What if Brazil Really Started to Grow?

With several investments in Brazil, principally the food company Sadia (SDA) and the airline Gol (GOL) I consider the country's prospects to be significant to my portfolio's future.

So, will Lula turn Brazil back into a huge growth engine while continuing to tame inflation and help the poor ... or will he, in trying to push additional growth, bring back the freakishly high inflation of the past and sink the Bovespa ... or will he, in trying to help all the helpless of Brazil, go too far injure the homegrown companies that have helped the country become significant on the international economic stage?

I don't know ... but I hope. Lula was just sworn in for his next term, and is now considered by many to be the most successful president in Brazilian history -- and he's certainly still popular, though perhaps not as much so as when he was more of a populist firebrand in his earlier years in office (years that gave Wall Stree the heebie jeebies, for the most part).

And while Brazil is a founding member of BRIC (or CRIB, if you prefer), the big emerging countries that stand as the bulwarks of the developing world (Brazil, Russia, India and China) ... it's certainly been, in recent years at least, the least followed one in that group.

Brazil has been the kid in the back row of the BRIC class, with much slower growth than India and China who sit up in the front and raise their hands all day long ... and thankfully, with more integrity than Russia, which, to continue the strained metaphor, is the kid selling cigarettes by the loading dock (you know he's got tons of money and all the chicks, but you're pretty sure you'd get burned if you got involved with him ... just ask your friends Belarus or Ukraine).

And really, if you consider that Brazil has grown at only 2.6% during Lula's reign in office, it seems odd to consider them to be part of this fast-growing emerging group at all -- except the stock returns have been sometimes spectacular, and the future might be more spectacular still.

Brazil doesn't have the massive population of China that makes all fiscal daydreams seem possible, nor the huge wealth of educated and English-speaking labor of India ... and they don't have quite the massive buffet of natural resources to snack at of the Russians. Really, in some ways all they've got is what the US had 100 years ago -- a growing, diversified economy based on cheap(ish) labor and lots of great arable land.

They have a large population of workers that are growing in level of education and, thank to the progressive policies of the government, slowly climbing out of poverty ... or at least, from really bad poverty into just plain run of the mill poverty. And that means they have, potentially, the second largest market in the Western Hemisphere.

And most significantly, for investors, is that the country seems to be hitting a sweet spot. Lula's regime has, by most accounts, tamed inflation. Ethanol and successful offshore drilling by PetroBras mean they're less subject to oil shocks than many markets. And because much of their trade is in agriculture and other natural resources, they might not be as susceptible to a dip in US or Japanese or European demand for finished goods the way China, India, Taiwan or Korea should be.

But make no mistake, Brazil is still a risky place to invest -- and my investments are primarily domestic in nature in Brazil, since it remains to be seen whether they can become an important player in multiple industries the way China has.

But it seems that Brazil does have, at least, a population that is slowly becoming better off, a good handle on inflation, and political stability -- that's something, and if they just continue on the path to development there will be plenty of money to be made even if they don't catch fire in quite the way their more popular (or notorious) BRIC brethren have of late.

In addition to my investments in Brazilian agriculture and airlines, which depend primarily on a building domestic and regional market, I'm intrigued by Lula's promise to liberalize financial markets and make investment in Brazil easier as a way to help spur some growth. This brings to mind a few companies that might benefit.

The first ones that come to mind with that environment are the banks, of which Brazil has two biggies that are traded in the US in Banco Bradesco (BBD) and Banco Itau (ITU), both of which have been awfully successful (though BBD has a bumpier chart than ITU). I don't know a lot about those companies, but I'm not terribly interested in investing in a bank at this point.

And second is the investment banking business ... the investment houses all have interest in Brazil too, of course, including Goldman Sachs and all their Wall Street brethren ... but the one that stands out for me in Brazil is a Canadian company, Brookfield.

Brookfield Asset Management (BAM), which I looked at for a few minutes when I was pondering the next Berkshire Hathaway, has a surprisingly high (and growing) level of involvement in Brazil (and has for most of its history) -- which intrigues me. They recently IPO'd a homebuilding business on the Brazilian exchange, which if financial markets and mortgages are going to be liberalized might be one of the more prescient moves of late, and they have a growing interest in Brazilian commercial real estate. It really feels to me at times as though Brookfield is becoming the Macquarie bank of the Western Hemisphere -- and if so, that would be fine indeed for BAM investors.

