Buffett's Investing in China, So Why Aren't You?

"The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly." -- Warren Buffett

Superinvestor Warren Buffett is rightly labeled a financial genius for his ability to spot undervalued companies where no one expects. Buffett's fluency with numbers is astounding, but he hasn't thrashed the market for an average 20% gain for over 40 years with financial wizardry alone. He's also relied heavily on trust, which has limited his downside and helped him avoid the "permanent loss of capital" that he so highly dreads.

As I've argued before, being able to trust the management of your companies is absolutely central if you're looking to earn Buffett-size returns in global investing.

Howdy, partner
Often we think of managers only as a secondary concern when investing our hard-earned cash, instead relying solely on the numbers to tell a company's tale. But ultimately, you have to rely on dependable managers to protect your stake and grow it well into the future. For Buffett, trustworthy management is a fundamental cornerstone in an investment. That was especially true when the Oracle of Omaha purchased shares of a Chinese company with which he was not particularly familiar.

The decision to invest in BYD, a Chinese maker of batteries, mobile phones, and electric cars, was prompted by Charlie Munger, longtime vice chairman at the Buffett-run Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . For Munger, the investment was as much in BYD as it was in its founder, Wang Chuan-Fu. "This guy is a combination of Thomas Edison and Jack Welch -- something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it," Munger enthused to Fortune. Founded in just 1995, BYD already supplies its batteries to the rigorously produced Apple iPod. Management matters. Tremendously.

After such effusive praise, Buffett sent David Sokol, the chairman of Berkshire subsidiary Mid-American Energy, to investigate BYD and its founder and chief further. Sokol was as impressed as Munger. Buffett confided, "I don't know a thing about cellphones or batteries. And I don't know how cars work. [But] Charlie Munger and Dave Sokol are smart guys, and they do understand it." Shortly thereafter, Buffett was writing a check for $230 million for a 10% share of the company.

For an investor who has shunned "sure-fire" tech companies, investing in a Chinese company that he doesn't fully understand is something of a coup. Buffett has tended to stick close to consumer franchises, such as top holdings Procter & Gamble (NYSE: PG  ) and Coca-Cola (NYSE: KO  ) , which have defensible brands and don't rely heavily on technology. Because of these qualities, Coke and P&G offer more secure future cash flows. Nevertheless, the Berkshire trio thinks BYD has the opportunity to become the world's largest automaker by selling electric cars, and to become a leader in solar panels. Their investment is a testament to their trust in Wang's character.

Sokol and Munger discovered a tireless manager working five or six days a week until 11 or 12 at night. Wang is uninterested in being wealthy, and lives a modest lifestyle. That's surprising, given that his company managed to grow revenue by 44% per year over the last five years, to more than $5 billion. In 2008, he earned just $265,000, a trifle compared to what an American CEO earns at a comparably sized company. Wang even transformed his personal luxuries into practical benefits for BYD. He owns a Mercedes and a Lexus, whose engines he disassembles to discover how they operate.

Such frugality has been transferred to the company as a whole, and Buffett has long coveted parsimonious managers, whether they be at Wal-Mart (NYSE: WMT  ) , with its ruthlessly efficient supply chain, or the Nebraska Furniture Mart, run by the legendary cost-slasher Mrs. B. Executives at BYD had long flown coach exclusively, until recently. When they attended the Detroit Motor Show, they rented a house in order to avoid the cost of a hotel. It's impossible to imagine Ford and GM so rabidly focused on costs.

When Wang finally met Buffett, the Oracle was concerned about how BYD, which was dependent on technology for its competitive advantage, would maintain its lead. Wang replied: "We'll never, never rest."

Getting to know managers -- how they operate the business, whether they're honest, and how they're likely to treat you -- is central to understanding whether they're going to maximize your returns. So it's important to read what they have to say in interviews, conference calls, and financial releases and observe how their companies are run. And that's doubly true when investing overseas. Buffett understands the value of meeting management and discovering whether they operate in the interests of shareholders, and it's an approach taken by the advisory team at Motley Fool Global Gains.

It's a matter of trust
Led by co-advisors Tim Hanson and Nathan Parmelee, the team at Motley Fool Global Gains travels the world looking for trustworthy managers to provide you with the next market-crushing stocks. That approach has led them to recommend such home runs as China Marine Food (NYSE: CMFO  ) and China Green Agriculture (NYSE: CGA  ) , which are up 150% and 500%, respectively, since they were first recommended.

China Marine offers tasty seafood snacks in mainland China and has grown earnings at an average annual clip of 27% over the last three years. China Green produces organic fertilizers -- a quickly expanding segment -- and has grown earnings at 46% annually over the last two years.   

After they toured production facilities in China, Nathan characterized China Green's CEO as a "straight shooter" and noted the clear-cut approach from China Marine's managers. The team meets with managers of prospective investments to determine how they're likely to treat outside investors such as us, so that we can invest with confidence in the true gems of what the Oracle has proclaimed, "China's century." Of course, the team doesn't look just at China; they have traveled to meet with managers in Brazil, Mexico, India, Chile, and Argentina to find the world's greatest investments.

