Interpretation of Buffett's investment in Japanese trading companies

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

What is different from previous years is that this conference seems to have attracted special attention from self-media. In addition to reposting videos from the scene online, many self-media also commented on some of Buffett's investment cases in recent years.

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

According to the recollections of Buffett's old partner Charlie Munger and public market information, Buffett's investment in Japan was probably carried out in the following way.

Buffett used U.S. dollar certificates of deposit as collateral to borrow Japanese yen at a market interest rate of 0.5% (ten-year interest rate) (there is also data online saying that Buffett borrowed Japanese yen at an interest rate of less than 0.2%).

Buffett bought shares of Japan's five largest trading companies, namely Mitsui & Co., Mitsubishi Corporation, Sumitomo Corporation, Itochu Corporation and Marubeni.

When Buffett borrowed yen, the exchange rate for the dollar to the yen was about 110 yen to the dollar. As of this writing, the exchange rate for the dollar to the yen is 150 yen to the dollar.

When Buffett bought the shares of the five major trading companies (Mitsui, Mitsubishi, Sumitomo, Itochu, Marubeni), their share prices were approximately 1,900 yen, 1,700 yen, 900 yen, 2,200 yen, and 700 yen. As of the time of writing, the share prices of the five major trading companies are approximately 7,600 yen, 3,500 yen, 4,300 yen, 7,300 yen, and $2,900.

From the perspective of returns, the stocks of the five major trading companies denominated in 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 so), then the money he borrowed for US$1 that year would only need to be repaid US$0.73 due to the depreciation of the Japanese yen.

Regarding this typical investment case, there are several popular opinions on the Internet:

Buffett reaped the rewards of Japan.

Buffett has a large stake in Japan.

Buffett makes huge profits without any investment.

Saying that Buffett reaped the benefits of Japan sounds like taking advantage of the situation.

But in fact, all of Buffett's operations were conducted in the open market, and there was nothing special or forced about them. Except for the borrowing of Japanese yen with US dollar certificates of deposit as collateral, which might require a certain threshold, his other operations had no threshold and could be carried out by any investor who could invest freely in the international market.

Even if it is to borrow 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 go to "harvest" Japan, but how many people actually do it?

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

According to public data online, as of the fourth quarter of 2023, the total market value of Buffett's holdings reached $1 trillion; the market value of his holdings of the five largest Japanese trading companies is 2.9 trillion yen, equivalent to about $20 billion in U.S. dollars. This holding is only 2% of his total holdings.

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

This is like when we allocate 2% of our funds to buy one coin in crypto asset allocation. I’m afraid no one would think this is a heavy investment, right?

It is said that Buffett made huge profits without investing any capital, and judging from the results, it seems to be true - he used borrowed money to invest, and the final returns not only more than covered the principal, but also brought him additional generous returns.

But in my opinion, the reason why he used US dollars as collateral to borrow Japanese yen instead of directly investing in US dollars was more to avoid the risk of exchange rate fluctuations. He did not plan this investment with no investment and huge profits from the beginning.

Therefore, many opinions on the market seem to be sensational.

I think this investment is actually another typical example of Buffett's value investment.

These five Japanese trading companies have huge assets overseas and control almost every area 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 share prices of these five major trading companies do not continue to fall too low, the annual dividend of 5% will be enough to cover his annual borrowing interest rate of 0.5%.

So from many perspectives, Japan's five largest trading companies were all very valuable and good companies back then.

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

Buying good companies at prices below their intrinsic value is the old man's consistent style and operation.

When I first looked at this case, there was one thing I didn’t quite understand:

The old man has stressed 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 much, it was completely within the risk control range, which I can understand. But I am still curious about the mentality and reasons behind the old man's borrowing investment operation?

Later I found the answer in Munger’s book:

In response to an investor's question about one of Buffett's strange investment operations, Munger said with a smile that (roughly) Buffett sometimes plays some small games on a whim.

I understood after reading this sentence: It is like an investor who invests seriously during the weekdays, but occasionally goes to the casino to play a few games to relax on the weekends. However, such an investor will never take the casino games as a serious investment.

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