What Core Investment Principles of Warren Buffett Can We Learn from This Investment? (e.g., Patience, Contrarian Thinking, Circle of Competence)

Core Investment Principles Learned from Buffett's Investment in Japan's Five Major Trading Houses

Warren Buffett's 2020 investment in Japan's five major trading houses (Itochu, Mitsubishi, Mitsui, Sumitomo, and Marubeni) exemplifies his classic investment philosophy. From this move, we can distill the following core principles, which apply not only to this specific investment but also to the broader framework of value investing:

1. Contrarian Thinking

• Buffett often says, "Be fearful when others are greedy, and greedy when others are fearful." Amid the 2020 global pandemic, market panic drove down the stock prices of Japanese trading houses, causing many investors to flee. Buffett seized the undervalued opportunity by buying against the trend. This embodies the essence of contrarian investing: avoiding herd mentality and uncovering value overlooked by the market.

2. Patience

• Buffett emphasizes holding high-quality assets for the long term. This investment was not a short-term speculation but a plan for long-term (even "permanent") ownership. With the trading houses' stable operations and generous dividends, Buffett patiently waited for value realization rather than chasing short-term fluctuations. This reminds us that investment success often requires time and endurance, avoiding frequent trading.

3. Circle of Competence

• Invest only in fields you understand. Buffett was familiar with the business models of trading houses, which resemble Berkshire Hathaway’s diversified holding structures, featuring extensive global networks and resource integration capabilities. He avoided unfamiliar sectors like high-tech or emerging industries, adhering to his circle of competence to ensure decisions were based on deep understanding.

4. Value Investing

• Buy assets whose intrinsic value significantly exceeds their market price. At the time, Japanese trading houses had low P/E ratios and healthy balance sheets yet were undervalued by the market. By calculating the Margin of Safety, Buffett acquired high-dividend companies at low prices. This reflects Benjamin Graham’s core tenet of value investing: focus on a business’s true worth, not market sentiment.

5. Economic Moat and Sustainable Competitive Advantage

• Choose businesses with strong economic moats. The five trading houses possess global supply chains, resource monopolies, and diversified operations (e.g., energy, food, metals), creating long-term competitive barriers. Buffett invested in them precisely for their resilience against economic cycles, ensuring long-term stability.

6. Dividends and Capital Allocation

• Prioritize efficient capital allocation by management. These trading houses maintain stable dividend policies and share buyback programs, which Buffett admires as shareholder-friendly practices. This aligns with his principle of investing in companies that consistently generate cash flow and reward shareholders, rather than high-risk growth stocks.

Through this investment, Buffett reaffirmed the universality of these principles: combining contrarian thinking, patience, and a defined circle of competence can uncover opportunities in uncertain environments. Investors may apply these to their personal strategies to enhance financial literacy.