Step 2 of Becoming a Global Investor: Buffett and RussoVW Staff
Jeffrey Towson is the former Head of Direct Investments for Middle East North Africa and Asia Pacific for Prince Waleed, nicknamed by Time Magazine as the “Arabian Warren Buffett”. He is the author of the global investing book “What Would Ben Graham Do Now?
In my previous article on Step 1 of Becoming a Global Investor, I argued that “going global” as a value investor means exponentially increasing your potential opportunities. There are just so many more companies out there now. It’s a fantastic time to start looking globally.
But it is also about overcoming “5 going global” problems:
- Limited access
- Increased uncertainty in the current intrinsic value
- Increased uncertainty in the long-term intrinsic value
- A weak or impractical claim to the asset
- Foreign disadvantages
If you can overcome these problems, and you have the flexibility in your capital source, you can start to hunt for investments virtually anywhere. And I propose you will find, as I have, that most of the world outside the highly hunted Western democracies is wildly mispriced today.
In Step 3, I will introduce a comprehensive approach for this. But here I just list three common strategies for overcoming these problems. I do not think these are actually the best approaches today, but they are the most familiar to Western-based investors and a good discussion topic.
Buy publicly-traded multinationals with extensive emerging market operations (i.e., Tom Russo buys multinational retailers)
This is straight from the Tom Russo / global value investor playbook. Buying an American or European company, in say retail or natural resources, with operations in China or India takes care of problems 1 and 4. You have access to the deal and you get a clear, legal claim to the asset.
This approach also addresses problem 5 (foreigner disadvantages), which can be significant in many places (Russia and China being the most serious). A US-based investor buying into a Chinese company is at the minimum going to have some information disadvantages relative to local Chinese investors. But a US-based investor buying a US multinational has no such disadvantage.
This is a fairly common strategy but it does strike me as a bit contorted. I prefer to go as direct as possible.
“Buy and sell” a mispriced publicly-traded emerging market company (i.e., Buffett buys PetroChina)
Warren Buffett’s 2002-2003 purchase of $488M of PetroChina was a classic value investment. He spotted a very sustainable competitive advantage (a government-mandated monopoly) that was trading on the Hong Kong exchange well below intrinsic value. He later stated in his annual report that when he purchased PetroChina the market capitalization was $37B and he estimated the value to be at least $100B. He sold his entire $488M stake in 2007 for $4B, a 10x return. Note my earlier comment on wildly mispriced markets.
In terms of the five problems, this approach effectively managed problems 1 (access is via the HK exchange), 2 (he had a huge margin of safety) and 4 (he had a clear legal claim and ability to exit).
His main problem was the long-term uncertainty. If the government can bestow a political monopoly it can take it away. Or more likely it can change the rules in other ways that quickly impact intrinsic value. This was Buffett doing “buy and sell” – not “buy and hold”. Although he did later comment he should have held on as the value kept going up.
“Buy and hold” through direct negotiation with an emerging market company (i.e., Buffett buys Chinese BYD)
In 2008, Buffett purchased 10% of Chinese Electric Car Manufacturer BYD for $230M – through a negotiated purchase with the owner-manager. While the press published pictures of him in a BYD electric car, this strikes me as a value investment in a cell phone battery-maker, not a car company. BYD makes over 50% of the world’s cell phone batteries and has a competitive advantage in this area.
In 2010, his BYD stake was trading at $1.45B and he openly stated his intention to hold the investment forever. I view this as Buffett doing global value “buy and hold”. Although BYD has since had some government and legal problems so this could be changing.
I also view the BYD purchase as mostly a strategy to overcome Problem 1 (limited access). Buffett’s unique reputation got him access to a tightly held attractive company. BYD’s Chairman at the time said he was primarily selling to Buffett because of his reputation.
This is much closer to my operating method. I gravitate to privately negotiated deals where factors other than just capital can be used. Reputation usually takes care of problem 1 – but you can also often impact problems 2, 4 and 5 in private negotiations.
Below is a basic framework for this with the three strategies just detailed in the lower left. I will describe tactics for shifting to the right, where there are far more opportunities, in Step 3.