Legendary investor Warren Buffett likes being in Omaha. The quiet, folksy surroundings of his hometown enable him to develop billion-dollar perspectives hidden, in plain sight, from the hyperactive money managers in busy fund houses in bustling financial hubs. However, occasionally when the Oracle travels out of Omaha for work, he means business.
Warren Buffett was in Tokyo for the first time in twelve years in April. He, along with his heir apparent and Vice Chairman Greg Abel, was in the Japanese capital to visit the heads of five trading houses in which his conglomerate Berkshire Hathaway (BRK.B) had acquired 5% stakes in August 2020 through its wholly owned subsidiary, National Indemnity Company.
During his visit, he upped stakes in all of those companies to 7.4%. However, according to the latest disclosure this month, BRK owns an average of more than 8.5% of each of the five companies. This has made its Japanese investments the largest outside the United States.
Moreover, in its June 19 press release, the conglomerate announced that its “intention continues to be to hold its Japanese investments for the long term.” While BRK may increase its holdings up to a maximum of 9.9% in any of the five investments, depending on the price, Buffett has pledged that the company will make no purchases beyond that point unless given specific approval by the investees’ board of directors.
In this context, let’s take a closer look at the investments in which Buffett and Berkshire are deploying a significant chunk of their mountain of cash.
Firstly, the five biggest trading houses based in Japan: Mitsubishi Corporation (MSBHF), ITOCHU Corporation (ITOCY), Mitsui & Co., Ltd. (MITSY),Marubeni Corporation (MARUY), and Sumitomo Corporation (SSUMY), are what the Japanese call "sogo shosha."
These are trading companies that deal in a wide range of products. They are involved in multiple businesses, such as imports, energy, minerals, materials, chemicals, textiles, and much more.
Mitsubishi is involved in multiple businesses, including automotive products, chemicals, energy, food, and mineral resources. Mitsui and Itochu aren't too far behind Mitsubishi in size, while Marubeni and Sumitomo are considerably smaller. However, together they are adequately geographically diversified to play an instrumental role in the functioning of the Japanese economy and the global economy.
Secondly, in addition to the large size of the investees that have put them on the radar of BRK in its perpetual search for “elephant-sized” acquisitions, the Japanese companies are in businesses within Buffet’s circle of competence.
Moreover, the attractively-valued businesses capable of generating strong cash flows were available for what Buffett has described as “ridiculous prices compared to the prevailing interest rates.” He added that he was “confounded by the fact that we could buy in these companies."
With the benefit of hindsight, these investments appear no-brainers because even after significant price appreciation in each of these stocks after disclosure of BRK’s expanded position, their dividend yields range from 2.54% at the very least to as high as 3.88%, with a CAGR as high as 5.3% over a horizon of 5-years.
In view of the above, as American investor Chamath Palihapitiya pointed out in his shout-out to one of the Greatest Of All Time (G.O.A.T), it’s hardly surprising that Buffett issued significant yen-denominated debt at dirt-cheap rates, used the proceeds to acquire stakes in the Japanese businesses.
Buffett is now using “the dividends he then gets from owning these stocks (which are greater than the interest rates he’s paying to borrow in the first place) to pay the coupon!” This translates to a “near-risk less bet” by borrowing trillions of Japanese Yen for free and using the proceeds to buy stakes in companies that are “growing earnings in the mid-teens.”
Moreover, an improbable but possible downside of the Japanese economy completely blowing up is covered by the global exposure of all of the trading houses.
Fit for A Retail Investor?
Without mincing words, Yes!
However, given the fact that all the stocks spit back capital in the form of dividends, if reinvestment of those funds is a headache investors would like to spare themselves from, it could be wise to take Mohnish Pabrai’s maxim of being a shameless cloner one step further and acquire a stake in the BRK, a capital allocation and compounding machine in and of itself.
