Ryuto Andy Kawai: Founder of Kawai Capital and an Ex-Material Science Ph.D Student at Northwestern

In today’s article, I share with you a very inspiring story by Ryuto Andy Kawai.   Andy is a Japanese American who studied Chemistry and Material Science in school.  He went to UCLA for undergrad and pursued a Ph.D in science at Northwestern.  However, a burdening medical condition called IBS and his discovery of a bigger passion led to change his course in life.

Now a Genius kaChing investor with nearly 50% annual return and a founder of Kawai Capital, Andy shares his personal story that led him to where he stands today.  Learn about what drives him and hear his advice to the investors on how to keep things in proper perspective and understand what truly matters in life.

“So Andy, can you tell us about how you ran into kaChing?”

kaChing has been around since 2007. A friend of mine simply invited me to this stock app on Facebook. I was a graduate student at Northwestern University at the time, working on a Ph.D. I was in a lab working on electro-optic thin films, but my mind was definitely on stocks and the business of technology. My passions have always been with science and business, but it took some time for me to realize that I could not tolerate 4-6 years of engineering for engineering sake. Business, science, and technology always fit together in my mind.

As for the story of how I came to be a genius mirrored investor on kaChing, long story short, I continued to post solid gains on its simulation with real-time prices and simulated commission and slippage costs. As a result, I came to be ranked high quite consistently on its site. Outside of a few months leading up to the financial crisis, I have always been on kaChing since the outset, and have always ranked high regardless of the ranking criteria adjustments made over the years.

“What do you currently do full-time? Also, with the recent launch of trade mirroring at kaChing, do you find it even more challenging to balance between work and passion?”

I currently work out in San Jose as an electronics component technical salesperson. It was one of a handful of positions I could choose from in the midst of a bad recession. Another choice was to work at a well-known TV station in Indianapolis, but I chose the position that put me in the heart of Silicon Valley. It is not glamorous, but I am grateful to have had the opportunity to ‘feel out’ perhaps a hundred different technology companies in the bay area and throughout the US.

You can pick up a lot from visiting a company—the energy level, the sense of urgency, the sense of participating in something worthwhile, the integrity and ethics of people that make up a company.  These are all important factors that are at the core of business. Moreover, since the business I am at is a small operation, I have had the chance to see how managerial decision making, finance, supply management, sales, marketing, collections, legal, etc. all fit together.

“We know you studied science in school, and now you’re one of the most successful investors on kaChing.  What led you to the discovery of passion in investing initially? “

It was a number of things, but family influences have played a big role. Good investing runs in my family. Since a young age, my brother and I both had a passion for sports trading cards. We knew what things to look for in a player, in a set, or in a card. While I gave up that interest, it was more or less the pee-wee leagues of investing.

At age 14, I began analyzing stocks. This came from reading numerous stock books. In the earlier days, I read more daytrading and swing-trading technical analysis books.  What I picked up from that period was a need for meticulousness and discipline, and an understanding that ideas need to be linked to results systematically and across a large number of samples and cases.

Also during my teen years, I discovered that my grandfather had made a small fortune investing in real-estate in Japan. He had bought property in Japan, only to see the value rise several thousand percent. I also learned around the same time that my mother’s aunt had begun investing under the tutelage of my great-grandmother with a modern day equivalent of around $50K. Over the past 60 years or so, she has done very well for herself investing in domestic (Japanese) stocks.  Being modest, she attributes her successes to a booming market during the 50s and later in the late 80s; however, I know better that even though the markets have fallen off dramatically from the 90s to now, she has fared well and counted very few losing years amongst countless years of high double digit gains due to her skill.

“So your family initially had a big impact on your inspiration to be a successful investor.  Can you tell us about your developments since?”

Getting back to how I became interested in investing when my academic background is Chemistry and Material Science at UCLA, I have to go back again to my early teenage years. Thanks to my father who indulged me in all books and magazines, I read hundreds of technological business books and magazines.  One magazine which I still own (in a box tucked away in my parents’ house) is a late 90s copy of Red Herring with Vinod Khosla on the front cover.  Back in those days, Red Herring had the latest juice on a fast-changing Silicon Valley. The biography of Vinod Khosla and how he came to the States with little to his name but a spot at Carnegie Mellon, and later making a fortune in Daisy Systems and Sun Microsystems deeply impressed me.

Additionally, I’ve read the stories of high-tech entrepreneurs Robert Noyce, Gorden Moore, and Andy Grove of Intel, the story of William Hewlett and David Packard and their humble beginnings in a garage, and more recently the story of Liu Chuanzhi and Lenovo.  These and many more biographies and articles of great leaders and large-scale entrepreneurship have all inspired me.  Now the inspiration did not come from their amassed fortunes, but rather the innovation and intellectual versatility these leaders needed and demonstrated. Learning about their undying passion, hard work ethics, ability to inspire teamwork, and most importantly, their struggles as human beings on this planet trying to carve out a better future and making it happen all motivate me every day.

Thus in my mind, business, science, technology and philanthropy have always been interlinked. When I went to UCLA or Northwestern to study material science, my goal was to become an inventor/entrepreneur. I was never interested in a teaching career, or even a laboratory career at an established firm.  As I grew older and shed my naiveté, I came to realize that I may have better opportunities impacting the business of technology in a major way outside the path of lumbering through a Ph.D. and applying for grants to fund my inventions.  Finally, a recurring problem with a medical condition called IBS, and a lack of chemistry with my research advisor, a man I respected, but whose work I could not find any passion in, sealed the deal.

Shortly thereafter, I decided to leave Northwestern’s prestigious Material Science program.  Even to this day, I find myself scared sometimes that I might have made a poor choice. However, my belief that God has a plan for all of us, and this recent ‘run-in’ with kaChing keeps me very optimistic.

