Warren Buffett's BIG bets in JAPAN (w/ @InvestingwithTom)

Hey guys, welcome back to the channel! In this video, we've got some big news to cover because news out of Warren Buffett's company Berkshire Hathaway. They put out a press release a few days ago now, where they said that Berkshire Hathaway has acquired a five percent passive stake in each of the five leading Japanese trading companies. So estimates are that this deal in total was worth roughly six billion dollars. After doing a little bit of digging, I was actually struggling to understand this deal or these trades from Warren Buffett because I don't really have that big of a grasp on the Japanese economy or the Japanese market.

So what do I do when I get stuck? Well, of course, I call my third favorite Kiwi in the whole world, behind Peter Jackson and Neil Finn, Tom from the Investing with Tom YouTube channel. We had a great discussion on what these trading companies are, what's the thinking behind each of these trades by Warren Buffett, and what it means for his company, Berkshire Hathaway.

So if you enjoyed the video, guys, make sure you leave a like on it! I should say as well, Tom has actually made his full video of his own on this topic, so I'm going to leave that linked down in the description if you would like to check that out as well. But with that said, let's get stuck into it.

Alright, so the story is here: Berkshire Hathaway has acquired five percent stakes in each of the leading five Japanese trading companies. The companies they listed are Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. I'm sure I've butchered that like nothing else. But first of all, one thing that I don't quite get is I'm not actually too sure what trading companies are. So I was wondering if you could, I don't know, share any insight on how trading companies actually work and what they actually do.

Yeah, sure! I’m sort of in the same boat as you because the first time I saw this, I was like, “Are they acquiring like the Japanese Robin Hood or some sort of stock trading platform? What's going on?” But I’m certainly no expert on any of these individual companies, but I think fundamentally what each of these businesses are doing is, you know, I read an article that they're importing anything from like oil to noodles into Japan—like all sorts of random stuff. Because basically Japan isn't particularly rich in natural resources like Australia or Japan might be. So a lot of the goods and services, or the goods and raw materials, I suppose that they have to use, they sort of import from other parts of the world. Essentially, these trading companies have equity stakes in a bunch of different subsidiaries that facilitate that. It's like a lot of other companies, partnerships, businesses and whatnot, and not even just on Japanese soil; it's like international stuff as well.

Yeah, for sure! It's a little bit tricky to give a specific overview for one of these companies because all of them are doing all sorts of different stuff. It's sort of like asking, you know, what does Berkshire Hathaway do? They've got like 90 different businesses under the hood, and it's kind of similar with this.

Right, okay, that makes a bit more sense. So they've bought five of the top Japanese trading companies, and these trading companies all do different sorts of things. It sounds like it's very much just like it's not a specific play on a specific industry or something like that, but they did say in their press release that Berkshire Hathaway's intention is to hold its Japanese investments for the long term. So I'm kind of interested in what you think—why did Buffett, you know, pull the trigger and say actually we're really interested? Is it just like, is it a broad bet on something, you know, how like you bought into all of the airlines? Or is it just to try and get more diversification? What do you think his thinking might be? Because it kind of seems a bit out of left field, to be honest, for me anyway.

Yeah, I think, um, I guess maybe if we put in the context of Buffett's usual MO, or you know, all the way back to Ben Graham, he's kind of looking at an investment as something that has, you know, low risk of downside—so low risk of permanent loss—and an adequate return. I think, yeah, basically these businesses sort of expose him broadly to growth in Japan. If you look at even just some really basic, you know, sometimes they're a bit crude, but kind of basic valuation metrics on some of these companies, you know, some of them are trading at like PEs of five and free cash flow yields of like 20—like huge returns.

Something that both of us talk about all the time is this idea that when you invest in a business, it has to return a certain amount of cash to you for that investment to make sense. I think the lower the price you pay, the lower that bar is for, you know, cash to be returned. So in my opinion, at least, Buffett's kind of looking around at the universe of potential investment possibilities, and you know, this is just the most attractive thing he's seen. It's sort of like something like an investment in Coca-Cola sort of exposes you broadly to, you know, growth in the U.S. in a lot of ways—like as the population grows, the consumption of all the different brands that Coke owns kind of goes up. I think it's kind of a similar thing with these Japanese companies; it just touches a whole range of different industries. And when you're paying like five times earnings, the downside is probably limited as well.

Yeah, that's kind of what I started thinking as well. Because, yeah, I had just a very quick look and yeah, you're right—we're seeing P/E ratios of like nines, tens. I think there was one which was like 34, but predominantly they're like single digits, which is crazy. And they offer good dividend yields as well. So, I mean, it's kind of if they can hold on and keep paying those dividend yields, you know, he's going to get that dividend return. And, yeah, I guess you're right, like the downside is protected just by the fact that they are so cheap. And then the downside is also protected, I suppose, because generally speaking, they're very diversified. So a lot of things would have to go wrong for, you know, this cheap stock to actually be like in a big pickle.

