Warren Buffett is one of the richest men in the world, and he’s probably the world’s most famous investor. But there’s one thing for certain that we recently learned. Mr. Buffett is not very excited about the shipbuilding industry’s prospects.
The Oracle of Omaha has let POSCO (a Korean steel mill) know that his company Berkshire Hathaway has no intention of backing their bid for Deawoo Shipbuilding & Marine Engineering.
The reason Warren Buffett is not going to support the bid is quite simple. He expects that there is going to be a downturn in the shipping industry and he feels that it will be worldwide. At the time of this writing, Berkshire Hathaway has a controlling interest in POSCO at 4.5%.
POSCO’s CEO, Chung Yang, in an effort to expand the businesses reach, has put together a plan in the amount of $30 billion which will allow them to construct plants in Indonesia and India once the global recession comes to an end and demand improves. Chung also tells us that POSCO will also consider bidding on the world’s third-largest shipbuilder, Deawoo Shipbuilding & Marine Engineering, in January of next year.
The Deawoo Shipbuilding & Marine Engineering shares are going to be affected. They will drop in price because the media now knows that this deal is not going to be completed as of yet. Cho In Karp, Heungkuk Securities Co.’s head of research said, “POSCO is the only company that has the cash on hand to buy a company of this size.” Deawoo Shipbuilding & Marine Engineering’s stock has declined to its lowest levels in the last four months.
Korea Development Bank and Korea Asset Management Corp. both chose to keep their 50% stake in Deawoo Shipbuilding & Marine Engineering during the previous year. They believed that the stock prices would increase so they hung onto them.
As you know, Warren Buffett has a very simple way of investing, and this deal obviously didn’t meet his criteria. His goal is to keep a very consistent margin of safety while compounding capital at a rapid rate. The margin of safety varies with each investment. In some cases it could be very limited competition in the marketplace. In other cases it could be a high gross margin for the products being sold. It all depends on the company itself.
Warren Buffett’s friendship with Charlie Munger really changed the way he styled his investments. He learned many things from this friendship. And one of them being that a company with a better competitive advantage and limited competition is going to grow much quicker than any other company.