Al-Waleed vs. Buffet: Investment Strategies in China in Comparison - Research Paper Example

Introduction Warren Buffet is considered as the most successful investor in the world with the wealth running into billions of dollars. His investment strategy is unique and over the period of time has been proved as the most successful investment strategy. Buffet’s firm Berkshire Hathaway recently invested into a Chinese firm called BYD. Originally BYD was a car battery maker however; it turned towards manufacturing the energy efficient green cars. Though, many believe that Buffet’s investment into a firm which utilizes reverse engineering can be risky as the company usually uses the Japanese and American technology to manufacture the cars and is considered to be in violation of the intellectual property rights. Prince Al-Waleed Bin Talal- a Saudi oil Tycoon also recently invested in China especially in hotels and real estate sector. Prince is considered to one of the most instrumental investors in Asian region and Al-Waleed’s interest in China are not just limited to investing in hotels as he is actively making investments into communication as well as real estate sector of the economy also. What distinguishes both these investors and their approach towards investing in China is something which this paper will attempt to explore and discus. China has become a subject of special importance owing to its consistent economic progress which it has made over the period of last two decades. Many international firms and organizations have either have interests in China or they are planning to move towards China to tap into the rising economic potential in China. Background information Warren Buffet Warren Buffet is regarded as the most successful investor in the world and has been ranked consistently in the list of top 10 richest men in the world. Over the period of time, he has developed a unique investment philosophy which consistently helped me to find out the desired stocks to purchase and gain on the value appreciation of such shares. Born in 1930 in Omaha Nebraska, he was raised in a family who has deeper roots into the stock markets as his father was a stock broker. It is also said that since his childhood, he was specifically fascinated with the numbers and can easily perform the complex mathematical calculations in head. His love for the stock market and business started when he was just 8 when started to work with his father and read his books on the stock markets. (Hagstrom, 2005) Buffet completed his degree in business from University of Nebraska and it’s where he seriously started to study the dynamics of stock markets and how to evaluate the firms before buying their shares and investing into them. It was during this period that he read the classic book “ The Intelligent Investor” by Ben Graham. He was so impressed with the overall investment philosophy of Ben Graham that he took admission in Columbia University in order to study under Prof. Ben Graham. He completed his masters in Economics from Columbia University however it was here that his overall investment philosophy started to get a shape. (Buffet & Clark, 2002) Investment Philosophy The overall investment philosophy of Warren Buffet is based upon value investing- the philosophy which was developed by Ben Graham. The overall context of this approach towards investment indicates the purchasing of only those securities which are relatively underpriced due to market imperfections. Value investing therefore suggests that the investors shall only buy those securities whose value is below their fair value so that the investor can have an opportunity to earn reasonable return through the capital appreciation. The fair value of the securities is assessed by discounting all the future streams of cash flows which a security expect to provide at an appropriate discount rate and subsequently finding out the correct price. The different between the fair or intrinsic value of the security and its actual market price is therefore considered as the margin of safety for the investors. (Hagstrom, 2005) Buffet followed and further perfected this investment philosophy and his firm Berkshire Hathaway- an insurance firm in reality- peruses the value investing philosophy to make investment decisions. Over the period of time, Buffet has been able to identify some excellent stocks such as Coca Cola and Gillette which were underpriced at the time of their purchase and Berkshire was able to earn significantly through the capital appreciation. The overall approach therefore is to buy the underpriced stocks and hold them till the point they reach their maximum stock value and subsequently sell them to book the profits through capital appreciation of the securities purchased and retained over the period of time. Al-Waleed Bin Talal Prince Al-Waleed Bin Talal belongs to the royal family of Saudi Arabia is the nephew of the current King Abdullah. He is considered as one of the most successful entrepreneur and investor from the royal family however, he wields little political power and is mostly busy in making his fortune in the real estate and other sectors in the global economy. His overall wealth is more than $19 Billion and is often nick named as the Arabian Warren Buffet because of his investment decisions and the growth in the wealth. He is also among the