Warren Buffett, the renowned investor and CEO of Berkshire Hathaway, is widely recognized for his long-term investment strategy. In his classic 1988 letter to shareholders, he famously stated, “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” However, in a more recent 2016 letter, Buffett admitted that Berkshire wouldn’t necessarily hold all its marketable securities indefinitely.
This statement rings particularly true today, as investors have witnessed Buffett’s recent sell-offs totaling approximately $177 billion over the last three years. Yet, amidst this activity, there are specific stocks that he seems unlikely to part with anytime soon, if ever.
In fact, in his 2023 letter to shareholders, Buffett indicated an increase in Berkshire’s stakes in two particular stocks, suggesting they are expected to be held indefinitely.
Buffett’s hunt for value in the stock market has proven increasingly challenging. As the broader market saw prices rise faster than companies’ financial results, the valuations of stocks reached unprecedented levels. The S&P 500 index now boasts a forward price-to-earnings (PE) ratio of 22.4, well above its historical average.
Buffett has acknowledged a dwindling number of companies capable of significantly impacting Berkshire’s portfolio. With approximately $344 billion in cash available for investment, his options have become limited, focusing primarily on the largest companies that have outpaced smaller firms in valuation growth.
Recently, he found value in two substantial Japanese trading houses: Mitsubishi and Mitsui. Berkshire allocated over $400 million to these investments in late August, capitalizing on their strong positions within an array of industries.
Mitsubishi, while largely recognized in the U.S. for its automotive segment, has diversified interests spanning energy, natural resources, and retail. For instance, it owns a significant stake in Lawson convenience stores, a well-known brand in Japan. Berkshire’s National Indemnity increased its stake in Mitsubishi by half a percentage point recently, costing an estimated $400 million to $450 million based on stock prices at that time.
On the other hand, Mitsui is similarly large, with a focus on liquefied natural gas, natural resources, and metals. Notably, it holds a 20% stake in Penske Automotive Group. Berkshire’s management has also revealed an increase in its stake in Mitsui, although specific details remained undisclosed.
Both stocks exhibit clear value. Mitsubishi is currently trading below 1.5 times its book value, having been below 1.4 times prior to the recent disclosure. Mitsui stands even lower at approximately 1.25 times its book value. Concerns stemming from tariff issues previously weighed on these valuations, but a trade agreement reached between the U.S. and Japan in early September alleviated those worries. This reflects Buffett’s strategic mindset of being “greedy when others are fearful.”
The rationale behind these potential “forever holdings” stems from Buffett’s admiration for the operational strategies of these five Japanese trading houses. All exhibit strong balance sheets and maintain a disciplined approach to returning profits to shareholders, typically redistributing only about one-third of earnings as dividends. Instead of aggressive stock buybacks or excessive stock issuance, they focus on reinvesting their capital to foster growth and explore new investment avenues.
Moreover, Buffett anticipates opportunities for collaboration between Berkshire and these large conglomerates. Their broad industry expertise offers immense potential for productive involvement, which could be further exploited under the leadership of Buffett’s successor, Greg Abel.
Given the appealing valuations of these Japanese trading houses, it’s plausible that Buffett and Abel will continue expanding Berkshire’s investments. Recently, Berkshire secured permission to exceed a 10% stake in all five trading houses, already surpassing this threshold with its latest purchases of Mitsubishi and likely Mitsui, suggesting a bright future for these relationships.
