by Noriyuki Morimoto
The principle of investment is to not lose money, not necessarily to make money. Assets themselves have intrinsic profitability. In other words, earnings are inherent in the ownership of assets. Therefore, investment is all about managing assets so as not to incur losses that would erase their intrinsic returns.
So, what is a loss in investment? At the origin, the answer is totally evident: A loss means that when the invested funds are cashed in, the amount recovered is less than the amount invested. The basic idea is to compare the beginning and ending points of an investment in terms of cash in hand, with the increase in cash being considered a profit and the decrease in cash being considered a loss.
During the Age of Discovery, a ship’s voyage was considered one investment. In the beginning, initial investment funds are used to prepare a ship and purchase merchandise, and the ship sets sail. At various ports along the way, the merchant sells the merchandise in exchange for cash to purchase other goods, and ultimately returns to the port of departure, sells off all the goods, and recoups the investment. The profit/loss is calculated by comparing the initial investment with the amount recovered over that one voyage as one accounting period. This is simple cash accounting at the origin of investment.
In a Japanese money trust, a provision sets the end point of the trust term, when the money held in the trust is returned in cash. Therefore, the increase or decrease can be measured by comparing the amount of money held in the trust with the amount of money returned after the trust is terminated. The basis of a money trust is simple cash accounting with the trust period as one accounting period.
For something with a definite beginning and end, such as a ship’s voyage or a Japanese trust, the nature of the loss was evident. Today, however, shipping has become a permanent ongoing business, and Japanese trusts, which are used to manage the assets of pension funds, have effectively become indefinite in their termination dates.
When there is no end point, the period is artificially cut off, for example at one year, for the profit and loss for that period to be measured. Fiscal years are also introduced for money trusts. In this case, even if a loss is recognized, it is often only a perceived loss in valuation based on the market value of the asset at a certain point in time, rather than a real loss.
In this situation, it is suddenly difficult to understand what a loss is. Is a write-down a loss? It should only count as a loss during the measurement period, not necessarily a confirmed loss in cash. The debate over this issue has been going on endlessly for many years, in connection with the meaning of fair market value measurement, but it remains confusing. This poses a problem.
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.