This week, Warren Buffett turned 90 years old. Happy Birthday, Warren! Also, his company, Berkshire Hathaway, announced they had taken huge stakes in five of the largest Japanese conglomerates. In a year when Tesla, Apple, and other growth stocks have seemingly done nothing but go up, some may wonder why the world’s most famous stock investor would invest billions of dollars in companies like Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp. Given the dismal performance of Japanese stocks over the past 30 years or so, the questions aren’t surprising.

As of this morning, the Nikkei 225 was trading just over 23,000. The Nikkei is Japan’s stock market index of the largest publicly held companies in the “Land of the Rising Sun”. Had you invested at its peak of 38,957 on December 29, 1989, you would still be waiting for the dawn.

For those old enough to remember, though, it seemed like Japan could do nothing wrong back in those days. Long before Tesla was making cars that do not use gasoline, Toyota was perfecting manufacturing processes that became the world’s standard. Prior to iPod, Sony made cassette players that you could plug your headphones into and walk around with. Canon made the world’s best cameras. Nintendo made the most popular video games.

A memorable quote from the movie Back to the Future Part III in 1990 summed it up when Marty McFly went back to the 1950’s and asked for a young Doc to assist him in repairing his time machine. Doc said, “No wonder this circuit failed. It says "Made in Japan".” Marty responded, “What do you mean, Doc? All the best stuff is made in Japan.”

While there are many different factors at play that have contributed to the divergent paths of Japanese and US stocks over the past few decades, at times you can hear echoes of the late 80’s when listening to “experts” talk about US technology stocks. Back then, the experts predicted that the US could not possibly compete with the superior Japanese products, innovation, or technology. Sound familiar?

It appears that Berkshire Hathaway thinks so. Back in 1990, when I was a senior in college, the US was in a recession. US stocks had seen some impressive returns in the 80’s but Japan’s economy and asset prices seemed supercharged, with stocks and real estate tripling in value.

Perhaps what Buffett sees in Japan today is the opposite of what was happening back then. Decades of “lost performance”, the rise of China, and the resurgence of the US has left Japan as largely an afterthought to many investors. However, it is exactly those kinds of situations that value investors seek.

US stocks have enjoyed a period of significant outperformance versus the world (and Japan) since the end of the Great Recession. But 10 years ago, we were lamenting the “Lost Decade” in the US stock market where domestic investors had seen virtually no returns while international stocks outperformed.

Recently, investors that like to invest in fast-growing high-priced companies have also enjoyed a period of outsized returns versus those that prefer to buy stocks that appear cheaper relative to earnings, book value, etc. But as I discussed in my Accountable Update a couple of weeks ago, Driving for Value, value stocks have largely performed in line with their historical average over the past decade while growth stocks have been the outlier.

The idea that the less you pay for an asset results in higher expected returns is a fundamental economic principle that history has shown to be a better approach. No one can predict when international or value stocks will outperform again, but we know shifts in investor sentiment can be sudden. Historically, some of the worst periods for value versus growth stocks have been followed by some of the best. At the end of the technology bubble of the late 90’s, growth stocks had outperformed value stocks in the US over time frames ranging from 1 – 15 years. Yet by 2001, value stocks had surged ahead as growth stocks came crashing back to earth.

I haven’t been at this nearly as long as Warren Buffett, but after nearly three decades of seeing how markets and investors behave, I have learned that we cannot often successfully predict when certain markets or investment styles will perform better or worse. Buying assets that are on sale, however, is a strategy that makes sense and has served the Oracle of Omaha well. I believe it will payoff for our clients too.

Get in touch if you would like to discuss.