10 ms·

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

127 points by Anon84 6y ago

victor106 6y ago
Two other possible reasons:- 1. Buffett might be expecting US inflation to devalue the dollar. 2. He raised debt in Japan at 0% interest and is getting an approx 3% return by investing in these relatively stable companies.
- mimikatz 6y ago
  It is pretty clearly #2 and I don't know why people are acting confused. He got a huge loan at roughly 0% and the main risk to mitigate is a currency risk. Investing in stable Japanese companies heavily reduces that risk and growth/dividends is basically free money.
- Bombthecat 6y ago
  Or both, which I suspected.
  - sushshshsh 6y ago
    Given his record with airline companies there's a chance he's wrong, hey hey!
- adventured 6y ago
  They made a recent smaller bet on Barrick Gold ($588m holding), which is blatantly a bet on the price of gold remaining elevated / going higher over time due to profligate US spending and the consequences for the USD. Based on the size of the bet, this one (trading houses) is Buffett led and the Barrick investment is one of Berkshire's other two prominent investors (Ted Weschler, Todd Combs).
  - krustyburger 6y ago
    Given the sheer size of Berkshire’s holdings, that sounds less like a bet and more like a hedge.
wefarrell 6y ago
Funds are always looking to diversify in order to increase their returns while mitigating their risk. The problem is that in today's interconnected economy where funds are extremely diversified, shocks cascade and unrelated sectors wind up taking a hit. Japan's stock market is unique, because their central banks own a large portion of their ETFs, which insulates them from these global shocks: https://www.businesslive.co.za/bd/world/2019-09-04-storied-investor-michael-burry-has-this-to-say-about-markets/ https://www.businesslive.co.za/bd/world/2019-09-04-storied-i...
- rmrfstar 6y ago
  Do you mean that financial shocks propagate because a leveraged investor may have to sell assets in market A to fund margin calls in the primary impacted market B, or that economic shocks propagate because supply chains are deep and brittle?
  - smallnamespace 6y ago
    Both happened in 2008
  - wefarrell 6y ago
    Financial shocks driven by passive index funds that hold pre-defined percentages of different asset types. Let's say you have a diversified passive fund that holds 25% each of asset types A, B, C and D. If asset type A crashes and it's now 10% then B, C, and D will now be 30%. The fund will rebalance and sell B/C/D so they're back to 25% and the values of those asset types will decline. The values of A/B/C/D all correlate with one another even if they are fundamentally unrelated.
    - centimeter 6y ago
      Most passive funds are cap weighted so this is not an issue.
droopyEyelids 6y ago
Whenever Buffet invests in something, part of the reason is always that he has identified that it has monopolistic or cartel like characteristics- or it can buy out competitors and gain some of those characteristics through his investment. Would love to see this article rewritten to analyze the dominance of these firms in their market.
trikonasana 6y ago
Buffet has been warning about inflation for two decades. He has said repeatedly over the years that one of the best ways to combat inflation is to buy companies that make their money in foreign currency. This would be a big hedge against dollar inflation in that case, which makes sense given how much the US Gov has spent already this year. A second reason might simply be that he got an amazing deal. An interesting takeaway I got from reading University of Berkshire Hathaway is that people call him to buy their companies, usually not the other way around. It's possible that he got a call from struggling companies and decided it was a good deal.
- mxschumacher 6y ago
  The calls come from businesses that want to be taken over in full, not public firms where berkshire takes a 10% stake. The equity investment made with proceeds from yen denominated bonds, so it doesn't imply a bet on a weaker dollar (the debt would be more expensive to repay if the yen were to strengthen)
  - xibalba 6y ago
    This isn't strictly true. Berkshire has made large investments in companies (outside their insurance float capital) where they weren't buying 100% ownership. See their investments in Goldman Sachs, BofA, Pilot Flying J, Nebraska Furniture Mart, and others. Buffett and Berkshire are attractive as an investor because they send a strong confidence signal and because they are known to be extremely hands off.
- csomar 6y ago
  > This would be a big hedge against dollar inflation in that case, which makes sense given how much the US Gov has spent already this year. The irony, though, is that Japan is the leader in printing money. They have been doing it for many years and their interest rate has been 0 or negative for two decades. Source: https://tradingeconomics.com/japan/interest-rate https://tradingeconomics.com/japan/interest-rate
  - Ma8ee 6y ago
photon137 6y ago
In my view, as an investor in Japan, these firms are the best entry points to getting access to business relationships (and key projects) across Asia. One can imagine these to be huge aggregators of business relationships and as central points (besides the banks which are getting away from cross-shareholder relationships) into the major _keiretsus_. This is the entry fee for being really in the know in corporate Japan. And, as another commenter mentioned, getting a sweet arbitrage on the low borrowing rate and earning a nice dividend yield doesn't hurt.
- omot 6y ago
  He's 90 years old. It's kind of amazing, he's investing like he'll live for another century.
  - bbddg 6y ago
    Honestly it's kind of psychotic.
    - deadwing0 6y ago
      What makes it psychotic? I'd guess he really enjoys what he does. I hope to find something I enjoy that much and do it until I'm 90, too!
  - eloff 6y ago
    I don't think he ever did it with the intention of being around to spend the money. He lives off his modest salary, drives an old vehicle, and still is in the same normal house as decades ago. The money is more like points in a game to him I think, he just loves the game.
    - vmception 6y ago
      Liquidity service provider
    - novok 6y ago
      That is a well constructed image. In reality the man has multi million dollar vacation houses and is quite ruthless in business.
nabla9 6y ago
Berkshire has sold very low interest bonds denominated in Japanese yen to fund this investment. These companies many not generate huge ROI but they are collectively stable. When you buy them with near zero interest long term leverage, it seems like a good deal. Berkshire also sold 1B EUR zero interest bonds. Except similar deals in the EU.
- jariel 6y ago
  Great point. With interest rates so low for the foreseeable future, any consistent incremental growth can be leveraged quite hard. To the point of arbitrage. The market will invest in 'Buffet Safety' at x%, he can find a safe enough place to park the money for y% then that's it.
- joncrane 6y ago
  Did you mean "expect" or "except?"
  - nabla9 6y ago
    expect

