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Master investor Warren Buffett delivered a speech this past Friday that was as predictable as it was profound. The seminal value investor again advised his audience to buy what they understand, avoid overpriced stocks, and be rational and think for the long term. Why, then, do I mention it? Because while the content of Buffett's speech wasn't all that remarkable, the context was: Buffett delivered the speech in New Delhi.
Buffett was in India with fellow billionaire Bill Gates to encourage India's billionaires to give more to charity. But Buffett was also there on business.
Berkshire's first bet on India
That's because Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) recently launched Berkshireinsurance.com there, an agent set to sell auto insurance to India's growing legion of (relatively unsafe) drivers. And just as Chinese auto manufacturer and Berkshire investment BYD has leveraged Buffett's celebrity to try to sell more cars in the Middle Kingdom, reportedly hanging giant pictures of the famously folksy investor in its showrooms, Berkshireinsurance.com is also playing the Buffett card to attract customers. The company's website proclaims that "The legendary Warren Buffett's company, Berkshire Hathaway, has just set foot in India" and is adorned with well-known Buffett quotes. Couple that ability to build credibility with a low-cost sales and marketing model that seeks to replicate Geico's success here in the states, and you get the potential for a very interesting success story.
Yet Berkshireinsurance.com will not be Buffett's last bet on India. The billionaire said in Bangalore at an earlier speech that he expects to make one investment each year in the country -- noting as well that he was daft for not looking at opportunities in the country sooner.
Is India worth Buffett's time?
Why is a man who has been so successful and so adamant about staying within his circle of competence suddenly looking to branch out into new -- and volatile -- markets? The answer is that India, like China, gives Buffett the opportunity to invest in high-growth businesses again without requiring that he learn about sectors, such as high-tech stocks, that he has generally considered "too hard." That's a compelling proposition for a man who recently wrote to his shareholders that Berkshire's "bountiful years ... will never return."
Yet if Buffett can succeed as an investor in India, where despite what Buffett says, it's still early in the game, that warning may not turn out to be true.
The reason is that India, with more than 1 billion people, is a massive market. Furthermore, it's poor, with GDP per capita of just $1,134 versus $45,989 in the U.S., and massively underpenetrated by basic products and services such as water, electricity, and insurance. If Buffett really can find or build another Geico or See's Candies or Borsheim's in the country, they will grow rapidly along with the country. And while Buffett is invested in several blue chips, including Wal-Mart (NYSE: WMT ) and Coca-Cola (NYSE: KO ) , that are targeting India as a source for growth, it's these direct investments that have the most potential to accelerate Berkshire's returns.
But it's not easy money
Yet Buffett is also cognizant of the realities that could limit his returns in India. Foremost among those are the capital controls that restrict foreign investment in Indian stocks as well as foreign ownership in Indian companies. Consider that while more than 3,300 Indian companies are listed in India, just 14 trade on the major exchanges in the United States. And unless you're a nonresident Indian, there's no convenient way for you as an investor to get at those India-based investment opportunities.
Similarly, insurers like Berkshire are restricted to 26% ownership of Indian assets, while multibrand retailers such as Wal-Mart must have an Indian joint-venture partner and can't actually sell anything to consumers (only to other retailers). Even megabrands such as Nike (NYSE: NKE ) -- another Berkshire holding -- must give up a 49% stake in their Indian business in order to enter the country.
These regulations deprive India of foreign capital and investment -- capital that the country needs to continue its growth. And while food inflation is forcing the Indian government to consider letting retailers like Wal-Mart bring lower prices and greater efficiency into the market, there has been no action on that front. The longer India waits, the longer India's development will take.
The global view
What's clear to Buffett, however, and I agree, is that the potential long-term rewards from investing in India outweigh the risks by several orders of magnitude. That's particularly true for any investor who shares Buffett's long-term outlook and is loath to sell his ownership stakes in great companies. Although emerging markets are guaranteed to be volatile, they will be the world's fastest-growing markets for the next few decades -- places that will undoubtedly be larger, more important economies in the next 10 to 20 years than they are today. That fact may not be true for developed economies in Europe and the U.S., making emerging markets among the few market sectors left where time really is on the investor's side.