I don't know if I'm ready to become more exposed to Brazil than I already am -- I think it's unlikely that I'll invest in another Brazilian company at this point, but the more I've looked at Brookfield in the past few months the more I like it ... I just wish the valuation was a bit lower, but perhaps I shouldn't get hung up on things like reported earnings when the company has such a vast portfolio of assets ... including some juicy ones in Brazil.

full disclosure: I own shares of Sadia and Gol as of this writing, and LEAP options on Goldman Sachs. I don't own any other companies or investments mentioned.

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The Next Berkshire Hathaway? (MKL, SHLD, BRKB, WTM, FFH, LUK, BAM)

There are few things more entertaining or evergreen in stock investing than the search for the next Berkshire Hathaway (BRKB) and the next Warren Buffett -- with Berkshire having a nice renaissance in the last few months (up 20% or so) as they make headlines for breaking the $100,000 mark, I decided to check in on the search again.

Jim Cramer thinks he's found the next Warren (though he's far from the first to say so) in hedge fund whiz-kid turned Sears Holdings (SHLD) Chairman Eddie Lampert ... and many folks have identified other candidates, from Prem Watsa (at one time known as the "Canadian Warren Buffett") up at Fairfax Financial (FFH), to the guys at Markel (MKL). I've argued that Markel seems very Berkshire-like in the way they do business and conduct their conference calls (though having such a call is not very Berkshire-like), but they're definitely not the only ones.

Cramer is friends with Eddie Lampert and has talked about him for years, which may be coloring his assessment, but it's also a pretty nice, tidy argument to make. Warren Buffett started with a successful investment portfolio of moderate size, took over a failing company in Berkshire (a textile mill, if I remember correctly), diversified into a high-cash flow business (insurance -- most profitably GEICO), and figured out how to use insurance float and a contrarian bent to magnify his investing acumen.

Just as an aside, Cramer has also argued that Google and Goldman Sachs are good "next Berkshire" companies -- though presumably more for their high-dollar price points and growth potential than for any likelihood that they'll become investing conglomerates or holding companies.

Eddie Lampert is certainly, for a young man, a dramatically successful investor -- his ESL Investments hedge fund is generally admired for tremendous returns, and he certainly does follow some of the same contrarian investing principles as Buffett, though he has tended to be an activist investor rather than a buyer of entire companies ... and in my opinion, he has focused more on financial efficiency and on unlocking value than on building companies with great operating performance. To be fair, that's something like what Buffett did in his not-entirely-friendly takeover of Berkshire in the first place, so maybe my opinion is colored more by Buffett the friendly billionaire philanthropist than Buffett the aggressive young takeover investor, who probably shared many more of Eddie Lampert's current qualities.

I expect Lampert would need to focus on either ESL or Sears Holdings as his investment vehicle -- his hedge fund already has big investors like Michael Dell and David Geffen, and while SHLD probably makes up at least 2/3 of ESL Investments' holdings, it's not as if the two are the same. Buffett ended up having to drop his Buffett Partners investment vehicle to focus on Berkshire -- will Lampert do the same, or does he need to?

No one really knows what he'll do next, though speculation remains rampant that Lampert will be looking for acquisitions now that Sears appears to be stabilized (though the actual department store chain is still an awful business, as far as I can tell). As an outsider (though I did own Sears shares for a while and regrettably sold them well before the recent runup), I lke that Lampert's SHLD doesn't issue guidance and seems to be focused on the long term, but I don't like the fact that the companies he has worked with generally focus on improving near term profitability, arguably without an eye on long term business success. I think Sears will probably continue to spin out a lot of cash that Lampert may use effectively, but I question the staying power of the Sears stores and wonder if he's just milking a dying cow. I could easily be wrong on that.

Markel (MKL), as I've written before, seems to be following a very similar tack to Berkshire Hathaway -- albeit skipping the first few steps of buying the failing textile mill, etc., and instead moving straight into the lucrative insurance business. One of the things that stands out for me, aside from the great performance from their insurance lines during this nice rebound year for the insurers, is that management really SOUNDS like Warren Buffett in their corporate releases. And with their investment in the local First Market Bank in their local VA stomping grounds, there's some speculation that they're starting to spread their wings, investment-wise, and begin investing some of their prodigious cash flow outside the stock market (even as Thomas Gayner, who runs the investments for Markel, focuses on a lot of the same conservative, boring criteria as Buffett has in making hugely successful stock investment decisions).

What are some of the other companies that might look a little like a young Berkshire?

