On May 4th, Beijing time, Buffett held the annual Berkshire Hathaway offline shareholders' meeting with two new leaders.

Unlike previous years, this meeting seemed to attract particular attention from self-media. Many self-media not only reposted videos from the scene online but also commented on some of Buffett's recent investment cases.

Among these investment cases, I found Buffett's investment in Japanese trading companies in 2019/2020 to be particularly interesting.

According to Buffett's old partner Munger's recollections and publicly available market data, Buffett's investment in Japan was roughly as follows.

Buffett used a U.S. dollar deposit as collateral and borrowed Japanese yen at a market interest rate of 0.5% (10-year rate). (There is also data online suggesting that Buffett's yen borrowing rate was less than 0.2%.)

Buffett bought stocks of Japan's five major trading companies, namely Mitsui & Co., Mitsubishi Corp., Sumitomo Corp., Itochu Corp., and Marubeni Corp.

When Buffett borrowed yen, the exchange rate was roughly 1 US dollar to 110 yen. As of the time of writing, the exchange rate is approximately 1 US dollar to 150 yen.

When Buffett bought the stocks of the five major trading companies (Mitsui, Mitsubishi, Sumitomo, Itochu, Marubeni), their stock prices were approximately 1900 yen, 1700 yen, 900 yen, 2200 yen, and 700 yen. As of the time of writing, the stock prices of the five major trading companies are approximately 7600 yen, 3500 yen, 4300 yen, 7300 yen, and 2900 yen (details can be found at https://cn.investing.com/equities/).

From a return perspective, the stocks of the five major trading companies, priced in yen, have increased at least two-fold (Mitsubishi) and up to nearly five-fold (Sumitomo).

If Buffett were to choose to repay in US dollars (of course, Buffett does not need to do this), then the amount borrowed in US dollars that year would now only require 0.73 US dollars to repay due to the depreciation of the yen.

Regarding this typical investment case, there are several popular opinions online:

Buffett is reaping profits from Japan.

Buffett is heavily invested in Japan.

Buffett is making a risk-free profit.

Saying that Buffett is reaping profits from Japan sounds like taking advantage of the situation.

But in reality, Buffett's operations were all conducted in the open market, without any special circumstances or forced operations. Apart from using a U.S. dollar deposit as collateral to borrow yen, which may require a certain threshold, his other operations had no threshold, and any investor who can freely invest in the international market can do the same.

Even if using a U.S. dollar deposit as collateral to borrow yen, countless large institutions worldwide can complete this operation, so for these large institutions, it is not a difficult task either.

If this is also considered reaping profits, many investors, especially institutional investors, can "reap" from Japan. But how many people have actually carried out this operation?

Saying that Buffett is heavily invested in Japan is an exaggeration.

Based on publicly available data online, as of the fourth quarter of 2023, the total market value of assets held by Buffett reached $1 trillion, and the market value of the stocks of Japan's five major trading companies held by him was 2.9 trillion yen, equivalent to approximately $200 billion. This holding represents only 2% of his total holdings.

Can this be considered "heavy investment"? At most, it is just a small investment for Buffett.

This is like in our cryptocurrency allocation, using 2% of the funds to buy a coin. I'm afraid no one would consider this a heavy investment, right?

Saying that Buffett is making a risk-free profit, from the results, it seems so—using borrowed money for investment, he not only has more than enough to repay the principal but also receives substantial returns.

But in my opinion, the reason he used a U.S. dollar deposit as collateral to borrow yen instead of directly using dollars to invest more was more to avoid the risk of exchange rate fluctuations, rather than planning this risk-free profitable investment from the beginning.

So many of the opinions in the market seem to be sensationalized.

I believe that this investment is actually another typical value investment by Buffett.

The five major trading companies in Japan have huge assets overseas and almost control various fields of commercial circulation in Japan. According to Buffett's evaluation criteria, they are undoubtedly monopolistic enterprises.

The dividends distributed by these five major trading companies each year are close to 5%, providing very stable cash flow for shareholders. They are very much like insurance companies that provide continuous cash flow to support Buffett's continuous investments.

In addition, as long as the stock prices of these five major trading companies do not continue to fall too low, the 5% dividend each year is enough to cover his 0.5% borrowing rate.

So from various perspectives, the five major trading companies in Japan were quite valuable and good companies at that time.

Finally, what best suits the old man's taste is: after nearly 30 years of bubble deflation in the Japanese stock market, the stocks of the five major trading companies no longer have much room for speculation, and their prices are clearly undervalued.

Buying good companies at prices below their intrinsic value is Buffett's consistent style and operation.

When I first looked at this case, I was a little puzzled:

The old man had emphasized on multiple occasions that investors should not borrow heavily for investment.

But in this case, the old man did borrow, although the amount borrowed was not large and completely within the range of manageable risk, I can understand. But I was still curious about the mentality and reasons behind the old man's borrowing investment operation.

Later, I found the answer in Munger's book:

Munger, in response to an investor's question about Buffett's somewhat strange investment operation, smiled and said (in essence) that Buffett sometimes plays some small games on a whim.

When I read this, I understood: it's like an investor who is serious about investing but occasionally goes to the casino on weekends to relax. However, such an investor would never treat the casino's games as serious investments.

Even if it's a game, Buffett's investment in Japan still embodies his classic value investment approach.

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