During the Daily Journal annual shareholder meeting that was held last week, Charlie Munger (Trades, Portfolio) talked about a very successful money manager who indexes the U.S market and invests internationally in less efficient markets. Charlie then hinted that this is a very rational and smart approach.
I had the privilege to meet some phenomenal investors from all over the world after the Daily Journal Corp. (DJCO) meeting. A few of them were generous enough to share with me their experiences investing internationally. What fascinated me about these conversations is the fact that although they came from different backgrounds, utilized different strategies and focused on different markets, they all achieved remarkable returns. For example, a former engineer, who quit his job and invests full time now, showed me his portfolio in Japan using a Graham-like quantitative-based approach. His portfolio was up almost 60% last year. Another investor generated 30% annual returns for 15 years in India utilizing the Buffett-Munger approach. Both of them are non-professional investors yet their returns will make most hedge fund managers look like patsies.
Most U.S investors who I talked to expressed apprehension toward global investing. Among the reasons that led to their reluctance are:
- Illiquid market
- High trading costs
- Unfamiliar with foreign accounting standards
- Different corporate governance structure
- Formidable language, culture and political stability.
- Currency risks
Indeed, all of the above are risks not easily manageable. So why even bother?
Of course, there is nothing wrong with feeling uncomfortable about investing in foreign markets. If you have to lose some sleep in investing in Korea or Netherland, don’t do it then. But for those of us who are comfortable with investing in other markets, I think there are a few compelling reasons to do so, even with the presence of the aforementioned risks, especially at this market level:
- If you like great businesses running by great capital allocators as I do, you will find such companies are extremely rare in the U.S. So why limit your opportunities in the U.S.? Of course these businesses are also hard to find in international markets, but with information so easily obtainable nowadays, you can find a few just by searching.
- Although there are differences in local cultures, accounting practices and laws, the fundamental analysis framework should still apply. The business principles and human nature are remarkably consistent throughout the world.
- When bargains are harder to find in the U.S, a U.S investor is forced to sit on cash. But bargains could be abundant in other markets such as China and Japan. Why limit yourself in a pond with fewer fish left when you can switch to another pond with many more fish?
- Various statistical studies have shown that the Ben Graham approach also works in international markets. So even a quantitative approach with a basket of cheap stocks can still generate satisfactory returns. In the 1960s, John Templeton realized the Japanese market was extremely cheap and started investing there. He made a killing. Warren Buffett (Trades, Portfolio) also famously invested in a basket of Korean stocks when Korea’s stock market was extremely undervalued.
Some of the best examples of global investing were provided in the book “There is Always Something to Do.” Peter Cundill was a true harbinger of global investing. Below you will find 3 examples that I’ve picked from the book:
1.Anglo American (AAL, Financial)
“Anglo American is a South African holding and management company providing a complete range of technical and administrative services to 285 companies worldwide. In addition they hold significant equity interest in a group of international mining, industrial, and investment companies including De Beers, Engelhard, Charter Consolidated, Hudson’s Bay Mining and Smelting, Amax and Anglo American Gold.
De Beers controls over 80% of the world’s diamond output and Anglo’s investment has a market value of over $200 million. Anglo’s mining interests last year produced 29% of the Free World’s gold production and substantial quantities of coal, uranium, copper, iron ore, platinum, nickel and zinc. They have invested in a number of successful petroleum consortia in the U.K. and Dutch sectors of the North Sea, including the Forties and Argyll fields. Through Charter Consolidated they have a sizable interest in Rio Tinto Zinc. Anglo American of Canada owns 38.5% of Hudson Bay Mining and Smelting. There are smaller, but still not insignificant, investment in timber, real estate, asbestos, potash and citrus fruit groves.
Anglo is holding cash and equivalents of $235 million. Their investment portfolio is carried at a cost of $600 million against a value for the quoted securities alone of $1.1 billion. The shares at $2.50 are selling at a ten-year low with a capitalization of a mere $313 million, the company is profitable (will earn about 60 cents this year), and the dividend yield is 10% and more than twice covered. The numbers are solid, but the share price is clearly signaling a problem or problems – precisely what we like to see. As I see it, first of all there is the gold price, which has recently sunk back from $170 and is now teetering on the brink of $100, and I take this to be a psychologically important resistance point which may or may not hold. At the same time mining costs have risen sharply, so it would be sensible to assume that Anglo’s dividend stream from its gold-producing subsidiary will be substantially reduced awhile. In a worst-case scenario this could lop about 20% off the earnings, but still leave the dividend twice covered – a considerable margin of safety in itself and the debt/equity ratio at 0.7 is more than satisfactory. As the direction of the gold price – who can tell, but this is an unsettled and inflationary era, and it is not hard to imagine a further rush of financial assets to safe heaven, one of which is gold.
The other problem is clearly the politics, which the harbingers of doom predicting a collapse of order as black South Africans press more violently for equality, the demise of white supremacy, and a fair share of their birthright. The risks of labour unrest are undoubtedly realand might include sabotage and the spectre of expropriation if things really got out of hand. My instinct is that the worst case scenario is highly unlikely and even if it were to happen, Anglo’s internationally acknowledged expertise is in mine-management and someone would still have to manage and expropriated mines. However the true margin of safety lies in the diversified portfolio of assets outside South Africa. ”
2.Tokyo Broadcasting System (9401:TSE).
TBS was the third-largest television broadcaster in Japan. TBS suffered badly from the Japanese economic downturn, but it owned valuable property and a lot of cash.
According to the book, TBS’s share was trading at 1,500 yen per share at the time with the value of real estate per share of 1,000 yen per share and cash and investment per share of another 500 yen. Peter Cundill was essentially buying the rest of the business for nothing.
3. Sibir Energy
Sibir Energy was a Russian Oil Company and the largest company listed on London Stock Exchange’s Alternative Investment Market (AIM). Sibir’s stock crashed after the Russian Debt Crisis. According to the book:
“Sibir owned a UK operating that was cash flow positive and worth approximately half the company’s market capitalization. It had a rag bag of assets in Italy, whose value probably represented another quarter, which left a collection of assets in Russia, including one mature oilfield that was also cash flow positive and worth between 25% and 50% of the market cap. The rest of the assets were thrown in for free. But most important elements of the package were 50% interest in two oil fields, both in Siberia, one in partnership with Sibneft, controlled by Roman Abramovih, and the other a rather loosely constructed joint venture with Shell.”
Using the sum of parts approach, “you were paying mere 10 cents per barrel in the ground for the Russian reserves, well below the value of any other listed Russian oil company.” In the end, the Sibir investment turned into a “ten bagger.” However, it was a wild ride because of the particular political environment in Russia.
Conclusion
I hope the above examples from three very different markets give you some insight and confidence. The bottom line is, value investing works in international stock markets just like it does in the U.S stock market. In fact, I would argue that it may work even better in other markets because they are less efficient and more susceptible to short-term overreaction to rumors and negative developments. If you have the right approach and the right temperament, you are likely to achieve satisfactory returns in global stock markets.
So don’t wait. Start looking around.
