Warren Buffett has finally answered a question that has long intrigued investors: What sparked his interest in five Japanese trading houses in 2020, a bet that is now worth more than $25 billion?
The answer was hiding in plain sight: “I was just going through a little handbook that probably had two or three thousand Japanese companies in it,” he told investors at the annual general meeting in Omaha, Nebraska, earlier this month, shortly before announcing his resignation as head of Berkshire Hathaway Inc. “There were these five trading companies selling at ridiculously low prices. So I spent about a year acquiring them.”
It’s the same screening methodology the typical Japanese retail trader uses. The “little handbook” is the Kaisha Shikiho, the “bible of Japanese equities,” indispensable for the country’s stock-pickers. Released quarterly for ¥2,800 (around $20), the Shikiho is a thick, dictionary-sized guide listing facts and figures on every one of the country’s nearly 4,000 listed companies.
Buffett’s approval should have thousands of his acolytes flocking to the English version, known as the Japan Company Handbook and spotted on his desk as far back as 12 years ago. But in a remarkable fumble, the publisher last year discontinued the English version, just months before the world’s most famous investor endorsed it.
Perhaps that makes it harder to find stock gems, giving an advantage to the patient investor that he has long championed. Fortunately, it’s not the only lesson on investing in Japan he imparted. Until now, Buffett has largely let his money do the talking — but recent remarks reveal lessons on investing there that more should know.
Realize the opportunity
“Tim Cook would tell you that iPhone sales there are about as great as any country outside the United States. American Express would tell you that they sell their product very, very well in Japan. Coca-Cola, that we do business with, another big investment of ours, does extraordinarily well.”
While more people are paying attention to Japan these days, thanks to soft power and inbound tourism, it remains overlooked in everything from its approach to demographics or healthcare, to the investing opportunities that abound.
And as Buffett notes, it’s a colossal market not just for iPhones and Coke but the second largest for music, the third largest for movies. Something as obscure as the pachinko gambling business generates 10 times the revenue of all the casinos in Las Vegas combined. Yet some combination of cultural barriers, the slow pace of change, or the existence of faster-growing neighbors, means it gets less attention than it deserves.
Andrew McDermott of Mission Value Partners, a longtime investor in Japan who Buffett sought advice from, explains how the Oracle became “increasingly comfortable with Japanese companies and increasingly uncomfortable” with the then-in-vogue China. In 2012, Buffett “remarked that he’d rather invest in Japan than anywhere else in the world,” McDermott wrote in a blog post. And if that’s not enough, consider its position internationally: A strategically vital nation that advocates free trade and fair courts. These days, those are in short supply. Buffett suggested macro factors like another Bank of Japan rate hike wouldn’t dissuade him from investing further. Others should take note.
Embrace the difference
“They have some different customs than we have. They drink Georgia coffee as their number one Coca-Cola product. I haven’t converted them to Cherry Coke, and they’re not going to convert me to Georgia coffee. But it’s a perfect relationship.”
Georgia is a brand of canned coffee served in vending machines and convenience stores across the country. Cherry Coke is very occasionally available as a novelty. As Buffett suggests, to each their own: He understands what many who’ve left the country frustrated do not: That Japan is its own place, and it’s these differences that make the country, and its firms, compelling.
The biggest stocks are successful not in spite of their idiosyncrasies, but because of them. Consider how Toyota Motor Corp. has defied investor pressure to shift to electric vehicles, becoming the top-selling automaker five years running by focusing on hybrids. Or Nintendo Co., which faced down calls insisting it must abandon its own hardware and shift to mobile games; a decade and $100 billion in Switch sales later, the stock trades just off an all-time high. These firms might not put shareholders above all else, but they build lasting brands that reward the long-term investor.
Don’t expect overnight change
“We don’t have any intention of trying to change what they’ve done because they do it very successfully. Our main activity is just to cheer and clap.”
A lengthy time window is crucial when it comes to Japan. While it doesn’t always need to be the decades Berkshire plans, expecting rapid change is a recipe for disappointment. To follow Buffett, the strategy is to find the good management teams and “cheer and clap,” rather than lecture.
While Japan is becoming more receptive to outside shareholders, investors who work with management long term, rather than against them in a short investment period, still seem most likely to succeed. Consider Third Point LLC’s Dan Loeb. Had he just retained the 7% stake in Sony Group Corp. he held in 2013, Loeb could have turned $1.1 billion into more than $10 billion today — without doing anything.
Foreign investors can help by attracting attention to opportunities and explaining them abroad, something Japanese boards struggle to do (consider how few paid much attention to the trading houses before Berkshire.)
Investing in Japan isn’t for the faint of heart. But ultimately it can reward those who — like Buffett — turn every page.
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