INTRO: Imagine you’re the CEO of a large Japanese
bank with hundreds of billions of dollars under management. Your bank has been a leading
voice within the Japanese financial space for decades, but the future doesn’t look
so bright. The bank has been stagnating for years, and it’s just a matter of time until
profits start to decline. So, what do you do? Well, the obvious way to generate better
returns is to take on more risk and bet on the future. So, you go ahead and invest into
every hype tech company you can think of. Doordash, Uber, Lemonade, SoFi, Supercell,
TikTok, Tesla, Netflix, basically everything. For a couple of years, you ride up the momentum
of these growth stocks and your bank starts to return to its former glory. But then, one
of your risky investments WeWork jumps off a cliff and you end up losing $8.9 billion.
To make things worse, the pandemic rolls around and it looks like all your risky investments
are about to get obliterated. A normal investor would probably just not look at their portfolio
until the storms over, but you’re not a normal investor, you’re a giant bank. So,
you try to buy your way out of the situation and pour gas on every stock you own. And in
just 1 year, you go from posting your biggest loss in 14 years to posting the biggest profit
in Japanese history. In fact, you make so much profit that you become the 6th most profitable
company in the world pulling in $56.46 billion. The second highest bank on the list is Goldman
Sachs, and they only pulled in roughly ⅓ of your profit. So, here’s how SoftBank
bought themselves out of the pandemic.
HUMBLE BEGINNINGS: Taking a look back, the entire story of Softbank
circles back to one man named Masayoshi Son who was born on August 11, 1967 in Kyushu
Japan. Masayoshi had a pretty modest childhood, in fact, it wouldn’t be a stretch to say
that he was poor. His grandfather had made a living as a miner and his father was making
a living selling fish and pigs. Some reports even suggest that Masayoshi often slept with
the pigs when he was young. So clearly, Masayoshi didn’t have it easy by any means, and this
motivated him to work extremely hard and hustle as much as possible. When he was 16 for example,
Masayoshi looked up to a man named Den Fujita who was the president of McDonald’s Japan.
Den apparently had a best selling book that blew away Masayoshi, and Masayoshi was trying
to meet Den eversince. Masayoshi started off by repeatedly calling his assistants in an
effort to get a meeting. He says that he called Den’s assistants 60 times over many months,
and every time they told him that they would ask Den, but they would never get back to
him. So, one day, Masayoshi decided to go to McDonald’s headquarters in Tokyo and
ask an assistant in person. And sure enough, Den would agree to meet Masayoshi right then
and there for 15 minutes. Den told Masayoshi that if he was 16, he would go to America
to get his education and then do something related to computers. Hearing this from his
idol, Masayoshi would instantly make the move. He contacted some of his relatives who lived
in South San Francisco and arranged to move in with them. In San Francisco, Masayoshi
attended Serramonte High School, but Masayoshi had no intention of sticking around. Masayoshi
felt that he already knew everything in the textbooks and that he didn’t need to go
to class. So, he petitioned to just take all his final exams and get his high school diploma.
Just three weeks later, Masayoshi aced all his exams and graduated high school. Masayoshi
would go on to attend UC Berkeley where he majored in economics. Academics was no longer
his primary focus in college though. Following Den’s advice, Masayoshi attempted to create
something in the computer space. He committed to coming up with one new idea per day so
that he could iterate through a bunch of ideas and pick the best one. After several months
and over 250 ideas later, Masayoshi settled on creating a translation device that could
translate between Japanese, English, and German. He would end up selling this technology to
Sharp for $450,000 in 1978. But despite making a substantial amount of cash, Masayoshi didn’t
drop out of college. He eventually finished up his economics degree in 1980 and returned
to Japan. Now that he had money though, instead of getting a job, Masayoshi started Softbank
in September of 1981.
SOFTWARE COMPANY: Despite the name SoftBank, the company actually
had nothing to do with banking or the financial industry. The company was originally a software
distribution company and Masayoshi felt that it was a bank for software, hence the name.
SoftBank was the first PC software distributor in Japan which gave them a decent advantage.
But given the small nature of the software business at the time, SoftBank needed other
sources of revenue. So, Masayoshi expanded the company into the magazine space in 1982.
They came out with two monthly magazines called Oh! PC and OH! MZ. These magazines covered
the manufacturing and engineering side of PCs as opposed to the consumer side which
was much more common. This unique coverage made these magazines extremely popular and
it didn’t take long for SoftBank to become the largest PC magazine publisher in Japan.
In the meantime, SoftBank accidentally became more and more of an investment advisor. Given
that SoftBank was publishing magazines that covered the latest developments on the engineering
and manufacturing side of PCs, investors often based their investments on these magazines.
