Buffett's Geography Problem

How smaller investors can win...

The FINANCIAL TIMES led their weekend edition with a front page splash, writes Tim Price on his ThePriceOfEverything blog.
 

"Buffett backs Britain..."

If you dug a little deeper, the truth was somewhat more prosaic. The world's most famous investor wasn't actually putting his money where his mouth was, so much as lending moral support to a financial market that many claim is being 'artificially' discounted by issues relating to Brexit.

With all due respect to Mr.B, and noting that regardless of the article he has yet to commit any meaningful new capital to the UK, he is probably understating UK political risk.

We would suggest that the FTSE trades where it does – at no huge discount to other stock markets that we can identify – not so much because of overblown Brexit chatter (the FT is fiercely Remain), but rather because both domestic and global investors have no great enthusiasm for a possible future government led by two unashamed Marxists.

Two weeks earlier, the FT carried an interview with George Roberts and Henry Kravis, the co-founders of private equity specialists KKR:

"The founders of KKR have declared Japan their "highest priority" in the world outside the US as conglomerates like Hitachi, Toshiba and Panasonic jettison non-core subsidiaries and create potential gold mines for private equity.

"George Roberts said that he currently felt 'more comfortable investing in Japan than
I do in China' – remarks that come despite the significant investments and resources
KKR has channelled into Hong Kong and the mainland over the past decade.

"But after many years of disappointment, corporate Japan is now in a phase of fundamental change, said the KKR founders as the company held its annual partners' meeting in Tokyo for the first time. Mr Roberts said the push for improved governance and transparency initiated by the administration of Shinzo Abe now had the momentum to survive beyond his time as prime minister."

False dawns in Japan have scarred plenty of investors. Could it really be different this time ?

Japan represents our single largest country commitment, both in our fund and in our managed accounts. We clearly believe, like Henry Kravis and George Roberts, that it is different this time. Jan Pstrokonski is the manager of the Samarang Japan Value Fund, which invests in undervalued small- and mid-cap Japanese companies. Here is what Jan wrote in a recent commentary:

"I would like to emphasise the quality of the companies we are able to buy, thanks to the continued generosity of the short-term trading community involved in smaller Japanese companies. Our investees' R&D into new products, and their perspectives for new services, are not easily captured by current statistics, but these efforts are signs of quality companies that have bright futures."

"While picking out which quarter will be weaker or stronger is a difficult game, it is much easier to predict that undervalued and practically unknown companies that are doing their homework will be worth more in the future."

Warren Buffett – within Berkshire Hathaway – is sitting on over $100 billion of cash. As he has himself frequently conceded, the scale of his business undoubtedly inhibits future returns.

As the FT interview observed:

"With $700bn in assets, $112bn of that in cash and cash-like investments, only vast investments can meaningfully improve Berkshire's profits. The publicly traded stocks Buffett can sensibly buy number no more than 100, he says. Buying companies outright is no easier. A billion-Dollar company that immediately increases in value by 50% hardly helps at all: 'Making $500m sounds great and $1bn sounds like a big investment, but [$500m is] less than a tenth of a per cent' as a contribution to Berkshire's assets, Buffett notes."

Warren Buffett may be constrained by the enormity of his asset base, and he may even be considering investing elsewhere in the Anglosphere, i.e. in the UK. Those of us with more modest levels of investment capital to deploy can invest on a geographically unconstrained basis where we can fish in a far broader investment pool, and take advantage of a much more populous, not to say compelling, investment universe.