For a guy who just turned 90 — his birthday was Aug. 30 — Warren Buffett is still razor sharp. He is certainly not “washed up,” as flash-in-the-pan day trader Dave Portnoy called him earlier this year.
Every once in a while, Buffett makes a surprise investment with billions.
It is typically an unexpected move — the kind of thing that wouldn’t have occurred to Wall Street, but seems smart, possibly even brilliant, the closer one looks at it.
The latest example of this is Berkshire Hathaway’s purchase of 5% stakes in Japan’ “sogo shosha,” which translates to “general trading houses.”
Berkshire Hathaway, by way of National Indemnity, a subsidiary, revealed a 5%-plus stake in each of the five trading houses, for a collective stake value greater than $6 billion.
The move is significant, in part, because of its international flavor. Berkshire Hathaway only has a small handful of investments outside the United States. Putting more than $6 billion into Japan changes that. (And the new Japan investments could be a backdoor emerging market play — more on that shortly.)
Buffett, and Berkshire Hathaway, have been laying the groundwork for a big Japan investment for quite some time. Buffett first visited Japan in 2011, in the aftermath of the Fukushima earthquake and tsunami.
Buffett didn’t act after Fukushima. But in 2019, Berkshire Hathaway issued roughly $4 billion in yen-denominated bonds, the biggest yen bond ever offered by a non-Japanese institution.
The Japanese currency taken in by issuing the bonds was likely used to purchase the sogo shosha stakes, which were accumulated over the course of 12 months.
In this manner, Berkshire’s equity position is hedged against currency risk. If the value of the yen declines sharply, the bond debt will be cheaper to pay back. If the yen strengthens sharply, on the other hand, the value of the equity stakes should rise in yen versus dollar terms.
In many ways the sogo shosha are a classic Buffett play. Japanese equities have been in the doldrums for the past few years, with an estimated $132 billion worth of investor capital flowing out of Japan over the last 32 months.
Because the mood in the Japanese stock market has been so gloomy, Berkshire was able to acquire the various stakes at 75% of book value, which roughly translates to 75 cents on the dollar. The sogo shosha also offer a decent dividend yield, paying 5% at recent share price levels.
With U.S. equity valuations as stretched as they are right now, and U.S. Treasuries yielding less than inflation, the ability to get a 5% dividend yield, on an investment that amounts to buying dollar bills for 75 cents, that’s pretty good.
The trading houses, as they are known, have a 100-year history with an emphasis on commodities. But these days they are more like a combination of investment banks, private equity firms, and international investment firms.
The downside to the five firms, in part, is the opaque nature of their investment portfolios. Each firm is sort of like a cross between Berkshire Hathaway and Goldman Sachs, in the sense of having complicated ownership stakes in a wide array of investments.
For example, Mitsubishi — one of the five trading houses — has stakes in everything from Japanese convenience stores to an automaker (Mitsubishi Motors) to Russian oil and gas fields.
The five firms are known for spending billions of dollars per year on due diligence, searching the planet for new investments. Like Berkshire, they are also willing to own equity, own partial stakes, or purchase a business outright.
Berkshire got a deal on the sogo shosha, in part, because the Japanese economy has been depressed.
Interestingly, though, the international investment footprint of these companies makes them more of a potential emerging market play.
Berkshire Hathaway is famously a proud American conglomerate. Were Berkshire to start buying stakes aggressively and repeatedly in overseas markets, eyebrows would be raised.
But with partners in Japan, and the ability to do joint ventures with the sogo shosha — not to mention raising the size of the stakes later on — Berkshire could now have a backdoor means of deploying more capital in overseas markets.
There is investment risk in the form of Japan’s weak economy, still struggling to break free of the doldrums. There is also risk in the fact that Shinzo Abe, Japan’s longest-serving prime minister in history, has just resigned for health reasons.
Abe’s legacy is something dubbed Abenomics, which represented an aggressive effort to heal Japan’s economy through fiscal spending, monetary easing, and policy reforms. Abenomics never truly took off, but it made decent inroads.
The hope is that Abe’s successor — who will be chosen within weeks, if not days — will honor Abe’s legacy by continuing in his path. It remains possible, though, that Japan’s next prime minister turns out to be a wild card, with at least one candidate expressing hostility to Abe’s ideas.
And yet, for Warren Buffett, the decision was probably easy. Six billion dollars sounds like a lot, but it only represents about 4% of Berkshire’s still-growing cash pile, recently worth almost $147 billion.
With a high-profile purchase of Japanese equities, Berkshire could also play a role in reviving Japan’s equity markets in general.
Western money managers have long salivated at the low valuations of Japanese companies, often paired with huge war chests of cash. But getting such companies to reform their clubby, conservative ways, and to genuinely unlock shareholder value, has been a frustrating uphill battle.
It may be that, this time, real change can finally take hold, a development that would be good for the Japanese economy, good for the Japanese stock market, and good for the world.
But even if not, Berkshire is still paying 75 cents on the dollar for a currency-hedged 5% dividend yield, while getting a backdoor global investment vehicle to boot. So there’s that.
Ignore Dave Portnoy. Even at 90, Buffett has still got it.