Free Money + Carry Trade: Why Buffett’s Japan Bet is a Masterclass in Value Investing

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Huber discussed Free Money + Carry Trade: Why Buffett’s Japan Bet is a Masterclass in Value Investing. Here’s an excerpt from the episode:

Tobias: Japan was a good one. The more recent Japan one was a good one. How many of those big trading companies did he buy?

Jake: Five, I think.

Tobias: Five. Yeah.

John: Yeah. I think he’s got four or five. Yeah, the investment has been extraordinarily good so far. It’s only been three years. But I wrote a post recently or last year sometime, and I did the math on it. I haven’t updated the numbers recently. But in his first three years as a basket, the first investment, they compounded at over 40% annually from 2020.

Jake: It’s okay.

John: It’s not bad. And that was coincidentally right around the time in 2020 where people were questioning that he had been over the hill.

Jake: Can you imagine?

John: Yeah. And even now, people say, “Well, he did the Apple thing, but he hasn’t made many other bets.” But that Japan investment flies under the radar. That has been an extraordinary investment. And it’s become big. It’s a big position now. I think it’s in his top five. It doesn’t show up in 13F, so I think people overlook it. But collectively, that Japan investment is up there with– Apple is far and away the biggest, but it’s up there with OXY and his Coke investment and some of the others.

Jake: How did you calculate the borrowing at 0% interest to the purchase?

John: I just did it on a cash basis. So, the return on equity over that he’s achieved is astronomical.

Jake: Infinity, almost may be?

John: Indefinite. Because he borrowed money to make the investment. He used debt to fund that investment. To me, I think what he’s doing is he wanted to keep his Japanese assets paired with Japanese liabilities. So, he’s borrowing money in yen, so that he doesn’t have to worry about the currency. He wanted to make an investment– I see a lot of people talking about how he’s doing this incredible arbitrage with the cost of debt, and he certainly is taking advantage of Berkshire’s AAA credit. But that in and of itself is not– I don’t think that’s the reason he did the investment. I think he saw these stocks as incredibly undervalued, and he’s like, “How can I fund it? I can fund it with cash, which I have plenty of.”

Jake: Free money.

John: “I can fund it with 1% long term debt.” [Tobias laughs] “Oh, let’s fund it with 1% long-term debt,” and then don’t have to worry about the currency to boot.

Jake: Yeah, especially with the dividend policies that tend to be with those companies. The carry trade that he put on made it like time then can just– It could take as long as it needs to, I’m getting paid pretty adequately for my effort.

John: He’s making a net interest margin of 4%. Probably even much higher than that on a cost basis, because these companies have increased their dividends. So, his cost of funds are 1%, and he’s probably collecting dividends that I would bet in excess of 7% or 8% on his cost basis right now. So, his net interest margin is probably double that of Bank of America, and he’s taking far less credit risks. So, not a bad investment.

Jake: He might be okay at this.

John: [laughs] He’s still got it.

Tobias: You see that Facebook is going to start paying a dividend?

John: I saw that. Yeah.

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