Masayoshi decided to lean into this and target American investors as well. In March of 1994,
SoftBank expanded to the US where they specialized in identifying internet related investment
opportunities. Just a few months later, SoftBank would go half public through the OTC markets
and end up raising 20 billion yen or roughly $175 million. SoftBank could use this cash
to make their own investments as opposed to just recommending investments. And with that,
SoftBank took their first steps into becoming an actual bank.
RIDING DOTCOM WAVE: Around this same time, growth shifted away
from PC companies and into internet companies. Masayoshi was well aware of this trend and
was determined to capitalize on it. In late 1995, he made an investment in Yahoo, and
over the next year he would work with Yahoo to launch Yahoo in Japan. Two years later,
SoftBank would go fully public by debuting on the Tokyo stock exchange. Following the
IPO, SoftBank quickly became a pure holding company, and they would make several investments
into internet companies. But by far their biggest investment of all time came in 2000
when they invested $20 million into Alibaba. Ironically, they bought in at the peak of
the dotcom bubble, but despite that, their $20 million investment has turned into wait
for it $110 billion. And that's after the 50% crash Alibaba experienced over the past
year. Alibaba has grown so large that it accounts for 47% of SoftBank’s entire assets, so
this was no doubt a massive win for SoftBank. But as the dotcom bubble came to a close,
Masayoshi adopted a more conservative investing style which led him to the telecommunications
industry.
TELECOMMUNICATIONS & STAGNATION: Starting in 2004, Softbank went on a telecommunications
buying spree. In July of 2004, they acquired Japan Telecom company which got them into
the fixed line telecommunications business. 2 years later, they bought Vodafone which
got them into the mobile communications business. And in 2008, they worked with Apple to be
the exclusive provider of the iPhone 3g in Japan. All these endeavors allowed Softbank
to grow through the early 2000s, but the rate of growth was nowhere near the 1980s and 90s.
Despite this, Masayoshi continued with this more conservative style into the 2010s. In
July of 2013, SoftBank acquired 70% of Sprint, and they held onto this purchase up until
last year when they sold it to T-Mobile. On the flipside though, Softbank’s revenue
and profit went from slow growth to no growth. Some years were better and some years were
worse, but for the most part, SoftBank profited between $4 and $8 billion for 5 years straight
between 2012 and 2017. Masayoshi knew that something had to be done, so he started something
called the vision fund in 2017.
VISION FUND: Masayoshi looked back at what made SoftBank
successful in the first place and the answer was clear: outsized bets in emerging industries.
The bulk of Softbank’s exponential growth came from PCs, software, and the internet.
So, Masayoshi decided to return to the roots of the company with the Vision fund. He put
$100 billion into the Vision Fund and focused on investing into all of the up and coming
tech companies including Nvidia, Flipkart, ARM, GM, Slack, OneWeb, all the companies
we mentioned at the beginning, and much much more. Over the next few years, SoftBank’s
profits grew to $10 to $20 billion per year. But then, as we discussed at the beginning,
WeWork happened. SoftBank quickly racked up billions of dollars worth of losses in the
first quarter of 2020, and we all know what came about in March of 2020. Losses quickly
compounded on each other and it didn’t take long for SoftBank to be in the worst position
they’ve ever been in. But luckily for SoftBank, they had an ace up their sleeve which was
options trading.
MARKET MANIPULATION: In the summer of 2020, SoftBank went out and
bought $4 billion worth of options in Amazon, Netflix, Tesla, Microsoft, Alphabet and 19
of the biggest tech companies in the world. $4 billion alone would be enough to move these
stocks multiple percent, but since it was options, their $4 billion purchase actually
translated to $50 billion worth of stock. I don’t think I need to explain how powerful
this is. SoftBank was one of the key reasons for the tech rally in summer of 2020 when
the entire Nasdaq rallied nearly 30% in 3 months. To put that in perspective, the market
generally grows 8% per year. SoftBank exited their options positions at the end of 2020,
but not before locking in tens of billions of dollars worth of profits. When it was revealed
that SoftBank was the whale behind these massive purchases, investors and the SEC were not
happy. The SEC launched an investigation into SoftBank, but we don’t have a decision yet.
The truth is though, the SEC is unlikely to do anything to SoftBank because they probably
didn’t break any laws. Here’s the thing, it’s not illegal to buy $4 billion worth
of options. Now, if the SEC is able to dig up some sort of insider trading evidence or
evidence of a pump and dump, then they could fine SoftBank. But, if all SoftBank did was
buy a crap load of options, it’s not illegal and the SEC can’t do anything about it.
Even if the SEC did somehow fine SoftBank for hundreds of millions or even a few billion,
it would be nothing in comparison to the $50 billion they made. So, there’s no doubt
that SoftBank came out on top financially. Morally, however, it’s a different story.
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