How Berkshire Hathaway views investments in China, airlines and tech
If you had money to invest, where should you put it? According to Warren Buffett’s business partner, Charlie Munger, you should look at China. Munger shared his investment insights in a recent interview. It makes vital reading for all investors in global equities, and those with holdings in The Montgomery Global Fund.
Many of you would be aware that The Montgomery Global Fund has performed exceptionally against the market and against our local peers since inception – beating even some of the major global managers based here in Australia.
What you may not know is that the Global Fund is truly global with investments in France (Essilor), the UK (Playtech), Japan (Bridgestone), the US (Apple) and China (Alibaba & Tencent).
Berkshire Hathaway’s Vice Chairman and Warren Buffett’s business partner, Charlie
Munger, gave an interview at the Daily Journal Corporation’s AGM in the second week of March. You can watch the interview here.
In addition to answering questions about the Daily Journal, Munger was asked the following: “What would be the first thing that you would tell the Chinese person who wants to invest in the U.S.?”
His answer: “If I were a Chinese person of vast intellect, talent, discipline, all the good qualities…I would invest in China, not the United States. I think the fruit is hanging lower there. And some of the companies are more entrenched. So I don’t agree with your proposition. I think they have a tendency to think, ‘we were backwards therefore when we get rich, we should go over and invest in America.’ I think it’s always a mistake to look for a pie in the sky when you’ve got a big piece of pie right in your lap. And so…at current prices, I think an intelligent person would do better investing in China.”
Of course anything Munger says carries weight in Chinese culture, which ascribes wisdom to advanced age, and Charlie Munger is 93.
Two Chinese holdings in The Global Fund’s portfolio are Alibaba and Tencent.
Both operate ‘platforms’. Tencent is an effective monopolist on Chinese mobile internet traffic through WeChat. The company is building an enormous portfolio of platforms across every service: social, games, news, video, payments, banking, ecommerce, online travel, O2O. The ecosystem of platforms makes it both highly convenient and engaging for consumers.
Alibaba is the largest mobile ecommerce platform in the world, positioning it ideally for growth in Chinese consumption. Thanks to the network effect of 400 million active users, the company’s platform is effectively a monopoly already. Given online retail accounts for only 10% of total Chinese retail, the opportunity to grow is a very long runway. Alibaba is also the largest recipient of mobile internet advertising in China with a greater than 34% market share, and the number one Chinese provider of cloud services.
If you watch the interview on Youtube, you will enjoy Charlie’s answer to the question of recurring fee proportions at the Daily Journal…
Questioner: What proportion of software fee revenue is recurring and what proportion is one-time fees?
Munger: That is so complicated that I am not even going to try to answer it directly. I will just answer it in substance; there’s a lot that’s recurring if we stay in there.”
And in an expansive answer to a question about Berkshire buying airlines, Exxon and Apple (at approximately 41m37s) Charlie observes: “Do you know why Warren bought Exxon? As a cash substitute! He would never have done that in the old days! That’s a different kind of thinking from the way Warren came up. He’s changed… And I think he’s changed when he buys airlines and he’s changed when he buys Apple.”
“Think about the hootie we’ve done over the years about buying high tech; ‘we just don’t understand it’; ‘It’s not in our circle of competency’; ‘The worst business in the world is airlines’ … and now we appear in the press with… Apple and a bunch of airlines!”
“I think we’re adapting to a business (investing) that has gotten much more difficult. We just have to marry the best person who will have you.”
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Herman
:
I am very interested in your view on airlines given you have written before about what poor businesses they are for investment. How can you reconcile Buffet’s former view on airlines with his view today. Furthermore, how do you view ASX listed airlines?
Roger Montgomery
:
Hi Herman,
Charlie Munger recently commented on this himself. “And in an expansive answer to a question about Berkshire buying airlines, Exxon and Apple (at approximately 41m37s) Charlie observes: “Do you know why Warren bought Exxon? As a cash substitute! He would never have done that in the old days! That’s a different kind of thinking from the way Warren came up. He’s changed… And I think he’s changed when he buys airlines and he’s changed when he buys Apple.”
“Think about the hootie we’ve done over the years about buying high tech; ‘we just don’t understand it’; ‘It’s not in our circle of competency’; ‘The worst business in the world is airlines’ … and now we appear in the press with… Apple and a bunch of airlines!”
“I think we’re adapting to a business (investing) that has gotten much more difficult. We just have to marry the best person who will have you.”
You can read more at: https://rogermontgomery.com/how-berkshire-hathaway-views-investments-in-china-airlines-and-tech/#more-22235
Kelvin Ng
:
Hi Roger, in fact this is the transcript to the entire interview. Its quite long, but worth it:
http://www.cnbc.com/2017/02/27/billionaire-investor-warren-buffett-speaks-with-cnbcs-becky-quick-on-squawk-box.html
Kelvin
Kelvin Ng
:
Thanks Roger. And here’s Buffett’s view on stock market valuations at the moment, in a recent interview with Becky Quick on CNBC:
“Quick: Although you have had times where you thought stocks were incredibly cheap, like in 2008, 2009, when you talked about that, even on our program. You thought that there were times that stocks were greatly overvalued where you’ve said, “Forget it, don’t do it.” Are we near an inflection point right now, as best as you can tell?
Buffett: Well … I’ve been talking this way for quite a while, ever since the fall of 2008. I was a little early on that actually. But I don’t think you could time it. And we are not in a bubble territory or anything of the sort. Now, if interest rates were 7 or 8 percent then these prices would look exceptionally high. But you have to measure, you know, you measure everything against: interest rates, basically, and interest rates act like gravity on valuation. So when interest rates were 15 percent in 1982 they’d pull down the value of any asset. So, what’s the sense of buying a farm on a 4 percent yield basis if you can get 15 percent in government’s? But measured against interest rates, stocks actually are on the cheap side compared to historic valuations. But the risk always is, is that — that interest rates go up a lot, and that brings stocks down. But I would say this, if the ten-year stays at 230, and they would stay there for ten years, you would regret very much not having bought stocks now.”
Jack Ross
:
Thanks Roger for the article,
I have had Alibaba, Tencent and NetEase (NYSE : NTES) and Baidu on my radar for a while now. I would like to know what you think of the value these companies present at current prices.
Roger Montgomery
:
Hi Jack, We don’t provide individual advice however keep an eye on the blog or type the stock name into the search bar on the home page and you’ll be able to find and track any blog posts about your favourite companies.