Tags: Korea, Warren Buffett

Three Ways to Profit Alongside Warren Buffett

By , Money Morning •

By Martin Hutchinson
Contributing Editor

For all you global investors out there, riddle me this: What has investment guru and Berkshire Hathaway Inc. (BRK.A, BRK.B) Chairman Warren Buffett recently bought 20 of that we should be looking to invest in ourselves?

  • Corporate jets? No. While a famously frugal man, he's owned several hundred of them, especially after taking control of Executive Jet, the corporate jet timesharing service.
  • African countries? No, he has declared that the great majority of his charitable activities will be carried out through the Bill & Melinda Gates Foundation, so if an African country or two gets bought by accident, it will be the Foundation doing the bidding.
  • Houses? No, he currently owns only one home, in Omaha; he sold his more expensive home in Laguna Beach, Cal. in 2004. He was also notably absent in buying subprime mortgages, and hasn't yet started buying housing companies. That's a sign we aren't yet at the bottom of the housing decline. When Buffett starts buying, we can all breathe a sigh of relief because we'll know the bottom must be near.
  • Tax shelters? No, Buffett is famous for believing in the estate tax, and in substantial taxes, generally. Mind you, the $40 billion he's given away to foundations won't be taxable....

Give up? Well, if you've been reading Money Morning, you shouldn't be stumped. Buffett last month bought shares in 20 South Korean companies. A lot of other smart money is going there too; Macquarie Group Ltd., the huge Australian investment bank, has together with the private equity company MBK, set up in 2005 by four former Carlyle Group executives, just bought 30% of the second largest Korean cable operator. MBK and another U.S.-based private equity company CCMP Capital are short listed, along with two Korean companies, for the electronics retailer Himari Co., worth around $2.5 billion. In total, about $26.8 billion of acquisitions have been done in Korea since July.

Do these guys know something we don't? Not really. We've been calling attention to the Korean market since early this year. The country has an excellent long-term productivity growth rate of more than 4% per annum, yet its stock market trades at only about 12 times earnings. One reason has been that the country has had a rather anti-business government under President Roh Moo-hyun, but that may be about to change. Presidential elections are to be held Dec.19, and the Grand National Party candidate Lee Myung-bak is currently leading in the opinion polls - the GNP, out of power since 1997, is the pro-business party that has presided over the era of Korea's fastest growth, which took place from 1970-95. Lee's lead is substantial; in the latest poll he has 38% of the intended vote, compared to 18% for a right-wing challenger and 14% for Chung Dong-young of the government party.

If Lee wins, business conditions in Korea may improve - for one thing, the party would presumably stop harassing the major companies as Roh has done, imprisoning the chairmen of three of the six largest chaebol conglomerates. Also, with taxes under control and business conditions more friendly, the market may well rise to a higher P/E ratio. There will also be congressional elections in April to negotiate before the full shape of the new government is known, but now may indeed be a good time to buy.

Buffett bought shares in 20 Korean companies, but you don't need to go nearly that far to get a decent exposure to the market. For one thing, you can buy the iShares MSCI South Korea Index Fund (EWY), an exchange-traded fund (ETF) whose only current disadvantage is that it is trading at about a 4% premium to its underlying net asset value. This reflects the fact that other U.S. investors have presumably had this same idea.

A second possibility is Korea's largest bank, Kookmin Bank (KB). Kookmin trades at a P/E ratio of less than 10 right now, which makes it look like a real bargain. Of course, banks in general have been battered by the subprime-mortgage crisis, but Kookmin has little exposure to the troubled U.S. housing and credit markets and its own credit problems in Korea surfaced four years ago, when there was a credit-card-debt disaster. This looks like a good double bet, on a gradual recovery of those banks with little connection to the U.S. mess, and on a re-rating of Korea in general.

Finally, you can buy what Buffett bought - 4% of Posco (PKX) the Korean steel giant that has a P/E ratio of 14 [Presumably, you're not out to buy 4% of it, which would cost you $1.9 billion, but you see what I mean]. Posco has business in both Korea and China, and is one of the largest and most efficient steel companies in the world - well worth looking at.

The bottom line: You can buy the same things as Warren Buffett; you just can't buy as much.

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