One of the most well-known investors of all time is seeing his recent investment activity called out by a more recent well-known investor.
Are the comments praise or an attempt to take on his legacy?
What Happened: Legendary investor and Berkshire Hathaway Inc (NYSE: BRK-A)(NYSE: BRK-B) CEO Warren Buffett has been increasing his bets on Japanese stocks and enjoying strong returns in recent months.
The investment strategy saw his ownership stakes in the Japanese companies increase and came at a time when major Japanese stock market indexes outperformed the key American stock index metrics.
Investor Chamath Palihapitiya, who was once labeled as the "next Buffett" by the media, took to Twitter to share his thoughts on Buffett’s strategy.
“I was really curious about Buffett’s ownership of the Japanese trading companies and wanted to understand why he did it? As it turns out, the trade is really brilliant,” Palihapitiya tweeted. “He found a group of companies that had very low volatility, grew earnings predictably, had a good dividend and, in most cases, were buying back their stock.”
Palihapitiya said the next step by Buffett is one that is “awesome.”
“As far as I can tell, he issues Japanese debt at very low rates, uses the proceeds to buy the stocks and then uses the dividends he then gets from owning these stocks (which are greater than the interest rates he’s paying to borrow in the first place) to pay the coupon!”
The investor said this could be a “near-risk less bet” by borrowing trillions of Japanese Yen for free and using the proceeds to buy stakes in companies that are “growing earnings in the mid-teens.”
“And over a 10-20 year holding period, he becomes insensitive to currency vol and so really can’t lose money. He locks in the earnings gains over this period along with whatever spread he keeps between his dividends and his coupons.”
The risk for Buffett is the concern that the Japanese economy could totally blow up, which Palihapitiya said is “pretty unlikely” as the companies in question are also exposed to the rest of the world.
“It’s inspiring to see folks act this intelligently at scale. That’s why he’s the (GOAT).”
Related Link: Chamath Palihapitiya Sounds The Alarm-Corporate America Running Into Massive Debt Wall
Why It’s Important: The post by Palihapitiya drew plenty of responses from the public and his 1.6 million followers on Twitter.
One user questioned the potential criticism of Buffett as he once compared himself to the famed investor. Palihapitiya said he never compared himself to Buffett and it was the media.
“Don’t trust what you read,” Palihapitiya said.
Another user said this was misleading as the shareholder letters issued by Social Capital in 2018, 2019 and 2020 compared early returns of his Social Capital to Berkshire Hathaway.
“You chose Buffett as your benchmark. Which is comparing yourself to him,” the user said.
Palihapitiya said this was different than a comparison and was only a benchmark.
One user was quick to point out that Buffett is producing a crazy return on equity by borrowing at 0% to 1% and investing in 7% to 10%. Palihapitiya said it could be better than this with borrowing at 1% to 2% and investing at 12% to 14%.
Palihapitiya acknowledged a user that called Buffett’s strategy as yield farming by calling it “OG yield farming.”
A user asked what it was that the Japanese companies Buffett has invested in do and how he can use this investment strategy.
“They are middlemen that trade in various commodities for many economies in the world. So as long as the world needs ‘stuff’ these folks will provide it for a small fee…hence it’s bet levered world GDP which tends to grow over long periods of time,” Palihapitiya said.
Palihapitiya added the Berkshire Hathaway can issue debt anywhere on the planet.
Short seller Muddy Waters replied to Palihapitiya’s post asking if it “depends on what the definition of ‘is’ is.”
“Don’t worry about this mid level bullsh**. I’m just trolling these guys,” Palihapitiya told Muddy Waters.
The comments by Palihapitiya come as Buffett’s bets on five Japanese companies have grown from $6 billion to $17 billion.
Berkshire Hathaway took 5% stakes in several Japanese companies back in August 2020, positions which have increased along the way. The Japanese companies are:
Itochu Corp ITOCF
Marubeni Corp MARUF
Mitsubishi Corp MSBHF
Mitsui & Co Ltd MITSY
Sumitomo Corp SSUMF
Photo: CP via Shutterstock, Buffet via White House (Public Domain)
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