“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.