How Warren Buffett Made Money With Foreign Stocks

Posted by Guru Focus

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UnknownSince Warren Buffett bought his first stock at the age of 12 and started his first partnership in his early 20s, for over half a century he rarely considered buying foreign stocks. In the wake of 9/11, the Federal Reserve made dramatic interest rate cuts and easy money was dumped into the financial system. The U.S. was experiencing ever-expanding trade deficits. Buffett was deeply concerned with the value of the U.S. dollar and U.S. assets. He believed the U.S. dollar would lose value. 

By 2002, Berkshire Hathaway (BRK.A)(BRK.B)’s cash position had increased to about $40 billion. Buffett found very few attractive stocks to buy in the U.S. Together with the view that the U.S. dollar would decline in value, he was looking for investment ideas in foreign countries. He made his first serious investment in foreign stocks – PetroChina (PTR).

The U.S. was in recession back then, and oil was traded around $20 a barrel. PetroChina ADS was traded around $15 a share. For about $500 million, Buffett bought 13.3% of the company.

Why did Buffett buy PetroChina? The reason was simple: It was cheap, very cheap! At the time, PetroChina was earning about $5 per ADS, and paying out more than $2 per ADS in dividend. Therefore Buffett bought the stock at about three times earnings with a dividend yield of more than 10%. Buffett held the position for less than five years, netting $3 billion for Berkshire Hathaway.

We want to point out that for the period that Buffett held PetroChina, the Chinese currency increased value against U.S. dollar by about 10%. Therefore, Berkshire benefited not only from finding a cheap stock in the international market, but also from Buffett’s view on the U.S. dollar.

Still struggling with too much cash on his hands and no attractive stocks in the U.S., Buffett was looking for a market that was overlooked and undervalued. He found it in Korea. According to “Snowball,” his biography by Alice Shroeder, one day in 2004, he got a book the size of several telephone directories stapled together. Its pages contained lists of Korea stocks. Buffett sifted through these pages in the old fashioned way, just as he went through Moody’s manual in his 20s. He narrowed the list to a workable number and studied more until finally, he arrived at a much shorter list which could fit on one page of legal-size paper. He said:

“It’s like finding a new girl to me… These are good companies, and yet they’re cheap. The stocks have gotten cheaper than five years ago, yet the businesses are more valuable. Half of the companies have names that sound like a porno movie. They make basic products, like steel and cement and flour and electricity, which people will still be buying in ten years… Here’s another one, a dairy. I could end up with nothing but a bunch of Korean securities in my personal portfolio.”

Regarding risk, he said:

“Now, I’m no expert on foreign currencies. But I’m comfortable owning these securities denominated in the Won right now… When you invest, you have to take some risk. The future is always uncertain. I think a group of these stocks will do very well for several years. Some of them may not do well, but as a group, they should do very well. I could end up owning them for several years.”

In 2006 Buffett spent $768 million and bought 5.1% of Posco (PKX), the Korean steel maker, and he still owns this position. His profit on this position is 70%. Regarding Posco, Buffett said, “It’s a great company. And great companies get worth more and more all the time.”

In October 2007, right at the recent peak of the stock market, Buffett visited Korea and said that the Korean market was modestly cheaper than most markets around the world. He said, “…but I am just looking at price earnings ratios, and you have a flourishing economy here with 50 plus million people that seem to be working very hard. So I would think that the Korean market would do as well over the next 10 years … not 10 weeks, 10 months … but 10 years, as most markets, and perhaps a little better.”

Buffett then became more aggressive with international investing. This time it was Europe. He bought into UK retail giant Tesco (TSCDY) in 2006, and regularly acquired more shares. Eventually he accumulated 3.6% of the company for the total cost of $1.7 billion. 

He was certainly finding a lot of elephants with his “elephant gun” in Europe. He bought French pharmaceutical giant Sanofi-Aventis (SNY) in 2011 and spent more than $2.8 billion to get 10.5% of Munich Re, and this was after he injected 3 billion Swiss Francs into Swiss Re.

What lessons can we learn from this? As value investors, we need to have a global view when looking for bargains. We should not only look at the market we are familiar with, but also other markets, where greater bargains might be found. Don’t we all wish that we could find companies that are traded at three times earnings and paying more than 10% in dividends, like PetroChina in 2002?

Other than the difficulty of leaving one’s comfort zone, the data on international companies is harder to get. A book of the size of several telephone directories containing foreign stocks is not available to most investors, even if they are willing to do the hard work.

Considering this, GuruFocus has made available the complete financial data for the international stock market. We are working hard to make all GuruFocus screeners, strategies and valuation tools work for international markets. With these tools, you will be able to screen the most attractive stocks in international markets with our All-In-One Stock Screener. You will be able to filter net-netin Japanese market, construct a Buffett-Munger portfolio from the stocks that are traded on European markets, for instances. Our Fair Value CalculatorWarning Signs, etc., will also work for stocks traded in international markets. 

We will release the features for these markets in the coming months. The first market to be released is the Canadian market. Stay tuned.

All these features and data will only be available to GuruFocus Paid Members. GuruFocus will release a global membership covering international stock markets.

If you are not a Premium Member, we invite you for a 7-day Free Trial.