What Buffett Is Buying Next

Every so often, Berkshire Hathaway Chairman Warren Buffett meets with business-school students. Because so few people ever get to sit down with the Oracle of Omaha, those who do have a responsibility to take good notes.

The folks at The Ben Graham Centre for Value Investing in London, Ontario, did just that.

What Buffett had to say
According to those notes, in addition to his usual advice to think long-term, read a lot, and take advantage of market volatility, Buffett said, "The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly."

That means "Buy China," and that's because, as National Geographic Editor-in-Chief Chris Johns wrote in a recent column, "The shock waves of its growth reverberate in every corner of the globe."

But don't buy it blind
"Buy China" is interesting advice, given that Buffett recently sold out of his somewhat controversial position in PetroChina. The explanation there was that Berkshire had already made a lot of money on the investment and that the valuation was looking stretched.

So while Buffett is bullish on China, he's still paying close attention to valuation -- and would probably urge us all to do the same.

Where to start
Buffett's modus operandi, however, suggests that he works on identifying superior companies first and then waits for market volatility to give him his buy-in price. Using some of the financial criteria Buffett says he looks for in acquisitions (at least $75 million in pre-tax earnings, consistent earnings power, and good returns on equity with little debt), here are a two Chinese quality companies:

*Trailing-12-month earnings before taxes, in millions.

If Buffett were able to consider smaller companies, these might also be candidates:

*Earnings before taxes, in millions.

Where to go next
Each of these companies has enormous growth potential as part of China's macro story. For example, Noah Education should benefit enormously as middle-class Chinese parents spend more and more to make sure their one child receives the best possible education.

And the good news is -- thanks to recent volatility in the Chinese stock market, these stocks have gotten cheaper:

Great opportunity, great price
This is one reason our Motley Fool Global Gains team came home with so many good ideas from its recent research trip to China.

If you'd like to read about what we found in China -- including our special report on three potential billion-dollar companies -- click here to join Global Gains free for 30 days.

This article was first published on May 22, 2008. It has been updated.

Tim Hanson owns shares of Berkshire Hathaway. The Motley Fool also owns shares of Berkshire Hathaway. Berkshire is a Motley Fool Stock Advisor and Inside Value recommendation. Baidu is a Rule Breakers pick. The Motley Fool has a disclosure policy.