top 20 richest men in the world having consistently increased his wealth over the period of time. Prince Al-Waleed is the grandson of founding King of Saudi Arabia and obtained his education from US. He shot to the prominence when he purchased major stakes in Citicorp during 1990s when the group was in difficulties. His decision to invest into Citicorp proved one of his best investments which almost doubled in a decade. His overall stakes in Citicorp worth more than $1 Billion and is considered as one of his major investments. Most importantly, he invested into the group when it was in difficulties due to bad real estate loans made by the bank. Apart from this, he also further invested into the group on different occasions using different investment vehicles to gradually increase his interests in the group. At one time, more than half of his investments were made in Citigroup. (HENDERSON, 2010) Over the period of time, Al-Waleed however, invested heavily into the technology and media companies including Apple. Inc, AOL, Motorola etc. He is also known for making large investments into the real estate sector wherein he hold significant chunk of investment into Four Seasons Hotel chain apart from making investment into other hotel chains in Europe and Asia. He is also believed to be holding approximately 10% shares in Euro Disney- the firm which controls and operates Disneyland Paris. (The Economist, 2008) His general investment philosophy however, is not clear as he seems to invest only in some specific particular sectors of the economy. His investment into Citicorp however, may hint to the overall approach he adapts for investing i.e. buying good firms which are in distress conditions. Further, he also seems to invest into the growing firms therefore he does not seem to be an investor who likes to peruse the value investing investment strategy. This is opposed to what Buffet has adapted because Buffet’s portfolio does not include the investments made into technology firms and is mostly focused on the consumer monopolies and public utilities. It is however, important to understand that Prince Al-Waleed tend to invest in some specific sectors of the economy. Buffet’s and Waleed’s Investment Strategies in China in Comparison As discussed above, the investment strategies of both the investors seem to be different in their overall orientation and style. Buffet seems to follow the value investing strategy and buy only those businesses which are underpriced. Buffet however, does not seem to follow any specific portfolio management strategy and focus on those firms which can provide a consistent return over the period of time and also offer an opportunity to gain the capital appreciation. Waleed however on the other hand seem to follow specific pattern of investment and invest only into some specific sectors . Warren Buffet’s Strategy in China Buffet’s investing strategy always focus on investing into the firms whose management has the reputation and are more transparent into its dealing. Buffet’s investing tenants also indicate that when a firm with excellent management but with poor economics operates into industry, it is usually the excellent management which ultimately overcomes the bad economics of the firm. The investment decision to invest into BYD is also based upon this rule wherein the man behind BYD is considered to be a person with the enormous entrepreneurial capabilities. It therefore seems that Buffet is adapting the same strategy in China also wherein he is focusing on the purchase of a business which he can understand and whose management has the potential to take the firm to new heights in future. (Gunther, 2009) Buffet made an investment of approximately $230 millions in BYD thus achieving the control of 10% stock in the firm. BYD is considered as the largest manufacturer of the lithium –ion batteries for mobile phones besides also manufacturing the electric cars. BYD therefore operates two divisions i.e. information technology as well as the automobiles and Buffet’s decision to invest into BYD is mostly based on its performance in the automobile sector for manufacturing energy efficient cars. Buffet’s investment into Petrochina was also based on his long standing belief that the companies with underpriced securities can offer great returns to the investors. It is estimated that the Buffet made billions out of the investment of only $500 millions in Petrochina. Buffet sold the stocks in the range of $150s however, subsequently the stocks of the firm went on to touch a a figure of more than $250. However, the firm’s stock prices drifted downwards and many believe that the Buffet’s decision to exit from the stock was right. (Brand) It is also important to note that Buffet also seemed to have responded to the growing criticism of the role of Petrochina in Sudan and many believe that his decision to sell this stock was largely influenced by the overall policy of US towards Sudan. Though Buffet later denied this and suggested that the sale was purely based on the price and has nothing to do with other factors. It is also important to note that the Berkshire’s shareholders also vehemently seem to oppose the firm’s stake into PetroChina solely based upon its links with the Sudanese government and the general opposition which Sudan receives from US and its allies. (BBC, 2007) As