Warren Buffett’s Shocking $6.3 Billion Bet

Warren Buffett

Warren Buffett surprised his army of followers over the weekend.

His investment company Berkshire Hathaway made a $6.3 billion investment into five of Japan’s century-old trading houses (sogo shosha).

Trading houses are Japan’s version of conglomerates. They have been involved in global trade since the 19th century.

The five companies are Mitsubishi, Mitsui, Itochu, Sumitomo and Marubeni.

Berkshire Hathaway bought a 5% stake in each company. Berkshire added that it may raise its stake in each to 9.9%.

Over the past decade, the five have tried to transform themselves into 21st century businesses.

It was too much of a scattergun approach, though. Interests were widely spread across unrelated sectors and countries, from U.S. shale gas to Vietnamese apparel to Chinese lenders.

Diversifying their businesses had largely failed.

Their main businesses were hit hard by the pandemic. All five firms rely heavily on cyclical natural resource-related operations for about 20% of their profits.

Obviously, this is a not a good place to be during a once-in-a-century global pandemic.

The plunge in crude oil prices in the first half left them all vulnerable.

Other main business lines — which span machinery, food and retail — have also suffered.

That is why this is not a sector known for impressive returns. 

Even so, Buffett’s decision makes sense. Here’s why. . . . .

  • The trading houses are solid, cash-generating companies. Several  have enjoyed rising free cash flows in the past four years. 
  • They are also dirt cheap. Four out of five trade below book value (0.7 to 0.8).

With U.S. stocks looking expensive and dividends falling, the returns look comparatively good. For example, Sumitomo’s dividend payout is more than 5%.

No doubt the Japanese trading houses face pandemic-related challenges. But Buffett always invests for the long term. . .he says his favorite holding period is “forever.”

Each trading house has hundreds of subsidiaries and affiliates across all industries whose businesses are essential to the functioning of the global economy.

In other words, these are classic Warren Buffett investments – companies with solid business models that are not fully appreciated.

It looked like Buffett was changing his investment style, with his huge investment in Apple.

But on his 90th birthday, this announcement of a truly contrarian investment showed the old Buffett is still there.

And maybe there is a growth kicker. The trading houses have shifted their recent investments toward venture capital and private equity.

There is another way for you though to get a growth kicker for your portfolio . . .         through pre-IPOs.

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The Big News

The Vacation Stigma

Vacations have become controversial. Many feel that travelers may be unnecessarily putting their health in jeopardy. Or are unknowingly spreading the virus to others. The U.S. travel industry has sustained $341 billion in losses since the beginning of March,  reports a U.S. trade group.

Children as Virus Spreaders

The debate about whether schools should re-open grows. A South Korean study found that many infected children show no symptoms but may spread the virus for nearly as long as children who are visibly sick.

Campus Contagion

Outbreaks at universities across the U.S. are beginning to infect surrounding communities. Look at the top 20 metropolitan areas where new cases per capita rose the most over the past two weeks. Nearly half were college towns where large universities recently reopened.

Coronavirus in Children

Young people are not immune to the virus. Cases, hospitalizations and deaths from the coronavirus have risen at a faster rate in children and teenagers than among the general public. This is according to data from the summer compiled by the American Academy of Pediatrics

AstraZeneca Begins Stage III Trials

AstraZeneca said on Monday it has begun enrolling adults for a 30,000-subject late-stage study in the U.S. of its high-profile COVID-19 vaccine candidate. It aims to enroll 50,000 people worldwide to test the vaccine.

Zoom Is Zooming

Zoom Video reported quarterly profit of 92 cents a share. That was more than double the 45 cents a share consensus estimate. Revenue also came in well above Wall Street forecasts. Zoom also raised its annual revenue forecast by more than 30%; use of its video conferencing technology is soaring as more workers and students operate remotely. The stock soared 30% in after-hours trading.  

Inside the Confidential Airbnb IPO

WSJ reports that Airbnb plans a secret +$18 billion IPO. That means the Silicon Valley giant is keeping details 100% confidential. Get details here: Inside Airbnb’s Confidential IPO.

Just click here to download your FREE report.

The Coronavirus Numbers

Here are the numbers from Tuesday at 8 a.m. ET from Johns Hopkins University:

  • 25,506, 759 Infected Worldwide
  • 851,095 Deaths
  • 6,031,287 Infected in the U.S.
  • 183,602 Deaths in the U.S.

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What’s Next

Let me get back to Warren Buffett for a moment.

It’s easy to see why he went to Japan in search of a decent return for the non-speculative part of his portfolio. . . .

Real yields on government debt have been negative for most of the year. This reflects the expectation that both rates and economic growth will stay low for a very long time.

Yields on corporate bonds have plunged, too. That is largely due to the Fed pledging to buy corporate debt for the first time ever. 

After soaring higher in March, the real yields on some high-quality U.S. corporate bonds are below zero. Real yields strip out inflation expectations from basic nominal yields.

For investment-grade corporate bonds, with a maturity of between one and three years, this marks the first dip into negative territory since March 2017.

Longer-dated bonds, with a maturity of between five and seven years, posted negative real yields this month for the first time since 2013.

One effect of sinking real yields is that some money managers have shifted their investments.

In an effort to get higher returns, some have dived into the U.S. high-yield bond. They say it’s one of the “safest” places to seek solid returns.

I don’t see Warren Buffett doing that. So, more overseas investments may be in the cards.

For the rest of us, this low interest rate environment keeps stocks attractive . . . and especially IPOs.

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Yours in Health & Wealth,

Tony Daltorio

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