by Noriyuki Morimoto
One maxim that expresses the basics of investment is “cows over pigs.” Cows here are not cattle for meat, but dairy cows for milking. Pigs, on the other hand, are those raised for meat. According to this maxim, investing in cows means milking the cows.
Think about pipeline investment. Investing in oil or natural gas itself is comparable to purchasing and raising pigs. On the other hand, purchasing a pipeline that runs the oil or gas is to purchase and keep dairy cows. The pipeline generates a regular and stable stream of royalties, which is comparable to milk. The real point of investment is to acquire these royalties.
Investment as a business can never be speculation: risks and returns must be managed scientifically. Expecting gains on the price rise of oil or natural gas is merely speculation and not investment. Since royalties on pipeline usage is charged by the flow volume, there is limited risk associated with price fluctuations of the oil that flows through the pipeline.
The risks in pipeline investment are related to facility management. For example, if the oil price falls below the production cost of an oil field, production will stop and the pipeline will no longer be used. Pipeline investment invests in this risk around operation.
This concept of pipeline investment is the same as that of real estate investment. Since real estate investment as a science does not bet on rising prices, the investment is not in the building itself, but the tenant fee income generated from the building. The building amounts to the dairy cow, and the tenant fee amounts to milk.
Acquiring a building is just a way to legally acquire the right to earn tenant fees. And, needless to say, the key risk is the occupation rate.
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.