Is Buffett Right to Invest in Asia?
Stock-Markets / Investing 2009 Mar 03, 2009 - 05:37 AM GMT
Tony Sagami writes: Warren Buffett knows a thing or two about investing. But what I really admire is that he always tells it exactly like it is … good or bad. Buffett really caught my attention a few days ago when he sent out his annual letter to the shareholders of Berkshire Hathaway, Buffett's insurance and investment holding company.
“The economy will be in shambles throughout 2009 — and, for that matter, probably well beyond,” warned Buffett.
Shambles? Well beyond? Those are very gloomy words. But Buffett has good reason to be so pessimistic … Berkshire Hathaway recently reported a staggering 96 percent drop in its fourth-quarter profits — the fifth quarter in a row of falling profits.
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| Warren Buffett didn't have good news for Berkshire Hathaway shareholders: Fourth quarter profits had plummeted 96 percent. |
Business was bad across the board. But Berkshire Hathaway got particularly pounded by $4.61 billion of losses on 251 derivative contracts. The result: Berkshire Hathaway's stock tumbled 44 percent in the last 12 months.
No Shortage of Pessimism …
Buffett isn't the only big name who is worried about the economy. Guess who said this: “The economy is going to get worse before it gets better.”
It was President Obama on December 7, 2008.
I am in 100 percent agreement with Obama's assessment of our economy. However, his multi-trillion dollar solution to rejuvenate our economy will cost us a fortune! In fact, his recent budget proposal includes a $1.75 trillion deficit — the largest in history.
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| “The economy is going to get worse before it gets better.” -President Obama, December 7, 2008, on NBC's Meet the Press. |
On top of that, he warned that we should expect similar deficits “for years to come.”
Unfortunately, that spend, spend, spend mentality is nothing new for our country. The politicians we elect and the got-to-have-it-today mentality of consumers is all about spending too much and saving too little.
I suspect that a lot of Buffett's pessimism is because of that spend-like-there's-no-tomorrow strategy. And despite his unflattering short-term performance, Buffett's long-term track record certainly proves that he is one of the best stock pickers the world has ever seen.
That's why you should …
Pay Careful Attention to What Buffett Says and What He Does
What Buffett says is that the U.S. economy is going to get worse, and what he is doing is investing in Asia. Here are two examples of where Buffett is putting money:
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| Buffett has increased Berkshire Hathaway's holdings in South Korea's third-largest steelmaker. |
Berkshire Hathaway recently increased its holdings of South Korea-based Posco (PKX), Asia's third-largest steelmaker. Posco makes structural steel used in the construction of buildings, industrial pipes, and automobile chassis; and steel plates used in shipbuilding, structural steelwork, power generation, earth-moving equipment, and other industrial machinery.
Buffett also invested $230 million for a 10 percent stake in BYD Company (1211.HK), a Chinese company that makes electric cars. BYD makes 65 percent of the world's nickel-cadmium batteries and 30 percent of the world's lithium-ion mobile phone batteries.
Is Buffett right about Asia? Absolutely … on a long-term basis. But I still expect things to get worse over in Asia before they get better.
Moreover, a poll of nine, Chinese-managed mutual funds showed that Chinese portfolio managers do not expect a quick rebound in Chinese equities. On average, they expect the Shanghai Composite to be at 2,133 three months from now, which is about where it is now.
The managers reported that they had chopped their average weighting for stocks from 71.6 percent to 68.9 percent from the last poll. More importantly, seven of the nine portfolio managers said they expect to reduce their allocations even further next month.
Stay Patient and Prepare to Become an Aggressive Buyer …
The Asian markets have unfolded exactly as I told you they would in previous Money and Markets columns. And if you have followed my suggestions, you've avoided a lot of pain and have a good-sized pile of cash to put to work when the market does bottom.
That bottom isn't far away though. So the best thing to do is to stay patient and prepare to become an aggressive buyer.
For now, consider sticking to short-term Treasuries or Treasury-only money funds like the U.S. Global Government Securities Savings Fund (800-873-8637) or the Weiss Treasury Only Money Fund (800-242-8092). Also, you might consider subscribing to my Asia Stock Alert newsletter so you'll know exactly when I think it's time to jump back in.
Best wishes,
Tony
P.S. As a regular reader of Money and Markets , I'd like to tell you about our new, specialized, free publication, Global Wealth Report , which launched yesterday. This daily newsletter focuses on the precious metals, natural resources, Asian and South American markets and more. The best part? A subscription to Global Wealth Report won't cost you one red cent!
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