"In his recent interview with FINSEC Law Advisor, Mohnish Pabrai discusses the genius of Warren Buffet’s Japanese bets. Here’s an excerpt from the interview:
Pabrai: Two or three years ago Buffett made an investment, a set of investments, where he bought five to ten percent stakes in a bunch of Japanese trading houses, and it wasn’t a lot of money, I think it went like six, seven billion dollars went into that, which is very small for Berkshire.
But the interesting thing is that when he did that investment the entire amount he invested, the entire seven billion he invested he borrowed in Yen, in Japan, and he borrowed it at like a half a percent a year or something.
So here’s Berkshire Hathaway sitting with hundred billion of cash earning nothing sitting in U.S Treasuries earning nothing like quarter of a percent or something, and he goes and invests in these three or four Japanese companies and he doesn’t put up his own money, he borrows the whole thing.
And the reason he did that was that these companies had a dividend yield of seven/eight percent and he probably also understood that they were cheap, they were sitting quite cheap.
Now what has happened in the last three years is all of them have moved up like 50 to 70 percent and he’s paying that half percent interest, and he’s collecting seven percent dividend."
“We’ll definitely miss Buffett when he’s gone. Investing genius who cannot be fully replaced by Greg, Ted and Todd”"
Thought this excerpt from Pabrai, quoting Munger on Buffett, was interesting:
"So this is what Munger describes as he says Warren has a very large brain, and that brain needs to be active, but it needs to be active in a manner that is not detrimental to Berkshire Hathaway.
So this Japanese bet is not going to do anything for Berkshire Hathaway but what it does is it soaks up brain power for Berkshire."
Buffett is self aware enough to know if he did something “stupid” he could really blow things up.
We’ll never know how many times Mr. Buffett has bounced an investment idea off of Mr. Munger and been told by Charlie (in seconds?) that it was a “stupid” idea, and vice versa.
How many “genius” investment managers out there have had long wonderful track records doing amazingly smart moves, only to completely blow up at some point? LTCM comes to mind.
Occurs to me we should be eternally thankful for all the potential investment mistakes that Warren and Charlie managed to avoid over their multi decade careers. In many ways, that is the true genius of Warren and Charlie.
One of Pabrai’s claims that surprised me was that Buffett makes small, creative investments like this to “soak up excess brain power,” in other words to keep himself from getting bored and interfering with the important stuff. Pabrai compared it to playing bridge ten or fifteen hours a week. The investor’s greatest asset, he said, isn’t intelligence (above a certain threshold – good news for me!) but time, followed by patience.
Personally, I’ve found that
there is always something I can rationalize doing, especially if I’m bored, and
it often works to my detriment, and when it does work out, I then need to sell it, pay taxes, and look for a new opportunity, because it wasn’t something I wanted to own forever.
All this unproductive activity, which has generated literally hundreds of mistakes, hasn’t hurt my overall returns as much as you might think, largely because I’ve managed to sit tight on four or five major positions.
I always thought Buffett’s punch card metaphor was aimed at optimizing your returns by encouraging you to pass on all but the very best opportunities. Now I wonder if it wasn’t aimed at keeping you from selling. You simply don’t get that many chances to buy something 1) really great that 2) you know really well 3) at price you’re certain is attractive. That, for me, is always an easy decision. I find myself looking under the couch cushions for more money to throw at those companies. Sitting on my butt and not selling something once it’s a double or a triple and not trying to optimize – that’s the hard part.
Any number of really smart investors have gotten themselves in terrible trouble by trying too hard to do something brilliant, and then, when it didn’t work, doubling down. In other words, they’re throwing themselves at high hurdles all the time. Buffett and Munger understand the extraordinary results that can be obtained by finding a succession of one-foot hurdles and not falling down.
No doubt! He will go anywhere anytime to move the needle for us with constant attention to risk. Also loved the Activision merger arb trade he announced in Omaha- looks like a darn good chance we pocket 1.2B or 20% on that deal. Fun to watch WEB and Ajit find unique ways to add a couple billion here or there.
Pabrai: Two or three years ago Buffett made an investment, a set of investments, where he bought five to ten percent stakes in a bunch of Japanese trading houses, and it wasn’t a lot of money, I think it went like six, seven billion dollars went into that, which is very small for Berkshire. … Now what has happened in the last three years is all of them have moved up like 50 to 70 percent and he’s paying that half percent interest, and he’s collecting seven percent dividend."
Perhaps we’re all too blasé.
I mean, something like four billion profit isn’t meaningless, and there might be a lot more to come.
… he doesn’t put up his own money, he borrows the whole thing. And the reason he did that was that these companies had a dividend yield of seven/eight percent and he probably also understood that they were cheap, they were sitting quite cheap.
I don’t think the yield was the only reason, nor even the main reason.
Don’t forget there was also a big currency hedge implication.
Which was not only the conservative way to go, but also either very prescient or very lucky.
The yen has fallen by about 22% since the investment was made.
Had he used USD to purchase the positions, their current value (net of stock + loan) would be that much lower.
In effect, for a US dollar investor like Berkshire, the yen loan has had an interest rate of -10% to date.
On Pabrai, I wonder how he has really done over time.
I think Pabrai has performed quite poorly for quite a long time. I was told Pabrai Fund 4 has a 19 year return of 6% annualized versus the S&P at 10.7% over the same time period. I don’t know the end date of that data and have not independently verified it. I am not invested with Pabrai.