Warren Buffett’s Japan Carry Trade

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During their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Warren Buffett’s Japan Carry Trade. Here’s an excerpt from the episode:

Tobias: We haven’t talked about Buffett buying– Was it 2017? He’s bought five of the Japanese trading companies that are– They all have thousands of subsidiaries. Do you think that he’s done the same level of diligence that he’s done? Do you need to? Is it like buying a basket and then he’s cauterized it with Japanese yen, borrowing in Japanese yen, so he’s got this gigantic carry trade going on? The dividends are already up 70% on those positions. That’s not bad for the old fella.

Bill: Nice. Smart guy. I don’t know. [crosstalk]

Jake: He sticks with it, he might-

Tobias: Make something of himself.

Jake: -might make something of himself. Might be pretty good at this.

Bill: Yeah.

Jake: Yeah. Well, just [crosstalk] legendary.

Bill: I didn’t actually watch him– [crosstalk]

Jake: No, it’s good. I find the psychology part interesting of how he interacts with management in this situation.

Tobias: Yeah.

Jake: So, he bought 5% and then he wrote them a letter, as one would, and said, “We won’t go over 9.9% without your blessing.” So, there’s an implicit– And then, of course, they welcomed him in, and then he went and talked to him, and he’s bought more. I think they’re in that way similar to– He’s able to hold people to doing things that he wants them to do by praising them in that direction. I think there’s something really smart-

Tobias: It’s clever.

Jake: -and important to think about that. I don’t know if that applies to your children or where else you can use that in life, but I think there’s something intelligent in that we could all learn from.

Tobias: Yeah, I agree. You had a few good bullet points out of the conversation you had with Becky. Can you run through those quickly? Do you know them off the top of your head?

Jake: Uh, maybe.

Tobias: He’s brought, John DeGrummond says, 7.4% of 5 trading houses. And the leverage the yen. And so, he’s borrowing at 0.5% in yen terms. He’s getting dividended up more than that, and the dividends are up considerably over the period of time.

Bill: I think the math works on that.

Tobias: Yeah.

Jake: Oh, that’s the other thing is, while he was over there chatting with them, he mentions, “If you’re open to incremental investment and you have deals, give us a call and we might be able to help out. We’ll pick up on the first ring and let you know within five minutes.”

Tobias: And we have an unlimited balance sheet.

Jake: Yeah. And so, think about that. He says he was surprised to be able to buy into these companies at a 14% earnings yield, which is like 7 PE, if my math checks out-

Tobias: Always checks out.

Jake: -with a growing dividend. And then, imagine basically saying, “Hey, if you want to do any M&A in this cheap environment, boy, that might be a good use of capital and we can give you more if you need it,” in a way, breaking the ossification that characterized Japan, Inc., over the last 30 years. He might be helping to chip away at that, actually, through capital allocation and the encouragement of the right moves within capital allocation. So, I wouldn’t be surprised if 20 years from now, this is setting in motion a ball that actually is a renaissance of Japan, Inc., in a good way for them, for everyone, really, and that if Berkshire doesn’t come out smelling like a rose on the whole thing.

Tobias: What do you make of him actually flying over where he didn’t need to do that when he bought the positions, and he wrote them a letter? So, two questions. What do you make of him flying over? And then why a letter versus a call? Do you think a letter, it’s more black and white and written down, like, we can hold you to it now or hold it itself to it?

Jake: It’s a very respect-based culture, as well. I think showing up is a– [crosstalk]

Tobias: But didn’t he buy them in 2017?

Jake: [crosstalk] gesture.

Tobias: We’re here in 2023.

Bill: He’s an old school cat though. I think he likes letters. I was told to handwrite him a letter when I wrote him. And it worked. Then, I don’t know where the letter that I got back is. But I have a picture of it, so I got that going for me.

Jake: Yeah. [laughs]

Bill: I think I’ll find it. I think it’s in some book.

Jake: Fair enough.

Bill: Too many moves, man. Too many moves.

Tobias: So, what’s interesting?

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