What is the primary source of profit for trading companies? Is it the trade margin from buying low and selling high, or dividends from their global investment projects?

Analysis of Primary Profit Sources for Trading Companies

Overview

Sogo shosha (especially Japan's five major general trading companies: Itochu, Mitsubishi Corporation, Mitsui & Co., Sumitomo Corporation, and Marubeni) are key investment targets for Warren Buffett. Their business model resembles that of a diversified investment holding company, with profits derived from multiple channels rather than a single source. Regarding whether profits stem from trade margins or investment dividends, the following provides a detailed explanation.

Primary Profit Sources

The main profit sources for trading companies primarily consist of investment dividends and operational income, rather than simple trade margins. Key reasons include:

• Higher Proportion of Investment Dividends:

  • Trading companies generate dividends, profit shares, and equity returns through long-term investments in subsidiaries, joint ventures, and resource projects (e.g., energy, minerals, infrastructure). This typically accounts for over 50% of total profits.
  • Example: Mitsubishi Corporation invests globally in mining, natural gas, and other sectors, with profits mainly from project dividends and capital appreciation. Buffett values this model as it aligns with Berkshire Hathaway’s "permanent holding" strategy, emphasizing stable cash flow.
  • Data: According to financial reports of the five major trading companies (e.g., FY2022/23), investment returns (including dividends and equity gains) usually constitute 60%–70% of net profit, far exceeding trade-related income.

• Role of Trade Margins:

  • Trade margins (profits from commodity price differentials) form the foundational business but contribute relatively less, typically only 20%–30% of total profits.
  • While trading companies deal in commodities (e.g., metals, energy, food), intense competition and complex supply chains limit pure trade margins (often 1%–5%). Trade primarily supports investments by securing supply chains for long-term returns.
  • Trade margins act as an "entry point," enabling access to upstream industries for investments.

Business Model Characteristics

• Diversification and Risk Mitigation: Trading companies extend beyond trade, building ecosystems through investments in resource development, manufacturing, retail, and finance. This stabilizes profits and reduces vulnerability to economic cycles.
• Buffett’s Investment Perspective: Buffett invested in the five majors (holding ~8%–9% stakes) precisely for their "investment dividend" model, which offers high dividend yields (~4%–5%) and compound growth potential. He likens them to a "Japanese version of Berkshire Hathaway," prioritizing long-term holdings over short-term trade gains.
• Risks: Investment dividends depend on global economic and resource price fluctuations; trade margins are susceptible to geopolitical impacts.

Conclusion

In summary, trading companies’ primary profit source is investment dividends, reflecting their nature as "investment-oriented trading firms." For verification, review specific financial reports (e.g., via Yahoo Finance or company websites). Investors should focus on long-term value rather than short-term trade volatility.