"We never buy stocks when we see prices soaring"

Buffett urges investors to be 'cautious' about Chinese stocks

By Zhao Yidi and Kyung Bok Cho
Bloomberg News
Thursday, October 25, 2007

DALIAN, China: The billionaire Warren Buffett said Wednesday that investors should be "cautious" about Chinese stocks after the country's benchmark index more than doubled this year.

"We never buy stocks when we see prices soaring," Buffett said in Dalian, in northeastern China, where he was visiting a subsidiary of Berkshire Hathaway, the investment firm he runs. "We buy stocks because we're confident of the company's growth. People should be cautious when they see prices rising."

Earlier this month Buffett said that Berkshire had sold its stake in PetroChina, which has risen 76 percent this year. The CSI 300 stock index has climbed 48 percent since May 17, when Li Ka-shing, the richest man in Asia, said there "must be a bubble."

The index has risen 174 percent this year, the biggest increase among 91 stock benchmarks tracked by Bloomberg. Investors in China have opened 46 million trading accounts this year, nine times the number from last year, as individuals poured their $2.2 trillion in savings into equities. The demand has pushed up valuations of Chinese stocks to the highest in the world.

"Buffett is right about China stocks, whose valuations are too high," said Wang Zheng, a manager in Shanghai at the asset management unit of Everbright Securities. "It doesn't make sense any more to still play in such a market. It's about time to pull out of it."

Buffett said he was "appreciative" of the performance of PetroChina, the biggest oil producer in China, and that he was doubtful he could find another stock like it.

Berkshire Hathaway, based in Omaha, Nebraska, owned more than 10 percent of PetroChina's publicly held shares as of the end of last year, a stake that fell to 3.1 percent as of Sept. 30, according to disclosures. The company has sold all of its holding, Buffett said last week.

Buffett learned about buying well-run, out-of-favor companies while studying under the Columbia University business professor Benjamin Graham, an advocate of value investing. Buffett said Wednesday that he was seeking to invest in large Asian companies with businesses he understands, denying Chinese media reports that Berkshire had invested in China Life Insurance.

"If you understand a business and buy at a reasonable price, there's no risk," Buffett said. "We've never realized a loss because we understand the businesses that we buy in."

Only government-approved investors can trade in Chinese shares on the mainland. Some companies like PetroChina are listed in Hong Kong and can be bought and sold by any investor.

The CSI 300 rose 0.9 percent Wednesday and reached a record high on Oct. 17. The Hang Seng index in Hong Kong, which set a record high Oct. 18, fell 0.15 percent Wednesday.

Buffett's trip to China and a visit to South Korea scheduled for Thursday were planned by Iscar Metalworking, a tool maker based in Israel in which Berkshire Hathaway bought an 80 percent stake last year.

As chairman of Berkshire Hathaway, Buffett transformed the company over four decades from a failing textile maker into a $200 billion investment and holding company with businesses ranging from ice cream and underwear to insurance and corporate-jet leasing.

Buffett, whose investment decisions are followed worldwide, said the company's strategy would not be derailed by problems in the U.S. housing market.

Mortgage defaults by people with poor credit histories have triggered a worldwide rout in debt and stock markets, and the U.S. Treasury secretary, Henry Paulson Jr., last week called the housing slump "the most significant current risk to our economy."

"The subprime crisis is a real problem in the U.S.," Buffett said. "But we have lots of problems in the U.S. We went through two world wars, we have other issues. We don't go in and out of the market."

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