It’s no secret that the US market has outperformed Japan’s for many years. However, one cannot deny the potential for solid returns through wise investing in international markets. Berkshire Hathaway, led by the celebrated investor Warren Buffet, has recognized this potential and made a surprising move. In August 2020, the company announced that it had acquired just over 5% stakes in each of the five major Japanese companies, indicating a notable pivot toward international investing. In April of this year (2023), Buffet went in again and increased his stake in the companies, https://seekingalpha.com/news/3955708-warren-buffett-said-to-ramp-up-bets-on-itochu-mitsubishi-other-japanese-trading-houses
So, what are these five companies? Why has Berkshire Hathaway invested in them? What does this tell us about the value of investing abroad, particularly in Japan? Let’s dive in.
The Five Japanese Companies: An Overview
The companies Berkshire Hathaway has invested in are all known as sogo shosha or general trading companies. These are some of the largest and most diversified companies in Japan, with operations spanning numerous industries, including energy, metals, food, textiles, and machinery. The total value of the investment was estimated to be around $6 billion.
ITOCHU Corporation (ITOCY): As one of the leading sogo shosha, ITOCHU has a diverse portfolio. It’s involved in domestic trading, import/export, and overseas trading of various products and also has investment and business operations globally.
Marubeni Corporation (MARUF): Known for its strong network and expertise in various industries, Marubeni operates in a wide array of sectors, from food and consumer products to energy and chemicals.
Mitsubishi Corporation (MSBHF): Mitsubishi Corporation is Japan’s largest trading company and a significant player in the global economy. Its diverse business includes consumer industry groups, natural gas, industrial infrastructure, and more.
Mitsui & Co. (MITSF): Mitsui operates in seven business areas: Metals, Machinery & Infrastructure, Chemicals, Energy, Lifestyle, Innovation & Corporate Development, and Mineral & Metal Resources. It is recognized for contributing to societal prosperity while creating globally competitive businesses.
Sumitomo Corporation (SSUMY): Sumitomo is a leading sogo shosha, engaging in multifaceted business activities across a wide range of industries. These include metal products, transportation, infrastructure, and media.
The Japanese Market: Slower Growth Compared to S&P 500
The Japanese stock market has long been overshadowed by the rapid growth of the US market, as reflected in the performance of the S&P 500. Over the past decade, the S&P 500 has significantly outperformed Japan’s primary index, the Nikkei 225. While the Nikkei 225 has shown periods of strength, it has struggled to maintain a consistent upward trajectory, hindered by a combination of economic, demographic, and structural challenges.
However, slower growth doesn’t necessarily mean a lack of opportunity. As the third-largest economy in the world, Japan presents substantial investment opportunities across numerous sectors. Buffett’s investment in the five sogo shosha is evidence that well-respected investors recognize the potential in the Japanese market.
The Value of Investing Abroad
Investing abroad allows for diversification, a vital strategy to mitigate risk in any investment portfolio. While US-based companies may dominate some portfolios, there’s value in exploring international markets that might offer solid returns. The world’s economy is interconnected, and many companies outside of the United States have significant growth potential.
In the case of Japan, while the market’s growth rate may be slower compared to the S&P 500, it boasts a robust business environment, stability, and an array of diversified industries that can offer compelling investment opportunities. Additionally, the Japanese market is known for its emphasis on long-term planning and steady performance, traits that align with Berkshire Hathaway’s investment philosophy.
Moreover, investing abroad can offer exposure to different economic cycles. Some markets may outperform others at different times, based on varying economic factors and conditions. Therefore, having international investments can potentially smooth out returns over time.
The investment in the Japanese companies by Berkshire Hathaway is seen as a vote of confidence in the Japanese economy. Furthermore, it is interpreted as a sign that Buffet believes these companies are well-positioned to benefit from the global economic recovery, particularly as economies rebound from the effects of the COVID-19 pandemic.
Potential Risks in Investing Abroad
While investing abroad can provide diversification and exposure to different growth dynamics, it’s crucial to acknowledge the risks involved. These can include geopolitical risks, currency risks, and differences in regulation and corporate governance. Moreover, there are unique risks associated with investing in Japan, including demographic challenges and persistently low inflation. However, with diligent research and potentially the use of financial advisors or internationally focused mutual funds, these risks can be managed.
Conclusion: Unveiling the Rewards of International Investing
Berkshire Hathaway’s significant investment in the five Japanese companies is an affirmation of the potential rewards that international markets can offer to investors willing to diversify their portfolios. Despite the slower growth of the Japanese stock market compared to the S&P 500, the country’s diversified industries and stable business environment present unique investment opportunities.
While it’s crucial to consider the inherent risks in international investing, the move by one of the world’s most respected investors into the Japanese market serves as a clear indicator of the potential benefits that can be gained. As always, investors should do their research and consider their risk tolerance and investment goals when deciding whether to invest abroad.
The world’s economy is increasingly interconnected, and as the global economic recovery continues, it will be interesting to see whether other investors follow Berkshire Hathaway’s lead in diversifying their portfolios with foreign investments.
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