The business of trading companies is significantly affected by the cyclical fluctuations in commodity prices, which does not align with Buffett's preference for 'stable and predictable' businesses. What has he seen that we have missed?

Deep Insights into Buffett's Investment in Japan's Five Major Trading Houses

Buffett has always favored "stable and predictable" businesses, such as consumer goods or utility companies, while avoiding highly cyclical industries. Yet, starting in 2020, he invested in Japan’s five major trading houses—Mitsubishi Corporation, Itochu Corporation, Mitsui & Co., Sumitomo Corporation, and Marubeni Corporation—which are indeed heavily impacted by commodity price fluctuations (e.g., energy, metals, agricultural products). This appears contradictory, but Buffett identified several key points overlooked by ordinary investors:

1. Diversified Business Structure: Beyond Commodities

• The five trading houses are not pure commodity traders but diversified holding companies (similar to Berkshire Hathaway’s model). They operate across multiple sectors, including retail, finance, food, infrastructure, and technology investments.
• For example, Mitsubishi Corporation has stable downstream businesses like convenience store chains (Lawson) and food processing, which provide cash flow buffers to offset commodity cyclicality. Buffett views this as an "economic moat," with the overall business resembling a "miniature economy" rather than relying on a single cyclical segment.

2. Appeal of Low Valuation and High Dividends

• When Buffett invested, these companies traded at extremely low price-to-book (P/B) ratios (around 0.5–0.8x), far below global peers, while offering dividend yields of 4–5%. This aligns with his philosophy of "buying wonderful companies at fair prices."
• Despite cyclical volatility, their long-term return on equity (ROE) remained stable at 8–12%, well above Japan’s market average. Buffett calculated that even during commodity downturns, these firms could sustain profits and return capital to shareholders via buybacks and dividends.

3. Shareholder-Friendly Management Policies

• Influenced by Abenomics, the trading houses’ management shifted toward shareholder orientation in recent years, prioritizing ROE improvement. They committed to high payout ratios (30–50%) and share buybacks, consistent with Buffett’s appreciation for "skilled capital allocators."
• Buffett emphasized that these companies function like "hidden Berkshires," navigating cycles through smart acquisitions and asset allocation. During his 2023 Japan visit, he praised their "long-term value-creation capabilities."

4. Macro Perspective: Unique Opportunities in Japan’s Market

• Buffett recognized opportunities in Japan’s deflationary environment—low interest rates and corporate reforms. The trading houses benefit from their global supply chain roles (e.g., in energy transition) rather than relying solely on commodity prices.
• Unlike cyclical U.S. stocks, they enjoy implicit government support (e.g., in overseas resource projects), reducing downside risks. Buffett believes cyclical swings are temporary, while their network effects and global footprint ensure "predictable long-term growth."

5. Extension of Investment Philosophy: Stability Within Cycles

• Buffett doesn’t entirely avoid cyclicals (e.g., his oil investments) but seeks targets whose "intrinsic value" far outweighs market volatility. He calculated that these firms’ "owner earnings" remain predictable through cycles due to risk hedging and diversification.
• Ultimately, Buffett identified a "moat + low price" combo: The trading houses’ scale (global trade networks) and efficiency enable them to thrive amid volatility, while others retreat due to surface-level cyclical fears.

In summary, Buffett didn’t ignore volatility—he saw through it to recognize these companies as "compound machines": stable engines weathering storms. This reminds investors that true stability often lies in diversification and value, not zero volatility.