Tuesday, August 03, 2010

“Buffett’s Possible Successor”? It Ain’t Over Til It’s Over

Seems like just last week the Wall Street Journal was trumpeting a successor to Warren Buffett in his role as chief investment officer (“capital allocator,” is how Buffett puts it) at Berkshire Hathaway.

And indeed it was just last week—Friday, in fact—that the Journal wrote the following about a previously little-known (outside Berkshire circles) Chinese investor name Li Lu, in “From Tienanman Square to Possible Buffett Successor”:

Twenty-one years ago, Li Lu was a student leader of the Tiananmen Square protests. Now a hedge-fund manager, he is in line to become a successor to Warren Buffett at Berkshire Hathaway Inc.

Mr. Li, 44 years old, has emerged as a leading candidate to run a chunk of Berkshire's $100 billion portfolio, stemming from a close friendship with Charlie Munger, Berkshire's 86-year-old vice chairman. In an interview, Mr. Munger revealed that Mr. Li was likely to become one of the top Berkshire investment officials. "In my mind, it's a foregone conclusion," Mr. Munger said.

—The Wall Street Journal, July 30, 2010

Now, Charlie Munger’s imprimatur is no small matter.

Munger is Buffett’s intellectual equal and has been his business partner and investment consigliere for decades—the skeptical “Abominable ‘No’-Man,” Buffett calls him.

And while Buffett buys entire companies these days without Munger’s specific input, he would no more anoint a successor without Munger’s approval than he would provide quotes for a glowing Wall Street Journal story on Li Lu as his “possible successor” if there wasn’t something to the story.

Mr. Li’s primary attribute for the role of Chief Investment Officer at Berkshire Hathaway, should that title ever be conferred on anyone but Warren Buffett, is not merely the returns Mr. Li has reportedly generated in his hedge fund—the Journal puts them at 26.4% annually since 1998, whether net or gross is not clear—but also, undoubtedly, the personal attributes that endeared Mr. Li to both Buffett and Munger, for neither man suffers fools gladly.

In fact, Munger suffers them not at all.

In addition, Mr. Li has already made Berkshire and its shareholders more than a billion dollars, thusly:

The Chinese-American investor already has made money for Berkshire: He introduced Mr. Munger to BYD Co., a Chinese battery and auto maker, and Berkshire invested. Since 2008, Berkshire's BYD stake has surged more than six-fold, generating profit of about $1.2 billion, Mr. Buffett says.

—The Wall Street Journal, July 30, 2010

BYD has also been mighty profitable for Mr. Li. In fact, BYD has accounted for what looks to be something like $360 million of the $460 million in gains recorded by Mr. Li’s hedge fund—if Friday’s article was accurate (we make no representations here).

And yet, BYD is not exactly hitting the cover off the ball these days, according to…the Wall Street Journal.

That’s right: today’s Heard on the Street contains a different side to the BYD story:

BYD's dreams are crashing into a humdrum reality.

The Chinese auto maker, famous both for its plans to market electric cars and for an investment from Warren Buffett, has hit a sticky patch. Sales are stalling, up just 3% on-year in June, according to data from J.D. Power & Associates.

In particular, sales of the F3 model, BYD's most popular car last year, slumped 30%. The compact car segment it is in has become the most competitive part of China's auto market. Accordingly, halfway through the year, BYD's made only 36% of its vehicle-sales target of 800,000 in 2010.

—The Wall Street Journal, August 3, 2010

Seems BYD had plans to build a plant in western China but “local officials are querying the legality of its land purchase there, putting the project’s future in doubt,” according to the article.

Furthermore, China’s auto market is flattening out in the wake of government efforts to deflate the Chinese property bubble.

Of course, the “sizzle” in the BYD story is not about selling conventional cars to middle-class Chinese: it is about developing lithium batteries capable of powering mass-market electric cars and storing energy from solar and wind:

Says Mr. Munger: "The big lithium battery is a game-changer."

—“From Tienanman Square to Possible Buffett Successor,” The Wall Street Journal, July 30, 2010

Now, we have no insight on whether BYD will win that race, or even finish near the head of the pack.

But Buffett watchers have learned over the years that the man who nurtured Berkshire Hathaway from failing textile maker into one of the most successful long-term investments in NYSE history can change his mind.

