At the recent Berkshire Hathaway shareholder meeting in Omaha, vice chairman Charlie Munger said that he thinks that stock market investors may be able to find better investment opportunities in China. He said, “I do think the Chinese stock market is cheaper than the American stock market. And I do think China has a bright future.”

“There will be growing pains of course,” he added.

In a subsequent interview with Yahoo Finance, he added these thoughts:

“I think a shrewd person can find more bargain stocks in China than he can find in the United States. That’s all. That’s all I meant. It was a happier hunting ground for the value investor.”

“I didn’t say it was easy. But if you work at it, you can find more [attractive investment opportunities]. And better.”

PE and CAPE ratios

Two commonly used valuation metrics are PE or price to earnings and Robert Shillers CAPE ratio (cyclically adjusted PE). Currently China look very cheap on both measures. The Shanghai market trades at just 7.6x and a CAPE ratio of 14.4 as of March 31. The compares to the US market trading at 22.7x and a CAPE ratio of 27.5.

Here is a chart of the Chinese CAPE ratio plotted against 3 year forward returns (inverted). In the past buying at this type of CAPE ratio has led to impressive future gains. It will be interesting to check back in 3 years…

“Berkshire Hathaway 2009 Munger quote” by TEDizen is licensed under CC BY-SA 2.0