Taking Stock (so to speak)

Isn't it true that if you cut out Berkshire Hathaway's top 5-10 investments, their track record would also be unexceptional?

Seems to me that Li Lu took this point to heart, and waited patiently for that big "fat pitch", investing very heavily when it came.

Buffett says the most important quality to have as an investor is temperament. One could argue that Li Lu has demonstrated that he has an ideal temperament for investing.

I enjoyed reading the two blog posts (main & goofiness) plus the two comments. I, too, sincerely hope to be proved wrong but based on the public data points, I don't see enough support for that "foregone conclusion".

The WSJ article stated ex-BYD results in "unremarkable" performance. And given the combined "unremarkable" performance (ex-BYD), the 7-fold gain in timberland, to me, actually means that some other investments must have done poorly to maintain that combined result.

May be the currently under-performing investments in Li's portfolio are all tomorrow's superstars but I don't know. And "tomorrow's superstars" don't qualify as track records.

In the July 31st edition of Hong Kong's Apple Daily (one of HK widest circulated Chinese newspapers), the WSJ Li Lu story was on the front page. And its largest headline simply stated (in my rough translation)

"Li Lu taking over from Buffett
Managing Berkshire's 780 billion [in HK dollar]"

Apple Daily covered this story with one lead story and 7 supplementary stories. I think I can safely bet a good majority of Chinese media in HK, China, Taiwan reported the story in similar manner and skipping the caveat that it was not an official announcement.

I really wonder what does Li Lu think about all these coverages for his chance of picking up the job? Publicity never hurts? Sure, many Chinese thinks Li Lu's appointment is a sure thing and rightfully feel proud. But am I too cynical in thinking all these publicity may actually be hurting Li Lu's "chance" as people are talking, and some people are less convinced than others.

** Disclosure: Personally, aside from what I said above, I deeply admire Li Lu's work as a student leader in the tragic & bloody 1989 Tiananmen Square student protests. Chinese government using tanks against unarmed students and citizens is something I cannot forget. And Li's subsequent years of consistent public support in advocating for democracy in China (as confirmed by those who knows) is also very noble. Li could have stayed quiet like some other student leaders but he didn't.

Alice,

You’ve raised important and valid questions about Li Lu and BYD. But I’m not sure that calling Buffett and Munger “goofy” is appropriate.

Or maybe it is. It’s true that some people, once they’ve reached that lofty station where no postscript can detract from their original accomplishments, do lose their bearings – just because they can.

I have a relative that made tens of millions in early ventures, and later hundreds of millions in LBOs, who did just that. Having arrived, he literally pronounced himself irrefutably a genius, and announced that all his future business activities would be selected first on the basis of their “fun” factor, and only secondarily on the basis of their economics.

Twenty years later the outcome is not handsome. It turned out that “fun” was simply his euphemism for a lack of discipline. He went into numerous ventures without the thoughtful deliberation that had characterized his early life, sometimes because the product tickled him or, in his mind, carried some social cachet. In the final analysis, he never made any additional money of significance, and I don’t think he’s had any fun either. It turns out that throwing capital around on a fancy, and then losing it, or even just treading water, wasn’t very enjoyable to him, even though he could afford it. Plus he’s lost the respect of his peers, who don’t take him very seriously as a businessman anymore, which frustrates him. He’s still quite rich, but it’s been a long time since he seemed happy. Now, that’s goofy!

Is Charlie Munger goofy for backing Li Lu and BYD? Could be. He’s a human being too, and maybe he’s decided to cut loose and take a flyer. What I hear you saying, in polite language, is that Charlie, by ostentatiously falling for this guy and gushing about a battery technology he couldn’t possibly understand, is making a minor fool of himself. But it's okay, because he can afford it – both financially and reputationaly.

I concede the possibility that Charlie is being goofy. But for the sake of argument, may we assume – provisionally – that Charlie is not acting on a well-earned fancy, but actually has a valid model or two in his head that accounts for Li Lu and BYD?

We know Charlie is a great proponent of the occasional, rational “big bet.” Long before he was rich, Charlie concentrated to an extraordinary degree in his own partnership, didn’t he? He’s said that just three well-chosen stocks is perfectly adequate diversification for a fund, provided the odds are decidedly on your side and you are prepared to accept extreme volatility. So it makes sense that Li Lu’s concentrated style would resonate with Charlie Munger.

You say the important question is whether you can assess the skills of an investor from a single huge investment that has positively skewed otherwise mediocre performance. But is Li Lu’s performance really mediocre ex BYD? Susan Pulliam says so, but offers no evidence. In his recent Columbia lecture, Li Lu profiled a concentrated investment he made in Timberland, the shoe company, that produced a 7-fold gain in the early 2000s. So we know of at least two fabulous investments that Li Lu made. Since the rest of his portfolio is not public, it’s an open question how his ex-BYD portfolio performed “all-in” – an open question for us, but not for Charlie. Elsewhere I have read that Li Lu, upon meeting Charlie, detailed for him every investment he’d ever made. Charlie, therefore, had many data points by which to judge him. One would think Charlie did so intelligently, no?

As for BYD, at the Wesco meeting this year, Charlie emphatically denied that BYD was a venture-capital type investment. This he said, because the battery technology is a proven one, not an R&D project. He also sees an autocatalytic model at work with BYD now hiring thousands of the China’s top engineering students upon graduation, who work like maniacs for peanuts (by Western standards), applying themselves, apparently, to re-engineering every aspect of design and production so as to lower costs across the whole manufacturing process. BYD is vertically integrated like almost no other company. Presumably, this is a huge edge that reinforces itself.

My point is not to advocate for Li Lu or BYD, but to ask if it’s possible that Charlie has a more important set of insights in this matter than you’re suggesting, and whether we should all drill-down and learn something from it. Or perhaps this whole matter really is just an overblown spectacle surrounding a very minor side-gamble in the Berkshire/Munger universe. I'm open to either possibility, but I think when someone of Charlie's caliber makes this much fuss over an investment or an investor, it ought not to be fluffed-off before entertaining the possibility that he's on to something important.