Warren Buffett's recent investment strategy has piqued the interest of many investors around the world, particularly his sizable investment in five major Japanese trading companiesBuffett, who is known for his preference for American stocks, has rarely ventured into overseas markets but has made an exception worth exploringIn late November, his company, Berkshire Hathaway, took the rare step of simultaneously increasing its stakes in Itochu Corporation, Marubeni Corporation, Mitsubishi Corporation, Mitsui & Co., and Sumitomo CorporationAfter the purchase, the stakes in these companies ranged from 6.21% to 6.75%. The question that arises is why Buffett chose to invest in these five companies at once instead of selecting the best value among them.

These five trading companies, collectively known as sogo shosha, account for a substantial portion of Japan's import and export business

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They engage in diverse activities that span a variety of industries such as food, textiles, energy, and metalsDue to Japan's resource scarcity, the role these companies play in the economy is significantly crucialA familiar example for many is the three largest convenience store chains in Japan—7-11, Lawson, and Family Mart—each of which is backed by one of the trading companies: Mitsui holds substantial shares in 7-11, Mitsubishi in Lawson, and Itochu in Family Mart.

Mitsui & Co., the oldest and one of the most prominent of these trading firms, was even noted for its expansive reach and diverse business portfolioThe company's representative in China once remarked that instead of asking what their company does, one should ask what they do not do, emphasizing their vast involvement and opportunistic approach to business—except for areas like illegal drugs and weaponry.

Buffett's confidence in these five companies can be attributed to their solid financials, with a return on equity (ROE) around 10% and a healthy dividend yield of about 3%. These companies provide a sense of stability, especially beneficial to an economy like Japan, which is simultaneously characterized by low growth and limited resources

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With Berkshire Hathaway's cost of capital being less than 1%, the situation sets up an almost risk-free arbitrage opportunity.

Buffett's foray into Japan started in August 2020. At that time, the global oil market was in disarray due to an oversupply problem following the crisis marked by negative oil pricesThe investment strategy appeared counterintuitive given the prevailing market conditions, but Buffett saw potential in the long-term hold of these companiesWith a total investment of around $6.25 billion, these have gained significant traction, with observed gains between 50% to 120% in the following years as commodities saw considerable rises in prices.

The recent decision to increase stakes is aligned with Buffett’s historical strategy of investing in undervalued companies, echoing Benjamin Graham’s "cigar butt" philosophy of looking for opportunities at unattractive prices

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What differentiates this investment strategy is Buffett’s enhanced criteria for qualityAlthough he aims for stocks trading below their net asset values (NAV), his acceptability threshold for price-to-book ratios has escalated compared to the past.

Buffett's current investment in Japan exhibits strategic brilliance further highlighted by the financing methods utilizedStarting in 2016, the Bank of Japan instituted a negative-interest-rate policy, which made borrowing costs significantly lowBerkshire Hathaway capitalized on this by issuing yen-denominated bonds in 2019 and 2020, raising around $6 billion to fund these acquisitionsThe average yield of stocks in his Japanese portfolio surpasses the low borrowing costs, amplifying the profitability of the investmentEach of these investment maneuvers outlines a classic case of textbook risk-arbitrage.

This investment framework also addresses Buffett’s expectations surrounding market performance in times of economic challenges, demonstrating adaptability and foresight

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At a time when many companies faced dim prospects, Buffett sought solace in markets that seemed undervalued relative to their potentialAs he advised in a past speech, focusing on high-quality businesses that can outshine economic adversities is pivotal—especially when investor sentiment swaysToday, companies like Baijiu maker Kweichow Moutai or advertising company Focus Media Trading have exhibited similar traits—strong balance sheets with low valuations and yielding attractively high dividends.

In conclusion, Buffett’s investment logic regarding the five Japanese trading companies signifies a calculated embrace of stability and long-term potential amidst fluctuating global marketsHis distinctive approach intertwining low-cost capital and sound investment principles serves as an essential case study for not only seasoned investors but also for those absorbing the fundamentals of market investment