Lastly, Mr. Andy Rachleff, CEO and co-founder of kaChing is one of the most successful venture capitalists. I find it very fortuitous that I came across and was receiving investing guidance from him through kaChing.  Up until perhaps July or August, I had no clue as to who Mr. Rachleff was! I respected him for his intellectual consistency and incisive comments; however, it was only through a Google search following discussions of kaChing going ‘live’ to real money, did it become clear to me that this person I was talking to was the main VC behind Blue Coat Systems, AOL, and Shasta Networks amongst other startups.

“So you have had many consecutive years of a positive return.  However, as investors, we all make mistakes.  Can you share some of the “bad” trades you’ve had in the past? What did you learn from it?”

My worst period was late 2000 and early 2001. I lost a lot of money not at the initial dot com bust, but trying to catch old leaders on a bounce thinking I was getting a bargain. As a neophyte to market crashes, I gravitated towards names like Cisco and Oracle after their stock’s first major drop, expecting a rebound. Boy! Was I wrong? At that time, I had money invested in a joint account with my girlfriend at the time. We both posted double-digit losses, and eventually decided to step away from the markets for a while.

Another mistake I made back then was putting too much trust in a well-known stock and mutual fund rating service, which is still very much in business and popular. ARMHY was a stock this service consistently rated highly, which has treated me unkindly. The stock still trades under the symbol ARMH, so the rating service may yet have the last word if its recommendations were meant for the long-term.

In any case, from the dot-com crash onwards, I came to understand the real meaning of ideas that I had only read about originally, such as systemic risk, stock trends through feedback loops, and George Soros’ theory of reflexivity. This experience has helped me to post gains in the most recent stock market crash of 2008.

“Do you have any advice to other kaChing investors who are trying to become the next ‘Genius’?”

Yes. It is general advice on investing, which should translate to a better ranking on kaChing. I have 4 pieces of investing advice:

1)   Dealing with systemic risk is an issue of timing. It is easy to buy into the idea that weathering the storm through sitting still is the best course of action. While overtrading is a costly mistake, when that rare level 5 hurricane hits, an astute investor must react via shortening the investment horizon and exploiting the opportunities that arise.  I would advise investors to be nimble and quick, but not to hurry when getting back in. Specifically, finding the bottom is only possible after the bottom has passed. Getting in, and missing the first few weeks or months of the bounce  is the small price paid to avoid the costly mistake of getting back in too early only to find that the bottom is half a year off. When GE fell Oct-2008, a friend of mine made the mistake of thinking he had a bargain at ~$20 only later to see a low of under $7 in a few short months. Similarly, a very intelligent friend with an MBA bought AIG around the same period, only to see it dip to lower lows in March and in mid-July. Often times, these further dips are not purely technical but are driven by fundamentals that are slow to be uncovered.

Because you can never know if a stock will fall further during panics, I like to know the survivability of a company before getting back in. Of course, I would look at the fundamental prospects and relative valuation of a company. But I am particularly interested in cash, cash flow, and low debt levels. What I am looking for is the company’s ability to weather a multi-year recession or Depression.

My mother’s aunt, who has 60 years of investing success, taught me that during these catastrophic periods, defensive sector companies (low-end consumer staples, defense, medicine, etc.) with little debt and high cash are attractive plays considering the reduced level of risk, and the company’s relatively secure revenue base.

2)    Outside of market crashes, the way to reduce risk is in avoiding excessive trading costs via having a long-term perspective, and in diversifying adequately. Avoiding excessive trading is more important than ever outside of calamitous market situations since well-equipped and well-funded traders are finding new ways to eek out more from ill-equipped traders. Day trading on technicals and split second information is a business for the well funded and for those with the cutting edge technologies.

Most think direct access, low commissions, and a knowledge of technical analysis is enough. However, besides the fact that many technical tools lack both a logical nexus and enough examples to statistically prove a technique’s worth, those well-funded professional traders will always have a “vig” over the small-time day trader due to their access to better technology, greater speed to information, exploitation, and execution. Therefore, an individual investor can mitigate this disadvantage by having fewer trades over the long haul.

3) On diversification, my ideas and advice is simple: examine both historical asset correlation and common macro-economic drivers.  Free correlation calculators are available and can be found via a Google search. Ideally, one shouldn’t just stick to stocks either. Stocks, quality bonds, and real estate around the globe could potentially form a well-diversified portfolio.

Furthermore, historical correlation is a mathematical concept that can be picked up and incorporated into a diversification strategy by the average investor, if that investor has the patience and willingness to learn. The other part of diversifying is in identifying macro-economic commonalities amongst the companies involved. For example, do they all receive their revenue in dollars? Are rising oil prices detrimental to the bottom line for all the investments owned? Obviously, the idea is to mix investments such that when, say the dollar rallies hard, that development does not negatively impact all investments simultaneously.

4)    My final piece of advice is for investors to keep things in proper perspective. My mother’s aunt told me in 2009 that some of her stocks recently dipped 20%, but she is still grateful to the company because of the great performances she benefited from over the last 60 years. Perspectives change when having a longer term view.

Furthermore, when it comes to investing, I would say that it’s only money at end of the day. When considering many issues I’ve had in the past with family during my rebellious teenage years, a debilitating health problem, periods of isolation and an utter lack of self-discipline and God, and the pain of neglecting certain aspects of my life that were truly important, I have come to understand the true priorities in life. Though I risk coming off as being philosophical or pretentious, I would say that the greater returns in life come from investing in family and friends, in God and spirituality, in health, in self-discipline and in lifelong learning.