Over last few weeks, the legendary value investor, Warren Buffett increased its stakes more than 7% in each of the five Japanese trading companies was become a hot news. This news has a big influence in the investment management industry. First of all, Japan was classified as a stagnant growth country in the aspect of economists for decades. Second, Japanese companies are losing their competitiveness in the global market. Third, Japanese labor force is aging and shrinking fast due to low birth rate.

So, what attracted Warren Buffett to these five trading companies actually? According to the report, the increasing geopolitical tension is the main motivation. This sounds very logical. Due to the increasing geopolitical tension, Ex-Import or trading activities are becoming more complicated than ever due to the changes of global rules and regulation. A country like Japan that lack of natural resources has to rely on Ex-Import to get external supply. Without the trading activities, Japan cannot be survived. Hence, this kind of trading company (a.k.a Shosha) indeed plays an important role to support whole country.

Berkshire Hathaway under the lead of Warren Buffett invested in five Japanese trading companies, namely Mitsubishi Corporation, Itochu, Marubeni, Mitsui & Co, and Sumitomo Corporation. I gathered some information from the internet and summarized in table below.

First of all, I found that Warren Buffett favors the top largest market value trading companies, although there are some other smaller size trading companies such as Toyota Tsusho (MV = JPY 2,006 billion) and Kanematsu (MV = 144 billion). Anyway, I also believe the size of Berkshire Hathaway made it hard to invest in small and midcap unless Warren Buffett wanted to buyout a whole company. Furthermore, I think the greater size of trading companies means more resources in terms of human capital and financial. This is the advantage of a trading company.

Second, all the five trading companies are currently trading at low PER ratio with two companies’ PBR below 1.0x. However, all the five trading companies have rather high ROE. This high ROE appeals to the foreign investors as most of the Japanese companies have rather low ROE if compared to the US or European companies. How to improve ROE have been discussed for many years by both Japanese Government and Tokyo Stock Exchange. Hence high profitability and low value looks like a great bargain.

As Warren Buffett is a well known long term investor, many people believe that this bring in a long term positive prospect to the Japanese equities market. I have been tracking some Japanese stocks but Warren Buffett is more convincing to anybody to start look for hidden gems in Japan.

Originally published on my blog:

​https://streetanalystblog.wordpress.com/2023/04/22/warren-buffetts-value-investing-in-japan/​