Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 1
One question for thoughts.
For Berkshire’s Japanese stocks investment, why Buffett hedged the currency risk by borrowing yen?
One reason could be yen loan has very low interest rates. But if he doesn’t borrow any at all, and simply just convert USD to Japanese yen and make the purchase, he will be long Japanese yen.
Now Japanese economy is doing well, stock is up and so is its currency. But berkshire is losing money on paper due to its yen loan/currency hedge
No. of Recommendations: 26
For Berkshire’s Japanese stocks investment, why Buffett hedged the currency risk by borrowing yen?
A few thoughts
First, why not? Berkshire was able to borrow money for extremely long time horizons for negative real rates, much lower than the [real] dividend yields. It's almost like the float from a new insurance business turning an underwriting profit. You gather funds like that whenever you can. On its own, borrowing yen would be a risky move because of currency moves, but when paired with a stock investment it becomes risk free new float. Berkshire has a profitable long term $20bn investment that didn't use any of the cash pile...pretty cool.
I don't think he thinks of it primarily as a hedge, more as a funding mechanism. He may have a large pile of cash, true, but the time to maximize your pile of cash is when it's easy, not when you need it.
Lastly, an investment in Japan might deserve a hedge more than one in many other places in the world. There is a saying that there are four types of economies in the world: Industrialized, developing, Argentina, and Japan. The macro and investing rules for other places just don't seem to apply in Japan, so a gigantic move in the yen can never be ruled out, and nobody knows which way it might be.
As for your note about losing money on paper due the hedge, it's best to avoid that kind of thinking. The whole POINT of any hedge is that one side is going to lose while the other wins, along with the point that you don't know in advance which one is going to be which. Never look at the losing side of any hedge, it will drive you crazy. The only thing that matters is the bottom line on the combination, which is going very well indeed in this case, so focus on that.
Jim
No. of Recommendations: 0
Thanks Mungo.
Yes, if the dividend itself can cover the interest charge, it’s indeed make a lot of sense.
No. of Recommendations: 5
No. of Recommendations: 11
I've held stock in Japanese companies for over a decade (been adding more over the past couple of years). I also own shares of other countries coincidently valued in Swiss francs, Australian dollars and Euros.
I fully understand Jim's multi-currency approach to "Atlantic" valuation. On the other hand, all the various flavors of shares I own ultimately get rationalized into US dollars at the bottom of my spread sheet.
Frankly the choice is arbitrary - as long as the currencies are not hedged.
In theory (sometimes practice can deviate as there is occasionally arbitrage opportunity on the shares of a company, but let's keep it simple) multinational companies tend to take their global sales and rationalize the profits into their native currency. This then reflects a stock price which is (should be, at least) translated into ADR (or equivalent) prices on foreign markets. As long as foreign currency holdings are not involved (say dividends are used to buy more shares), the currency shares are held in shouldn't matter at all.
I specifically keep the shares in terms of foreign currencies, not to make incremental profit on the shares (in theory, there shouldn't be any once their value is translated into greenbacks), but rather to have a diversified currency holding in case the USD suffers some catastrophic trauma not reflected in other currencies.
Using a "hedge" to minimize the effects of foreign currency fluctuations against the dollar not only doesn't necessarily help profitability, but destroys any protection currency diversification might offer.
Jeff
No. of Recommendations: 3
I specifically keep the shares in terms of foreign currencies, not to make incremental profit on the shares (in theory, there shouldn't be any once their value is translated into greenbacks), but rather to have a diversified currency holding in case the USD suffers some catastrophic trauma not reflected in other currencies.
En anglais, por favor?
Is this like buying stocks on foreign stock exchanges using interactive brokers or a similar brokerage to convert your US dollars into that country's currency?
No. of Recommendations: 0
Jeff
Would you feel comfortable sharing some of your non-US choices for investment consideration?
Mark
No. of Recommendations: 7
Mais certainement mon ami :-)
This is exactly "like" using Interactive Brokers to buy on foreign exchanges. A number of years ago, I noticed that brokers wer charging to hold ADR's of foreign stocks.
Actually, it turned out they were passing through service charges levied by the bank who creezted the ADR's. In addition, many of the shares offered in the US weree not terribly liquid. There was also the confusion between shares ending in the letter "Y" (which had "fuzzy" connections to foreign pricing) and those ending in an "F" (which followed the foreign shares).
Interactive allowed purchasing the shares directly - which added my desired currency hedging (against the USD) while also holding shares in great companies.
Until recently, this was a bit of a PITA, as I had to pre-calculate how much foreign currency I'd need, buy it and then make my purchase (and figure out what to do with the left over "pocket change". IB made a significant change recently which allows foreign stock to be purchased and then IB would procure the required currency on your behalf on the FOREX. This make things MUCH easier. I've checked their exchange rates and it seems they are being honest brokers on the exchange rates.
