Sri Lanka is for sale! I am buying
It is March 2020, global capital markets are in free-fall and Sri Lanka’s best companies are on sale as governments try to contain COVID-19.
Sri Lanka is in a mess, last year it suffered a devastating terrorist attack that put a serious dent to earnings from tourism that had spillover effects on the rest of the local economy. Today, COVID-19, a world pandemic has almost caused an entire shutdown of the global economy.
Global and local news headlines continue to be scary, as nobody knows for certain the implications of the virus. As local governments impose shutdowns, social-distancing, and curfews — a large amount of fear looms over the uncertainty regarding the spread of the virus and its implications on the economy. Maybe this is to continue over the next couple of weeks.
What I see shocks me, this is likely to be the greatest decline in market value we have seen in 10 years (possibly more). S&P SL20 saw it’s biggest one day drop in his history.
So … I have been buying stocks. Raising funds from my family and turning over fixed / time deposits into cash so I can invest it into some of Sri Lanka’s best publicly quoted businesses. The authorities are closing the market as investors rush for the exit, and I’m trying to buy as much as I can before trading halts or the markets close.
A simple rule inspired by Warren Buffett guides my philosophy and curiosity in business and investing: Be fearful when others are greedy, and be greedy when others are fearful.
There is certainly enough fear to go around. Don’t get me wrong, the health and economic implications of the virus scare me as well as I think about friends and family possibly getting exposed to the virus. People are right to be worried about the economic implications and the complete shutdown of businesses and essential services in the country.
However, fears regarding the long-term growth and prosperity of Sri Lanka’s most sound publicly traded businesses make no sense. These businesses will face difficulties in the short term, as they always have — from racial riots, a civil war, political and policy turmoil, terrorism, to a global pandemic.
Right now some of these businesses are being given away (literally) for cents on the Rupee. But these businesses are well-positioned to grow earnings 5, 10, 20 years from now. Sri Lanka has witnessed spectacular growth in GDP per capita since 2009, yet the market thinks the value of almost all of these companies should sell for lower than they did 10 years ago. It does not make sense. For Sri Lankan value investors this may well perhaps be a Lollapalooza type event.
I am not trying to predict or speculate on the ‘movement of the market’ in the short term. I really have no clue what stock quotations look like tomorrow, next week, next month or next year. All I try to do is buy a great company I understand, that offers value to its customers at a price I think is attractive with an appropriate margin of safety in place. I do not need any form of validation from the financial press and community and wait for sentiment to turn positive to form an opinion of the company’s underlying economic reality and earning power. By the time you wait on the crowd to act, the bargains will be gone.
Sri Lanka right now
As I write this, agriculture remains the largest source of employment nationwide but it is the lowest contributor to GDP. For nearly a century the majority of small-medium scale businesses and the entire sector (supply chain, etc) were linked to agriculture.
However, since the end of the civil war more than 10 years ago, we’ve seen a radical shift in the composition of these businesses to hospitality, health, import/export, and technology. Like advanced economies 100 years ago, it is possible we will see a shift away from agriculture as the country gets more productive in other sectors.
Internet penetration, currently at levels just under 40% and growing in double digits every year is another important factor to consider when looking at the Sri Lankan economy. Which companies are likely to benefit from this growth in earnings power 5 to 10 years from now?
This country is vastly more prosperous than it was 10 years ago, we in Sri Lanka can experience this all around us. The bear market and panic that has set in has completely forgotten to take any of this into account. It may not be linear and without its hiccups but as long as the economy continues to grow Sri Lanka will get more prosperous, and the earnings on its public companies represented on its capital market alongside it.
In short, Sri Lanka has got more valuable, and bad news is an investor’s best friend. It's given me a chance to buy a slice of Sri Lanka’s future at a marked-down price and right now it's not just marked down it is being given away. This is likely our 1973/74 moment and all value investors in Sri Lanka could be tap dancing to work.
This article was in large part inspired by the sources below.
Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, (Expanded Third Edition Hardcover — 2005) by Peter D. Kaufman (Editor), Ed Wexler (Illustrator), Warren E. Buffett (Foreword), Charles T. Munger (Author).
‘Buy American. I Am’ by Warren Buffett on the New York Times, October 2008 (link).
‘Why value investors are different’ by Seth Klarman on Barron’s, February 1999 (link).