Should I "Copy Homework" and Follow Buffett to Buy Stocks of the Five Major Trading Houses? What Are the Risks?

Introduction

Warren Buffett's investment in Japan's five major trading houses (Mitsubishi Corp., Itochu Corp., Mitsui & Co., Sumitomo Corp., and Marubeni Corp.) through Berkshire Hathaway has indeed attracted many investors to "copy his homework." Buffett's investment rationale is based on these companies' stable cash flows, diversified businesses (e.g., energy, metals, food), and low valuations. However, whether you should follow suit requires assessment based on your personal circumstances. The following analysis from multiple perspectives will help you decide.

Should You "Copy the Homework"?

Reasons to Support "Copying the Homework"

• Buffett's Investment Philosophy: Buffett prefers value investing, emphasizing buying undervalued quality companies and holding them long-term. These trading houses have a stable dividend history, global operations, and resilience across economic cycles, aligning with his "moat" concept. Since 2020, Buffett has increased his stake to about 9%, demonstrating confidence.
• Potential Returns: Japanese trading houses benefit from global commodity demand (e.g., energy transition and supply chain restructuring). Their stock prices have surged significantly in recent years (e.g., Mitsubishi Corp. doubled). A global economic recovery could further boost their performance.
• Learning Opportunity: Following Buffett can serve as a starting point for investment strategy, helping beginners understand value investing. But "copying homework" isn't blind imitation—it's about learning the underlying logic.

Reasons Against Blindly "Copying the Homework"

• Different Risk Tolerance and Goals: Buffett is an institutional investor with massive capital and a long holding period (potentially decades). If you're a retail investor, short-term market volatility could lead to losses. Ask yourself: Is your investment horizon years or months? Can you tolerate 10-20% drawdowns?
• Timing and Valuation Changes: Buffett bought at the 2020 lows when valuations were cheap (P/E ratios around 5-7x). Today, valuations have risen to 10-15x, partially pricing in the premium. Blindly following risks buying at a peak.
• Regional and Market Differences: These are Japanese stocks, influenced by yen exchange rates, Japanese economic policies (e.g., inflation control), and the Tokyo Stock Exchange. Chinese investors must also consider cross-border investment accessibility (e.g., via QDII funds or Hong Kong stock channels).

Conclusion: If you believe in value investing, can hold long-term, and have done your research, consider allocating moderately (e.g., 5-10% of your portfolio). But don’t go all-in; combine it with your financial situation and market analysis.

What Are the Risks?

Investing in the five major trading houses carries significant risks. Key risks are categorized below:

1. Market and Economic Risks

• Global Economic Volatility: Trading houses rely on commodities (e.g., oil, metals). Slowing global demand (e.g., from U.S.-China trade tensions or recession) could reduce profits. Energy price swings in 2023 already impacted some companies.
• Japanese Economic Uncertainty: Japan faces high debt, an aging population, and low growth. Sustained yen depreciation (from ¥105/USD in 2020 to ¥150/USD) may boost exports short-term but could trigger inflation or policy tightening long-term.

2. Currency and Geopolitical Risks

• Currency Risk: For foreign investors, yen fluctuations directly impact returns. Yen depreciation amplifies USD-denominated gains but causes losses if reversed. RMB-based investors face amplified volatility through currency conversion.
• Geopolitical Risk: Global operations (e.g., energy in the Middle East, minerals in Australia) expose them to conflicts (e.g., Russia-Ukraine war or South China Sea tensions). Supply chain disruptions could halt operations.

3. Company-Specific Risks

• Diversification Imbalances: While diversified, some (e.g., Mitsui & Co.) heavily rely on energy, facing green transition pressures (carbon neutrality goals may raise costs).
• Governance and Competition: Japanese corporate culture prioritizes stability but may lack innovation. Competitors (e.g., Chinese SOEs or emerging market players) could erode market share.
• Valuation Risk: Current prices reflect the "Buffett effect." A sentiment shift (e.g., from Fed rate hikes) could trigger a correction.

4. Operational Investment Risks

• Liquidity and Fees: Japanese stock trading fees are high. Retail investors may need ETFs (e.g., Nikkei-tracking funds) or ADRs for indirect exposure, adding costs and tracking errors.
• Taxes and Regulations: Cross-border investing involves dividend taxes (15% Japanese withholding tax) and capital gains taxes. Chinese tax rules also apply.
• Psychological Risk: Short-term price drops may trigger panic selling, violating Buffett’s long-term holding principle.

Risk Management Tips:

• Diversify: Don’t concentrate all funds in these five trading houses. Balance with other assets (e.g., bonds or U.S. stocks).
• Research Tools: Use Yahoo Finance or Bloomberg to analyze financials, quarterly reports, and dividend policies.
• Stop-Loss and Rebalancing: Set stop-loss points (e.g., reassess if down 15%) and review holdings annually.
• Seek Advice: Consult a financial advisor or gain indirect exposure via index funds (e.g., MSCI Japan) to reduce single-stock risk.

In short, "copying homework" can be a starting point, but success depends on your execution and risk control. Investing carries risks—proceed with caution! If unsure, start with small test investments.