discussed above that Buffet tend to find the companies which are underpriced and wait for the right price at which it can be bought keeping in view his margin of safety principle. Once purchased, he keep the stock to the time when there is no further room for the increase in the value of the shares and sell them at a price which can offer desired rate of return. Buffet therefore followed the same investing strategy in terms of Petrochina also wherein he was able to find the firm at relatively attractive price and hold the investment till the point he was able to sell the investment at a profitable rate. (Long, 2007). Though there are no clear figures as to how much Berkshire made out of this investment however, it is suggested that it made Billions out of an investment of only $500 m. It is important however, to note that the Buffet took a radically different approach in terms of choosing the businesses in which to invest. Traditionally, Buffet avoided technology based firms and focused on investing into the firms which were either consumer monopolies or were using the business models which were deeply connected with the consumers. However, in case of BYD specially, Buffet took a bet and invested into a technology based firm which he has historically avoided even during the technology boom in US during 1990s. His decision to invest into BYD however, also different from what he used to peruse as his investment strategy. He purchased the stock based on its prospects for the future growth thus ignoring the impact of industry in which he historically avoided to invest due to lack of understanding their economics. Al-Waleed’ Strategy in China Al-Waleed’s main focus is on the consumer and energy sector and he seem to focus also on the purchase of real estate and hotel businesses in China. As discussed above that Al-Waleed do not seem to follow a particular investing strategy but only invest into the firms in different specific sectors. One of the obvious reasons as to why Al-Waleed may be interested in the Chinese market is the number of consumers available in this market. The sheer size of the market therefore is enough to lure any investor to look for an investment which can provide returns as high as 20%. Al-Waleed’s strategy is therefore also believed to be based upon the notion of achieving high rate of returns before the economy reaches its full employment level. Al-Waleed made its first acquisition of hotels in China during 2007 when it acquired 387 room hotels in Kunshan area of China for a deal which concluded at approximately $60 Million. This acquisition was made as a part of the diversification strategy of the firm and as a result the acquisition was made in China to diversify the portfolio of investments. This hotel is based near the industrial hub of Shangai region therefore the overall goal of investment seem to be tapping into the growing market for businesses i.e. facilitate the international business executives travelling to industrial hub of the country. (abcmoney, 2007) Further, Al-Waleed has invested into the basic infrastructure in China thus diversifying further the portfolio into even in China. The focus and the overall investment strategy therefore seem to be based upon tapping into the rising economic power of China and tap into the growing segments of the market. A closer analysis of the overall investing patterns in China would therefore suggest that the investors included Al-Waleed are banking on the growth prospects of the economy and are interested in investing those sectors which have some good potential for growth. Since China is a rising economy and many international firms are relocating to the region therefore hotel industry will certain prove as a better opportunity for any investor. It was probably because of this reason that Al-Waleed invested into at least 10 hotels in China Mainland and HongKong. Another important investment strategy of Al-Waleed is to make investment into consumer and energy firms. Since the overall standards of living are improving in China and people are moving forward in their overall economic status therefore their purchasing power is increasing also. In such environment, consumer firms can easily achieve the growth as the Chinese consumers start to spend as the consumers in most of the Western societies do. Similarly, the growing requirements for the energy will also be other important reasons as to why Kingdom Holding Company of Prince Al-Waleed may be interested in expanding into Chinese market. Further, it is also important to note that the China as a market is evolving very fast and the potential for domestic growth is enormous therefore international firms are also looking into the possibility of tapping into the domestic market of China also. Thus the overall investment strategy of Al-Waleed in China can be based upon two important investment criteria. First, it is the need for achieving the relative degree of diversification because historically Al-Waleed’s portfolio has been concentrated into few firms. His major stakes were in Citicorp and recent financial crisis and its impact on Citibank has resulted into huge losses for the prince. Thus the urge to achieve the relative degree of diversification in the investments seems to be natural strategy. What is significant however, is the fact that this investment strategy seem to