Nestled in the shadow of Mt. Hakusan, a dormant volcano on Japan’s island of Honshu, lies a picturesque inn.
Built on top of a hot spring – a feature that ancient peoples the world over considered to have physical and spiritual healing qualities – it’s the very essence of old Japanese hospitality.
Hoshi Ryokan’s four wings form a diamond around an exquisitely peaceful garden, where towering red pines and cedars filter sunlight to the stream below. Meanwhile, its interior is carefully crafted to ward off cluttered thoughts and modern headaches (despite being fully equipped with Wi-Fi and indoor plumbing).
Hoshi Ryokan is on my must-see places when I finally get around to visiting Japan. I can’t imagine seeing a more serene property.
Source: Wikimedia Commons
But that quiet beauty isn’t why I’m writing about it today. This isn’t a travel blog, after all. It’s an investment publication designed to help you make money.
The kind of wealth that lasts beyond a lifetime. In which case, there are a few other details you need to know about Hoshi Ryokan.
Like how its history dates back 1,300 years, spanning entire world wars and system resets. How it has stayed in the same family for 46 generations and counting.
And how it holds the official Guinness World Record of being the oldest, continually run family business in the world.
I first learned about it while reading Repeatability: Build Enduring Business for a World of Constant Change. Written by Chris Zook and James Allen, it’s one of the best books I’ve ever read, explaining how:
Most of the businesses… with the longest continuous lives stayed entirely focused on a specific niche that had evolved gradually since the company’s founding around a relatively simple original model.
It’s certainly a concept that has benefited Hoshi Ryokan. And I know it can benefit us too, especially during these volatile times.
Understanding What Makes a Company Last
I’m sure investors are nervous right now. Yesterday, the S&P fell 2.5%. The Nasdaq was down 3.2% or 14% from its January 24 high. And if you are feeling uneasy about the markets, perhaps this essay will help. Today, I’ll show you how we find businesses that stand the test of time… no matter what the market throws at them.
Most of my readers know I’ve been an investor for over 30 years. So, I’ve seen plenty of businesses come and go – including some most people expected to last a lifetime.
Take Radio Shack… Blockbuster Video… OfficeMax… or Payless ShoeSource. I built for each of those now defunct chains back in my commercial real estate development days.
I also helped expand brands like Barnes & Noble, Walgreens, and Advance Auto Parts, once-dynamic companies now struggling to survive. Yet other stores I worked with are thriving, including Sherwin-Williams, Walmart, Home Depot, and McDonald’s.
A major determining factor in all of that, Zook and Allen argue, is the power of repeatability: the ability to give customers what they want over and over in ways the competition can’t or won’t.
“Differentiation is the essence of strategy,” they write, “the root cause of competitive advantage, and a major driver of relative profitability among businesses.”
This is the same exact concept as having a “wide moat” – the very idea I’ve built this entire publication and publishing company on. To quote Warren Buffett from his 1995 Berkshire Hathaway (BRK.A) (BRK.B) shareholders meeting, a business can have a wide moat:
… because it’s the low-cost producer in some area. It can be because it has a natural franchise because of surface capabilities. It could be because of its position in the consumers’ mind. It can be because of a technological advantage or any kind of reason at all.
Hoshi Ryokan, for instance, has a number of factors that add to its moat. While there are thousands of hot springs in the world, that number falls significantly if you want a full-service inn built on top of one.
It falls even further if you want it built up against a gorgeous mountain… on an island… in Japan… that has existed for centuries.
How do you beat a business description like that?
Four Secrets of Hoshi Ryokan’s Success
The answer?
I don’t think you can beat a wide moat like that. Not unless that volcano erupts and smothers the site with ash… the government decides to ban all hot spring inns… or the owners drastically change their operations.
All of these, of course, are possibilities. Not very likely ones, but they could still happen. So that’s why we want to evaluate every investment choice by a set of rules, both before and after we buy them.
We need to know whether these portfolio positions can:
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Adapt and Evolve – As the Repeatability authors explain, “The most successful teams at the helm of the Great Repeatable Model companies turn the debate on adaption into a competitive weapon – forcing continual discussion of changing market dynamics.” As I noted before, Hoshi Ryokan’s family business offers an ancient appeal with modern conveniences. It has ensured generations of success by staying attuned to market conditions.
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Keep It Simple, Stupid (KISS) – Zook and Allen also write how, “The very simplicity of the Great Repeatable Model raises a barrier to entry… In this complicated world, keeping your business simple is a tremendously powerful advantage.” For Hoshi Ryokan, it knows its heritage and the promise of serenity drives its appeal. That’s why it’s kept an exquisitely minimalistic look all these years.
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Succession Planning Is Critical – Succession planning is another must. It’s important for organizations to understand not just who’s in charge of doing what, but who can and will step in if necessary. This is another area Hoshi Ryokan has clearly perfected by training subsequent generations how to respect the business. Since that’s not the norm, however, look for companies where the CEO isn’t holding up the entire ship. If he or she actually has a stated succession plan, that’s even better.
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Sustained Profitability – When a company generates profits, it attracts competitors… which then makes it more difficult to generate long-term margins. In order to continue successfully, it must maintain financial discipline and invest in growth. That can be through better branding, advanced marketing, or updated facilities and products – all of which I’m sure the Hoshi Ryokan family knows about.
Companies that can do that make the best kinds of investments. They give their shareholders confidence that, no matter how the market turns moment to moment or month to month, they’ve got every reason to bounce right back.
Learning from a 1,300-Year, Wide-Moat Legacy
At Wide Moat Research, we’re passionate about finding businesses with sustainable competitive advantages that generate pricing power and profitability. We know how rotten it feels to put money into a losing position, and we want to minimize those risks wherever we can.
That naturally begins with choosing the right stocks. As Warren Buffett explained in a 1999 Fortune piece:
The key to investing is… determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
But it also requires staying serene in the face of market drops like we’re seeing this month. And since Hoshi Ryokan is pretty far away for most of us, my team and I have been working on another way to help you keep calm.
This week, we’ll be launching a new YouTube channel. Its mission: to search for wide-moat companies and reassure you that financial success really is possible.
We’re passionate about our research into wealth-building businesses that can withstand competition and generate steady and predictable returns – even when nothing else seems predictable around us. And we’re just as committed to our mission, which is to help you sleep well at night, secure in the knowledge that your portfolio won’t just survive.
It will thrive.
We might not have Hoshi Ryokan’s 1,300-year track record at promoting peace. But I hope you’ll check out our new YouTube channel all the same for another round of reasons to stay confident in your portfolio projections.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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What are you hoping to gain from Brad’s new YouTube channel? Write us at feedback@widemoatresearch.com.