Street Capitalist: Event Driven Value Investments

Wisdom on such diverse topics as: spin-offs, merger arbitrage, post-bankruptcy equities, global macro commentary and short ideas.

Street Capitalist: Event Driven Value Investments

Warren Buffett invests in Bank of New York

Yesterday, the new 13F filing for Berkshire Hathaway (NYSE:BRK.B) came out and for the most part, I wasn’t really surprised. Warren Buffett trimmed some of his holdings but increased his stake in Wells Fargo (NYSE:WFC), Johnson & Johnson (NYSE:JNJ), and a new holding in Bank of New York (NYSE:BK).

Berkshire Hathaway Q3 2010 Portfolio

via: Dataroma

The new position in Bank of New York is really interesting to me. I have had this theory for a while now that asset management/trust banks would become attractive going forward because of their large fee income businesses.

See, for a long time, most banks operated on this 80/20 model where 80% of revenues came from interest activities (loans) and 20% came from fees (overdraft, credit card interchange, debit card interchange). But that’s changed a bit with the Durbin Amendment which is scrapping the debit card interchange fee from banks. Most bankers have publicly said that they will be figuring out new ways to make up the lost income — most likely by charging customers for things that they take for granted (free checking).

The other model though, might be to acquire financial institutions that are driven primarily by fees. There are a few ways to do this. A bank could acquire wealth management firms that are within their geography — BBVA did this when they came to Houston. Or they could acquire a trust bank, which typically has the income structure split closer to 65/35 than 80/20. We saw one of these acquisitions when M&T Bank (another Berkshire Hathaway holding) acquired Wilmington Trust in an immediately accretive deal.

So where exactly does Bank of New York fit into all of this?

Bank of New York is regulated as a bank but actually derives most of its income via fees. It acts as a custodian for financial assets. As a result, Bank of New York can charge asset management fees to clients, typically at a percentage of AUM. Plus, it can also charge clients on a per transaction basis – so if you expect an increased level of volatility going forward, then the bank should do quite well. This is a great business to be in and throws off a lot of free cash flow when times are good.

The only thing that concerns me about Bank of New York is the company itself. The business they are in is great and should have excellent prospects for the future, but historically the bank’s own results have been less than spectacular. To illustrate, look at BoNY’s EPS since 2000 versus Wells Fargo:

Bank of New York EPS versus Wells Fargo EPS (2000-2009)

Those earnings seem pretty weak, which makes me wonder about BoNY. At the same time, they have engaged in M&A over the last 10 years, which might have hurt earnings growth — especially if there were integration costs and dilution. Maybe Buffett is expecting some kind of shift in operations, much like what happened with Coca-Cola when he invested.

I’d suggest taking a deeper look at trust banks and banks that have some kind of non-interest fee stream that makes up a greater than 20% portion of their business. This looks like a really fruitful area for some of the bigger banks to do deals and might be beneficial to investors.

Miguel Barbosa interviews Alice Schroeder

My friend Miguel Barbosa continues his interview with Alice Schroeder (Part 2 and Part 3). Here is an excerpt:

Miguel: What was it like being the world expert on Berkshire Hathaway?

Alice: I thought that it would be interesting to our retail brokers and to a limited number of institutional investors. I knew that a lot of people on Wall Street were indifferent to Warren Buffett and some even disliked him for one reason or another.

What I didn’t expect was that the new role would become huge, but it did, because, until that time, Warren had been so inaccessible. The New York Times ran a front page business section story “The Oracle of Omaha Taps a Medium on Wall Street.” For a while I had 3 people answering the phones. I can’t tell you how many phone calls just never got returned; it was like a wildfire. Thankfully, it calmed down after a few weeks.

Berkshire was a very interesting stock to follow, especially as you began to really understand it and its most important elements. Shortly after I began my new role, Warren made a series of acquisitions in the late 1990’s and early 2000’s. There was, as there still is, a fascination with the minutiae of these companies. But it seemed to me that the most important part of what he did resembled a factory-like process. What interested me was the factory.

