Warren Buffett's investment in Japan's five largest trading companies at the same time is like investing in a comprehensive trading company industry index fund

Source丨Liu Jianwei learns from Buffett every day

Editor's note

As the "Woodstock" event of the investment community, this year's Berkshire Hathaway shareholders' meeting will be held in Omaha on May 4. This is the first year that only Warren Buffett and two executives are in attendance, and there is no more Munger. This journal will closely follow the shareholders' meeting and report the wonderful content of the shareholders' meeting in real time.

If you want to ask Buffett's questions, you can leave a message at the end of the article, and the preparatory team of this journal will sort out the questions and send them to the mailbox of the shareholders' meeting.

Today I would like to share with you an analysis article on Warren Buffett's investment in Japan's five major trading companies, when the Japanese economy has a recovery trend, Buffett's views on Japanese trading companies directly reflect his judgment on Japan's development. Liu Jianwei, the translator of "Buffett's Stock Investment Strategy", believes that "investing in the five major trading companies can be roughly regarded as Buffett's investment in the Japanese general trading company industry index fund". "Warren Buffett made it clear that the big five trading companies are worth holding for the long term."

In this year's letter, Warren Buffett talked about another stock that he will also invest in for a long time:

"Berkshire continues to take a stake in five very large Japanese trading companies at the same time, which is a passive investment as well as a long-term investment. ”

B: Business quality

First of all, let's explain what is a "trading company", a trading company means "trading company" in Japanese, and a trading company is to sell products or services from country A to country B, which is equivalent to what we Chinese often call an international trading company. Trading companies are divided into "specialized trading companies" and "general trading companies". A specialized trading company is a trading company that concentrates on a certain industry, while a general trading company is simply a trading company that does everything in any industry. However, the functions of a general trading company are not limited to business transactions", and the core of its business is to create business opportunities. General trading companies work in partnership with commercial enterprises or with multiple partners. As Masahiro Okato, CEO of ITOCHU Corporation, said, "We will create business opportunities for ourselves by helping our partners improve their performance and corporate value." He added, "It is the general trading companies that will support the future of Japan."

There are many general trading companies in Japan, and the top general trading companies in terms of stock market capitalization are: Itochu 4 trillion yen, Mitsubishi 3.4 trillion yen, Mitsui 3 trillion yen, Sumitomo 1.5 trillion yen, and Marubeni 1.0 trillion yen.

"The big five Japanese trading companies operate in a highly diversified business, somewhat similar to the way we do business at Berkshire," Buffett said. ”

M: Manage quality

Warren Buffett praised Japan's five major trading companies for doing much better than U.S. listed companies in some aspects of management:

First, it is shareholder-friendly: "In some important respects, the five largest Japanese trading houses, Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo, all follow shareholder-friendly policies that are far superior to those typically implemented by U.S.-listed companies. ”

The second is low-price buybacks: "Since we started buying shares of these five major Japanese trading companies, these five major Japanese trading companies have been buying back shares at attractive cheap prices, and the number of shares outstanding has continued to decrease. ”

Third, the level of salary incentives given by the management is much lower than that of the US listed companies: "At the same time, under normal circumstances, the management of the US listed companies give themselves very aggressive salary incentives, compared with the management of the five major Japanese trading companies The level of salary incentives given to them is much lower. ”

Fourth, there are fewer profit dividends and more retention: "It should also be noted that each of the five major trading companies in Japan only takes out about 1/3 of its profits for dividends, that is, cash dividends. Japan's big five trading companies use the remaining two-thirds of their earnings as retained earnings, most of which are used to grow the company's many businesses, and a small portion is used to buy back shares. ”

Fifth, there are few new shares issued: "Like us at Berkshire, Japan's five largest trading companies are reluctant to issue new shares to dilute the equity of existing shareholders. ”

Another benefit of investing in these five Japanese trading companies for Berkshire is that these equity investments may lead to more opportunities for us to do business globally with these five large, well-managed, and well-respected Japanese trading companies. Their investment interests are far broader than those we have at Berkshire. On the other hand, from the other side's point of view, the CEOs of the five major Japanese trading companies are pleased that Berkshire always has a large amount of liquidity, and can immediately call on the two sides to cooperate in M&A business, regardless of the scale of the M&A project capital needs.

P: Stock price valuation

We started buying shares in Japan on July 4, 2019. Considering Berkshire's current capital in more than $700 billion in equity equity, it takes a lot of patience to build a position through open market purchases, and it will take a long time for the target company's stock price to remain at a "friendly" price level with a relatively cheap valuation. The process is like the turn of a bulky battleship. In the early stages of our Berkshire development, we have always had a small U-turn and a quick U-turn, and we have never faced the huge disadvantage of such a large boat and a slow U-turn.

Last year, in 2023, we increased our holdings in the five largest Japanese trading companies, and it was an investment move after I went to Tokyo with Greg Abel to talk to the management of the five major trading companies.

The total cost of our investment in the shares of Japan's top five trading companies is 1.6 trillion yen, and the total market value of these holdings will be 2.9 trillion yen by the end of 2023. However, the yen has weakened against the US dollar in recent years, and our unrealized investment income in FY2023 was US$8 billion in US dollars, with a cumulative investment return of 61%.

Neither Greg nor I believe that we can predict changes in the price movements of the world's major currency exchange rates. We also don't believe we can hire someone with the ability to predict exchange rates. As a result, Berkshire invested in the 1.6 trillion yen it used to buy the shares of Japan's five largest trading companies, most of which came from the 1.3 trillion yen bonds we issued in Japan. This yen bond issuance is very popular in Japan. I believe Berkshire now has more yen-denominated bonds than any other U.S. company in terms of market capitalization. The depreciation of the yen resulted in an investment income of $1.9 billion for Berkshire at the end of 2023, which has been amortized into current profit over the four fiscal years 2020-2023, as required by GAAP.

H: Long-term holding

Warren Buffett made it clear that Japan's five largest trading companies are worth holding for the long term.

Personal opinion: Warren Buffett's investment in Japan's five largest trading companies is like index investment.

According to Warren Buffett in this year's letter, investing in Japan's five largest trading companies is considered a stock, alongside Occidental Petroleum, even though it is actually a stock of five Japanese companies:

"This year in 2023, I would like to talk about two other equity investments that we invest in and hold, which we expect to hold indefinitely. Just like the Coca-Cola and American Express stocks, the market capitalization of our holdings in these two stocks is not a large proportion compared to the huge capital size of Berkshire in terms of shareholders' equity. However, these two stocks are worth holding for the long term, and we are fortunate to be able to continue to buy them in 2023, one is Occidental Petroleum and the other is Japan's top five trading companies. ”

Berkshire now owns about 9% of each of Japan's five largest trading companies. (A small reminder: Japanese listed companies do not calculate their outstanding shares differently than U.S.-listed companies.) ）”

Berkshire also pledged to each of Japan's five largest trading companies that it would not buy additional shares, giving us more than 9.9 percent of the shares. ”

This is similar to Warren Buffett's buying of the stocks of the four major American airlines at the same time, holding less than 10% of the shares.

It can be roughly seen as Warren Buffett's investment in the Japan General Trading Company Industry Index Fund.

Because the four major U.S. airlines are enough to represent the U.S. aviation industry, these five major trading companies are also enough to represent the entire industry of Japanese general trading companies.

(The article only represents the author's point of view and does not represent the position of this journal.) The individual stocks mentioned in the article are only for analysis and do not make investment advice. ）