(BRK.A), (BRK.B)
With Chinese stocks having soared in recent years, often fueled more by rumor than earnings, the question of whether value investing has any place in such an environment is a natural one to ask.
In Comes Warren Buffett With His Answer
“Investment principles do not stop at borders,” Buffett told a Chinese investor, who had made the pilgrimage from mainland China to Omaha, Nebraska, for the Berkshire annual meeting.
Buffett, who has put Berkshire Hathaway directly into Chinese equities as a minority owner in BYD Co Ltd, a Chinese manufacturer of automobiles and rechargeable batteries, also has a growing presence in China through Berkshire’s global companies.
Quick-service-restaurant franchisor Dairy Queen International has 600+ franchises in China, and ISCAR, a global manufacturer of precision carbide metalworking tools, maintains eight branch offices in provinces throughout the country, to name just two examples.
Still, speculative fever often appears to leave value investors, who focus on a company’s fundamentals, shaking their heads in disgust.
What should be remembered is that all speculative bubbles eventually burst, leaving all the stocks that are more hot air than substance to evaporate.
The recent tightening of the margin lending requirements in Chinese stock markets are just the first steps that could turn gamblers into paupers.
As economist John Kenneth Galbraith chronicled in The Great Crash 1929.
“That afternoon and evening thousands of speculators decided to get out while – as they mistakenly supposed – the getting was good. Other thousands were told they had no choice but to get out unless they posted more collateral, for as the day’s business came to an end an unprecedented volume of margin calls went out.”
That’s Not Buffett’s Only Advice
Or, as Buffett also has been known to say, “Only when the tide goes out do you discover who’s been swimming naked.”
© 2015 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.