The Line Forms

There is a new issue out of Outstanding Investor Digest (OID). For anyone that doesn't have a subscription, you're making a mistake. This publication is a marvelous resource. The current edition has a verbatim transcript of Charlie's remarks at the Wesco meeting (which I attended). There he made extensive comment on BYD, worth quoting in part:

"...Suppose I told you that I could press 800 pounds over my head using my right hand. You would laugh, right? There'd be a titter in the room. Well, suppose I picked up an 800 pound weight with my right hand and pushed it up and down - and then I said, 'Now I'll do 900 pounds with my other hand' and pushed it up. By the time the fourth weight had been pushed up, you would think that maybe this guy knows something about weights I don't know. Maybe I can't explain this, but I'm going to bet on him doing it one more time.

And to some extent, that's what happened at BYD. You had an organization so talented and hardworking - and so interested in perfecting everything that was being worked on - that observable miracles started happening. You can call the first one a miracle or an accident or something. But by the time the third or fourth one comes along, you think, well, I'm going to play this...

How can you be sure we'll be right with our new approach? Well, we're sure as hell not going to do it very often because there aren't that many BYDs and there aren't that many Wang Chuan-fus and Li Lus. So I don't think you need to suddenly worry that we are technology gurus...

A big lithium battery that will timeshift power in the utility systems of the world is like the holy grail. Cheap solar power is another holy grail. And better electric cars are another holy grail...

And I think the electric car has to come eventually...And the smartest people in the world are working on it at every major university, every major technological center, and every major automobile company.

So why does a little group of people in China - in my mind at least - have the lead? Well, I think it had a very unusual individual in a very unusual place. After all, if you've got 1.3 billion people in China, and you take the smartest of them and send them to engineering school - and then you hire the 5% of the graduates of the engineering schools and they work way harder than other people's engineers, let me just say that this is a very interesting and powerful model...

I hate the venture capitalist system as a place for me. I think it's a constructive business and I admire the people that succeed in it - but I know it doesn't suit me. And I may be crazy, but I think that when you bet on something like BYD, it's not really entering venture capitalism. I think you're doing something that's pretty close to foolproof...

I don't recommend that anybody in this audience - who has grown rich, by and large, by behaving the way I always did, which was avoiding high technology like the plague - change your ways. I think it will be safer not to change. But because what we are doing is so peculiar, I thought you were entitled to an explanation. There's an exception to every rule. And I think I'm right about BYD - even though I didn't come up by making such investments."

Later, Charlie answers a question about engineers being prone in business to "analysis paralysis":

"Well, I think you see a lot of analysis paralysis in the world. But if I were to name one big institution - and, after all, it's got 16,000 or so engineers - which had a low amount of analysis paralysis compared to its size, I would name BYD. They are determined to be rational and make things work in a practical way. And they don't like unnecessary delays - and analysis and pause just for the sake of analysis and pause.

So one of the things that makes me confident about BYD is its culture. It's different from what you describe when you talk about analysis paralysis."

And then later,

"I'm interested in knowing more about China and making more investments there. But I'm so happy to have found the one we have that it's hard for me to imagine that we'll ever find anything again that pleases me as much...We will look - but I'll be surprised if we ever find a better company."

And finally, on hard-to-judge investments:

"It's much better to find some no-brainer. I regarded Costco, when I bought into it, as a no-brainer. I also came to regard BYD as a no-brainer."

Alice, do you think Charlie's going overboard with effusive praise of BYD mostly to stroke Wang Chuan-fu (who was in the audience), or is this meant as a genuine, hard-headed analysis of the investment? (As Charlie said at some point at the meeting, something to the effect of, "I didn't get to be where I am by failing to recognize a big idea."

Alice,

Your comments are, of course, well taken. Value investors do indeed profit from the pain, misfortune, misinformation, emotionalism, and sometimes idiocy, of the sellers of undervalued stocks. I think John Templeton once addressed the ethics of this by pointing out that, as a securities buyer, he never forced anyone to sell at nonsensical prices, he just "accommodated" them when they sold of their own volition.

But I think you are right to say that the value investing community shouldn't squeal with quite so much delight when their future windfalls are coming at the expense of their fellows. It's both ill-mannered and politically ill-advised to crow about it.

But of course, even as we acknowledge Charlie's broader point about all the pain and suffering out there, it's still fun to talk shop! ;)