27 October 2016
Warren Buffett has built an enviable portfolio by seeking out investment opportunities when others panic. Photo: Bloomberg
Warren Buffett has built an enviable portfolio by seeking out investment opportunities when others panic. Photo: Bloomberg

Why investors must look beyond Fed moves

Global investors are paying close attention to the US Federal Reserve as it begins a two-day meeting Wednesday. Now what exactly should the investors do after the central bank rate announces its rate decision? Should they buy if the Fed doesn’t move, or should they sell if the Fed took the action?

The Hong Kong stock market has operated for more than 100 years, and the Hang Seng Index also has a history of nearly 50 years. Still, why are local investors so obsessed with speculating on the short-term market swings? Seeking profit from short-term fluctuations doesn’t constitute real investment. 

What’s investment? Warren Buffett, in a 2011 letter to Berkshire Hathaway shareholders, defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power in the future”. 

For wealth creation, investors should have long-term outlook and a time horizon of several decades. They should focus on sustainable growth of their purchasing power rather than temporary price corrections.

Buffett was less worried than most investors during the global market rout last month. Instead of fretting over the timing of the Fed liftoff, he only keeps an eye out for attractively valued quality stocks. The tycoon bought nearly US$500 million worth of equities during the market downturn in August.

Over Berkshire’s nearly 50-year history, has Buffett ever changed his mind about investing in something as a result of a Fed meeting? Or any sell decision due to a Fed meeting? The answer is no.

We can find a similar example in Hong Kong.

Cheung Kong Infrastructure Holdings (CKI) (1038.HK), part of billionaire Li Ka-shing’s business empire, offered last week to buy out Power Assets Holdings (0006.HK) in an all-stock transaction valued at US$11.6 billion.

To sweeten the deal, CKI offered to pay out a one-time HK$5 dividend per share pending the approval of the merger. CKI Chairman Victor Li described the special dividend as an “emotional” move, which won’t alter the big direction.

“From logic perspective, we should keep all the capital in the company. However, it’s time to throw a party,” he said.

Why did Victor Li say so? The remarks imply that the management is very confident in their operation capability, and that they could double the HK$5 to HK$10 within a few years.

Berkshire also paid dividend only once over its history, as Buffett has absolute confidence in growing the capital.

In short, investors should focus more on finding good stocks for long-term investment.

The timing of the US rate hike is important, in particular if investors can buy at low level. However, the more decisive factors are whether they can locate good stocks and stick through the whole investment cycle, and secure more purchasing power after a few years.

Berkshire and CKI both have more than doubled and hit new highs since the financial crisis. Good assets will appreciate automatically.

Market ups and downs attract attention. However, it is the company behind the stock code that is the key factor. While short-term volatility may lure some investors, it is the embedded value of the company that would make a relationship last for long.

This article appeared in the Hong Kong Economic Journal on Sept. 16.

Translation by Julie Zhu

[Chinese version中文版]

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Columnist at the Hong Kong Economic Journal

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