Warren Buffett is often quoted as saying his favorite holding period is "forever." But there are only a handful of companies in Berkshire Hathaway's (BRK.A +0.43%) (BRK.B +0.40%) equity portfolio that he truly plans to hold indefinitely. He has made that abundantly clear in recent years.
Buffett has sold more stock than he bought in each of the last nine quarters. And it's not even close, either. Net stock sales totaled $173 billion over that period. He sold so much stock in 2024 that Berkshire Hathaway set a new record for taxes paid in any year by a single company due to all the capital gains. And even after paying that massive tax bill, Berkshire is sitting on a record pile of cash.
Buffett told investors exactly where he was planning to invest that growing cash pile in his 2024 letter to shareholders, and we recently got the details thanks to some new regulatory filings. He just added significant amounts to five stocks he plans to hold forever, and he could continue to buy more in 2025 and beyond.
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The five stocks Buffett's buying
Buffett addressed the concerns regarding Berkshire's growing cash pile directly in his letter to shareholders in February: "Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities -- mostly American equities." He was keen to point out that despite the selling investors have seen in Berkshire's portfolio, it increased its stake in nonmarketable securities last year.
But he also noted a key exception to his preference for American equities. These are five foreign companies with massive international operations. Buffett has described his plan for the investments as "indefinite" and "very long term" and said, "We are committed to supporting their boards of directors," in the most recent letter to Berkshire shareholders.
They are the five largest Japanese trading houses: Itochu (ITOCF +1.31%), Marubeni (MARUY +4.17%), Mitsubishi (MSBHF +1.47%), Mitsui (MITSF +7.07%), and Sumitomo (SSUM.Y +3.25%). Each conglomerate owns a vast array of businesses that operate in Japan and around the world. Buffett has described them as similar to Berkshire Hathaway.
Their operations vary widely. "Trading house" has become something of a misnomer: These holding companies establish large long-term investments in various businesses. Most have some stake in natural resources like energy, minerals, or metals, which generally require a long-term outlook.
They have invested in cash flow-producing businesses, including Japanese convenience store chains FamilyMart and Lawson, and can often take advantage of vertical supply chain integration to produce better cash flow.
Why Buffett plans to hold these stocks forever
At first, Buffett's investments in the five Japanese giants looked like an arbitrage play. He could borrow yen at a very low cost thanks to prevailing interest rates in Japan and Berkshire Hathaway's stellar credit rating. He could then use that to invest in these businesses with strong free cash flow, stable dividends, and shareholder-friendly operations. But after he and Vice Chairman Greg Abel visited Tokyo in 2023, Buffett expressed plans to hold these stocks for decades.
He praised the management of all five, noting in his 2024 letter that their compensation programs are "far less aggressive than their U.S. counterparts." He said they increase dividends when appropriate and repurchase shares when it's sensible.
He pointed out in his 2023 letter to shareholders that each company applies only about one-third of its earnings to dividends. The rest goes mostly toward building their businesses, expanding their investment portfolios, and buying back shares.
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Key Data Points
Buffett also sees the opportunity to partner with the Japanese companies in the future. That gives Berkshire the chance to tap into the global business expertise of the Japanese CEOs (where Berkshire's expertise is mostly limited to American business).
On the other side of the partnership is access to Berkshire's capital. Buffett said, "Berkshire will always possess huge liquid resources that can be instantly available for such partnerships." Indeed, its insurance operations and massive equity portfolio give it a lot of liquidity.
He originally agreed with all five trading houses to keep Berkshire's stake in the businesses below 10%. However, they all agreed to lift that restriction recently, opening the door for him to increase Berkshire's stake further in 2025. Its current stakes range from 8.53% at Itochu to 9.82% for Mitsui.
Should investors follow Buffett?
While the five Japanese trading houses all present interesting opportunities for investors, there may be a broader takeaway for those following Buffett. The fact that he is selling tens of billions in U.S. equities while buying up foreign stocks suggests there's more value in international stocks than there is in American stocks, where he prefers to invest.
The S&P 500, which is composed of 500 of the largest profitable U.S.-based companies, trades for a forward price-to-earnings ratio (P/E) of just over 20. And that's after a recent 10% correction in the market.
The biggest of those companies, the ones where Buffett can easily deploy a lot of Berkshire's capital, trade for an even higher multiple. By comparison, the Japanese stock market trades for a forward P/E of roughly 14.
Japan's stock market (and other international stocks) may look attractive right now, but investors should also keep in mind the economic uncertainty we currently face, especially with international trade. Luckily, American investors can still find good value in U.S. companies. They just have to move their attention away from the biggest companies in the market to smaller businesses.
The mid-cap S&P 400 and small-cap S&P 600 indexes trade for substantially lower valuations than the large-cap S&P 500, with forward P/Es around 14.5. They're full of companies too small for Berkshire Hathaway to make meaningful investments, but they could present interesting opportunities for individual investors.
As such, it may be worth exploring along with international opportunities since Buffett's portfolio moves suggest there's not a lot to like in the biggest U.S. stocks right now.
