How to Apply Warren Buffett's Investing Philosophy to Chinese Stocks

Key takeaways

• Warren Buffett's principle, "Be fearful when others are greedy and greedy when others are fearful," can provide perspective on the recent performance of Chinese stocks.

• Following China's 2024 stimulus, many Chinese stocks experienced a brief uptick before declining, which may present opportunities for some experienced traders.

• Leading financial institutions, such as Goldman Sachs and BlackRock, offer differing views on the outlook for Chinese stocks, highlighting both cautious and more optimistic perspectives.

Introduction

Warren Buffett, often called the "Oracle of Omaha," is widely regarded for his investment philosophy, which encourages a long-term approach. His well-known rule, "Be fearful when others are greedy, and greedy when others are fearful," promotes considering investments during periods of uncertainty. While this approach has resonated with many, it is crucial to evaluate market conditions thoroughly before making any financial decisions.

In 2024, Chinese stocks saw a downturn following government stimulus efforts. For those considering long-term opportunities, it may be worth reviewing these developments with caution. Is this a situation where Buffett's approach could apply, or should individuals proceed carefully? Let's explore the context and how Buffett's principles might offer insight.

Background of the 2024 Chinese government stimulus

In response to economic challenges, the Chinese government introduced a stimulus package in early 2024, aimed at supporting sectors like real estate, manufacturing, and technology. The measures, which included tax cuts and infrastructure spending, were intended to revitalize the economy. However, despite some initial optimism, the recovery has been slower than anticipated, and the stock market saw only a brief rally before experiencing a more prolonged decline.

The stimulus addressed short-term concerns but did not eliminate structural issues such as debt levels and a weakened property market. This situation has led to varying viewpoints among investors about the future of Chinese stocks.

Post-stimulus economic fizzle

Despite the efforts of the Chinese government, economic growth remained subdued in the weeks following the stimulus. Key sectors, including real estate and technology, face ongoing challenges. The real estate market, in particular, struggled with issues related to debt and falling demand, while global trade tensions added further uncertainty.

As Chinese companies faced mixed earnings reports, questions arose about the future direction of the stock market. Economic challenges and cautious investor sentiment contributed to the current outlook, raising the question: could this present an opportunity, or should caution prevail?

Institutional outlook on Chinese stocks

Financial institutions have taken different stances on the future of Chinese stocks. Initially, Goldman Sachs expected China’s economy to grow by 4.5% in 2024. However, after the Chinese government introduced stimulus measures, including increased public spending and policy support, Goldman raised its forecast to 4.9%. They also updated their 2025 forecast to 4.6% from 4.4%.

While this reflects optimism, Goldman said it still sees challenges like an aging population and supply chain disruptions as risks to long-term growth. BlackRock has advised caution, pointing to ongoing geopolitical risks and sector underperformance, particularly in real estate and technology. Both approaches demonstrate the need for thorough analysis and reflection on one's own risk tolerance before making any decisions.

Successful examples of Buffet's investment rule

Buffett’s philosophy has been applied in various situations where he assessed opportunities in the face of uncertainty:

1. American Express (1960s): Buffett’s invested in American Express after a major scandal caused a sharp drop in its stock price. His long-term confidence in the company paid off as it recovered.

2. Coca-Cola (1980s): During a period of stagnation, Buffett recognized Coca-Cola's potential and made a significant investment, which later became highly profitable.  

3. Bank of America (2011): Amid financial instability, Buffett took a position in Bank of American when shares were depressed, yielding substantial returns over time.

While Buffett’s approach has yielded notable successes, there have also been instances where the outcomes were less favorable:

1. Tesco (2014): Buffett’s investment in the British retailer did not recover as anticipated due to company challenges.

2. Airlines (2020): During the pandemic, Buffett’s investments in airline stocks faced significant losses as travel came to a halt.

3. ConocoPhillips (2008): Buffett overestimated oil prices and later acknowledged that he had paid too much for the stock.

These cases underscore that even seasoned investors can face challenges, and no strategy is without risk.

4 Chinese stocks that dropped post-stimulus

Several well-known Chinese companies have experienced declines following the 2024 stimulus:

1. Alibaba (Tech): Faced regulatory headwinds and slowing consumer demand.

2. Evergrande (Real Estate): Continued to struggle with debt and weak housing demand.

3. China Mobile (Telecom): Despite its role in the 5G rollout, faced domestic competition and demand concerns.

4. BYD (Automotive): The electric vehicle maker dealt with lower-than-expected demand growth.

What's next from the Chinese government?

Following the announcement of China’s massive 2024 stimulus package, the focus will now shift to implementing these measures. The government is expected to prioritize stabilizing the property market, boosting consumer confidence, and supporting capital markets through mortgage-debt cuts, bond issuance, and enhanced state bank lending. However, balancing this immediate support with long-term challenges like rising debt levels and economic restructuring will be crucial as China aims to steer its economy toward more sustainable growth in the coming years.

Conclusion

While Warren Buffett's philosophy of considering opportunities in times of fear may resonate with some investors, it is important to remember that markets can be unpredictable, especially during periods of economic uncertainty. The Chinese market’s post-stimulus performance presents both potential opportunities and risks, making careful evaluation essential before any investment decisions are made. Whether an investor adopts a more optimistic or cautious outlook, understanding the broader context and considering individual financial goals and risk tolerance should be key to their decision.