Mohnish Pabrai: The Genius Of Warren Buffett’s Japanese Bets

In his recent interview with FINSEC Law Advisor, Mohnish Pabrai discusses the genius of Warren Buffet’s Japanese bets. Here’s an excerpt from the interview:

Pabrai: Two or three years ago Buffett made an investment, a set of investments, where he bought five to ten percent stakes in a bunch of Japanese trading houses, and it wasn’t a lot of money, I think it went like six, seven billion dollars went into that, which is very small for Berkshire.

But the interesting thing is that when he did that investment the entire amount he invested, the entire seven billion he invested he borrowed in Yen, in Japan, and he borrowed it at like a half a percent a year or something.

So here’s Berkshire Hathaway sitting with hundred billion of cash earning nothing sitting in U.S Treasuries earning nothing like quarter of a percent or something, and he goes and invests in these three or four Japanese companies and he doesn’t put up his own money, he borrows the whole thing.

And the reason he did that was that these companies had a dividend yield of seven/eight percent and he probably also understood that they were cheap, they were sitting quite cheap.

Now what has happened in the last three years is all of them have moved up like 50 to 70 percent and he’s paying that half percent interest, and he’s collecting seven percent dividend.

So this is what Munger describes as he says Warren has a very large brain, and that brain needs to be active, but it needs to be active in a manner that is not detrimental to Berkshire Hathaway.

So this Japanese bet is not going to do anything for Berkshire Hathaway but what it does is it soaks up brain power for Berkshire.

It is this kind of funny interesting mathematical game where he is able to show the world that hey look here’s something that was sitting there, where I couldn’t put a lot of money into it but I go to 6/7 billion and without any risk really I’m going to make several billion on it. I mean the annualized return on that and the annual return on equity invested is infinite. It’s a crazy bet!

You can watch the entire discussion here: