Warren Buffett, the world’s most famous investor and one of the richest men on the planet, does not appear to be very keen on the prospects shipbuilding industry.
The so-called Oracle of Omaha has conveyed to Korean Steel mill POSCO (NYSE:PKX) that Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) will not back the Posco’s bid for Daewoo shipbuilding & Marine Engineering (DSME).
Warren Buffett said the reason for not supporting the bid is that he is expecting a downturn in the shipping Industry worldwide. Buffett’s Berkshire controls a 4.5 percent stake in Posco.
Chung Yang, CEO of Posco, in a quest to expand the footprints of the company, is developing a $30 billion plan under which the company will construct plants in India and Indonesia after the demand improves post global recession. Chung announced that Posco will look into the bidding for DSME in January, which is the world’s third biggest shipbuilder.
The shares of Daewoo shipbuilding will be affected and come down as the news implies that the sale will not be concluded. Head of research at Heungkuk Securities Co, Cho In Karp said, “POSCO (NYSE:PKX) is the only company that has the cash on hand to buy a company of this size.” The stocks of DSME declined to their lowest in four months.
State-owned Korea Development Bank and Korea Asset Management Corp. have not agreed to selling their 50 percent stake in the Daewoo Shipbuilding in the previous year as they were expecting an increase in the stock prices.
Warren Buffett, who rejected to back Posco for DSME deal has a simple style of Investing. The idea is compounding the capital at the fastest rate and keeping the margin of safety consistent. The margin of safety could be anything from a balance sheet to a product with a high gross margin for which there is a limited competition in the market.
Buffett’s friendship with Charlie Munger changed his investment style. He learned that companies with limited competition and better competitive advantages have an edge over the dud companies, which have no future for growth.