Warren Does Japan

On August 30th it was revealed that Berkshire Hathaway had acquired roughly 5% stakes in Japan’s five leading trading companies.  Since then, many have made the attempt to get into Warren’s head to ascertain whether he’s calculating or losing his marbles.  Depending on your politics and views on economic theory a case could be made in either direction as well as somewhere in between.  What follows is my effort to get into the Oracle’s brain to decipher his thought process through his own words (as compiled by The Motley Fool).

“Never invest in a business you cannot understand.” and “Buy companies with strong histories of profitability and with a dominant business franchise.”

First and foremost, these are businesses he understands.  Perhaps not in the particulars, but in the structure.  They are all vertically integrated conglomerates as is, to a large degree, Berkshire.  Perhaps a look at the two trading companies he ignored can enlighten us further.  First is Sojitz Group which in a cursory overview appears to be less robust than the others, with some dependence on franchise and consulting operations.  Its dividend also failed to meet last year’s, probably Covid related.  The other is Kanematsu Corporation which has a technology bent which Warren tends to shy away from.  Either of these issues may be cause for the snub.

Of the select five, all but Itochu Corp are keiretsu members, however Itochu’s structure is similar.  During recent years, primarily as a result of mergers, the trading company role has expanded to pretty much include negotiating financing of which the traditional bank partner may be a participant.  As such, I neither see corporate structure as a positive or negative with any of these. 

“When stock can be bought below a business’s value it is probably the best use of cash.” and “Many management [teams] are just deciding they’re gonna buy X billions over X months. That’s no way to buy things. You buy when selling for less than they are worth. … It’s not a complicated equation to figure out whether it is beneficial or not to repurchase shares.

Bram de Haas has penned a series recently published on Seeking Alpha in which part of his speculation on Warren’s attraction was predicated on buybacks.  This is perhaps part of the equation but I tend to believe it’s only the icing on the cake as Warren’s criteria is more nuanced.  Even so, Bram’s work is well worth a read for a deeper dive into these company’s operations and financials. 

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.

Synergy is certainly a watchword for this transaction.  Imagine the obvious:

  • Berkshires recent purchase of Dominion’s natural gas assets included Cove Point, an LNG export facility.  Loads transported on, insured by, stored in, distributed through, logistics management by and financing and settlement provided by ‘in-house’ or select partner companies
  • Extrapolate across the hundreds of subsidiaries – you get the picture …

Little wonder in his sentiment, “I hope that in the future there may be opportunities of mutual benefit.”

“On the margin of safety, which means, don’t try and drive a 9,800-pound truck over a bridge that says it’s, you know, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds.”

This, I believe, is core to his decision and similar in nature to his Bank of America warrants during the financial crisis.  The difference?  Then, he took advantage of a situation that landed on his lap and now he is creating an advantageous situation.  First he acquired the stake over a 12 month period and then issued Yen denominated bonds – offsetting roughly 2/3rds the cost.  Considering the dividend average is significantly higher than his cost of capital he’s locked in probably a 4.5% spread with a hedge against currency fluctuations with the bond issuance.  The only downsides are dividend cuts or the companies going under.

 Reducing the associated risks that he can control effectively ensures the bridge won’t collapse while being crossed – essentially another round of profits in a stellar career.

Considering I’m small potatoes by comparison, I don’t have cost effective access to some of his tools.  Also, the trading companies are like ETFs in that the bad gets averaged into the good – minimizing losses but reducing rewards.  Therefore I’ve chosen to enter the Japanese market through individual companies – a couple being members of the same keiretsu families Warren has selected. 

Of these, the Coca-Cola bottlers are in the red thanks to the pandemic and the suspension of the Olympics. Takeda is still trying to digest Shire and Mizuho was free from a Webull promotion. Mizuho is currently a 2:1 ratio ADR and I’m not sure if the ratio will change post split (reverse). So I’ll buy more next week to avoid losing it. Once I do, the gain will drop to about 11%.

The point of interest to me is the timing. With Takeda in 2019 the outlier, the timing of my acquisitions mirrors Warren’s. Perhaps we have finally achieved peak US dollar – which I thought was upon us a few years ago. But my sense of timing has always been a little suspect. I do have two additional Japanese companies on my watch which I may (or may not) pull the trigger on.

Hope the upcoming week is to your benefit!