23 days ago • 2 mins
What’s going on here?
Japanese trading company Mitsubishi announced a buyback, proving that if you want a birthday gift worth keeping, you need to buy it yourself like Buffett.
What does this mean?
Warren Buffett tends to stick to what he knows: cherry cola, ice cream, and US companies with strong prospects that are trading for decent prices. But he treated himself to something a little different on his 90th birthday around three years back. He bought serious stakes in five Japanese trading firms with similar business models – investing in a chocolate box of different types of companies – to Berkshire Hathaway. That trip out of the States paid off. The stock prices of all five have more than tripled since then, with Mitsubishi’s pulling ahead by another 10% on Wednesday after the carmaker promised to buy back a tenth of its own shares.
Why should I care?
For markets: Backing buybacks.
Buffett loves buybacks, even calling their critics “economic illiterates”. The plus side is clear: shareholders can end up with a bigger stake since there are fewer shares in the market. What’s more, because buybacks tend to be a show of confidence, many new investors flock to a stock when they happen, bringing up the price for existing shareholders. Still, even Buffett agrees that they can go awry if a company buys its own shares back at too high a price. Investors won’t bite if the newly increased price is at odds with the company’s profit and prospects, so the stock could end up lower than it started.
The bigger picture: Test your patience.
Japan has successfully turned economy-bruising deflation into a healthy dose of inflation, while government incentives are shaping Japanese companies into profit-making machines. That wasn’t the case when Buffett took his punt, though. This isn’t proof of any truth behind the “Oracle of Omaha” nickname, of course. Instead, it’s a point for long-term value investing, when you spot a bargain with potential and patiently sit on it.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.