Warren Buffett's Japan Investment Strategy And How To Follow Him

The world's most famous investor has recently expanded his already-large investment portfolio with his favorite Japanese trading houses, teasing that there are more to come in the future.

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This week, Berkshire Hathaway raised its stake in five major Japanese trading companies, Mitsubishi Corp., Mitsui & Co., Itochu Corp., Marubeni, and Sumitomo, all increasing their stakes in the holdings to 7.4%. According to the Nikkei newspaper, Berkshire Hathaway even traveled to Japan this week, his first visit to the country in almost a decade, to meet with the heads of the firms and express his support.

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I believe that Buffett's five trading houses have checked every box of his stock-picking criteria on their way to becoming a conglomerate, just like Berkshire. Firstly, they are traditional value stocks, which can be defined as having a forward price-to-earnings ratio of 6.8, which is much lower than the average P/E ratio of 12.5 found in the MSCI Japan index. Additionally, the dividend yield on average for these stocks is much higher than the dividend yield on the broader Japanese stock market, at 5.2% versus 2.7% for these companies. Bill Stone, CIO at Glenview Trust and a Berkshire shareholder said that the companies produce a tremendous amount of free cash flow, which is a characteristic that Buffett looks for in his companies.

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As well as the hedging of currency risk, Stone says there are two additional bonuses in terms of the potential to make deals and deal-making opportunities.

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In addition to borrowing very inexpensively in Japanese, Berkshire can also hedge its currency exposure by utilizing the liabilities in the yen. According to Stone, Berkshire can borrow very cheaply in yen. It was also mentioned that Buffett expressed his interest in doing business with these firms as well as the fact that he has already taken steps to acquire international companies in the past.

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On his 90th birthday in August 2020, the "Oracle of Omaha" acquired the stocks for the first time through regular purchases on the Tokyo Stock Exchange on the occasion of his 90th birthday. He had stakes of about $6 billion in the company at the time when he sold them. In the fourth quarter of last year, he increased the amount of money he bet by about $2.4 billion. There have been more than double-digit gains in four of the five stocks since Buffett first invested in them.

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There was a statement by Berkshire in 2020 that he was planning to hold the investments for a long time, and that he may be able to increase the positions in any of the companies to a maximum of 9.9% based on the price of the company.

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In addition to supplying energy, machinery, chemicals, food, finance, and banking, Japanese trading firms, known as sogo shosha, also trade in an array of products and services. As soon as they appeared after World War II, they became crucial to the Japanese economy and global trade.

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Buffett and Berkshire know and love this business model, said CFRA analyst Cathy Seifert, referring to these firms as trading houses, but they are really conglomerates. Berkshire will also benefit from this transaction with some overseas exposure at a good price.”

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Will there be more Japanese investments?

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Additionally, Buffett expressed his interest in making further investments in Japan in his interview with Nikkei, stating that "the idea is always a matter of consideration," and that he has "a few ideas that I am considering."

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In light of the recent changes at the top of the Bank of Japan, many investors have speculated that in the future, Kazuo Ueda, who recently assumed the helm, may take a more hawkish approach to bring down inflation. His most recent move came at an interesting time for the global economy.

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The Bank of Japan introduced negative interest rates in 2016 to boost the Japanese economy, ward off a currency spike, and combat deflation. They have also stuck with them. 

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In light of expectations for tighter policy, BlackRock, the world’s largest asset manager, cut Japanese stocks last month to “underweight” as a result of expectations. In contrast, many individuals and institutions believe that a change in monetary policy could provide opportunities for the Japanese market as well as individual companies.

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According to Peter Boockvar, CIO at Bleakley Financial Group, Japanese equities have attractive valuations and are an excellent way to participate in the reopening of China. He is particularly bullish on Japanese banks because they could benefit from a change in the policy of the BOJ.

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According to FactSet, there is a price-to-earnings ratio among the Nikkei 225 that is around 16 times forward earnings, as opposed to a price-to-earnings ratio of 22 just two years ago.

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