China Out Smarts the Market (ZT)

China Out Smarts the Market


Some years ago, I read a very interesting book on the subject of investing, and though I cannot recall the name of the book or the author who wrote it (my apologies to the author), I do recall a very good lesson learned from the book.

According to the author, at one point in time Warren Buffett found his own company’s stock, Berkshire Hathaway, Inc. (BRK-A), substantially overpriced. This presented Buffett with a beautiful opportunity to profit, but left him with a problem as well; Buffett did not want to sell shares of his own company on the open market, knowing this would lead to speculation by Wall Street, and many investors would conclude what Buffett had and sell off their shares of Berkshire Hathaway, Inc.

Did this stop Mr. Buffett from making a profit? Come on guys, this is Warren Buffett we are talking about here, “The Oracle of Omaha”… not a chance!

To resolve the issue, Buffett simply bought out another company which just happened to have a high level of cash on their balance sheet; this is of course what Warren was after to begin with. As you might have guessed by now, Buffett bought the “cash rich” company with over priced shares of Berkshire Hathaway stock and the market was none-the-wiser. Yes, Buffett is a smart investor.

Fast forward to 2010, the European Union is in a financial bind, the Euro is dropping like a rock against many currencies, and though world leaders continue to tell the masses everything is just fine, a rumor surfaces on Wall Street on May 27, 2010 that China would unload Euros and Eurobonds from its huge reserves. [Source: New York Post] This, as you might imagine, is not a vote of confidence for the Euro, and such a move would have adverse effects on everyone currently holding the Euro. The following day China was quick to assure everyone these rumors were absolutely untrue, which of course is what China would say regardless.

On June 15, 2010, only twenty days later, mainstream media reported China "invested" more than a billion Euros into Greece, buying up everything from ships to real estate, with a pledge to “invest” more in the near future.

If you did not catch what just happened, you’re not alone; the DJIA sold off 69 points on the rumor that China would unload their Euro holdings, and rallied 214 points 20 days later on the news that China had just "invested" (unloaded) 1 billion Euros.

Like Warren Buffett, China is a smart investor.