Interpreting Buffett's Investment in Japanese Trading Companies

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

Unlike previous years, this meeting seemed to particularly attract the attention of self-media, with many self-media outlets not only sharing videos from the scene online but also commenting on some of Buffett's recent investment cases.

Among these investment cases, I find Buffett's investment in Japanese trading companies in 2019/2020 particularly interesting.

According to the memories of Buffett's longtime partner Munger during his lifetime and publicly available market data, Buffett's investment in Japan was likely conducted in the following manner.

Buffett used dollar certificates of deposit as collateral to borrow yen at a market interest rate of 0.5% (the ten-year rate) (some online data also indicates that the interest rate for borrowing yen was less than 0.2%).

Buffett purchased stocks of Japan's five major trading companies: Mitsui & Co., Mitsubishi Corporation, Sumitomo Corporation, Itochu Corporation, and Marubeni Corporation.

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

When Buffett bought stocks of the five major trading companies (Mitsui, Mitsubishi, Sumitomo, Itochu, Marubeni), their stock prices were approximately 1900 yen, 1700 yen, 900 yen, 2200 yen, and 700 yen, respectively. As of the time of writing, the stock prices of the five major trading companies are approximately 7600 yen, 3500 yen, 4300 yen, 7300 yen, and 2900 yen (for details, see https://cn.investing.com/equities/).

From a return perspective, the stocks of the five major trading companies have at least doubled (Mitsubishi) and nearly quintupled (Sumitomo) in yen terms.

If Buffett chose to repay in dollars (of course, he doesn't need to do this), then the amount borrowed at 1 dollar would now only require repayment of 0.73 dollars due to the depreciation of the yen.

Regarding this typical investment case, there are several popular opinions online:

Buffett has harvested Japan.

Buffett is heavily invested in Japan.

Buffett has made a risk-free profit.

Saying that Buffett has harvested Japan sounds like he took advantage of a crisis.

But in reality, Buffett's operations were all conducted in the open market, without any special circumstances or coercive actions. Aside from needing a certain threshold to borrow yen against dollar certificates of deposit, there are no barriers to his other operations; any investor who can freely invest in the international market can do the same.

Even borrowing yen against dollar certificates of deposit is something that countless large institutions around the world can accomplish, so it is not a difficult task for large institutions.

If this is considered harvesting, many investors, especially institutional investors, could also "harvest" Japan, but how many have actually taken action?

Saying that Buffett is heavily invested in Japan is also an exaggeration.

According to publicly available data online, as of the fourth quarter of 2023, Buffett's total asset holdings reached 1 trillion dollars; the market value of his holdings in the five major Japanese trading companies is 2.9 trillion yen, equivalent to about 200 million dollars. This holding is only 2% of his total holdings.

Can this be considered "heavy investment"? At most, it is just a small investment for Buffett.

It's like when we allocate 2% of our funds to buy a cryptocurrency; I doubt anyone would consider that a heavy investment, right?

Saying that Buffett has made a risk-free profit seems to be true based on the results—he invested with borrowed money and ultimately gained returns that not only covered the principal but also provided substantial profits.

However, in my view, the reason he borrowed yen against dollars instead of directly investing in dollars was more to avoid the risk of exchange rate fluctuations, rather than having initially planned this risk-free investment.

Thus, many opinions in the market seem to be sensationalized.

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

The five major trading companies in Japan own vast assets overseas and almost control various sectors of commercial circulation within Japan. According to Buffett's evaluation criteria, they are undoubtedly monopolistic enterprises.

These five major trading companies distribute dividends of nearly 5% each year, providing shareholders with very stable cash flow. They are akin to insurance companies that continuously provide cash flow to support Buffett's ongoing investments.

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

Therefore, from multiple perspectives, the five major trading companies in Japan were quite valuable companies at that time.

Finally, what most aligns with the old gentleman's taste is that after nearly 30 years of de-bubbling, the Japanese stock market has left little fluff in the stocks of the five major trading companies, which are clearly undervalued.

Buying good companies at prices below their intrinsic value is consistent with the old gentleman's style and operations.

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

The old gentleman has emphasized on multiple occasions that investors should not borrow heavily to invest.

But in this case, the old gentleman borrowed, and although the amount borrowed was not large and was well within a controllable risk range, I could understand that. However, I was still curious about what mindset and reasons led the old gentleman to engage in this borrowing investment operation?

Later, I found the answer in Munger's book:

Munger, in response to an investor's question about one of Buffett's somewhat strange investment operations, laughed and said (in essence) that Buffett sometimes also indulges in little games on a whim.

Reading this, I understood: it's like investors usually invest seriously, but on weekends, to relax, they might occasionally go to a casino to play a bit. However, such investors would never consider casino games as serious investments.

Even as a game, Buffett's investment in Japan still adhered to his classic value investing principles.