VALUE: After Hours (S07 E34): Buffett’s Japan Trading Houses Bet

During their recent episode, Jake Taylor and Tobias Carlisle discussed Buffett’s Japan Trading Houses Bet. Here’s an excerpt from the episode:

Jake: Okay, let’s talk about that then, and the third deal.

Tobias: So, when he was 90, he announced this deal. So, this is only five years ago now. They’d never really invested materially. Meaningfully, this is a little bit of a weasel word, I get, but they’d never invested materially outside of the US. I know they had done transactions at the inside the US. But Japan, they bought and famously made the announcement that they’d taken very significant positions in all of the sogo shosha, the Japanese conglomerates.

Jake: Yeah, trading houses.

Tobias: The trading houses. And so, they were all set up in the Meiji period to be Japan’s conduit to the rest of the world in terms of trading, because Japan is resource poor, and so they needed to find a way. And the way that they achieved it was by vertically integrating a lot of these things, so they buy the mine, buy the processor and so on. And so, they have these things touch every single aspect of a lot of the stuff that they’re involved in.

They do it very, very well, pretty efficiently. The criticism of Japan has always been that the corporate governance wasn’t very good and that they had all these cross shareholdings which made them way too complicated to value. You couldn’t exert any pressure externally if they weren’t performing the way that you would hope that they should.

Jake: And you get terrible ROEs.

Tobias: Terrible ROEs. As a result, the valuations are discounted to that extent. And so, Buffett takes these positions in five years ago. So, 2020 was when the announcement was made, 2019, 2020. What really stands out is that, again, using the coup d’œil, he had perceived that there was this move towards better corporate governance and they were becoming increasingly shareholder friendly. And also, that they were–

I think they’re similar in some respects to Berkshire Hathaway. They’re not identical, but they’re similar ideas in their conglomerates that touch many different aspects of the global economy. And so, you’re not really exposed to Japan or any single thing. It’s a reasonable portfolio bet on these things where the valuations were very, very low. I outlined them in some detail in the book.

But what really stands out? There’s this idea in Sun Tzu that in some places, it’s called The Moral Law. In some places, it’s called The Way. And so, that’s this Daoist idea. And so, Daoism, sometimes it’s described as a religion, sometimes it’s described as a philosophy. I use it more as a philosophy. I’m not really sure how it becomes a religion, but I describe it as a philosophy and it’s outlined in a series of foundational texts.

Da’o DeˋJing, the Zhuangzi and The Art of War is the third foundational text from that period. They talk about some of these principles. I use that as an opportunity to discuss those principles. Several of them are very important, I think, and I really are exemplified in Buffett. One of them is this idea of The Moral Law.

So, Buffett calls it character or– You show the

business with people you want to be and you like and admire, and you’ve got to conduct yourself in a way that will make people who you like and admire I want to do business with you. To find a good partner, you have to be a good partner, and you behave honestly and fairly, and you do all of these things.

Buffett has written about it and talked about it quite a lot. I’ve captured a lot of that. I’ve also tried to capture what the Daoists and The Art of War says about this. The Art of War, it’s one of the very first things that Sun Tzu discusses, and it’s one of the five elements that he says when you’re assessing which of the two– You do this analysis at the beginning. You ask five questions to determine which of the two sides is likely to prevail in a conflict.

One of the questions is, which of the two sides follows The Moral Law or which of the two sides follows The Way? Which of the two sides are the people more likely to follow the leader without being dismayed by danger? The idea is that if you have some totalitarian state where people are forced to fight, they won’t do as well against people who are fighting for their own freedom probably. And so, they’re looking at are the leaders moral and just and doing the right things, looking after the people that are they despots and oppressing the people. The idea is that the moral and just people should prevail. And so, I think that applies just as well in business.

I remember when I was getting started, I had this impression that business was very cutthroat, was ruthless and that in order to survive, you had to be smarter than everybody else. I remember reading Buffett and feeling like there was some hope that you could do business in a good way.

Jake: Be a good person also.

Tobias: Yeah, yeah. You didn’t have to destroy everybody along the way. You could still do well by behaving well. And so, I love Buffett for that. That was one of the main things that I was surprised when I read The Art of War, that I thought, well, that’s actually sensible– That’s a good approach. There’s some basis in decency for doing this stuff. So, I try to make that one of the most important ideas in the book.

Jake: Outside of Buffett, where might you be able to find that in– If you were looking at a company, does that live in the proxy statement?

Tobias: That’s a good question. I think you probably have to listen to what people say in totality.

Jake: Yeah.

Tobias: I think there are a lot of people out there who behave very well. I think most people in a Fortune 500 type context are pretty good moral– Most people are behaving pretty well. I would say everybody. But I think most people are doing a pretty good job, but I think the Buffett does better than everybody else.

Jake: I wonder about the relativity though sometimes. Like, well, isn’t it the most common excuse, well, everyone else was doing it? Buffett’s always said that like, “That’s one excuse that we’ll never fly at Berkshire.”

Tobias: [chuckles] Again, it’s a strategic type argument too. With the AI CapEx investments that we’re looking at now, how can you not throw a whole lot of money at this problem?

Jake: How can you. [laughs] yeah.

Tobias: I’ve made that decision, I’m not participating in it, but it’s one of the things that perhaps you could forgive somebody. If you’re in the Mag-7, can you not do it? That’s not really a question of morality. That’s more of a question of strategy that’s mutually assured destruction or something like that.

Jake: Right. Yeah, it’s a prisoner’s dilemma kind of thing.

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