Warren Buffett's new interest in Japan

A few weeks ago we were mildly surprised to see Warren Buffett come round to our way of thinking on a few things. He sold most of his shares in Goldman Sachs and bought into gold miner Barrick Gold. As Charles Gave of Gavekal Research notes, this is a pretty comprehensive shift. Goldman is the kind of firm you own if you believe that Wall Street’s record of money-making via financial engineering is sustainable. Barrick is the kind you buy if you don’t. So the combined trades are tantamount to “selling by proxy the fiat money system” from which Wall Street’s financial engineers have long benefited.

Perhaps Buffett is “starting to short the US central bank”, something we have been doing with our gold holdings for many years – and are even more keen to do now that the Federal Reserve has fairly explicitly said it isn’t much bothered by inflation risk.

No less interesting, however, is Buffett’s new interest in Japan. Just as Shinzo Abe steps down Buffett has been endorsing his (not perfect, but pretty good) legacy by buying into all five of Japan’s major trading companies at a cost of around $6bn. This makes sense to us. Japan looks pretty cheap – the 8.6% annual rise in the Topix under Abe was driven mostly by rising profits rather than (as in much of the US) by shares being valued at higher multiples of existing profits (see page 4). Better still, says Peter Tasker, strategist at Arcus Investment, “for the first time in living memory” Japanese equities offer a “solid, real” dividend yield of 2.4%. Not to be sniffed at in a world of negative interest rates.

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For investors (such as us) who worry about inflation, however, there is one more attraction deeply embedded in Buffett’s new holdings – commodities (see page 7 for more). The early phases of a reflationary environment are usually good for equities, good for commodities, and particular good for commodity-backed equities. We didn’t expect to end this phase of the crisis quite as in tune with Buffett. But this year has hardly been short of surprises.

This is not to say that pessimism rules at MoneyWeek. Far from it. We worry about valuations, so we are mildly concerned at the run up in the prices of some US tech stocks. Look at Apple’s numbers, for example, and you will see a situation that is the direct opposite of that in Japan: sales and income have barely budged in the last five years, yet its market value has quadrupled. Should Apple really be valued at more than all of the FTSE 100 – however great its products?

But that does not make us “anti”-tech. In this week's magazine, Max King looks at two tech trusts we like. It isn’t all about Apple. And I’d suggest you look again at the Blue Whale Growth Fund (70% in the US, 60% in tech). Since launch three years ago, the fund has returned 76% versus a global funds average of more like 26%. The fund does not hold the obviously overvalued stocks, so there may be more to come.

Finally, a warning. We tend to focus on making money in MoneyWeek. But it’s equally important not to lose it pointlessly. Getting caught evading tax is a silly route to poverty. Best just to pay. One example of why: the maximum fine for not declaring overseas holiday-home income is now double the tax owed. Ouch. The same goes for falling for scams. Losing money in a fund is one thing. Losing it to a criminal is another.