This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below. The author may hold positions in any of the securities mentioned.
Depending on your interest in Berkshire Hathaway, today's note will either be super interesting or overwhelmingly dry. Below is a short excerpt of why I find Berkshire's big investment in Japan's trading houses (aka sogo shosha) different & worth discussing.
Around this time in 2020, Berkshire announced that it had amassed a 5% stake in each of the five leading Japanese trading companies (Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo) over a 12 month period (for about US$7bn; now probably worth c.US$8.5bn).
Although I generally find that Berkshire gets too many headlines, below is a summary of why this particular investment is interesting compared to others (e.g. Apple, Coca Cola or Moody’s).
The complexity of these trading houses is such that it requires significant amounts of time to understand their underlying businesses, unlike Coca Cola. These conglomerates essentially provide financing and partnership to a lot of goods and services throughout Japan
Even with significant sell-side coverage, the business divisions are diverse and forecasting risk (at a business unit level) is relatively high
Japan, compared to US & China, is not generally seen as the main engine room for growth based on them experiencing several years of economic stasis
Generally, these companies have high gearing/volatility and have a low ROA. Offsetting this, they often trade at a discount to book value and have a ROE at c.10%
This is a position in the oligopoly players, not in one market leader (e.g. Coca Cola)
He has hedged the Yen position with long-dated cross-currency debt
Snapshot of these companies set out below
Only time will tell if this bet on Japan’s trading houses proves successful, however, it is a big vote of confidence for Japan's trading houses to get such an investment from one of the US’ most respected investors. It also suggests that the competitive landscape is such that all five players will remain relevant in the medium to long term.
Finally, it is worth noting that these businesses will perform well if the price of inputs increases (provided they can keep their leverage in check). Since we are experiencing record and low interest rates, it is not controversial to suggest this is a very long-dated inflation hedge for Berkshire
Kommentare