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Opinion

Do not mistake Masayoshi Son for Warren Buffett

People instincts and investment philosophies set them apart

Son's cowboy leadership style carries downside risks.   © Getty Images

Headlines call Masayoshi Son, founder and CEO of SoftBank Group, the "Warren Buffett of technology" as he has pivoted from the dull, capital intensive, low-margin telecom business to an investment fund model where he has put billions into companies from Uber and Slack to WeWork and semiconductor business Arm Holdings.

But unsettling recent news -- valuations slashed, controversial founders ousted -- calls into question Son's Midas touch and undermines the idea that he is anything like Buffett and that his Vision Fund shares the qualities of Buffett's Berkshire Hathaway.

Indeed, the contrasts between Son and Buffett show them to be mirror opposites along a range of characteristics relevant in judging a manager of other people's money.

One major factor is people instincts. Son's have come into question recently as he helped to oust Adam Neumann, CEO of office-rental company WeWork, after an aborted flotation which would have valued the business far below the level Son invested at.

When assessing the leadership of an investee company, Buffett says he looks for three things: "We look for intelligence, we look for initiative or energy, and we look for integrity. And if they don't have the latter, the first two will kill you, because if you're going to get someone without integrity, you want them lazy and dumb."

Not surprisingly, the CEOs of Berkshire Hathaway's portfolio companies such as J.P. Morgan Chase, Coca-Cola and American Airlines tend to have long and stable tenures.

By contrast, SoftBank's recent embarrassments have involved portfolio companies such as Uber, SoFi and WeWork headed by mavericks subsequently exposed and ousted for various forms of unappealing behavior from corporate espionage to drugs.

Son's attraction to mavericks like himself may be understandable but, as events have shown, the cowboy leadership style carries downside risks.

Next is investment philosophy. For over a half-century Buffett has consistently applied the "value" approach to investing established by his Columbia Business School mentor, Benjamin Graham.

Buffett's annual letter to investors, written in plain English without fancy graphics, clearly explains the thinking behind his investments. Above all, he honestly grades his performance cumulatively and year-by-year by a single criterion -- Berkshire Hathaway shareholder return relative to the S&P index. For the record, that is 20.5% compounded annually against 9.7% for the S&P from 1965 to 2018.

Son, in contrast, has offered performance metrics that should have investors scratching their heads, if not running for the doors. At the 2013 SoftBank annual general meeting he declared he would make SoftBank the number-one global company "in every aspect -- profit, cash flow, stock value."

The following day the Financial Times tartly -- and correctly -- noted that size in itself is irrelevant to investors; the only thing investors should care about is bang for the buck, return on investment.

At the most recent annual general meeting, Son presented slides showing the inexorable growth of SoftBank's market capitalization by 2040 to a staggering 200 trillion yen ($1.85 trillion) -- more than 20 times its value today.

Yet the reality is that SoftBank Group has underperformed the Nikkei 225 Index during the last year and the last five years. A Napoleon complex is not a substitute for a disciplined investment philosophy.

Third is Buffett's tech skepticism. He has shied away from technology and internet stocks because he says he does not understand the sector. But he has also given other reasons: it is a gamble to pick winners in the early stages.

Buffett has shied away from technology and internet stocks because he does not understand the sector.   © Reuters

Son's investments in development-stage tech ventures suggest his understanding of the sector may be even less advanced than Buffett's. His recent AGM presentations hype leading edge technology in AI and the Internet of Things that are leading to the singularity -- the day that machines surpass human intelligence.

But in fact the businesses SoftBank and its affiliated funds have acquired are for the most part not technology companies at all, that is companies developing goods and services that depend on new patented inventions in AI or IoT.

The SoftBank portfolio, rather, is focused on "network platforms" connecting buyers and sellers: Uber and Uber-like car sharing platforms; local Amazon-like e-commerce companies in South Korea and India; WeWork's rental offices.

The basic network platform business model is identical to Amazon, Alibaba, Airbnb, Zillow, Tinder, Facebook. The key to success is not sophisticated technology but managing to be the first to create a monopoly platform on which everyone has to do transactions for the product in question.

The SoftBank Vision Fund's $300 million investment in Wag, a dog-walking platform that connects owners and walkers, should give investors pause. Wag recruits people to walk your dog, like Uber recruits people to drive you places.

It calls to mind Pets.com, the internet startup that tried to sell pets online that flamed out in 2000, nine months after its IPO, in the dot-com bubble collapse.

To call Masayoshi Son the "Warren Buffett of technology," is plainly misleading. It is hard to imagine two individuals as unlike each other across a range of character traits that investors ignore at their risk.

Stephen Givens is a corporate lawyer based in Tokyo.

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