The Primary Reason Why Warren Buffett Acquired Stakes In Japanese Companies

A key takeaway from the 2007 annual shareholders meeting emphasizes the need for ‘diversifying’ in the long-term

Image: The Street

The five companies were Mitsubishi Corporation, Mitsui & Co. Ltd, Sumitomo Corporation, Itochi Corporation and Marubeni Corporation.

But the question still remains. Why Japan?

Isn’t the Asian giant still impacted by small amounts of deflation?

By early 1990, the P/E ratio of the overall Japanese market was close to 60 times its trailing 12-month earnings and it was roughly 4 times more expensive to buy an apartment in Tokyo than it was in California.

Japan is an advancing nation in terms of technology, healthcare, and education but its citizens are carrying the debt burden of their previous ancestors. Parents of the average Japanese teenager didn’t cash out on their stock market and real estate gains when they had the chance, and some are holding their assets at “unjustified prices” even today.

Japan were the pioneers of quantitative easing (QE) whereby the Bank of Japan had also bought into listed securities in addition to keeping the economy progressing at a rapid pace, a step the Federal Reserve chairman Jerome Powell is currently undertaking to keep the US economy afloat.

In his 2007 annual shareholder meeting, Mr. Buffett indicated that the value of the US Dollar may decline against major currencies when the carry trade made it expensive to own foreign currencies directly.

All this goes to show the wisdom of a 90-year-old prodigy who is always prepared to diversify his risk profile on behalf of his company and shareholders since diversification is one of the many keys to unlock the doors and escape the perils of a “recessionary blow-up”.

Image: Gilly on Unsplash



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