take advantage of the growth potential of the Chinese businesses also therefore attempting to cater the achievement of risk minimization as well as achieving the desired level of returns. Another important consideration which has been discussed above also is to tap into the changing economic conditions of China. As a result of the rapid growth in the country, the overall standards of living are improving therefore the overall purchasing power of Chinese consumers is increasing also. Thus investing into the consumer and energy firms of the country is also seem to be a strategy to invest into the firms who may develop into consumer monopolies in future. This will however, depend upon how effective these firms are being managed by the Chinese entrepreneurs and how they take advantage of the changing economic conditions of the country. Comparison The investments made by two of the biggest investors of the world in Chinese market indicate towards two different approaches to investment also. Warren Buffet- the world’s second largest richest man- follow the value investing strategy wherein he choose the investments based on pre-defined notions. He invests into those firms which depict certain specific characteristics besides considering the important criteria of price. A closer look at the investment strategy of Buffet in China would suggest that he invested into the Chinese firms based on two criteria i.e. effective and transparent management as well as the price. His investment into PetroChina was considered as something which was mostly driven by the price considerations whereas investment into BYD was solely based upon his assessment of the people behind running this firm. Al-Waleed’s strategy is different from Buffet in the sense that Buffet does not seem to be a big fan of diversification and he tend to invest without considering the impact of diversification. Al-Waleed’s strategy therefore seem to focus on achieving the diversification targets while at the same time also tap into the growing economic potential of domestic Chinese market. Both strategies can proven profitable in the long run however, Buffet’s decision to systematically exit the Chinese market may suggest that he has achieved his investment targets. One of the Buffet’s investment tenants suggest to exit from the Stock when the market price of the stock reaches to a certain level with no future growth prospects. Al-Waleed however, on the other hand seem to focus on achieving the long term growth from this market. Conclusion Chinese economy is the fastest growing economy in the world however; the concerns for rising inflation and artificially managed currency may further pose the problems for the country in the future. China has managed to keep the value of its currency down in order to boost its exports whereas it is also battling with higher inflation rates in the domestic market. As such these two problems may not seem to be so serious however, they can hamper the short term growth prospects of the economy. Due to the overall attractive nature of the economy, Warren Buffet and Al-Waleed Bin Talal invested into China though in different sectors of the economy. Buffet made two important investments into the economy by acquiring the stakes in PetroChina and BYD. He exited from PetroChina owing to the growing pressures from the shareholders of Berkshire due to the close connections of PetroChina with Sudan. His investment into BYD is still intact however, there are speculations that the Buffet may exit from this stock also owing to the fact that firm is considered to be in violation of the intellectual property rights and uses reverse engineering to produce the cars. Al-Waleed’s investments however are mostly in the real estate as well as in the consumer and energy sector of the firm. The major reason for such investments is to achieve the benefits of the diversification and it seems Al-Waleed might stay for longer in Chinese market as compared to Buffet. Bibliography abcmoney. (2007). Saudi Prince Alwaleed looking to expand into Hong Kong and China - report . Retrieved December 20, 2010, from abcmoney.co.uk: http://www.abcmoney.co.uk/news/04200750900.htm BBC. (2007). Buffett sells PetroChina shares. Retrieved December 20, 2010, from BBC: http://news.bbc.co.uk/1/hi/business/7052545.stm Brand, C. (n.d.). Should We Buy the PetroChina Stock Buffett Sold? Retrieved December 20, 2010, from Seeking Alpha: http://seekingalpha.com/article/69825-should-we-buy-the-petrochina-stock-buffett-sold Buffet, M., & Clark, D. (2002). The New Buffettology. New York: Free Press. Gunther, M. (2009, April 13). Warren Buffett takes charge. Retrieved December 20, 2010, from Fortune: http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/ Hagstrom, R. G. (2005). The Warren Buffett way. New York: John Wiley and Sons. HENDERSON, S. (2010, August 27). The Billionaire Prince. Retrieved December 20, 2010, from Foreign Policy: http://www.foreignpolicy.com/articles/2010/08/27/the_billionaire_prince?page=full Long, M. (2007). Buffett: Petrochina sale 100% based on valuation. Retrieved December 20, 2010, from Market Watch: http://www.marketwatch.com/story/buffett-petrochina-sale-100-based-on-valuation The Economist. (2008). Doing an Alwaleed. Retrieved December 20, 2010, from The Economicst: http://www.economist.com/node/10522716?story_id=10522716 Read More