Creating Your Own Upside
Most investors buy stocks because of a story. It’s the narrative about why the business should be worth more than it is today. The platform is growing. The market is expanding. The product is sticky, the customer base is loyal, and the total addressable market is large.
These stories can be compelling, and they are sometimes right. But they are also, by their nature, dependent on the future unfolding in a particular way. The investor who buys into a story is making a bet on outcomes that are uncertain, in a timeframe that is unpredictable, at a valuation that may already incorporate the optimistic case.
There is another way to invest. It is one where the upside is not contingent on the story proving correct but on realising the value of hard assets that already exist and returning cash to shareholders. This chapter explains that approach, why it can produce more consistent outcomes than narrative-driven investing in our experience, and why Japan provides an unusually large opportunity set in which to apply it.
SAAS company Atlassian’s stock in 2021 is the classic illustration of a story taken too far. Its software products were genuinely useful, deeply embedded in client workflows, and difficult to replace. The total addressable market was large, and the company had a credible path to expanding its product suite and increasing its revenue per user over time. These were real attributes of a real business.
The problem was the valuation. When AI began to raise questions about long-term demand for tools that assist human software developers, the story changed. The business continued to grow, and revenues roughly tripled from 2021 to 2026. But the stock fell from about US$458 to about US$67.
Atlassian may be a good or even great business. But buying a good business at a price that incorporates the best-case scenario leaves the investor exposed to any deviation from that scenario. We know in the long run that deviations are inevitable.
The Alternative: Buying What You Can See
Deep-value activist investing starts from a different premise. Rather than forming a view about what a business might be worth in five or 10 years based on assumptions about future growth, it focuses on assets that are observable today. This includes cash on the balance sheet, real estate carried at historical cost, cross-shareholdings in other listed companies, current earnings from a stable core business, and the potential for cost reduction through restructuring. It then assesses the gap between their value and the current market price.
When a business trades at a significant discount to the sum of its observable assets, the question is not whether the business will grow, it is why the market is discounting those assets, and whether that discount can be closed. In many markets, the answer to the second part of the question is “not easily.” The assets are there, but the mechanism by which management returns them to shareholders is absent. Management has no incentive to change the capital structure, and minority shareholders have no practical means to compel it.
This is the value trap problem. A stock can be demonstrably inexpensive on an asset basis and remain inexpensive for years because valuation alone is not a catalyst. The investor who buys on valuation alone is still dependent on an external event to close the gap. It might be a change in management, a strategic review, or a corporate action. Without a clear line of sight to that catalyst, the inexpensive stock is not necessarily a good investment. It is simply an inexpensive stock.
Creating The Catalyst
To resolve this problem, activist investing constructs the catalyst rather than waiting for it. Activist investors do not merely identify the gap between price and value. Rather, they engage with the company’s management to advocate for the actions that will close it.
Increase the dividend payout ratio. Implement a share buyback program. Divest non-core assets. Sell the business to a private equity buyer who will pay a private market value based on control and efficient management, rather than the depressed public market price.
Each of these actions has a direct and largely predictable effect on valuation. A company paying out 30% of its earnings as dividends that increases its payout ratio to 70% or 80%, without any change in the underlying business, immediately becomes more attractive to income-oriented investors.
The stock re-rates. The gap between price and value narrows. The investor who identified the opportunity and advocated for the change benefits from a return that was not dependent on the market eventually agreeing with a narrative, but on a specific decision around capital allocation.
The range of potential improvements available in a typical target company is substantial. Capital structure optimisation is the most immediate. This strategy deploys excess cash through dividends or buybacks rather than allowing it to accumulate on the balance sheet.
Disposal of non-core subsidiaries or cross-shareholdings releases capital that can be returned to shareholders or reinvested in the core business. Operational improvements such as cost discipline, tactical pricing actions, and strategic focus are more difficult to implement but can materially increase earnings without much change in revenue.
And where management is unwilling or unable to pursue these changes independently, a sale to private equity can provide a definitive exit at a price that reflects the assets’ private market value rather than their depressed public market price.
Activism Overtakes The Narrative
The risk profile of deep-value activist investing differs fundamentally from that of narrative-driven investing. Anchoring the investment thesis to observable assets such as cash, real estate or cross-shareholdings increases the obvious value to the investor. If the share price falls, its descent is likely slowed by the support provided by this obvious base of value.
With narrative-driven investing, narrative follows price. The more the price sinks, the more investors believe the new negative narrative.
Compare that to a company that holds cash and real estate: The value of its assets is knowable with reasonable precision, rather than being based on speculation about the future.
As the SaaS experience demonstrates, the downside to the negative price-narrative cycle can be very large. A business trading at 30 times revenue on the assumption of sustained high growth can lose 80% of its market value without the underlying business deteriorating materially. Simply because the expectations embedded in the price were unrealistic.
In our experience, applying a deep-value activist approach in Japan presents a substantially more favourable risk-return proposition than paying up to buy into uncertain earnings growth several years out. We make no claim that guarantees outcomes. Investment always carries risk, and individual positions do not always resolve on the expected timeline.
But the combination of observable asset backing, a deliberate engagement strategy, and a private equity market willing to pay full value for assets that public markets are discounting creates a structural advantage that narrative-driven investing in crowded markets does not offer.
Why Japan, Specifically?
The activist value approach is not unique to Japan. What is unique to Japan is the concentration of opportunities to apply it, and the supportive legal environment. Decades of corporate governance norms that prioritised relationship stability over shareholder returns have produced a large population of listed companies carrying substantial assets at depressed valuations. This includes cash balances representing significant portions of market capitalisation, underused real estate on the books at historical cost, and cross-shareholdings designed to reduce the influence of outside shareholders.
Crucially, Japan’s governance environment has changed. The reform agenda that began in earnest under Prime Minister Abe from 2013 and has continued under successive administrations has created both the obligation and the expectation that management teams will engage with shareholder concerns.
Domestic institutional investors, previously passive, now face stewardship obligations that require them to exercise their AGM votes in their beneficiaries’ interests. Foreign private equity has arrived with capital and appetite even as local funds grow quickly. The conditions that previously made it impractical to push for change have shifted materially.
The following chapters examine each dimension of this in detail: the governance reform that has made engagement viable, the specific characteristics of the companies Senjin Capital engages with, and the mechanics of how constructive activism creates value in a market that has spent decades accumulating it.
