Home > A Quick Look at Buffett’s Japan Investments

A Quick Look at Buffett’s Japan Investments

September 16, 2020 By Mircea Vasiu

Warren Buffett’s recent announcement of his participation in five Japanese trading houses took many by surprise. Berkshire was viewed as moving terribly slow during the pandemic, with little or no reaction to the opportunities seen in the stock market. 

However, Berkshire did what it knows best – invest. The move out of the United States and into Japan is just another way of obtaining diversification benefits. On one hand, Buffett reduced exposure to the USD, the world’s reserve currency. On the other hand, by adding international stocks to the portfolio, known as having a low degree of correlation with the domestic stock, Buffett adds value to the portfolio.

On top of that, the prices paid for the participation give him voting rights. Finally, Buffett began buying participations in the five trading houses way before the pandemic hit the Western world. It just shows, once again, that one should not hurry when investing.

Why Exactly Did Buffett Agree to the Japanese Investments?

Besides the reasons explained earlier, Buffett opted for a value investment at a deep discount when compared with the valuations in the United States. As a matter of fact, Berkshire’s $5 billion acquisition is more than 30% cheaper than the TOPX valuation. Moreover, on a price-to-book basis, the Japanese investments were made at a discount of 79%.

Furthermore, the five participations bought offer a dividend yield three times bigger than the S&P500 companies or twice as big as the one in the TOPIX index.

Last but not least, the five trade houses (Sumitomo, Mitsui, Mitsubishi, Marubeni, Itochu) have an average debt level of 54% and trade about eight times their EBITDA. While it looks like this is a leveraged bet, there is no corporate bankruptcy in Japan in the last two decades, and the high dividend yield justifies the value investment analysis.

Once again, Buffett did what he knows best – finding companies worth investing in, using the value investing approach. On top of that, he managed to diversify Berkshire’s portfolio at a time when the valuations in the United States are sky-high.

A close look at Berkshire’s stock price performance in 2020 reveals the fact that it lags other tech stocks. For instance, Tesla rose dramatically this year. As such, choosing to invest in Berkshire is only for the ones that share the same values as Buffett – scarcity, durability, long-term investing.

Tags: