Last week, Warren Buffett visited Japan for just the second time in his life. The so-called Oracle of Omaha came with the message that the Japanese market was “cheap” — unsurprisingly, this has turned the heads of many investors.
Buffett is among the most successful investors of all time, having amassed a personal fortune worth over $100bn. As such, it’s no wonder that millions of investors around the world hang on his every word.
So, let’s take a closer look at how Buffett invests and explore how I could also invest in Japan.
Value investing
Buffett is a value investor. This means that he looks to buy stocks that are trading for less than their book or intrinsic value. Value investors, including me, often refer to this discount as a security’s margin of safety.
Finding these undervalued stocks isn’t always easy. It does require plenty of research. I can start by using simple metrics such as the price-to-earnings ratio and the EV-to-EBITDA ratio. Then I can look at more complex calculations such as the discounted cash flow model.
The strategy tends to involve holding stocks for a long period of time, during which the investor hopes their holdings will actualise their potential.
We also know that Buffett prefers blue-chip stocks and household names. He says he’d rather pay a fair price for great company than a great price for a fair company.
Buffett also likes to take advantage of a falling market. He says he’s happy when share prices go down because he can buy more of his favourite stocks.
Investing in Japan
Buffett’s Berkshire Hathaway recently increased its stakes in Japan’s five largest trading houses as its chairman touted the market’s attractiveness.
The trading houses are Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co, and Sumitomo Corp — Buffett owns 7.4% in each company, representing Berkshire’s biggest position outside the US and Europe.
Speaking to CNBC last week, Buffett said that the trading houses were “selling at what I thought was a ridiculous price, compared to the interest rates prevailing at that time”.
Most of these companies can be traded on investment platforms such as Hargreaves Lansdown. Many major Japanese companies will have US listings in addition to listings in Tokyo.
However, I can also look at funds. Funds can be a good way of increasing exposure to a market that is expected to perform well in the coming years. This is something I readily consider when I don’t know the market all that well.
After all, as Buffett says, it’s best to stick to what you know best. But what I know best is UK stocks. So sometimes it can be a good idea to use funds to help navigate a new market.
I haven’t made my mind up on a Japanese investment just yet. In fact, I think there’s plenty of value opportunities in the UK. But I am keeping an eye on two funds: Two Man GLG Japan Core and Alpha FSSA Japan Focus.
