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Emerging Markets? No, Thank You! (Part 4 of 4)

|Includes: Berkshire Hathaway Inc (BRK.A), BRK.B, BYDDF, BYDDY, WSC-OLD

In the third of a four series blog post, I explained why investing even small sums in emerging markets ("EM") is not worth it.  In this last blog post, I exhibit a highly respected fund manager and how his past and present investment experiences serve, respectively, as point and counterpoints to my argument against most non-EM-based investors sending their capital to EMs.

Anthony Bolton as Point and Contra-Point

Almost one year ago, Fidelity International's esteemed investor Anthony Bolton announced he was coming out of a brief retirement to start investing in China.  Now, for those unfamiliar with Bolton, he made his name managing a UK and Europe focused fund over a 30-year continuous period and earned 19% per annum--that's 185x for those keeping score.  Those returns are even more impressive considering that these investments were of companies operating in a European ecosystem of slow growth, double-digit unemployment, little innovation, stagnant populations growth, and terrorist attacks at home to boot.  Despite all that, he still returned 185x--unlevered--in a sizeable mutual fund.  That's better than most US-focused fund managers during the same period who enjoyed the winds in their sails of a more economically dynamic ecosystem.

Mr. Bolton's example brings home the idea that it's not the GDP growth figures that should take primacy in common stock investing for better returns, it's the discount to valuation price paid for the common stock of the business and its managers.  Even if the US's best days are behind it, which Buffett highly doubts, the investment opportunities could be very rewarding as Mr. Bolton's experience demonstrates.

"But Even Buffett is Investing in Emerging Markets"

Over the last few years, Warren Buffett has also made striking investments in common stocks of EM companies and at least one of their currencies.  It is therefore reasonable for one to ask, "Buffett invests in EM.  Are you smarter than he?"  The quick answer is "no".  The query warrants a closer inspection.  Berkshire Hathaways's media-friendly investment in BYD, a Chinese auto batteries maker is often attributed to Warren Buffett though that is unlikely.  The decision to do so seems like it was jointly made but led by BRK's head of MidAmerican Energy, David Sokol.  As a self-described technophobe, Buffett seems unlikely to have invested in a Chinese battery-technology startup.

Buffett did however score coups the common shares of PetroChina Co. Ltd. as well as a basket of South Korea's largest companies.  On a closer look, one notices that he purchased common shares in these companies at significant discounts to their fair valuations and these companies had either assets traded around the globe, e.g. crude oil, or had global businesses with heavy exports, e.g. Samsung and Hyundai chaebols.  Many of the Korean companies he bought common shares in traded at 3x-5x earnings.  What's further interesting is how quickly he disposed of all those investments once they appreciated.  He clearly did not think these were Washington Post, Inc. businesses worth owning their common shares continuously for decades.  He has however staked Berkshire Hathaway's future on--get this--a railroad business in the United States.  It's worth noted where Buffett places his wallet rather than his weekend pocket money.

Mr. Bolton's recent post-retirement venture in China, where he moved to Hong Kong, raises the question whether his prior experience is replicable in such a market and then if investors should follow him.  Time will answer the former question though the arguments made in this blog series accords it low probabilities.  With regards to the latter, the last page of Chapter 20 of "The Intelligent Investor" reads:  "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

The historical data and the reasons behind the performance of EM common stock investing, whether the US 1900-1950 experience or EMs during 1990s, lead one to question the wisdom of following even the sharpest minds there.  Even Warren Buffett may not warrant a following into EM.

There are many more reasons for non-EM-based investors to keep their capital home not least is recurrent xenophobia; underdeveloped legal and commercial systems; and corporate governance, or lack there of.  The arguments made in this series should provide most investors with sufficent reasons to avoid EM common stocks.

I wrote this blog series partly to help a friend who's a professional investor in emerging markets.  I hope others find it useful and, at least, gives them a jumping-off point for further enquiry.

Comments and suggestions are welcome.


Disclosure: The author owns no common shares in any of the aforementioned companies.