Berkshire's Diversification Trap: Why Warren Buffett's Model Might Not Work for African Investors

Summary

• African currency risk undermines gains from US-centric investment models like Berkshire Hathaway's.
• The Berkshire model assumes market stability that is absent in Africa's volatile regulatory landscape.
• Diversification risks increase for African investors as global stock correlations rise during market crises.
• African investors should consider local strategies over Berkshire's model to manage unique market risks.

Is Following Warren Buffett a Fool's Errand in Africa?

The American Dream, Not a Global Blueprint

Let’s be clear. I have a great deal of respect for Warren Buffett. The man is a living legend, and Berkshire Hathaway stands as a monument to patient, sensible investing. His model is deceptively simple, isn't it? Buy wonderful companies at fair prices and hold them forever. It’s the sort of wisdom you’d expect to find embroidered on a cushion. And for decades, in the calm, predictable waters of the American market, it has worked beautifully.

The problem is, not all waters are calm. The Berkshire blueprint was forged in an environment of stable currency, predictable laws, and mature consumer markets. It assumes a certain level of order. To blindly apply this strategy in the dynamic, often chaotic, markets across Africa strikes me as a triumph of hope over experience. Are we really to believe that a strategy perfected in Nebraska will work just as well in Nigeria or Kenya? I have my doubts.

When Your Profits Evaporate

For an investor sitting in Lagos or Nairobi, the biggest monster under the bed isn't a market crash, it's currency. Imagine you’ve done your homework. You’ve bought into a global giant like Unilever or Procter & Gamble. The company performs brilliantly, delivering a handsome 8% return in dollar terms. You should be celebrating, right? Well, not if your local currency, the naira, has decided to take a 15% nosedive against the dollar in the same period.

Suddenly, your profit has vanished. In fact, you've lost money. It’s like running on a treadmill, putting in all the effort, only to find the machine is slowly rolling backwards. When currency swings can wipe out fundamental gains, the entire premise of picking good companies starts to look a bit shaky. The diversification Buffett champions across sectors becomes almost meaningless when a single factor, the exchange rate, holds a veto over your entire portfolio.

The Great Diversification Deception

This brings me to the heart of the matter. The very idea of diversification gets twisted out of shape. You might think that by owning shares in Mondelez, Unilever, and other global titans, you are spreading your risk. You own food, soap, and technology. It looks diversified on paper. But in reality, you may just be concentrating your risk in a different way.

All these multinational corporations, when operating in Africa, face the same fundamental hurdles. They all struggle with currency controls, tangled supply chains, and the whims of local regulators. An economic downturn driven by falling commodity prices doesn't just hit one of them, it hits them all. Their fortunes are far more correlated than a textbook would have you believe. To me, this isn't diversification. It's a mirage. The very idea that a model like the Berkshire Hathaway Stock B Model: Diversification Risks offers a simple shield is, frankly, a bit naive when you're dealing with these correlated risks. You haven't built a fleet, you've just bought different cabins on the same ship.

Context is King

So, what's the answer? I’m not suggesting that African investors should retreat into a shell. Nor am I saying that global companies are a bad investment. The point is that context is king. A buy and hold strategy that works in a low inflation, stable political environment needs a serious rethink when applied elsewhere. The luxury of waiting decades for compounding to work its magic is less appealing when a currency crisis can reset your progress every few years. Successful investing isn't about finding a magic formula and applying it everywhere. It’s about adapting sound principles to the reality on the ground. And the reality for many African investors is that the Berkshire Hathaway playbook, for all its brilliance, was written for a very different game.

Deep Dive

Key Companies

• Unilever plc (UL): A global consumer goods company whose performance for African investors is significantly impacted by local currency fluctuations. The company's growth in Africa depends on rising disposable incomes and urbanisation trends.
• Procter & Gamble Company, The (PG): A global consumer goods company whose shares are subject to currency risk for African investors. Its African operations rely on economic drivers like increased disposable income and urbanisation.
• Mondelez International, Inc. (MDLZ): A company with a strong global brand portfolio that must navigate complex and unpredictable regulatory environments in Africa, including import rules, foreign exchange controls, and shifting government policies.

Primary Risk Factors

• Currency Volatility: Local currency depreciation against the dollar can result in net losses for African investors, even if the underlying company performs well.
• Regulatory Uncertainty: Global companies face unpredictable risks in Africa, such as sudden changes in foreign ownership rules, new taxation regimes, and complex import regulations.
• Breakdown of Diversification: Sector diversification becomes less effective when currency movements are the dominant factor in returns. During market crises, correlations between assets increase, removing diversification benefits.
• Liquidity Constraints: During periods of global market stress, African investors may face reduced access to foreign exchange, leading to forced selling and amplified losses.
• Concentrated Economic Exposure: Seemingly diverse global companies often depend on the same underlying economic drivers in Africa, such as rising disposable incomes, creating a hidden concentration risk.
• Operational Challenges: Multinational companies in Africa often face similar operational headwinds, including currency conversion difficulties and supply chain disruptions.

Growth Catalysts

• Favourable Demographics: The growth of consumer goods companies in Africa is linked to long-term trends of rising disposable incomes and increasing urbanisation.