Indeed, longtime Berkshire followers will recall that Rich Santulli, the genius who started what became NetJets before selling it to Buffett and staying on to run the business, was once one of the faired-haired men deemed in line to take Buffett’s place as Chief Executive Officer of Berkshire Hathaway.

But late last year, Santulli was “disappeared,” in the lingo of Latin American dictatorships, and banished from the Berkshire family like a prodigal son after spending NetJets into a near death-spiral of ballooning debt and losses, about which Buffett himself abjectly apologized in his Chairman’s Letter this spring.

Whether BYD’s near-term problems herald the potential for longer-term concerns with Mr. Li, we have no clue. He clearly has the most interesting background for Buffett’s investment job, having confronted Chinese tanks at Tiananmin Square in 1989.

Also, and most importantly, he comes from where the world is moving. After all, the “Next Warren Buffett” will not likely be a young stock broker from Nebraska sitting in his upstairs room reading Moody’s manuals and S&P sheets.

Still, it ain’t over til it’s over

Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Anonymous said...

Ha, I was wondering why he was generating so much press recently.

I was somewhat aware of BYD before its auto transformation and Buffet investment. I feel pretty silly looking at the stock chart but my problems then were the same as now: It's great at copying, it's great at keeping decent quality, and it's great at doing so cheaply.

It has the most popular model car in China now, which is basically a copy of the Corolla. You see them everywhere in the south. But really, it's just a copy. Its battery technology isn't world-changing, which means that it will encounter the same problems as every electric/hybrid car designer, and thus will need to depend on the power of its R&D team to propel it onto the world stage. But it won't. Because that's not what it does.

Now, looking at BYD from Li's perspective after readong more of his commenst, it's got a decent floor: BYD is unlike the US or Japanese manufacturers in that it is in no danger of going bankrupt. It still knows the value of a lean company. Perhaps that's the real value that they saw in the company and its founder.

If that's the real thesis, I'd be impressed. It's not one that would play well in the US or world press, so you can only really talk about the battery and other BS. It also makes a lot more sens in light of his comments -- he's studied the history of the industry and focused on the failures. Well, we've seen pretty clearly where there have been failures in the auto industry. And the key seems to be finding the niche between cheap manufacturing and good quality. Expensive and inventive brands don't always survive financially, as can be seen from Rolls and Land Rover. Cheap brands don't either. BYD is aiming for that mice middle ground.

But it's not world changing.

Anonymous said...

Actually, the next Warren Buffett probably will be "a young stock broker from Nebraska sitting in his upstairs room reading Moody’s manuals and S&P sheets." Of course, the successor to Warren Buffett as the head of Berkshire Hathaway probably will almost certainly not be.

Dow Quote said...

All these newspapers and mags love a WB story. If there is no story, they'll gladly invent one.

John said...

The winner of the X-prize $10 million contest ( super efficient cars ) will be announced in Washington some time in Sept.


I don't think BYD entered the contest and i have wondered why.

Anonymous said...

Professor Jeff:

Just curious, what's your take on why Lou Simpson, the President and CEO, Capital Operations for GEICO, didn't get a chance to be in the mix as Buffett's possible stock-picking successor?

Anonymous said...

Jeff, this is OT but your recent article on RIMM was so funny. I was changing my 'phone this week, asked for a BlackBerry - which I love - and the sales rep TOLD me there's no need for them anymore. I'm going to get one anyway coz I like them, but take it FWIW. All the best!

Anonymous said...

Can someone explain to me why a fund of his size does not file a 13F-HR? I thought one has to file when AUM is above $100M.


BobE said...

The mainstream media is so confused about Berkshire that they will write anything. This little gem is pulled from Fortune Magazine's profile of David Sokol:

"In April, when Buffett had concerns about a provision in the Senate financial regulation bill that would have required Berkshire and other companies to post billions of collateral on their existing derivatives, it was Sokol he sent to argue his case. Buffett's side of the argument won."


Fortune conveniently omitted that Sokol's argument did not prevail long. The collateral posting requirement is in the final bill, passed before the magazine went to press.

Today's NY Times takes up the discussion of just how much collateral might be required of Berkshire:


Anonymous said...

Aaron - Lou Simpson is in his 70s. They want someone who can allocate capital for several decades.