Most of the world looks at growth as a measure of success. Economists (and politicians) closely watch GDP reports. Public market investors value stocks by looking at comps and forward earnings. Private underwriters base their valuations on estimated growth rates and the associated exit multiples. Simply put, if you’re not growing, you’re dying, and nobody wants to be around death.
We, like most people, also like growth, whether it be in our fitness or free cash flow. That’s why an off-hand comment about Japan, a perennial no-growth country, in a recent All In podcast piqued our interest. From the podcast:
“If Japan is the butt of every joke that economists tell or the focus of the concern of economists.. you know lots of chin tugging and threading about ‘Japan’s negative growth economy’ and then you go to Japan and there’s literally not one piece of litter and four-year-olds ride the Subway unaccompanied…
… I don’t think we are using the right measurements and I do think we are taking economists a little more seriously than they deserve because they’re not describing what Japan actually is, which is freaking awesome and way more functional than our society, despite the massive disparity in growth rates.
The thing you’ll find is every person in Japan takes the job that they’re doing as incredibly important and has massive pride in it. When you go there as an American you’re like wait wasn’t this what America was about? It’s really shocking as an American because you’re like, this is what I want Society to be. I want the person who works in the subway or the stock market or the newspaper to take their job deadly serious and put their best effort in.
So why should I care about economic growth at least as measured in the conventional sense?
The only reason is if you have a lot of debt. If you didn’t have a lot of debt you shouldn’t care about economic growth rate with respect to the measure of prosperity.”
Of course, it’s not all rainbows and sunshine in Japan (they do have a lot of debt alongside negative birth rates). But, it poses an interesting question: why do we gauge a country’s “success” only by economic growth when many other factors, such as work ethic, public safety, and cultural pride play an important role in the national identity?
As those close to Chenmark know, our relationship with growth is different than many other investors in that we are happy to underwrite a deal with little to no growth assumptions. We are able to do this for three reasons. First, we don’t intend to sell our companies, so we don’t care about exit multiple arbitrage. Second, we don’t use growth as an assumption when calculating our debt service obligations. Finally, we have seen firsthand the beauty of a highly stable, cash-flowing company that has a great culture, provides employees with a long-term home, and is part of a local community. A typical investor might dismiss these comments but we think there’s something there that cannot be reflected in a top-line growth rate.
Of course, as was also mentioned in the podcast, if an economy (or company) is stagnant, a lack of opportunity for advancement can lead to discontent. For starters, we have worked with plenty of great people who would pick a stable job in a company that does great work and cares about their employees over an opportunity with more growth but less stability (or caring). For those seeking growth elsewhere, that’s where buying multiple companies comes in handy—there is always opportunity somewhere in the Chenmark network. So, while we still think growth is good, we have come to appreciate it’s not the only metric that matters.
Have a great week,
Your Chenmark Team