Interpretation of Buffett's investment in Japanese trading companies

Source: Daoshuo Blockchain

On May 4, Beijing time, Buffett held the annual Berkshire Hathaway offline shareholders meeting with two new leaders.

Unlike previous years, this conference seems to have attracted the attention of self-media. Many self-media not only forwarded videos from the scene online, but also commented on some of Buffett's investment cases in recent years.

Among these investment cases, I think the more interesting one is Buffett's investment in Japanese trading companies in 2019/2020.

According to the memories of Buffett's old partner Munger and the information disclosed by the market, Buffett's investment in Japan is probably carried out in the following way.

Buffett used US dollar certificates of deposit as collateral and borrowed Japanese yen at a market interest rate of 0.5% (ten-year interest rate) (there are also data on the Internet saying that Buffett's interest rate for borrowing Japanese yen is less than 0.2%).

Buffett bought shares of the five major Japanese trading companies, namely Mitsui & Co., Mitsubishi Corporation, Sumitomo Corporation, Itochu Corporation and Marubeni Corporation.

When Buffett borrowed Japanese yen, the exchange rate of the US dollar against the Japanese yen was about 1 US dollar to 110 Japanese yen. As of the time of writing, the exchange rate of the US dollar against the Japanese yen is 1 US dollar to 150 Japanese yen.

When Buffett bought the stocks of the five major trading companies (Mitsui, Mitsubishi, Sumitomo, Itochu, Marubeni), their stock prices were about 1900 yen, 1700 yen, 900 yen, 2200 yen, and 700 yen. As of the time of writing, the stock prices of the five major trading companies are about 7600 yen, 3500 yen, 4300 yen, 7300 yen, and 2900 US dollars.

From the perspective of returns, the stocks of the five major trading companies denominated in Japanese yen have increased by at least 2 times (Mitsubishi) and at most nearly 5 times (Sumitomo).

If Buffett chooses to repay the loan in US dollars (of course Buffett does not need to do this), the loan of 1 US dollar that year would only need to be repaid 0.73 US dollars now because of the depreciation of the Japanese yen.

For this typical investment case, there are several popular views on the Internet:

Buffett harvested Japan.

Buffett has a large position in Japan.

Buffett has made a huge profit without any investment.

To say that Buffett harvested Japan sounds like taking advantage of the situation.

But in fact, Buffett's operations were all carried out in the open market, and there was nothing special or forced. Except for the fact that lending Japanese yen with US dollar certificates of deposit as collateral may require a certain threshold, his other operations have no threshold and can be carried out by any investor who can invest freely in the international market.

Even if lending Japanese yen with US dollar certificates of deposit as collateral, this operation can be completed by countless large institutions around the world, so it is not a difficult task for large institutions.

If this is also considered harvesting, many investors, especially institutional investors, can "harvest" Japan, but how many people actually do it?

It is also an exaggeration to say that Buffett has a large position in Japan.

According to the data publicly available online, as of the fourth quarter of 2023, the total market value of Buffett's holdings reached 1 trillion US dollars; the market value of the stocks of the five largest Japanese trading companies held by him was 2.9 trillion yen, which is about 20 billion US dollars in US dollars. This position is only 2% of his total holdings.

Can this be considered a "heavy position"? At best, it is just a small investment by Buffett.

It's like when we use 2% of the funds to buy a coin in the allocation of encrypted assets, I'm afraid no one would think this is a heavy investment, right?

It seems that Buffett has made a profit without any investment. From the results, it seems to be the case---he used borrowed money to invest, and the final income he obtained was not only more than enough to pay back the principal, but also received a generous return.

But in my opinion, the reason why he used US dollars as collateral to borrow yen instead of directly investing in US dollars was more to avoid the risk of exchange rate fluctuations, and he did not plan this investment without any investment from the beginning.

So many opinions on the market have a taste of sensationalism.

I think this investment is actually another typical value investment by Buffett.

The five major Japanese trading companies have huge assets overseas and control almost all areas of Japanese commercial circulation in Japan. According to Buffett's evaluation criteria, they are undoubtedly monopoly enterprises.

The dividends distributed by these five major trading companies are nearly 5% each year, which can bring very stable cash flow to shareholders. They are very much like insurance companies that provide Buffett with a steady stream of cash flow to support his continued investment.

In addition, as long as the stock prices of these five major trading companies do not continue to fall too low, the annual dividend of 5% is enough to cover his annual borrowing interest rate of 0.5%.

So from many aspects, the five major Japanese trading companies were all very valuable good companies at that time.

Finally, what suits the old man's appetite the most is that after nearly 30 years of de-bubbling in the Japanese stock market, the stocks of the five major trading companies no longer have much water, and their prices are obviously undervalued.

Buying good companies at a price lower than the intrinsic value is the old man's consistent style and operation.

When I first examined this case, there was one thing I didn't quite understand:

The old man had emphasized on many occasions that investors should not borrow heavily for investment.

But in this case, the old man borrowed money, although the amount of the loan was not large, and it was completely within the controllable risk range, which I can understand. But I am still curious, what is the mentality and reason for the old man's borrowing investment operation?

Later I found the answer in Munger's book:

When Munger answered an investor's question about Buffett's strange investment operation, he smiled and said (roughly) Buffett sometimes plays some small games on a whim.

I understood after reading this sentence: This is like investors who invest seriously on weekdays, but occasionally go to the casino to relax on weekends. But such investors will never take casino games as serious investments.

But even if it is just a game, Buffett's investment in Japan still implements his classic operation of value investment.