Following Buffett Into South Korea

By Matthew McCall | May 08, 2008 AAA

Over the weekend one of the most exciting events in the investing world was held - the annual Berkshire Hathaway (NYSE:BRK.A, BRK.B) meeting. For anyone not sure why that is a big deal, Berkshire is Warren Buffett's company. Many will argue he is the best investor of our time; I will put him at the top, but not the greatest. Even still, when he talks people listen. After looking over the notes from the meeting I found several interesting remarks made by the Oracle of Omaha.

Buffett Goes International
In recent years Buffett has begun to focus on investment opportunities outside the U.S., a move that was not a common thing for the long-time investor. The purchase of an Israeli company last year and more talk about possible purchases overseas has reaffirmed my thinking that investors must look outside the U.S. At the meeting Buffett confirmed that he is interested in the insurance arm of the Royal Bank of Scotland and that he is in the process of buying another mid-sized firm in the U.K. However, the biggest news on the international front came when Buffett referred to the South Korean stock market as "one of the most attractive in the world". He went on to say, "If you were going to buy indexes in the top-25 world markets you would have to have it in the top half of the class and likely much higher." (To learn how venturing outside of the U.S for your investments can help with diversification, read Going International.)

Berkshire currently owns shares of POSCO (NYSE:PKX), the third largest steelmaker in the world, based in Seoul, South Korea. Since hitting a high in October 2007, the stock has struggled as the majority of steel stocks are hitting new highs. Buffett commented that he would consider adding more shares of POSCO if the price became attractive. Investors that do not want to take the risk of buying an individual stock in South Korea have the option of a exchange-traded fund (ETF), the iShares South Korea ETF (AMEX:EWY). POSCO is the No.2 holding in the ETF, making up 8% of the allocation. Samsung Electronics, which is not traded in the U.S., is the largest holding with a stake of 15%. (For more on ETFs, read 3 Steps To A Profitable ETF Portfolio.)

Because of the limited number of South Korean stocks that are traded in the U.S., it will likely be in the best interest of most investors to use the ETF for exposure to the small country. But, for the investors that would like to venture into stocks, I will list a few that are traded here in the U.S.

Korean Financials
The No.3 and No.4 holdings of EWY are Korean financial institutions, Kookmin Bank (NYSE:KB) and Shinhan Financial Group (NYSE:SHG), respectively.

Kookmin Bank is a diverse financial company that offers asset management, insurance, credit cards, and other banking services to nearly half the population of South Korea. Citigroup (NYSE:C) has taken a 15% stake in the company.

Shinhan Financial Group is Korea's second largest financial company, as ranked by assets. It has more than 1,000 bank branches, making it one of the largest in the country.

Korean Utilities and Telecom
Korea Electric Power (NYSE:KEP) is the country's largest power generator and a former monopoly. The government retains 51% control over the company that generates most of its power from nuclear and thermal - taking the strain of high energy prices off the most of Korea.

SK Telecom (NYSE:SKM) is the No.1 wireless provider in South Korea with 50% of the market share of the entire country. The company is based in Korea, but has operations throughout Asia. In emerging countries such as Korea, the best play in the telecom sector is wireless because more and more people everyday are able to afford cell phones. Fundamentally the stock is attractive with a P/E Ratio of 9.27, lower than most of its competitors.

Long-Term Outlook
Keep in mind the volatility in South Korean stocks and ETFs will be greater than that of its U.S. counterparts. The country is considered an emerging market and should be looked at as a long-term play, just as Buffett would do. If you are not willing to ride the ups and downs and prefer a stable investment, South Korea is not right for you.

For further reading on the Oracle of Omaha, head over to our related article Warren Buffett: How He Does It?

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