Source: Daikang's World of Strategy
Author: Dai Kang
Title: “Dai Kang: What's the mystery of Buffett's bet on Japanese stocks? —Written on the eve of the 24th General Meeting of Shareholders》

On May 4, 2024, the Buffett Shareholders' Meeting, known as the “Spring Festival Gala in the Investment Community”, will be held as scheduled

The investment community's annual event, the Berkshire Hathaway Shareholders' Meeting (Buffett Shareholders' Meeting), will be held on May 4, 2024 in Omaha, USA. Among them, Buffett's investment in Japanese stocks is a widely discussed topic in the market. Buffett began investing in the five major Japanese trading companies in August 2020, and increased his positions significantly in the first half of 2023.

What's the logic behind this move? In addition to the five major trading companies, what other Japanese stock companies are worth watching? On the eve of this Buffett shareholders' meeting, let's talk about Ba Lao's perspective.

Question 1:

Is Buffett's continued increase in positions in the five major trading companies one of the factors stimulating the strengthening of Japanese stocks?

We believe that Buffett's continued increase in positions in the five major trading companies is, to a certain extent, one of the factors stimulating the strengthening of Japanese stocks.

Buffett continued to increase positions in the five major trading companies, attracting increased attention from global investors to the Japanese stock market, and Japanese stocks received a gradual increase in the allocation of multinational capital. Of course, the logic behind Buffett's long-term shareholding in the five major trading companies is that the five major trading companies can be considered representative companies of the “Japan Special Assessment.” “Japan Special Assessment” generally refers to Japanese listed companies that are undervalued, have high dividends, and are continuously improving governance efficiency. In the new anti-globalization investment paradigm, global capital is more inclined to allocate assets with high certainty. The “Japanese Special Assessment” indicates that the company has stable profitability and can give investors greater confidence in the corporate governance structure. Under the new investment paradigm, the Japanese special valuation is the general trend.

Question 2:

Buffett previously revealed that he plans to hold these investments for 10 to 20 years. Why does Buffett continue to be optimistic about Japan?

First, Buffett's long-term investment strategy is in line with his investment philosophy, which is to find companies with good management, stable cash flow, and reasonable valuations to invest in, and hold these investments to achieve long-term growth. The above can be summarized as value investment and long-term holding. This reflects Buffett's long-term optimism about the Japanese economy. What is behind it is also that Japan's economy showed clear signs of improvement after the pandemic.

The second is to consider regulatory and governance factors. In some important ways, the five largest Japanese trading companies he invests in all follow shareholder-friendly policies, which are far superior to US practice. In recent years, the Japanese government and the Tokyo Stock Exchange have promoted a series of corporate governance reforms, raising the level of transparency and governance of listed companies. These reforms are aimed at attracting foreign investors and enhancing market vitality. For example, the restructuring of the Tokyo Stock Exchange has raised listing standards, actively carried out corporate governance, and improved corporate profits, all of which have made the Japanese stock market more attractive to foreign investors.

Buffett has revealed some reasons for choosing to invest in Japanese stocks — these five trading companies meet some of his stock selection criteria: high dividend yields and high free cash flow. These companies usually have strong cash flow and prudent financial management, and can maintain stable returns in different market environments. At the same time, large Japanese general trading companies and other companies usually diversify their business, covering various fields from trade and manufacturing to financial services. This diversified business model can maintain profitability under different market conditions and reduce investment risk. This is also in line with what we have always suggested that global capital is currently chasing a deterministic premium under a new investment paradigm.

Question 3:

On the evening of February 24, Buffett issued an annual letter to shareholders. Referring to the most popular investment in Japan, he said that Berkshire continues to passively hold shares in Japan's five major trading companies for a long time, and that each company's business methods are highly diversified, which is somewhat similar to Berkshire's own business method. What are the business characteristics of the five largest trading companies in Japan?

The five major trading companies have a long history of operation, dating back to the 19th century. In the past, the focus of these five major trading companies was mainly in the field of trade, but now they focus more on the field of investment. The five major trading companies have in common many aspects, such as diversified operations, high dividends, high free cash flow, and prudent issuance of new shares.

The five companies all operate in a wide range of business areas. Through diversified development strategies in different industry sectors, the company can effectively diversify operating risks and obtain stable revenue growth in different industries and markets. Furthermore, the business of the five major trading companies has penetrated deeply into the upstream and downstream of the industrial chain, basically covering the entire industrial chain from raw material procurement to product sales. This enables trading companies to grasp more market trends, enhance market competitiveness, and achieve the effect of reducing costs and increasing efficiency through the integration of resources in different aspects of the business.

The five major trading companies, represented by Mitsubishi Corporation, have an important position in Japanese society. They monopolize nearly 99% of large production companies and trading companies in Japan, and rely on their respective foundations to monopolize the global mineral and petroleum resources industry chain. These foundations combine industrial capital, commercial capital, and financial capital, and are large monopoly holding companies supported by the Japanese government after the Meiji Restoration and World War II.

The scope of business involved in the five major trading companies is very similar, but the dominant industries and business characteristics are slightly different.$Mitsubishi (8058.JP)$,$Mitsui (8031.JP)$The advantages are most prominent in the energy/resources industry;$Sumitomo (8053.JP)$Outstanding advantages in media, real estate and other industries; $ITOCHU (8001.JP)$Outstanding advantages in food, finance, information and other industries; $Marubeni (8002.JP)$It has outstanding advantages in industries such as electricity, grain, oil, and grain.

Question 4:

What is the benefit of Buffett's investment in the top five trading companies? Why is it difficult for ordinary people to copy homework?

Buying the top five trading companies is also an expression of Buffett's value investment philosophy, which is to find companies with good management, stable cash flow, and reasonable valuations to invest in, and hold these investments to achieve long-term growth. These trading companies are not only the core forces of their respective parent groups in the global economy, but also famous in the international market due to their global networks and diversified business.

But for the average person, it's hard to do:

(1) Berkshire Hathaway purchased Japanese shares by issuing Japanese bonds, keeping capital costs below 1%. Also, against the backdrop of anticipated future inflation or rise in Japan, anti-inflationary assets (stocks, real estate, etc.) are purchased using Japanese yen bonds. It's hard to imitate as an individual investor.

(2) Buffett's “pick up cigarette butts” rule is to look for underrated companies. In this way, when the stock price rises to fair value, it is possible to make a big profit, and even if it goes bankrupt and liquidates without rising, it is possible to make money. Japan's top five trading companies are famous for their undervalued market capitalization, high dividends, emphasis on business quality, continuous meeting the stable needs of consumers, unique business models, and strengthening governance and reform capabilities. They are typical examples of “Japanese special valuations,” and are also the general trend of global investment. Buffett's continued increase in positions will further attract global investors' attention to the Japanese stock market, and Japanese stocks will receive a gradual increase in the allocation of multinational capital.

Editor/Somer