If Nintendo was a person, a week ago it would have celebrated its 134th birthday. This type of longevity is rare; as my friend Hamza observes, the vast majority of companies that make it to a public listing stage don’t make it through half that time.
In his book Nintendo Magic, Osamu Inoue takes a look at the business that Nintendo has grown into. It’s an amusement company that focuses on making games and entertaining its customers.
In December 2008, Nintendo held over a trillion yen in cash reserves and cash-equivalent assets. Inoue explains why (emphasis added):
From an investor’s perspective, a cash reserve of one trillion yen is excessive, a useless asset that only serves to increase the denominator of the return on capital. Investment, after all, is the profession of taking a small amount of capital and turning a large profit with it. There are consequently investors who see Nintendo as having a poor efficiency of capital.
Choice and concentration is all fine and well. But since the amount of business they do has expanded far beyond the old days, and since they are so busy, many investors are pressing them to sink some money into growing their game operations.
But Nintendo has avoided using its cash reserves for large investments like M&A’s and continues to pursue a policy of constantly saving money. Iwata’s explanation of the reasoning: “The game platform business runs on momentum. When you fail, you can take serious damage. The risks are very high. And in that domain, Nintendo is making products that are totally unprecedented. Nobody can guarantee they won’t fail. One big failure and boom—you’re out two hundred, three hundred billion yen. In a business where a single flop can bankrupt you, you don’t want to be set up like that.”
The takeaway here runs counter to the widespread story of financial leverage for capital. If you’re working as a creator, artist, or an entrepreneur, a cash reserve enables you to survive and to be resilient; you can set up circumstances to focus on the work. You need to buy the time it takes to build a reputation, develop processes and products, and build an audience.
As Morgan Housel writes in The Psychology of Money:
Capitalism is hard. But part of the reason this happens is because getting money and keeping money are two different skills. Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.…
The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own.
The next question is whether creative work actually produces compounding returns or not. I’d make the case that there’s an approach which does make things compound, that’ll be another post for another day. If you want an answer right now, Ryan Holiday’s Perennial Seller is a good resource here.