To discover what other stocks the Motley Fool Global Gains team recommends, click here to join us as a Global Gains guest free for 30 days.

Already a member of Global Gains? Log in here.

Jim Royal, Ph.D., owns shares of Berkshire, Microsoft and Procter & Gamble. China Green Agriculture and China Marine Food are Global Gains picks. Berkshire Hathaway, Microsoft, and Wal-Mart are Inside Value recommendations. Apple, Berkshire Hathaway, and Ford Motor are Stock Advisor selections. Coke and P&G are Income Investor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Berkshire Hathaway and China Green Agriculture. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (16)

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  • Report this Comment On April 27, 2010, at 5:49 PM, madmilker wrote:

    The reason I don't...

    read slowly....

    Remember what Lance Winslow wrote in that article "The Flow of Trade in a Global Economy"....dang! better yet...jus take the time and read this ...."Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what's in the best interests, and we should make sure that trade is not only free, but fair too."

    Also, think for a moment about George Washington....yes the man that is on the US dollar bill.... "Washington had been reelected unanimously in 1792. His decision not to seek a third term established a tradition that is now embedded in the 22d Amendment of the Constitution."

    Take the time to read his farewell address after only eight years of serving his country and than ask yourself this....How do you think George feels being sent overseas in return for all that foreign so-call cheap items and being left in a foreign bank because the American worker doesn't make anything for the foreigners to buy. Cheap items didn't make this great union of 57...oops! 50 states the greatest place on the face of this Earth.....the American worker (union and non-union) did.

    You can't have a strong country without having a strong currency and you can't have a strong currency unless you keep it floating around within your 50 states. This is why the store with the star in the name puts 95% China made items in their stores in China....to keep their "yuan" in their country helping the nice people there. And with only 5% left for all the other 182 country's that make stuff including the United States of America....that doesn't produce very many jobs outside of China.

    Being an old person myself and knowing how it was back in the 40's, 50's and 60's in this union of 50 states....I look at George each time I pull him out of my billfold and make a promise to send him out for items made in America so after floating around helping each hand he touches just maybe one day he will shake mine again.

    Now...maybe the reason Buffett is...

    on Wal*Mart's China web page!

    "Wal-Mart China persists in local procurement which provides more job opportunities, supports local manufacture industry and promotes local economy. So far, 95% of merchandising sold at Wal-Mart China store are local products by which Wal-Mart has established business relations with nearly 20,000 suppliers. At Wal-Mart, we treat suppliers as partners and would like to develop with them. In 2008 Wal-Mart won the Supplier Satisfaction published by Business Information of Shanghai for five consecutive years."

    But does that support American export and jobs....

    And what about the Port in Mexico that Wal*Mart, China, Mexico and that Hong Kong container company made a deal on back in 2006....was that to support jobs in America....add to that the dang Choo Choo! that Buffett bought last year...which by the way...runs in and out of Mexico...

    This O'fart invest in America....cause Retail makes NOTHING and the dang Government only makes more debt....if Corporate people want to invest out of the USA and at the same time sell the America people down the river...they will in the end get what they deserve and I truly hope it hurts.

    15 cargo ships pollute as much as 760 million automobiles....and Buffett nor Wal*Mart pay to clean the dang fish out of their ballast tanks....but there is $9 billion of hidden taxes that ALL AMERICANS pay each year to do the job....why in the he!! ain't you typing about those facts....

    Good day!

  • Report this Comment On April 27, 2010, at 7:50 PM, dstb wrote:

    I'll be more brief. China is all smoke and mirrors. How can you trust any economic numbers that come out of the country or any individual company? The popping of their real estate bubble is going to be brutal.

  • Report this Comment On April 28, 2010, at 12:44 AM, Chinastocks55 wrote:

    Here is a stock Buffet will love.

    Profitable, growing and announced they filed for uplisting.

    LPIH.OB

    LongWei Petroleum

    http://topics.nytimes.com/topics/news/business/companies/lon...

  • Report this Comment On April 28, 2010, at 1:11 AM, summersnowflake wrote:

    I hope people will wake up to the new world and not make comments that are based on stereotypical perceptions of a country they probably have never been.

    The world is connected. It's no longer us vs them. The entrepreneurs in China are no more and no less evil than those in the US. They have one motive and that's to make money, not to conquer the world or hurt anyone else.

    There are lots of issues in China, but is it all smoke and mirrors? How about Wall Street in our own backyard? Is it all smoke and mirrors? If you think so, then you shouldn't be investing at all.

    I lived in China for 10 years and continue to travel there every other month for business. That country is definitely growing and has lots of opportunities, but is it going to over take the US as many people fear? I don't think so, at least not in the next few decades. However, it's growth opportunity that will be great for investors when you take a longer term view

  • Report this Comment On April 28, 2010, at 3:24 PM, stills999 wrote:

    So many great investments...

    BSPM, LPIH, CNYD, CCME, SKBI, TPI, HOGS, CPBY ... all undervalued.

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