A letter to Warren Buffett 5 comments
(P.S: Sorry for any disturbances the advertisements above may have caused you)
It is too expensive to buy a dinner with you so I thought I'd write instead to highlight an investment proposition to you --- one that would bring you running like an oversexed teenager in a whorehouse.
I am one of your fans, but unlike the countless others who profess their admiration for your investment philosophies and insights I am more a fan because of the enormous wealth that you possess, which makes you the first, second or third richest man in the world at various times, depending on Mr Market's daily evaluations of Microsoft's future and Mexico's potential.
My investment proposition is true to my patriotic nature --- come to Singapore to explore the wonderful bargains available that will allow you to diversify out of the terrible sinking US dollar, which I understand is your prime objective now. You may know that you are not the first one; a former affliate of George Soros is here already, allegedly to teach his happy daughter Mandarin.
This is not a cigar-butt proposition; it is not just a one-puff thing. This is a long-term story, and I happen to know that you absolutely love the long-term. A big ship takes time to turn, so it'll take you a while to switch out of your US assets into the secular rise of Asia --- with its domestic consumption and infrastructure buildup themes --- but you'll see the investment returns well before your breath wears out. And Singapore stands poised at the heart of the Asian story. It is increasingly mentioned in the same breath as the other Asian financial capitals: Hong Kong, Shanghai, Tokyo, Sydney. It is the logistics heart of Southeast Asia and the transhipment and transit hub of resurgent Asia. Ditto its refining hub; add to that its positioning along the entire value chain from research to services to alternative fuels to trading, plus the abundant resources from its neighbours and you have the makings of an Asian Houston in the future. You have a domestic reflation story, fuelled by government commitment to a rising population, new massive investments (two spanking new casinos) and a likely multi-decade remaking (together with associated investments) of the country towards services and away from manufacturing, and you have what you could call a country PE re-rating (upwards). Currently it is a developed country growing at developing country pace (5-7%). It might be volatile, but that's not a problem with you, I would imagine, you of the Mr Market and his crazy moods analogy.
That's the fundamental story for you.
You were recently quoted as saying that you don't believe a credit crunch will happen, and on this point I agree. There is plenty of cheap money around. Much of the current ready-to-invest money, however, resides in Asia's reserves and the Arabs' petrodollars, as evidenced by the sources of the buying sprees in the recent recapitalisation exercises of your US banks. In the wake of the US financial problems which are leading to downward pressure on both US equities and bonds alike, and given the long-term falling US dollar which reduces attractiveness of Treasuries, I would imagine (as you might have done so ten steps in advance of me) these money would go towards building up their own domestic economies (to cushion export stagnation) AND towards investing in still-buoyant themes --- which is of course Asia as a whole. What Mr Market will not pay in these current times, way-above-market-valuation M&A deals will: just look at the tussle for Rio Tinto (or even Yahoo! in the US). Check out the Middle-East funds and how they're moving acquisition targets from the traditional West to Southeast Asia, China, India. The general point in this is that Asia is the destination of significant liquidity in the absence of credible substitutes (since developed world equities and bonds have become risky), and there're still not many liquid and deep equities markets in Asia which thus limits their options.
That's where Singapore comes in, long-term liquidity-wise.
And sentiment is depression-like, which must surely complete the holy triumvirate of favourable investment criteria in your eyes. I can tell you from Ground Zero that the spectre of the Asian crisis ten years ago still weighs heavy on the guts of many who still want to wait for stock prices to hit rock-bottom before they want to buy. My reading is that should the stock prices hit their predefined level, they will again find excuses not to buy. Thus it is the mirror image of the "buy high, sell higher" mentality in bull markets; now we have the "sell low, buy lower" hope. It would be impolite to brand both as "greater fool" behaviour, though I am tempted. I will instead call it "a decoupling of the right and left brains"*. Local blue-chips have generally corrected 25% off their highs and now trade at 13-14X PE (historically 15-16X), while smaller companies have probably dropped 40-50% on average, in anticipation of a US recession. Among them are China-linked stocks of which about half or more trade at single-digit PEs, even as their Shanghai or HK-listed counterparts continue to trade at three times that PE, and even as we await a wave of Chinese QDII funds fanning out to invest outside China. And the mouth-watering proposition here is that the earnings of most of these companies are not leverage-enhanced ie. they are funded mostly by equity, unlike many US companies which often jazz up asset ownership and profits with debt and financial restructuring. There is capacity for growth with such balance sheet cushion, as you obviously would understand.
That is a cross-sectional view of the Ground Zero sentiment and valuation picture. It brings to mind one of your sayings: "Be fearful when others are greedy and greedy only when others are fearful".
Finally, I would like to express my admiration for the design of your Berkshire Hathaway website. It is truly one of the most iconoclastic corporate sites I've seen for a US top-10 company. I guess your best friend Bill Gates must have lent you some of his best Web design talent to come up with the site.
By the way, if you should decide to buy stocks on the Singapore market, please let me know which ones in advance since I'm the one who highlighted this proposition.
And last but not least, kateks die pain pain!
* Left brain-right brain: Left-brain focus on logical thinking, analysis, and accuracy. Right-brained subjects, on the other hand, focus on aesthetics, feeling, and creativity.