a halt with the savings and loan crisis of ‘89, where the junk bond market which had been providing most of the debt capital for the buyouts seized up as the demand for risky debt disappeared. When the credit marks began to open back up, they required much higher upfront equity ( 20-30% ) compared to the 5-10% that had been common during those early LBO deals.

Point being, debt is great during boom times, amplifying returns and greater access to cheap capital, but can just as easily exacerbate losses during down turns.

As I go through life and experience firsthand the certainty of volatility, I’m increasingly drawn to the enduring models of Munger/Buffett, concepts like Shinise, and simple systems that can withstand the pressures of time. The hardest part about these models is not their sophistication, rather the mental discipline and psychology to outlast the businesses themselves to benefit from the magic of compounding.

Compounding is the eighth wonder of the world, so the goal should be to do whatever it takes to let it do it’s magic. In the words of Charlie Munger, “All I want to know is where I”m going to die, so i’ll never go there”. Not for fear of death, but to avoid cutting compounding short.