Jeff
No. of Recommendations: 2
[)rmontUS:] ...specifically keep the shares in terms of foreign currencies, not to make incremental profit on the shares (in theory, there shouldn't be any once their value is translated into greenbacks), but rather to have a diversified currency holding in case the USD suffers some catastrophic trauma not reflected in other currencies.
=====
En anglais, por favor?
Is this like buying stocks on foreign stock exchanges using interactive brokers or a similar brokerage to convert your US dollars into that country's currency?
Further to OrmontUS's reply:
I completely agree with Ormont about actually wanting the foreign currency exposure as a hedge against devaluation of the other currencies I have holdings in (mostly USD and CAD). But if you just buy the Japanese shares with an Interactive Brokers account, without any forex trade, you will have a negative yen cash position which exactly offsets your yen stock position, which defeats the purpose of having some exposure to yen.
For instance, I just coattailed Buffett with a small stake in one of Buffett's five Japanese trading houses, Sumitomo Corporation in my case, 500 shares at about 3700 JPY/sh (roughly $25 USD), leaving me with 1,850,000 JPY worth of Sumitomo and cash position of -1,850,000. If I do nothing further, I end up having zero exposure to the Yen, and if the yen appreciates by 10% against the USD, I will still have a net zero position and no exposure to the yen. Of course, if my shares appreciate by 20% in the next year, then I will have 2,220,000 in shares and -1,850,000 in cash, so then I would have a small exposure to yen, but if my intention is to have my full Japanese investment exposed to yen, I have to get my yen position up to zero. So I would need a second trade, say USD:JPY, converting $12,680 to 1,850,000 yen and now I have -$12,680 USD and 0 JPY in cash, plus the Japanese shares. So if the yen moves up by 10% against the USD, now I will benefit from that currency movement(and of course, if it goes down by 10%, I will lose.)
On the other hand, I have to consider that interest rates on negative USD balances are much higher: with Interactive, they are 5.83% on the first $100,000 of margin loan, whereas they are only 1.88% on the negative JPY balance. So for the moment, I am doing it more like Buffett, and staying with the loan in JPY, removing the currency exposure not because I don't want currency diversification but because I would rather pay the lower interest rate.
dtb
No. of Recommendations: 1
finally getting around to opening an IBKR account. to do exactly this. and to retain when I finally move. have dithered over it for far too long....,
No. of Recommendations: 1
I think give the much lower interest rate of jpn margin loan, maybe it make sense to do the carry trade/fx hedge. But i also think fx movements price in such interest rate differentials: YEN is more likely to appreciate because of its current interest rate may rise. Taiwan dollar recently rose like 8% overnight. Also this is not long term loan like Buffett took out. So probably safer just convert to JPN..
For me, i am planning to buy some stocks in Europe
No. of Recommendations: 10
Just a reminder to everyone that it makes no difference at all to your returns where you buy a stock, where the exchange is, what currency it is quoted in, or what currency you use to pay for it. There are lots of currency concerns for many companies in their operations, but the only thing that matters to you and that you can control is what currency you choose to hold your cash/debt balance(s). Borrowing in a different currency to fund a stock purchase is important to your returns because you then have a non-zero cash balance in that currency.
That's in terms of currency movement. You might of course have a different jurisdiction risk if a given country or exchange does something weird, so in that sense the exchange you choose might matter.
Jim
No. of Recommendations: 0
"1,850,000 JPY worth of Sumitomo and cash position of -1,850,000"
I just did a sanity check and my Japanese yen account is at zero. I don't think I did any special setting (but who knows?). The way it is treating these transaction (at least in my case) is to fully transparently purchase enough yen (minus whatever my yen holdings already are) to procure the stock. Theey even return any "change" (generally a few bucks worth) left over after the transaction to my US dollar account.
I have not recently sold any foreign shares, but hopefully if I did, the proceeds would be retained in terms of the currency (but I guess I should check and not take it for granted)
Maybe Jim knows?
Jeff
No. of Recommendations: 1
Just a reminder to everyone that it makes no difference at all to your returns where you buy a stock, where the exchange is, what currency it is quoted in, or what currency you use to pay for it.
It will matter a little bit, if you can avoid ADR fees on dividends.
Maybe you give that up in frictional costs of converting the currency dividends are paid, to the currency you can spend to buy stuff.
The ADRs with 5 letter tickers and a -Y or -F at the end have significantly more fees on dividends than the "regular" ADRs that look like NYSE/NASDAQ tickers.
