Speaking today at a press conference in Bangalore, Warren Buffett announced his intention to make major investments in India, China, and Brazil.
(Note: Later in this article we compare Buffett in the 2000s to a bunch of ordinary index funds. The results will surprise you.)
Together, India, China, and Brazil contain 3.7 billion people, but only 5% of the world’s $29 trillion in liquid stocks and bonds. Buffett is betting that these high growth economies will create plenty of wealth in the next 10 years.
Buffett is a value investor, and this strategy has paid off for BRKA shareholders. An investment of $100K in January of 2001 is worth $179K today. Almost double – which sounds decent considering the S&P 500 has been practically flat.
Berkshire Hathaway – what the heck is it?
What is Berkshire Hathaway really? It owns complete or partial stakes in around 100 companies, and it rarely sells anything. Sounds more like a strange sort of buy-and-hold mutual fund than a typical public company.
Fine – Buffett runs a mutual fund. So let’s compare his performance to that of various index funds. Buffett methodically buys companies that his sharpened instincts tell him will outperform their competitors, and index funds simply buy a huge basket of whatever fits their criteria.
The Sage vs the Sieve
Because Buffett buys some large and some small companies, I’ve compared his performance to two index funds:
- Dimensional’s US Large Cap Value fund DFLVX. This fund currently own 211 large/value companies, making it twice as diverse as Berkshire Hathaway.
- Dimensional’s US Targeted Value fund DFFVX, which contains 1,517 value companies that are small-to-mid in size. Given that there are only about 6,500 public, exchange-traded US companies, this is a huge chunk of the market: basically the 1/4 of exchange-traded companies that are small (instead of big) and value (instead of growth). Note: I have personal and client money in this fund.
As you can see, Buffett’s performance as a mutual fund manager is average. He’s done slightly better than a large-value index fund, but only because he owns some small-value companies too.
Go Further West, Young Man
Now, let’s compare Berkshire Hathaway to a fund that virtually every RossAsset client owns: Dimensional’s Emerging Markets Value fund DEMSX. This fund owns 2,076 Value companies across 18 countries, including Taiwan, South Korea, China, Brazil, India, South Africa, Mexico, Russia, and Israel.
You’re reading that right: $100K became $679K
It’s not hard to see what the Oracle of Omaha finds so enticing. The world’s growth engine has shifted from the United States to China, India, Brazil, and their third world brethren.
The countries that make up Emerging Markets contain 80% of the world’s population, yet only 17% of the world’s exchange-traded wealth. As these economies grow, their private companies will go public, and their public companies will go big. Wealth creation will happen on a scale only comparable to America’s post-war boom. Buffett wants in, and he should.
We’re glad he’s come around
Warren Buffett delivered extraordinary returns from 1965 through 1997, and very, very good returns since then – though not market-beating when compared to the correct index. Any genius would struggle to manage $200 billion in assets, of which 85% is in the United States, and it is exciting to see Buffett come to grips with this challenge by storming the beaches of Goa, Rio, and Shenzhen.
At RossAsset, we’ve shared Buffett’s enthusiasm since our early days. We’ve been putting 30-40% of client equity assets in Emerging Markets, and will continue to do so.
Among the many mistakes most investors make, one of the most common is to ignore the unfamiliar. Don’t make this mistake! Whether you can access Dimensional funds or not, diversifying into emerging markets, particularly in a value fund, will help you shorten the doubling period on your investments.
- Article in The Times of India: “I’m a retard for coming to India so late: Warren Buffett”
- Article in The Wall Street Journal: ”Buffett Looks Beyond Home Turf To India For Invest Opportunities” (article no longer available online as of 6/22/2011)