Where Are the Wonderful Businesses, Warren?

2009 was no time to be sitting on the sidelines.

The lows of the global financial meltdown was the best buying opportunity in your lifetime. It wasn’t as easy to see at the time. Many thought it was capitalism that caused the mess.

Not only would we have to start over with a new system. Economic powers like the US would have to completely reinvent themselves.

But as everyone turned fearful, Warren Buffett got greedy.

With billions in cash, 2009 was one of his most active years. Usually he’d be in his office, quietly reading a book or the newspaper. But in 2009, he was ripping through financial reports trying to find as many bargains as possible.

There was one company he came across that many other investors would simply pass over. It was the 131-year old Burlington Northern railroad company.

A bet on America

Burlington Northern is the largest freight railroad network in North America.

China mobile payment dwarf US 7-05-18

Source: BNSF

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Unlike roads, the government doesn’t build railroads. To build a similar network, private companies would have to shell out the cash themselves.

Such a project might end up costing billions. It would then take years, maybe decades to recoup this sunk cost. So you can be pretty sure no new competitors will come in to threaten Burlington Northern.

But not only was Burlington Northern protected from new entrants, they also had a cost advantage on trucks. There are millions of trucks transporting goods all over the US. However, it’s much cheaper and more efficient to do it via rail.

You could say Burlington Northern had an incredibly valuable asset (the rail network) that produced reliable, growing earnings each year.

But even this stock faltered in 2009.

Investors didn’t think this was just a stock market correction. They thought America itself was on the brink of going bust.

It’s why Buffett’s bet on Burlington Northern wasn’t so much a bet on the company. It was a bet on America. If the US recovered, business activity and freighting would continue to rise for decades to come.

And, as often, Buffett came out of 2009 looking like a genius.

Today, Buffett continues to bet on America. But his most recent purchases have nothing to do with railroads.

The next trillion dollar company?

In a CNBC interview, Buffett made a point of mentioning a changing business landscape. It’s something ‘people don’t appreciate at all,’ Buffett said.

Instead of companies that need a lot of cash (rail and oil), the aristocrats of American business are those which take little to no cash.

Five of the largest US businesses have a value of about US$2.5 trillion or more. 

You could run those five businesses with no equity capital. So you have close to 10% of the market value of the United States in five extremely good businesses that essentially take no capital. That was not the case in the past,’ Buffett said.

Not investing in Amazon.com, Inc. [NASDAQ:AMZN] or Alphabet, Inc. [NASDAQ:GOOG] was a mistake, according to Buffett. But he’s managed to capture one of those five — Apple Inc. [NASDAQ:AAPL].

In 2016, investors thought it was strange. A tech adverse investor buying one of the largest US tech firms. Buffett initially bought Apple for an average price of $109 per share.

When asked about it today, as Apple trade for $184 per share, Buffett says the company is far more a consumer product play than technology.

Fortune sums it up:

Why did Warren Buffett buy into Apple?

Because consumers don’t care about the price of smartphones, the investing titan told CNBC Monday morning, two days after Buffett appeared at Berkshire Hathaway’s annual shareholder’s meeting over the weekend.

“People want the product. They don’t want the cheapest product,” Buffett said, noting that smartphones aren’t price sensitive in the way that furniture may be, meaning investors will choose to buy an Apple iPhone for $700 even when faced with a cheaper alternative.

“It’s a very, very, very valuable product to people that build their lives around it,” Buffett said.

Warren likes Apple so much he’s continued to increase his holdings over the last two years. In the March quarter of 2018, Buffett told CNBC he bought 75 million more Apple shares. It now gives Berkshire Hathaway a 5% stake in the company, and is close to Warren’s largest investment overall.

Berkshire Hathaway's 15 largest stock holdings

Source: CNBC

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Many believe, based on Buffett’s recent purchase, Apple is quickly heading for a trillion dollar market cap. But it’s not the only wonderful business ready to rise higher in 2018.

A bet on China

American isn’t the only place to find wonderful businesses. China has a group of their own — companies that take little cash and produce a whole lot of earnings.

Ant Financial, a subsidiary of Alibaba Group Holdings [NYSE:BABA], is one.

It’s not like any other company on earth. Bloomberg describes it as a ‘mashup of PayPal [payments], Geico [insurance], Wells Fargo [lending] and Equifax [credit scores] – with a bit of Blackrock [funds management] thrown in for good measure.

Anatomy of a Chinese Financial Powerhouse

Source: Bloomberg

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Better yet, you can access all this from your smartphone. It’s made quite a splash with the growing Chinese middle class. Bloomberg continues:

Ant oversees the world’s biggest money-market fund and handles more than $2.4 trillion of mobile payments every three months. Many of the company’s 870 million customers rely on it for nearly every aspect of their financial lives.

A typical Ant Financial user is Zeng Jinping, a college student in Shanghai.

The 23-year-old uses Ant’s payment platform for most of his big online purchases. He puts his savings in the company’s funds. He also borrows money from Ant’s consumer-lending arm.

Zeng’s high credit score (also provided by Ant) entitles him to zero interest short-term cash advances.

Ant has become so important to the people of China, policymakers now plan to regulate the company. While this may reduce earnings growth for Ant in the long-run, it’s great for China long-term.

Keeping lending under wraps will likely prevent a 2009 situation happening in China. So while most don’t admit it, China’s financial industry is moving in the right direction.

But if you really want to bet on China, why not bet on one of their best industries.

This trillion dollar industry dwarfs all others

Like Buffett, I’m also looking past the US/China trade tensions. Instead I’m looking into one of the fastest, large markets in the world. China’s mobile payment market.

China’s mobile payment market is worth more than US$16 trillion. And it’s expected to grow far larger in the years ahead. How does America stack up? While US$49.3 billion is nothing to sneeze at, compared to China it leaves a lot to be desired.

You might wonder how China’s explosive mobile payments market even happened. Long story short, China was never really big on credit cards. Without that infrastructure in place, it was easy for them to adopt a superior payment system.

As author David Wolman explains, China has leapfrogged us here in the West. Less developed countries like China had ‘minimal obstacles preventing the implementation and adoption of a superior system,’ Wolman writes.

That superior system is mobile payments.

It’s why in my brand new advisory service, Wealth Eruption, we’re looking for some of the best investments within this trillion dollar market.

As of writing, I’ve found two ASX listed stocks ready to significantly rise on the back of China’s fintech industry. Both are already on the rise. But there could be still far more gains to come.

One in particular could rise a further 1,000%. Far more than you’d likely make on Apple this year that’s for sure.

Click here to find out more.


Härje Ronngard,
Editor, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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