Value Investing for Filipinos – The Warren Buffett Investing Style

Value Investing - Warren Buffett Investing Style

Have you heard of the name Berkshire Hathaway?

For a great many Filipinos, this name conjures either nothing at all or a faint connection with business, America, and its famous CEO Warren Buffett. Those who know it though, and know it intimately, are spectators to the grand tradition of value investing–Warren Buffett’s investing style.

The name itself is self-explanatory but bears repeating not for its simplicity but its poignancy. With much simplification, it is buying things now for considerably less than they are worth. This simple principle is what allowed Warren Buffett to turn 9,800 USD of his own money into 140,000 USD or at an average annual return of over 50%. This money he would use to build a personal fortune of 79.1 Billion USD.

The company he owns, Berkshire Hathaway, is valued at, as of June 11, 2020, 465.26 Billion USD. In local currency that number is 23,250,000,000,000 Pesos. These kinds of numbers often defy comprehension. Something about a sequence of zeroes just does not compute in the human mind. To illustrate, that is worth over 10 Million units of the highest specification of 2020 Toyota Fortuner. That is enough cars to fill the parking lot of 1,250 Mall of Asia’s.

If we hypothetically had Warren Buffett’s net worth and invested it as conservatively as possible, you could spend 4 Million Pesos every day of your life and never run out of money. (Mind you, between the years of 2014 to 2018 Warren Buffett’s donations topped roughly 15 Billion USD, so this number would be higher if not for the man’s generosity. Siya na.)

These are just some of the fun computations I repeat to myself to call to mind why I invest the way I do. You may be wondering though: “These numbers are great, but what does that mean for me?” Why thank you for asking Mr. Rhetorical Device, let me answer that question.

The principle of paying less than what something is worth applies to many things. If you have a job that pays you well then, your time is best suited to being used in that endeavor. If you have a feel for real property, maybe flipping houses is your game. Are you particularly sharp in the head but feel undervalued? Then maybe picking up a new trade is what you should do. There are many paths to material wealth so I won’t pretend to know every way a person can get rich. (If you have doubts on that statement, think on the fact that someone got rich off of fidget spinners.)

However, let’s talk specifically about value investing as applied to the stock market, which is almost impossible to do in any relevant way without referencing Warren Buffett. Mr. Warren Buffett was particularly attuned to digesting large amounts of numbers and so he would pour his time into reading about stocks on offer in the New York Stock Exchange. There is no shortage of quotes where Warren belittles his own intelligence. He was terribly skeptical that he knew anything about the companies he was deciding to buy shares in.

There were a few things that he knew though, some small companies traded at very low prices. When he discovered one with a low market capitalization (This is the price of a share of a company multiplied by the number of shares in existence.), he would investigate further. Rarely, they would trade at a market capitalization less than the total working capital and/or cash on hand of a company minus debts. (Working capital is the amount of money the company keeps on hand to pay for wages, materials, and to keep the lights on.)

This meant that everything else in the company, its brand, its factory, the land the factory sat on, the office supplies, the inventory, and whatever else you could imagine that the company owned was valued by the stock market at zero dollars. He would buy up however many shares were available at said price and wait. Someone from a larger firm would inevitably discover that the market had grossly mispriced the company and buy up the shares causing the demand and consequently the price of those shares to go up. Alternatively, the company itself would buy back the shares at a premium to the market price. If he had a controlling stake in the company, he could liquidate it in order to sell the business and its underlying assets. In any of the above scenarios, a substantial gain would occur.

While this was the way that Warren Buffett would get his foot through the door as an investor, this strategy would only work for the first few million dollars. In order to grow your wealth to the colossal levels it currently sits at he needed to invest in large, and therefore successful companies. He credits his friend Charlie Munger for steering him away from his cigarette butt style of investing. (It was called this because Charlie colorfully described Warren’s previous investing style as picking discarded cigarette butts off the street.)

Image from ABC News | (AP Photo/Nati Harnik) The Associated Press

This was done by identifying companies with, first, a durable competitive advantage and, second, that were trading at fair prices. The durable competitive advantage is a very subjective test but is best articulated in the following manner: “If you gave someone 1 Billion USD and told them to outdo your business, would they be able to do it?”

The example often offered by Mr. Buffett is Coca-Cola. In 1988, Warren Buffett visualized himself in possession of 1 Billion USD, he asked himself that question focusing specifically on Coca-Cola. He looked back on his memories opening Coca-Cola with friends in the summertime, ordering them while eating out, and the feeling of happiness that was associated with the brand. He then imagined himself with 1 Billion Dollars and really thought about how someone could go about trying to replace Coca-Cola in that rose-tinted space it had made for itself in his head.

@Mehaniq at Twenty20

He came up with nothing.

He would then take around 1 Billion USD and buy 6 percent of the Coca-Cola company. That 1 Billion Dollar investment is currently valued at about 20 Billion Dollars, without counting the money that the company has paid out in dividends through the years. (Dividends are the earnings of a company that are released to the holders of its stock, this represents the owner’s participation in the profits of the business.)

In my own subjective opinion, there are such companies that exist here in the Philippines with that durable competitive advantage. Can you imagine your country men ever forgetting which fast food brand is Langhap Sarap? If you had to buy a condominium in the city, which company would you go to first? If you have a family, or ever plan to start one, which mall do you know you’re going to take them to after Sunday Service “para magpa-aircon ng saglit” but inevitably leads to you buying something?

Now, just because these companies fit that first criterion, doesn’t mean you can blindly buy their stock. There is a price at which it makes sense to buy these companies, and thankfully the stock market spits out ludicrous prices with surprising frequency.

Now what constitutes a fair price is subjective, as anyone who has been to a public market can readily attest to. However, in order to supply a criterion, we can begin with a benchmark and compare the stocks we buy to said benchmark. The best reference point is… wait for it… Treasury Bonds. (Igoogle mo nga. Just kidding, these are debt instruments issued by the national government.)

The ROI of treasury bonds is often referred to ask the risk-free rate of return because theoretically, the government can never default. I’m sure you’re thinking to yourself, really? Our government? No risk? Let me put it another way, our government has its finger on the money printing button in the economy so the chance that they will be unable to pay you back is extremely remote. Entendido? Very good! Golden Star!

If the companies you are considering buying have high owner’s earnings (Cash inflows minus reinvestment.) in relation to market capitalization which is far in excess of the return you could expect from treasury bonds, then you may have found yourself a winner.

If you are interested in going deeper into value investing, I wholeheartedly recommend the book The Intelligent Investor by Benjamin Graham, Warren Buffett’s mentor and influenced much of Warren Buffett Investing style.

I hope this brief foray into the field of investment has inspired you to see beyond the usual fair of multi-level marketing, Organicos, Insurance/Investment combos, and time deposits that are typically paraded by people as investments. If you think you have the patience and attention span to take upon yourself the perspective of the value investor, I wish you the best of luck.

Also Read: Mutual Funds versus Stocks for Filipinos

This is a guest blog post written by Rami Hourani JD–lawyer, businessman, and consultant based in Cebu, Philippines.. As a lawyer he specializes in the fields of commercial and labor law. Read more of his investing insights on his website: A Filipino Lawyer’s Guide to Investment.

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2 thoughts on “Value Investing for Filipinos – The Warren Buffett Investing Style”

  1. I still have doubts about our government. Hahaha! Great read! I also always hear about Mr. Buffett but never got to really read about his principle. This seems an insightful summary of it! 🙂

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