Risk Ascent | Exploring the Edges of Risk

In August 2020, while the world chased high-growth tech, Warren Buffett quietly deployed ~$6B into five Japanese trading houses (sogo shosha): Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo.

Critics called them “value traps” – old-economy conglomerates with complex structures and heavy commodity exposure.

📈 Fast-forward to 2025: that position is now worth just over $30 billion, making it one of Berkshire’s largest holdings outside the U.S. Berkshire added more capital over time, and the stocks themselves have delivered extraordinary gains – most of the sogo shosha have more than tripled, with several up 200% – 500%+ from Buffett’s 2020 entry levels.

For professionals in Risk and Investment, looking at the P&L 🚫misses the point. The Truth is in the Balance Sheet ✅.

Here is the breakdown:

1. The “Financial Alchemy”: A Perfect ALM Hedge ⚖️
Buffett didn’t just buy low – he financed smart.

Instead of converting USD to JPY, Berkshire issued yen-denominated bonds at ~0.5% – 1%, then bought stocks yielding ~3% – 5%.
📉 Risk Mitigation: By funding in yen, he matched asset and liability currency, substantially reducing FX risk.
📈 The Arbitrage: Positive carry. Dividends cover interest payments many times over.

2. Valuing the “Unloved” Complexity 📉
Markets ignored sogo shosha for years due to perceived inefficiency.

Buffett saw:
⚓ Resilience: These firms anchor Japan’s resource and trade ecosystem.
🛡️Margin of Safety: He bought high-cash-flow assets at or below book value.
📈 Inflation Tailwind: Japan’s rare inflation cycle (2022–24) boosted commodity earnings and global cash flows – another lever Buffett quietly captured.
💴Weak Yen Advantage: Overseas earnings translated into stronger yen profits.

3. The Governance Pivot 🏛️
A hidden driver: Japan’s corporate governance reform.

The Tokyo Stock Exchange pushed companies trading below book value to improve ROE or publicly justify why they weren’t (“comply or explain”).
Since Buffett’s entry, these conglomerates accelerated:
🔄 share buybacks, 💰dividend increases, ⚙️capital efficiency,📄investor transparency.
Buffett wasn’t just buying cheap stocks – he was buying into a systemic governance re-rating.

4. The Lesson
🏗️ Structure is Alpha: Liability engineering (cheap yen funding) created superior risk-adjusted returns.
⏳Patience Pays: Buffett framed this as a decades-long investment.
🥱 Look where it’s boring: While markets chased AI and Technology, he accumulated mispriced essential infrastructure.

Buffett’s Japan trade reminds us that value investing isn’t dead. It simply requires: a global lens, a risk manager’s discipline, and a balance sheet mindset.