Warren Buffett has been in the news a lot lately because of his unconventional investing decisions. Although Buffett himself has never been an advocate of market timing, he had ensured his shareholders, adequate risk protection during the past financial crashes.
His business partner, Charlie Munger, who according to Mr. Buffett is one of the smartest individuals he has ever known also made investments outside the US, in particular China, where the risks of corporate governance, shadow banking, and shadow companies have always persisted to be overshadowed by the likes of “fundamental” companies like Alibaba.
Mr. Buffett has always put “America first” as his key motto and in search of wonderful businesses he rarely went outside his comfort zone, even when the likes of Charlie Munger, Ray Dalio, and Seth Klarman have always diversified their holdings across the globe.
However, Berkshire Hathaway’s decisions to invest in five Japanese companies might have had taken the “investing world” by storm.
According to the Wall Street Journal, “Berkshire Hathaway Inc. took stakes of slightly more than 5% in five of Japan’s most venerable corporate names with big investments in energy”.
The five companies were Mitsubishi Corporation, Mitsui & Co. Ltd, Sumitomo Corporation, Itochi Corporation and Marubeni Corporation.
The combined stake in the five companies was estimated to be close to $6 billion USD and all these entities are deemed to be wonderful conglomerates that host a range of diverse businesses under their umbrella.
Buffett has always been a fan of boring, defensive stocks and after the acquisition of Dominion Energy in early April 2020, his recent shift in selling banks and acquiring energy companies may indicate his outlook towards the overall macroeconomy.
But the question still remains. Why Japan?
Isn’t the Asian giant still impacted by small amounts of deflation?
According to the book “Devil Take The Hindmost” anecdotes and statistics for the Japanese housing bubble can be referred to in order to better understand Japan’s current macroeconomy.
From 1956 to 1986 land prices increased a whopping 5000% even though consumer prices only doubled and ever since the 1980s share prices in Japan’s premier index, “Nikkei” increased three times as much in comparison to the corporate profits reported by the companies behind those shares.
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.
The large-cap stocks yielded a return of 22.43% from 1970 to 1989 whereby a $100,000 investment from 1970 would have returned $5.7 million in 1989.
But the unfortunate saga that followed is one that is being witnessed by the world even today.
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.
This is where traders and technical analysts might have to say and suggest that “buy and hold” doesn’t work.
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.
Mr. Buffett may finally give up on “home country bias” as he seeks to diversify his holdings across various countries. Even though his selection of companies are more or less the same ( i.e- stable, mature businesses that generate a reliable cash flow year on year) diversifying into other territories may indicate Mr. Buffett’s sentiment towards the US Dollar.
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.
This was a point when Berkshire Hathaway had $20 billion in foreign currency exchange contracts and Mr. Buffett was shifting towards buying stakes in foreign companies like PetroChina, POSCO, and Tesco in foreign currencies.
Later on in 2009 after the global financial crisis had gone live, Buffett mentioned that the best protection power against inflation is “your own earning power” and the next best thing is to “own wonderful businesses”.
He had hedged his position through derivative contracts, acquiring convertible securities for certain bank stocks in addition to some of his foreign holdings to weather out the storm that other businesses were facing, and later on, began the 2010 meeting rather comfortably as each share of Berkshire Hathaway Class-A trading at upwards of $99,000.
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”.
Rarely do individuals make the right calls at the right time. During the 90s most people were certain that Japan would surpass the US. However, if one looks past the sands of time, history would suggest otherwise.
Thus, what appears to be a deflationary economy now, might reverse its course if a major economic disruption were to occur.
Disclaimer: This article is for information purposes only and should not be treated as financial advice. Please consult a financial advisor prior to making any investment decisions.