Warren Buffett once said, 'Never invest in a business you cannot understand.' Can he really comprehend five such complex companies in such a short time?

Analysis of Buffett's Investment in Japan's Five Major Trading Companies

Warren Buffett's core investment philosophy of "never invest in a business you cannot understand" stems from the influence of his mentor Benjamin Graham, emphasizing that investments should be based on a profound understanding of a company's intrinsic value. However, regarding the skepticism about his 2020 investment in Japan's five major trading companies (Itochu, Marubeni, Mitsubishi Corporation, Mitsui & Co., and Sumitomo Corporation)—whose businesses are highly complex, spanning trade, resources, manufacturing, finance, and more—we must analyze whether he could genuinely comprehend them in a "short period" from the following perspectives.

1. Review of Buffett’s Investment Philosophy

• Core Principle: Buffett emphasizes the "Circle of Competence," investing only in businesses he understands. He famously stated, "If you don’t understand it, don’t invest." This does not require mastering every detail but rather understanding a company’s economic moat, sustainable competitive advantages, and long-term cash flows.
• Not "Short-Term" Comprehension: Buffett is not an impulsive investor. He typically spends months or even years researching companies. Before investing in the trading houses, he likely conducted in-depth analysis through Berkshire Hathaway’s team or partners (e.g., Charlie Munger)—not a hasty "short-term" decision.
• Simplifying Complexity: Buffett excels at simplifying complex businesses. For instance, he views these trading houses as "mini-Berkshires"—diversified conglomerates similar to Berkshire itself (which spans insurance, railroads, energy, etc.). He focuses not on granular details but on their overall stability, dividend policies, and undervaluation.

2. Complexity of the Trading Houses & Buffett’s Approach

• Business Complexity: Japan’s Sogo Shosha are global trading giants with operations across energy, metals, food, chemicals, and finance, often generating over $100 billion in annual revenue. Unlike single-industry firms (e.g., Coca-Cola), their complexity tests investors’ analytical skills.
• How Buffett "Understands" Them:
  • Macro Perspective: Buffett likely focused on their historical performance and financial metrics. These century-old companies have weathered multiple economic cycles, demonstrating resilience (e.g., high ROE, stable dividends). He sees them as "perpetual entities," akin to his beloved consumer brands.
  • Key Insight: In his 2020 shareholder letter, Buffett highlighted their low P/E ratios (~5–7x) and high dividend yields (~4–5%), aligning with his value criteria. He need not grasp every trade detail—only confirm their wide moats (global networks and government ties).
  • Time Factor: Reports indicate Buffett studied these companies for months during the pandemic. He has stated that reading annual reports and financial statements allows him to grasp essentials efficiently—not "short-term" but skilled analysis.
• Potential Challenges: Critics argue that the opacity (e.g., complex supply chains) and Japan-specific risks (deflation, aging population) may exceed his circle of competence. However, Buffett mitigated risk via diversified stakes (~5–9% per company), reflecting prudence.

3. Investment Outcome & Philosophical Consistency

• Performance Validation: Since 2020, these stocks have surged, generating substantial profits for Berkshire (over 50% returns by 2023). This validates his approach.
• Philosophical Alignment: Buffett did not violate his principles. When investing in Apple, he was no tech expert but understood its brand and ecosystem. Similarly, for the trading houses, he saw a "simple truth": they were undervalued cash-generating machines.
• Key Lesson: Understanding a business is not about memorizing details but grasping its essence. Retail investors should first build their own circle of competence rather than blindly follow trends.

In conclusion, Buffett likely comprehended these complex firms not in a "short period" but through systematic research and simplification—fully consistent with his philosophy. Had he not understood them, he would not have invested. This discipline is key to his success. Investors should emulate this depth-focused analytical approach.