White Mountains Insurance (WTM) comes up with some regularity, not least because Buffett has owned shares for ages. Another insurance conglomerate, with a strong investment portfolio but without the Berkshire focus on buying operating companies in other industries, White Mountains may be a great investment -- and certainly an underlooked one, with shares trading well above $500 according to the Buffett anti-split preferences. But with the aging insurance legend Jack Byrne at the helm this feels more like a current Berkshire Hathaway, Junior than a company that's likely to take it to the next level in the coming decades.

Leucadia (LUK) wins for having the most Berkshire-like website (just compare http://www.leucadia.com to http://www.berkshirehathaway.com). It's a relatively small company for all the investments and properties they own, and I'm sure there's a significant "conglomerate discount" built into these shares to compensate for the fact that anyone buying LUK shares has to understand operations as diverse as wineries, timber, telecom, and manufacturing. I believe Leucadia started as a financial company, but is no longer significantly exposed to insurance or banking as far as I can tell -- this is certainly an intriguing company for further research.

Prem Watsa at FFH seems to be too much of a lightning rod at this point for my taste -- I'd rather not buy into a company with so much legal risk, even if he has shown some promise in building an insurance holding company in Canada (and the shares may have more volatility than any other pretender to the Berkshire throne, which some folks like).

Also up North -- the former Brascan, now Brookfield Asset Management (BAM), has been hugely successful both in managing money for institutions and in building up a collection of hard assets in, among other areas, real estate, timber, and power generation, and may be able to use the recent Canadian Trust tax law changes to buy up some valuable trust assets on the cheap, not unlike Buffett's investment in MidAmerican Energy back when pipelines seemed boring ... but while the conglomerate is growing and I'm intrigued by the opportunity ahead for this company to potentially build itself into the Macquarie of North America, there's no hint of the kind of quiet under-the-radar wealth building that early Berkshire investors enjoyed.

Others that have done a great job of building conglomerates and becoming bazillionaires? The Rales brothers who built Danaher (DHR) come to mind, and I used to own shares in that company -- but given their extremely hands-on management style and focus on manufacturing this is really more like GE Junior than Berkshire Junior.

The search goes far and wide. A Motley Fool author argued that Joel Greenblatt is investing like Warren Buffett, though he doesn't run a public company that we can invest in -- so that's not exactly the same kettle of fish.

And smaller companies with intriguing holdings or misunderstood book value often get compared to Berkshire -- including PICO holdings, described here by Cheap Stocks.

There's even a small Chinese holding company that likes to say that it has a "Berkshire Hathaway model" for China (I don't know anything about this company, they seem to be some sort of a venture investment group).

But maybe we're missing the real story -- is Buffett really just the next William Jardine? Jardine Matheson (JMHLY.PK or Jardine Strategic at JSHLY.PK, both are difficult to trade) is an international conglomerate that owns pieces of everything from the Mandarin Oriental hotels to Hong Kong Land to Astra ... and some big insurance operations.

I'm still nervous about Sears Holdings, with so many people buying it because they want to ride along as Eddie Lampert invests the Sears cash flow into other companies -- but maybe that's like being nervous about Warren Buffett buying a suffering textile mill, perhaps I just need to see through my hangups about Sears and trust in Cramer and Lampert.

For my taste, right now an investment in Markel feels much more solid -- I know I'm getting a company that focuses on profitability and growth in book value while ignoring their stock price, and I know they have the built-in insurance company advantage that Buffett had of investing with other peoples' money. Leucadia is very tempting for me if I find time to really delve into their operations, but I like the potential of Markel, and Berkshire itself (especially if they become a massive dividender following Buffett's demise, as I think is quite possible), more than that of White Mountains right now.

It's a fun game, but of course we're as likely to find the next Warren Buffett today as our parents were forty years ago -- and the brilliance of Buffett was certainly not taken as gospel even back in the 1980s, when you could have bought A shares for well under $1,000. If the next Buffett is out there right now, getting his business started, we'll probably overlook him -- after all, he'll probably be a boring, small-town businessman in a cheap suit, running a snoozy business and flying under the radar.

If you're lucky enough to find a small company with steady and ethical management, a contrarian bent, a focus on building cash flow, and a distaste for quarterly stock market performance metrics, it may be worth a shot -- especially if no one is calling it the next Berkshire Hathaway, and especially if your broker thinks you're crazy for asking about it.

Disclosure: as of this writing I own shares in Markel and Berkshire Hathaway.

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