127 points by Anon84 6y ago

Two other possible reasons:- 1. Buffett might be expecting US inflation to devalue the dollar. 2. He raised debt in Japan at 0% interest and is getting an approx 3% return by investing in these relatively stable companies.

mimikatz 6y ago
It is pretty clearly #2 and I don't know why people are acting confused. He got a huge loan at roughly 0% and the main risk to mitigate is a currency risk. Investing in stable Japanese companies heavily reduces that risk and growth/dividends is basically free money.
Bombthecat 6y ago
Or both, which I suspected.
- sushshshsh 6y ago
  Given his record with airline companies there's a chance he's wrong, hey hey!
adventured 6y ago
They made a recent smaller bet on Barrick Gold ($588m holding), which is blatantly a bet on the price of gold remaining elevated / going higher over time due to profligate US spending and the consequences for the USD. Based on the size of the bet, this one (trading houses) is Buffett led and the Barrick investment is one of Berkshire's other two prominent investors (Ted Weschler, Todd Combs).
- krustyburger 6y ago
  Given the sheer size of Berkshire’s holdings, that sounds less like a bet and more like a hedge.

wefarrell 6y ago

Funds are always looking to diversify in order to increase their returns while mitigating their risk. The problem is that in today's interconnected economy where funds are extremely diversified, shocks cascade and unrelated sectors wind up taking a hit. Japan's stock market is unique, because their central banks own a large portion of their ETFs, which insulates them from these global shocks: https://www.businesslive.co.za/bd/world/2019-09-04-storied-investor-michael-burry-has-this-to-say-about-markets/ https://www.businesslive.co.za/bd/world/2019-09-04-storied-i...

