Will Buffett's entry permanently alter the pricing of these stocks, preventing them from ever returning to an 'undervalued' state?

Analysis of the Impact of Buffett's Intervention on Stock Pricing

Buffett's investment activities, particularly his involvement with Japan's five major trading houses (such as Mitsubishi Corp., Mitsui & Co., etc.), can indeed significantly influence stock pricing. However, whether this "permanently alters" valuations to prevent a return to "undervalued" status requires multi-dimensional analysis. Below is an interpretation based on value investing, market efficiency, and historical cases:

1. Short-Term Effects: The Immediate Impact of the "Buffett Effect"

Mechanism of Stock Price Surge: When Buffett publicly invests in a stock, the market often experiences the "Berkshire Hathaway Effect," where prices surge sharply in the short term. This occurs because investors view Buffett as a value investing authority, interpreting his involvement as a strong signal of undervaluation. Capital inflows follow, pushing prices from undervalued toward fair or overvalued levels.
Case of the Five Trading Houses: Buffett began investing in Japan’s five major trading houses in 2020. These stocks were initially undervalued due to the sluggish Japanese market. After his holdings (~8-9%) were disclosed, their prices rose by 20-50% on average, with some price-to-earnings (P/E) ratios climbing from low levels to above industry averages. This did alter short-term pricing, making immediate "undervaluation" unlikely.
Permanent? Not necessarily. Short-term effects are often emotion-driven, akin to a "celebrity effect." The Efficient Market Hypothesis suggests such adjustments are temporary unless fundamentals improve permanently.

2. Long-Term Impact: Dependence on Fundamentals and Market Dynamics

Value Investing Perspective: Buffett emphasizes intrinsic value. His involvement may enhance corporate governance (e.g., increased dividends and buybacks at the trading houses), thereby raising true value. However, if performance deteriorates (e.g., due to global trade volatility), prices can still fall back to undervalued levels. Historical data shows Buffett-backed stocks (e.g., Coca-Cola or Apple) were not permanently overvalued and became undervalued again during market downturns.
Improved Market Efficiency: Buffett’s participation may attract more institutional investors and analysts, boosting information transparency and aligning prices closer to fair value. This "permanently" reduces undervaluation opportunities to some extent, but markets are not perfectly efficient—black swan events, economic cycles, or investor panic can still cause undervaluation.
Counterexamples: Some Buffett-invested stocks, like IBM or Kraft Heinz, rose post-intervention but later declined due to fundamental issues, even falling below initial purchase prices. This demonstrates pricing is not permanently locked.

3. Implications for Investment Strategy

Impact on Retail Investors: Following Buffett’s purchases may entail "chasing highs" risk, as prices already reflect partial value post-intervention. Value investors should focus on long-term fundamentals, not short-term effects.
Can Undervaluation Recur? Permanently impossible. Stock pricing is dynamic, influenced by macro conditions, competition, and unforeseen events. If the trading houses face geopolitical risks or demand slumps, their prices could revert to undervaluation.
Recommendations:
- Monitor corporate ROE (Return on Equity) and dividend policies—key metrics Buffett prioritizes.
- Use DCF (Discounted Cash Flow) models to assess intrinsic value, avoiding emotional follow-the-crowd behavior.
- Remember: Markets always offer undervaluation opportunities; Buffett’s involvement merely accelerates their discovery.

In summary, Buffett’s intervention often permanently enhances a stock’s visibility and partially elevates its value, but it does not "permanently" prevent a return to undervaluation. Investment decisions should be based on independent judgment, not blind imitation.