Editor's note: This article has been corrected. A previous version miscalculated the estimated size of Berkshire Hathaway's investment.
Warren Buffett is well known for his preference for holding investments long term. "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever," he wrote in his 1988 letter to Berkshire Hathaway (BRK.A +0.16%) (BRK.B +0.21%) shareholders.
But Buffett clarified his comments in his 2016 letter to shareholders. "We have made no commitment that Berkshire will hold any of its marketable securities forever." That certainly rings true with Berkshire investors today, who have seen Buffett sell off $177 billion worth of stock over the last three years. But there are a handful of stocks that Buffett looks unlikely to sell for the foreseeable future, perhaps even forever.
In fact, Berkshire just increased its stakes in two stocks he said Berkshire expects to maintain indefinitely in his 2023 letter to shareholders.
Image source: The Motley Fool.
Finding great value in today's market
Warren Buffett's biggest challenge over the last few years has been finding good value in the stock market. Stock prices, as a group, have climbed faster than financial results, leading to record-high valuations. The S&P 500, which represents 500 of the biggest U.S.-based companies, now sports a forward PE of 22.4, well above its historical average in the mid-teens.
As early as last February, Buffett was lamenting, "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire." With $344 billion in cash to deploy, Buffett's universe of investable stocks is limited to only the biggest companies in the world, which have climbed in valuation faster than smaller companies.
But Buffett has found one set of companies that are big enough to absorb a significant amount of capital from Berkshire. And he deployed over $40 million worth in late August. That's when the company added to its stakes in Mitsubishi (MSBHF +2.27%) (MTSU.Y 0.74%) and Mitsui (MITSY +1.19%) (MITSF 3.65%), two of the five big Japanese trading houses, which also includes Itochu, Sumitomo, and Marubeni. The trading houses are massive conglomerates with businesses in just about every industry you can think of.
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Key Data Points
Mitsubishi may be best known in the United States for its automotive company. And while that's a significant holding of the parent company, the firm also holds assets in energy, natural resources, and retail. If you've ever been to Japan and seen Lawson convenience stores on every other block, that's a company 50% owned by Mitsubishi. Berkshire subsidiary National Indemnity increased its stake in Mitsubishi by half a percentage point in late August.
Mitsui is almost as big as Mitsubishi with a heavy weighting in its operations toward liquefied natural gas and other natural resources and metals. Other notable holdings include a 20% stake in Penske Automotive Group. Management said National Indemnity had also increased its stake in the trading house the same day as the Mitsubishi disclosure, but no details of the purchase were released.
There's clear value in these two stocks. Mitsubishi currently trades below 1.5-times book value, trading below 1.4-times book value until the disclosure in late August. Mitsui has an even lower valuation, trading below 1.4-times book and closer to 1.25-times in August. Those valuations were likely weighed down by tariff fears, but the U.S. and Japan reached a trade agreement in early September, removing the overhang from the stocks. That's another example of Buffett successfully becoming greedy when others are fearful.
What makes them forever holdings?
Buffett has praised each of the five big Japanese trading houses, noting they all operate in a manner similar to Berkshire Hathaway itself. They maintain strong balance sheets and only return about one-third of their earnings to shareholders as dividends. While they'll occasionally execute share repurchases when the stock offers good value, the bulk of their capital goes toward building their businesses and finding new investment opportunities. Buffett also points out they're all reluctant to issue new shares of their stocks.
In other words, the management at these companies is "outstanding," fitting the bill for Buffett's preferred holding period. On top of that, Buffett foresees potential opportunities to partner with the large conglomerates. Their management teams bring expertise across many more industries and markets and Berkshire has plenty of capital to back new investments. Buffett said he expects his successor Greg Abel to "work productively with the five companies in the future."
With the stocks of the Japanese trading houses all trading at attractive valuations, it wouldn't be a surprise to see Buffett and Abel continue adding to Berkshire's holdings. Berkshire received permission to exceed the 10% stake threshold for all of them. It already surpassed that level for Mitsubishi (and likely Mitsui) with its recent purchases. But the opportunity is still there for additional purchases.