rmrfstar 6y ago
Do you mean that financial shocks propagate because a leveraged investor may have to sell assets in market A to fund margin calls in the primary impacted market B, or that economic shocks propagate because supply chains are deep and brittle?
- smallnamespace 6y ago
  Both happened in 2008
- wefarrell 6y ago
  Financial shocks driven by passive index funds that hold pre-defined percentages of different asset types. Let's say you have a diversified passive fund that holds 25% each of asset types A, B, C and D. If asset type A crashes and it's now 10% then B, C, and D will now be 30%. The fund will rebalance and sell B/C/D so they're back to 25% and the values of those asset types will decline. The values of A/B/C/D all correlate with one another even if they are fundamentally unrelated.
  - centimeter 6y ago
    Most passive funds are cap weighted so this is not an issue.

droopyEyelids 6y ago

Whenever Buffet invests in something, part of the reason is always that he has identified that it has monopolistic or cartel like characteristics- or it can buy out competitors and gain some of those characteristics through his investment. Would love to see this article rewritten to analyze the dominance of these firms in their market.

trikonasana 6y ago

Buffet has been warning about inflation for two decades. He has said repeatedly over the years that one of the best ways to combat inflation is to buy companies that make their money in foreign currency. This would be a big hedge against dollar inflation in that case, which makes sense given how much the US Gov has spent already this year. A second reason might simply be that he got an amazing deal. An interesting takeaway I got from reading University of Berkshire Hathaway is that people call him to buy their companies, usually not the other way around. It's possible that he got a call from struggling companies and decided it was a good deal.

mxschumacher 6y ago
The calls come from businesses that want to be taken over in full, not public firms where berkshire takes a 10% stake. The equity investment made with proceeds from yen denominated bonds, so it doesn't imply a bet on a weaker dollar (the debt would be more expensive to repay if the yen were to strengthen)
- xibalba 6y ago
  This isn't strictly true. Berkshire has made large investments in companies (outside their insurance float capital) where they weren't buying 100% ownership. See their investments in Goldman Sachs, BofA, Pilot Flying J, Nebraska Furniture Mart, and others. Buffett and Berkshire are attractive as an investor because they send a strong confidence signal and because they are known to be extremely hands off.
csomar 6y ago
> This would be a big hedge against dollar inflation in that case, which makes sense given how much the US Gov has spent already this year. The irony, though, is that Japan is the leader in printing money. They have been doing it for many years and their interest rate has been 0 or negative for two decades. Source: https://tradingeconomics.com/japan/interest-rate https://tradingeconomics.com/japan/interest-rate
- Ma8ee 6y ago

photon137 6y ago

In my view, as an investor in Japan, these firms are the best entry points to getting access to business relationships (and key projects) across Asia. One can imagine these to be huge aggregators of business relationships and as central points (besides the banks which are getting away from cross-shareholder relationships) into the major _keiretsus_. This is the entry fee for being really in the know in corporate Japan. And, as another commenter mentioned, getting a sweet arbitrage on the low borrowing rate and earning a nice dividend yield doesn't hurt.

omot 6y ago
He's 90 years old. It's kind of amazing, he's investing like he'll live for another century.
- bbddg 6y ago
  Honestly it's kind of psychotic.
  - deadwing0 6y ago
    What makes it psychotic? I'd guess he really enjoys what he does. I hope to find something I enjoy that much and do it until I'm 90, too!
- eloff 6y ago
  I don't think he ever did it with the intention of being around to spend the money. He lives off his modest salary, drives an old vehicle, and still is in the same normal house as decades ago. The money is more like points in a game to him I think, he just loves the game.
  - vmception 6y ago
    Liquidity service provider
  - novok 6y ago
    That is a well constructed image. In reality the man has multi million dollar vacation houses and is quite ruthless in business.

nabla9 6y ago

Berkshire has sold very low interest bonds denominated in Japanese yen to fund this investment. These companies many not generate huge ROI but they are collectively stable. When you buy them with near zero interest long term leverage, it seems like a good deal. Berkshire also sold 1B EUR zero interest bonds. Except similar deals in the EU.

jariel 6y ago
Great point. With interest rates so low for the foreseeable future, any consistent incremental growth can be leveraged quite hard. To the point of arbitrage. The market will invest in 'Buffet Safety' at x%, he can find a safe enough place to park the money for y% then that's it.
joncrane 6y ago
Did you mean "expect" or "except?"
- nabla9 6y ago
  expect