"Trading Price Significantly Below Intrinsic Value" is the Core of Buffett's Investment Philosophy: How "Cheap" Are These Trading Companies?

Core of Buffett's Investment in Japan's Big Five Trading Houses: Trading Price Far Below Intrinsic Value

Warren Buffett's investment philosophy emphasizes "buying wonderful businesses at prices below their intrinsic value," which is precisely the key to his investment in Japan's Big Five trading houses (Mitsubishi Corp, Mitsui & Co, Itochu Corp, Marubeni Corp, Sumitomo Corp). As global diversified trading companies, these firms operate across energy, metals, food, chemicals, and other sectors, boasting stable cash flows and diversified assets. However, when Buffett invested (around 2020), their stock prices were far below intrinsic value, presenting a classic value investing opportunity. Below is a multi-dimensional analysis of just how "cheap" they were.

1. Overview of the Big Five Trading Houses

Berkshire Hathaway holds approximately 5-9% stakes in these companies (as of 2023 data). They are not mere traders but own substantial industrial assets—such as mines, energy projects, and real estate—resembling a "Japanese version of Berkshire Hathaway."

Mitsubishi Corp: The world’s largest diversified trading house.
Mitsui & Co: Strong in resources and energy.
Itochu Corp: Prominent in consumer goods and textiles.
Marubeni Corp: Robust in food and power.
Sumitomo Corp: Leader in metals and transportation.

2. Why Were They "Cheap"?—Valuation Metrics Analysis

When Buffett invested, these trading houses traded significantly below intrinsic value, reflected in the following metrics (based on 2020–2023 data; specific figures may fluctuate with markets):

Price-to-Book Ratio (P/B): One of Buffett’s most valued metrics. Their P/B ratios ranged between 0.5–0.8, meaning stocks traded at 50%–80% of net asset value. For example:
- Mitsubishi Corp: P/B ≈ 0.7 (net assets include substantial unrealized appreciating assets like mineral rights).
- Itochu Corp: P/B ≈ 0.6, well below Japan’s market average (~1.2).
  This allowed investors to buy ¥1.5–¥2 worth of assets for ¥1—a classic margin of safety.
Price-to-Earnings Ratio (P/E): Average P/E of 5–8x, far below global peers (e.g., U.S. trading firms at 15–20x).
- Marubeni: P/E ≈ 5x, implying a 5-year payback period from profits.
- By contrast, tech stocks often trade at P/E >30x, indicating severe undervaluation.
Dividend Yield: High yields of 4%–6%, exceeding Japan’s market average (2%) and the S&P 500 (1.5%).
- Sumitomo Corp: Yield ≈5%, with share buybacks boosting shareholder returns.
- Buffett favors high-dividend firms for their "free" cash flow.
Intrinsic Value vs. Trading Price:
- Intrinsic Value Estimate: Per Buffett’s DCF (discounted cash flow) model, intrinsic value was at least 1.5–2x market cap. Hidden assets (e.g., overseas mining rights) meant book value understated future cash flow potential.
- Discount Magnitude: Discounts reached 30%–50% at investment. For instance, Mitsui & Co’s intrinsic value (factoring in resource assets) could be ¥8,000/share, yet it traded at ¥4,000–¥5,000.
- Reasons: Japan’s prolonged market slump, perception of trading houses as "old-economy," and lack of Wall Street attention masked their global competitiveness.

3. Embodiment of Buffett’s Investment Strategy

Margin of Safety: Buffett insists on buying far below intrinsic value to hedge against volatility. The low P/B provided a massive buffer.
Long-Term Holding: Trading houses possess "moats"—diversified operations reduce risk, akin to Buffett’s See’s Candies or Coca-Cola.
Market Timing: During 2020’s pandemic-driven market lows, Buffett seized the opportunity to build multibillion-dollar positions.
Risk Note: Despite cheap valuations, beware of currency risk (yen volatility) and geopolitics (e.g., energy prices).

4. Valuation Update (as of Late 2023)

With Japan’s market recovery, these stocks have risen 30%–50%, yet remain undervalued:

Average P/B rose to 0.8–1.0, but intrinsic value grew faster (boosted by inflation and resource demand).
Buffett continues holding them as "permanent investments," expecting future dividends to exceed tens of billions of dollars.

In summary, the "cheapness" of these trading houses stemmed from the market underestimating their assets and cash flow potential, perfectly aligning with Buffett’s core tenets: buy cheap and hold wonderful businesses. If you practice value investing, study their financial reports and calculate intrinsic value yourself—but invest cautiously and consult a professional advisor.