Now the one thing that I found super, super interesting that you brought up in your video on this topic was talking about the bonds that Berkshire Hathaway sold—was it last year? I think last year. They sold, I think, four billion dollars in bonds, you said in the video. Conveniently now we're looking at these five investments, and I think in total the investments are worth six billion dollars. So, like, what's the strategy here? What's the ploy? Did Buffett literally just raise this cash over in yen and then just use that money to dump it in over the last 12 months in these companies?

Yeah, it is pretty interesting. Like, um, I don't know—maybe we can put the exact numbers up on the screen here somewhere, but all of these bonds are denominated in yen. I think that they're many hundreds of billions or maybe even like trillions of yen, yeah. I think it was hundreds of people—I think it was like 600 and something billion yen.

Yeah, yeah. But I mean, at the time, or today, I guess it’s equivalent to about four billion US dollars roughly. Yes! And the interest rates on these things are like stupidly low—like less than one percent. I saw that, yeah. And it's really interesting because if you think back to maybe like 2008, 2009, when a lot of financial companies in the U.S. were in strife, you know, Buffett was sort of on the other side of these similar types of trades—like he was buying preferred stock and stuff and some of the big financial corporations and getting like seven or eight percent interest.

It's gone beyond the point where making those deals is unattractive for Buffett, and it's gone all the way to where he'd prefer to be on the other side of the table, and he wants to be the one borrowing money from other people because it's so cheap. And, you know, since it's denominated in yen, essentially he's able to borrow this money and unlike, you know, a margin call or something, you can't have that happen because they're bonds and he's a business, not an individual. So, you know, he's borrowing money at less than one percent, he's getting at least a five percent dividend yield from a lot of these companies, and then, like we talked about earlier, they valued pretty cheaply compared to a lot of the U.S. kind of equivalents. So he's got kind of that upside potential as well if they ever go up to a more normal sort of earnings multiple or something like that.

Yeah, that's super interesting because I think you're right. The bonds, I think the 10-year bonds that they issued were, was it like 0.44 or something like that? So if you think about it, so if I'm piecing this together right, and let me know if I'm not, so they've sold these bonds, so they've collected money at this tiny little interest rate that they have to pay off over a variety of different times but it's really, really cheap. And then they've been able to then turn around and see an opportunity in these big trading companies which are diversified, which are paying three, four, five, six percent dividend yields, and now are also in like single digit PEs.

So is this Buffett literally kind of just like arbitraging the system a little bit? Raising a whole lot of money really cheap and just turning around and putting it somewhere where he's going to just almost instantly just turn it into more and more money? Is it kind of like an arbitrage bet, you reckon?

Yeah, I think it kind of is, which is, yeah, a bit of an unusual play for him, I guess, but like it makes sense. He's borrowing money for almost free and he's making five percent on it.

Yeah, and he doesn’t have to deploy any of his own cash. It just kind of is magically, you know, captured four billion of four billion US dollars, and he's making like, you know, I don't know, a five to maybe twenty percent return depending on if there's capital gains.

Yeah, yeah, and these stocks as well. And I guess he would probably assume there is capital gains because of what they said in this press release. He went on and he, well, they made a point to say literally what did they say? Berkshire Hathaway's intention is to hold their Japanese investments for the long term. So clearly, it's not just a pure arbitrage in the sake of, oh, I see this and I see that, you know, they—I guess Buffett definitely is the type of person that would have taken the time to actually look into it and make sure that these diversified trading companies are actually what they cracked up to be and actually do have that long-term potential as well.

Yeah, and interestingly, he also borrowed money at literally a zero percent interest rate in Europe around the same time, at this like start of January last year. He issued some zero percent bonds, which is—it’s crazy, that’s crazy to me that people buy that stuff.

Yeah, well, to be honest, I don't know who would, but I'm no expert when it comes to bonds. There has to be one specific case where that would be enticing to someone out there, I don't know. But yeah, I guess maybe if you buy a bond at zero percent and then you think maybe bonds are going to be like negative two percent at some point in the future, then yeah, zero percent’s worth like so much more.

So anyway, I guess that kind of makes a little bit more sense now. So it seems very much just like a smart, you know, play. It's a very Warren Buffett-y kind of play, you know? He sees value—like I think he's got on the record saying before that, you know, value investing, basically every form of investing, no matter what you do at the end of the day, is value investing.

So while this may not look, you know, super like Warren Buffett, like buying a U.S. bank at, you know, a low P, it's just—it’s slightly different; it's in a different market. He's, you know, looked more at the arbitrage opportunity, but he's still kind of doing as he always has done, I suppose.

Yeah, yeah, for sure! I think, um, yeah, downside's low and upside looks pretty attractive, so he went for it.

Well, it seems like a bit of a no-brainer when you just play out just basic numbers. It seems very good, but yeah. Anyway, um, I think we'll wrap it up there. Thanks very much for your time. I know this is a busy work day for you and I've pulled you out of work for this. But, um, I saw your video on it yesterday, I think it was, and yeah, I just immediately knew that I had to get in touch with you and get you over to explain it a bit more because I was trying to read through this some research, and I just had no idea what was going on. So I appreciate your time! Thanks for coming on the channel and thanks for explaining it to us.

No worries! I appreciate you having me on.