Keiretsu. Say what?

Keiretsu: A Japanese concept by which investors find interrelated businesses and buy pieces of all of them to profit from their symbiotic relationship.

If you hadn't heard the term before, don't worry. I didn't know what a keiretsu was until Fool co-founder David Gardner recently wrote that he was building one. The concept intrigues me, and I've been researching the real economic power of the keiretsu -- and its practical portfolio application.

Believe it or not, the career of hip-hop impresario and business mogul Calvin Broadus, more commonly known as Snoop Dogg (a.k.a. Snoop Doggy Dogg), is a shining example.

The history of Snoop
Snoop Dogg debuted as a rapper on Dr. Dre's seminal 1992 album The Chronic. His first solo effort, Doggystyle, was released in 1993 to both critical and popular acclaim. The album was an incredible success, selling more than 800,000 copies in its first week and 5 million overall. But what is the apex of many celebrity careers was only the beginning for Snoop.

According to an interview posted on MTV.com, Snoop "used to be focused on being the dopest rapper in the game ... but I wanted to be able to say that, business-wise, people were calling me on that same level." Today, Snoop's resume includes musician, actor, movie producer, pornographer, inventor of slang (fo' shizzle), Deutsche Telekom (NYSE:DT) spokesperson, and host of "Welcome to Da Church" on XM Satellite Radio (NASDAQ:XMSR). He's also a character in Activision's (NASDAQ:ATVI) "True Crime" video game, and he recently created a soundtrack to promote Microsoft's (NASDAQ:MSFT) blockbuster Halo 2 game for Xbox. Finally, for now, he's a fashionista -- having lent his style and name to Pony's Doggy Biscuitz line of shoes.

In all, Snoop has his hands in a number of interrelated aspects of style and entertainment. That's Snoop's keiretsu, and it's made him a very wealthy individual.

What works for Snoop can work for you
The key to Snoop's keiretsu is that each venture is not only profitable on its own, but enhances the value of the others as well. Since most investors don't have Snoop's rhyming skills to jump-start their own careers, the question is: How can we put the power of keiretsu in our own portfolios?

The key is to find strong interrelated businesses that -- alone -- demonstrate the characteristics of long-term investments. This means they:

  1. Are profitable.
  2. Generate substantial amounts of cash.
  3. Have excellent management.

Next, find the links among these strong businesses. Determine the companies that will complement one another's business models to supercharge performance across the board.

A mini-keiretsu
 Pixar (NASDAQ:PIXR) creates The Incredibles, an extremely lucrative intellectual property. The company then licenses that property to video-game-manufacturer THQ (NASDAQ:THQI). Both businesses will now benefit from sales of the product at Best Buy (NYSE:BBY), which relies on companies such as Pixar and THQ to create dynamite products. Shareholders of all three companies are ultimately rewarded to a much greater degree than they would be if each firm operated in a vacuum. For evidence, just take a look at this mini-keiretsu's performance against the S&P 500 over the past five years. A $5,000 investment in each of the three companies five years ago would be worth more than $41,000 today -- a compounded annual growth rate (CAGR) of 23%. A $15,000 investment in the S&P 500, on the other hand, would actually have been a losing proposition.

The risk, of course, is that a keiretsu will not leave you well-diversified. But for master investors such as Charlie Munger, diversification is overrated. As he has said, "We don't believe that widespread diversification will yield a good result. We believe almost all good investments will involve relatively low diversification." Why? Because while diversification can limit your downside, it limits your upside as well. The rewards of finding the right keiretsu, however, can be enormous -- as they've been for Snoop Dogg.

Through his recommendations in Motley Fool Stock Advisor, Fool co-founder David Gardner is building an entertainment-property keiretsu, and he's beating the market by more than 30%. To get started adding some of his recommendations to your portfolio, try a subscription to Motley Fool Stock Advisor. For $149, you'll enjoy access to all back issues and Dave and his brother Tom's previous picks, as well as the dedicated Stock Advisor discussion boards, where Dave and Tom post regularly and where you'll find hordes of like-minded investors sharing wisdom, ideas, and analysis. For a limited time, you'll also receive a free copy of The Motley Fool's brand new Blue-Chip Report 2005 -- a $49 value of 10 great stock ideas that have a place in every portfolio. Click here to learn more.

Tim Hanson owns none of the companies mentioned in this article. Activision, Pixar, and Best Buy are three of David's Motley Fool Stock Advisor recommendations. At the Fool, no writer is too cool for disclosure ... and Tim's pretty darn cool.