Japanese stock market hits record high, Berkshire Hathaway profits $8 billion from investments in five major trading companies

The Japanese stock market has recently hit a historic high after decades of stagnation, with the Nikkei 225 index surpassing the 39,000-point mark for the first time since 1989. Berkshire Hathaway, the investment firm led by stock market guru Warren Buffett, mentioned in their 2024 annual letter to shareholders that their investments in Japan's five major trading companies over the past few years have brought them $8 billion in profits.

Berkshire Hathaway has been buying shares of Japan's five major trading companies since 2019

Berkshire Hathaway started buying shares of Japan's five major trading companies - Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo - in July 2019. Given Berkshire Hathaway's current size, acquiring positions through open market purchases requires great patience and a longer period to obtain better prices without disrupting the market.

Currently, Berkshire Hathaway holds approximately 9% of each of these five companies. In order not to affect their management rights, Berkshire Hathaway has also promised each company not to acquire more than 9.9% of their shares. The total investment cost for Berkshire Hathaway in these five companies is 1.6 trillion Japanese yen, with a year-end market value of 2.9 trillion Japanese yen. However, due to the recent depreciation of the Japanese yen, Berkshire Hathaway's unrealized USD gains at the year-end were 61%, or $8 billion.

Buffett also mentioned that Berkshire Hathaway will continue to passively hold long-term shares in Japan's five major trading companies because the business models of each company are highly diversified, similar to Berkshire Hathaway's own business approach.

Difficulty in managing foreign exchange risk, issuing Japanese yen bonds to buy shares

Investing in Japanese stocks requires using Japanese yen, but Berkshire Hathaway is not adept at predicting currency market prices. Therefore, Berkshire Hathaway provided funding for most of its positions in Japan by issuing 1.3 trillion Japanese yen bonds. These bonds are popular in Japan, and Japan's long-term negative interest rate policy greatly reduces Berkshire Hathaway's borrowing costs. The depreciation of the Japanese yen also brought Berkshire Hathaway a year-end profit of $1.9 billion.

The chart below shows the trend of the Japanese stock market from July 2019 to the present. While the Nikkei 225 Index has risen by 76% so far, the Japanese yen has depreciated by nearly 40% against the US dollar. The orange line represents the USD/JPY trend, with an upward trend indicating yen depreciation. If investing solely in Japanese stocks with US dollars, the exchange rate depreciation would eat up more than half of the gains. It is evident that Berkshire Hathaway's method of buying stocks by issuing Japanese bonds is quite clever.

Stock market reflects "true value" only in the long term

Berkshire Hathaway reported a net income of $96 billion in 2023, $90 billion in 2021, and $23 billion in 2022, with Berkshire Hathaway's stock price rising by 15% last year.

However, in the first paragraph of his letter to shareholders, Buffett pointed out that evaluating Berkshire Hathaway's investment value based on "earnings" is very foolish because "earnings" include the unpredictable day-to-day changes in the stock market and even the market fluctuations year after year. As the value investing guru Ben Graham famously said:

In the short run, the market is a voting machine, but in the long run, it is a weighing machine.

The stock market only reflects "true value" in the long term. Buffett also recalled the day he first bought stocks on March 11, 1942, when the Dow Jones Industrial Average dropped below 100 points. After school, Buffett lost about $5, and now the index hovers around 38,000 points.

For investors, the United States has always been a remarkable country. All they need to do is sit quietly and not listen to anyone.