Why did Warren Buffett invest $6B+ in centuries-old Japanese trading houses?

Warren Buffett’s $6B+ bet on Japanese trading houses is his biggest one outside of America. Why did he do it, and what does it say about Japan?


September 29, 2020

One of Warren Buffett’s key rules is to invest in what you know or — as he calls it — the “circle of competence.”

For decades, Buffett avoided tech stocks because he didn’t understand them. To be sure, his 2016 bet on $AAPL and pre-IPO stake in $SNOW have paid off handsomely (let’s not talk about $IBM, though).

For many, Berkshire Hathaway stepped far out of its circle of competence when it invested $6.7B across 5 Japanese trading houses in August.

It’s Buffett’s biggest bet outside of America

The $510B Berkshire acquired 5% stakes each in Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo.

As highlighted by The Economist, Japanese trading houses are notoriously complicated.

Dating back to the 19th century, these de facto conglomerates have opaque shareholder structures and operate in dozens of unrelated businesses (mining, energy, convenience stores, cable providers, etc.).

Besides being hard to understand, the trading houses break 2 other Buffett investing maxims: reliable returns and business moats.

Their performances in recent years have been spotty, and the business lines for each trading house fiercely compete against one another.

Could it be a value play?

As a famed value investor, Buffett may have targeted these Japanese firms for their relative cheapness (AKA the market value is below the book value of the net assets).

However, one analyst tells The Economist the trading houses are cheap for a reason: Their complicated businesses increase the perception of risk.

The actual reasons could be long-term bullish for Japan

There are 2 other explanations for Buffett’s investment:

  • Japan has seen shareholder-friendly reforms in recent years, leading to better corporate governance, increased productivity, higher dividends, and stronger cash positions
  • The trading houses all have energy businesses, which dovetails with Buffett’s affinity for the industry (think Berkshire Hathaway Energy)

These bets can pay off if Japan’s new Prime Minister Yoshihide Suga continues his predecessor’s corporate reforms and if a post-COVID recovery drives the country’s energy demand.

A final aspect yet to be mentioned and firmly within Buffett’s “circle of competence”: Berkshire itself is a sprawling conglomerate.

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