THE TEMASEK REVIEW

By Lee Chong Meng, Guest Columnist

This credit crisis has claimed many victims. GIC and Temasek ’s investment portfolios have suffered too. However, this is not the time to despair, instead it’s time to pick up good bargains like Berkshire Hathaway. Instead of throwing good money,which is Singapore’s hard earned money, after bad money like US Treasuries,Merill Lynch, UBS, Citigroup, Barclays, ABC Learning Centre, Shin Corp,etc., it may be wiser to start investing with the master.

Berkshire Hathaway is the world’s best managed company, with the world’s best investor,Warren Buffett at its helm and has a diversified portfolio of world class companies. Although its reinsurance business is cyclical and thus can affect short term results but in the long term, it is the best in the field as it has a capable team who can adopt counter-cyclical measures to ensure profitability in the long term.

It is also rated the best by AM Best, an insurance rating agency. With Berkshire’s strong balance sheet as its backup, it is capable of writing risks that others don’t. Warren Buffett is presently taking care of investing the ‘float’ from the insurance premiums and is doing a great job. He invests in businesses with strong competitive advantage, whether they are public or private without overpaying for them and always seeking a margin of safety.

Recently, he has invested in Goldman Sachs (the best in investment banking field) and GE (one of the rare counters to stay on the Dow Jones Average) demanding 10% in dividend and got free warrants to convert into shares in the future. I doubt anyone can have this type of opportunities but he has due to his prestige as the world’s best investor.

No doubt, Berkshire’s share is suffering now due to Warren’s bets on index derivatives, the downcycle of the reinsurance business and the recession affecting Berkshire’s other businesses. But Berkshire’s shares is down about 40 plus % from its peak, which is pretty good in view of the holocaust out there.

Warren always says “when people are fearful, it is time to be greedy”. His recent article in NY times urging people to buy stocks is rare as he doesn’t make forecasts easily as he says that’s for the fortune tellers. For him to put his reputation at stake, stocks must be cheap enough and indeed they are. Berkshire’s shares are now about 1.1 X book value, and close to 5 years low.

People are hoping to see Buffett fail as they think he has met his Waterloo, but I disagree. The reason is that he has make wise, prudent investments in new wonderful business which will perform well in the future, his bets on the index is only due in the future when the secular bull market will start again and he has a succession plan if he is not around.

Warren has cautioned investors in Berkshire’s stock to expect less than 10% returns per annum in the long term, but he always use this under-promise,over-deliver method to please investors. I am confident that Berkshire will be one of the best stocks to buy and hold for Singapore’s GIC and Temasek holdings.

As Gates Foundation will be holding more and more of Berkshire’s stock in the future, it is expected that Berkshire Hathaway will be incorporated into the S&P 500, or maybe even the Dow Jones(though,i doubt so due to Dow peculiar price weighting feature). Thus, more index funds, ETFs which track the S&P 500 will be forced to buy Berkshire which will push the price further up. However, that’s the future,in the meantime, we buy Berkshire because it is cheap, good and solid.

Berkshire’s has not given out a dividend for many years but its market value has make it one of the world’s best performing stocks. However it may consider giving out dividends once Warren is not around as i doubt his successors can match his investing prowess.

Nevertheless, Warren has laid a good foundation for Berkshire. For those folks out there in town council, forget about Lehman toxic assets and buy Berkshire instead, you will never have to answer for your mistakes in the future. As Warren says, ‘i will rather cross 1 foot bar than climb 3 foot hurdles”, Berkshire Hathaway is the ‘ 1 foot hurdle’ for Singapore. Perhaps, Temasek and GIC can considering reducing their workforce then as they need not so many overheads (which Warren detests most) to monitor Berkshire Hathaway.

P.S. Warren just commented that he is willing to buy back Berkshire shares if they go too low,that will act as a floor for Berkshire’s stock. He has also lent money to Harley Davidson,Tiffany at a high interest rate which should guarantee increased income in the next few years. Most importantly, Buffett is honest enough to admit mistakes when he make them,this is one guy that everyone can trust.

Chor Meng blogs here

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