[Editor's view]An undervalued country‘Plus ca change, plus c’est la meme chose,” is a charming expression beloved by cynical Parisians. It means “The more things change, the more they stay the same.” How true. It’s 2007 and we have another jaebeol chairman wearing handcuffs.
Hanwha’s Kim Seung-youn joins an impressive list of other company executives who have found themselves behind bars.
And there is a presidential election looming, with a list of prospective candidates that nobody seems to like.
On top of that, North Korea continues to play diplomatic games while doing nothing to dismantle its nuclear program and there are complaints from Samsung that the quality of its profits are declining.
And yet one thing is different. Warren Buffett has been buying Korean stocks.
To many, the news that a conventionally dressed septuagenarian, who drives an old Lincoln Town Car, has a modest office in a nondescript building in an American small town and likes to spend his evenings playing cards, is buying shares in Korean companies may not be Earth-shattering.
But this is no ordinary septuagenarian.
Warren Buffett is the second-richest man in America with a personal fortune of $43 billion. Only Microsoft’s Bill Gates has more money, but Buffett did not get rich by making things. He did so by being the world’s smartest investor, at least when measured in annual profits.
Since 1951, Buffett has generated an annual average return of 31 percent for his company, Berkshire Hathaway.
As the Wall Street Journal pointed out recently, a $1,000 investment in Berkshire in 1965 would now be worth around $5.5 million. When Buffett says he’s buying, the world listens. And, more importantly, it tries to buy alongside him. His investments in Korea are a sign of something important.
Buffett’s approach is as simple as his lifestyle. He does not surround himself with material luxuries, and his office is not full of corporate trophies or stacks of meticulously prepared reports. Buffett just looks for value.
For example, if a company’s book value, that is the amount which could be obtained by selling all its physical assets, is greater than its market capitalization, the current value of all its shares, then smart investors like Buffettstart buying. The extent to which a company’s market capitalization exceeds its book value is a good measure of when to sell.
Buffett’s investments in Korea, which include the steel company Posco, are a sure sign that he thinks Korean companies are undervalued. And given that his investments here require him to buy the won, his purchases also represent a vote of confidence in the country as a whole.
Some may find that idea strange. After all, there are the many social and political issues, such as those described above, which seem to cast shadows over the future.
And the main share index, the Kospi, is near record highs while the won has risen sharply.
These do not seem to bother Buffett. According to officials at his company, he decided to invest in Korea after looking at a slim volume of research provided by Citigroup, the giant American bank. What he found, apparently, was lots of solid companies with very low ratios of market capitalization to book value and the bonus of having excess cash on their balance sheets. And it seems probable he also found something else. Korea signed a free trade agreement with the United States in April and will sign another one with the European Union before too long. The country is being exposed to international economic and social forces to an unprecedented extent.
Within a decade FTAs with Europe and America will force deregulation across a wide range of Korean industries, including legal services, retailing, agriculture and banking.
These changes will transform the flow of foreign investment into Korea from a steady steam into a flood. Then something interesting will happen.
Buffett’s most important move into Korea so far has been his investment in Posco, one of the top five steel companies in the world.
Its chairman, Lee Ju-taek, said in a recent interview that his company faced a crisis a few years ago because, after it was set free from government control, many employees were unable to adjust their conservative mindsets to succeed in a global environment against tough competition. In saying this he was revealing the secret of Buffett’s investment strategy.
For foreign firms, Korea represents a wealth of untapped opportunities. With open markets, Korean companies must either adjust their often conventional approaches to business or they will be bought by foreign companies.
Buffet is buying because he knows Korean companies will either have to change and improve their profitability or a new foreign owner will do the job for them. His message is that Korea is undervalued because many executives are doing a poor job with valuable assets and he’s confident that others are ready to step in.
When money can move freely, it flies to the best opportunities.
Buffet is not using company money to buy here. He’s using his private wealth. He once said, “Price is what you pay, value is what you get.” On this basis, it’s obvious he thinks Korea is cheap and it’s hard to argue with a man who has made $45 billion in the span of one lifetime.
*The writer is a deputy editor of the JoongAng Daily.
by Daniel Jeffreys