Meeting the Oracle of Omaha (Simoleonsense)

Miguel Barbosa interviews Warren Buffett biographer Alice Schroeder

These days Alice Schroeder gets a lot of hate for her biography The Snowball, about the life of Warren Buffett. It’s still my favorite Buffett biography because it gives you the most in depth view of his early life as an investor. People complain about all the pages dedicated to his personal life, but if you really want, you could just skip through those parts. You’d still end up with more information than what’s in the Lowenstein book.

My friend Miguel Barbosa of Simoleon Sense has an interview with Schroeder and it’s worth a read, especially for people who are interested in insurance. Also, Schroeder is featured in The Confidence Game which details Bill Ackman’s short selling campaign against MBIA.

Miguel: This reminds me of James Grant indicating a great way to make a name is to follow unpopular paths and recommend shorts.

Alice: In a normal market, it is tough to be the naysayer, but the past few years have been a heyday for shortsellers. With so much hedged money, there’s also far more demand for diverse opinions today. In general, though, the human race is biased towards the positive. You have to be optimistic to go through life.

There’s also some interesting research that shows that people who speak out critically are viewed as smarter than those who give only uncritical applause, even though they are less liked. In the long run, the price of popularity is paid in respect.

Miguel: Two things I wanted to go back to; first your experience as a regulator and how this taught you how games are played; and second, you mention the importance of being skeptical. Is this an inborn trait or can analysts, investors, and others develop this trait (if so how)?

Alice: We may have a natural bent one way or another, but it is very strongly shaped by experience. As just one small example, when I worked on the E&Y transition team, it was fascinating to see first-hand the amount of friction, wasted time, and lost energy that inevitably occurs in a merger integration. And this was quite a successful merger. So you can imagine how skeptical the experience made me of projected “acquisition synergies” in deals I later covered or took part in on Wall Street.

My experience in regulation was also immensely useful in this respect. It exposed me to dozens of people lobbying for an outcome. This is a side of human behavior that we see much less often as an analyst or investor. Try as they might, people aren’t putting their best foot forward when they’re lobbying you; they’re putting their greedy foot forward. Also – and I have never said this before in an interview — being in the presence of a blonde has an interesting effect on some people. It can get tedious to be underestimated, but has its advantages. Certainly, it raises one’s skepticism.

The Forging Of A Skeptic- From Accountant To Buffett’s Voice On Wall Street

I thought the bit about getting exposed to regulation was really interesting. I feel as if investors who come from a regulatory background have a good edge for analyzing financial stocks. Todd Combs, Buffett’s latest hire has that kind of a background and he has done quite well for himself.

Todd Combs of Castle Point Capital to join Berkshire Hathaway

According to Bloomberg:

Berkshire Hathaway Inc. has hired Todd Combs of Castle Point Capital to manage a “significant portion” of the investment portfolio built by Chairman Warren Buffett.

Combs, 39, issued a letter to partners of Castle Point announcing his decision, Omaha, Nebraska-based Berkshire said today in a statement distributed by Business Wire.

For three years, Vice Chairman Charles Munger and I “have been looking for someone of Todd’s caliber to handle a significant portion of Berkshire’s investment portfolio,” Buffett said in the statement. “We are delighted that Todd will be joining us.”

Buffett Names Castle Point’s Combs to Investment Post (Bloomberg)

Overall, I think that this decision makes a lot of sense. If you look at Berkshire over the course of its history, one of the common trends is a tendency to invest in financials. I’ve often wondered why this is but can speculate that it’s because insurance companies and banks tend to have recurring earnings and the threat of technological obsolescence is pretty low.

So who exactly is Todd Combs?

Combs (39 years old) runs Castle Point Capital, a long/short equity hedge fund focused exclusively on the financial services sector. Formed in 2005, the fund is based in Greenwich, Connecticut. Trident III provided the hedge fund’s seed capital in November 2005.

Here’s what Buffett has to say about Combs:

Buffett described Combs as an “all-American type” who is not the least bit interested in publicity, an attitude unlikely to shield him from it. Now a resident of Darien, Conn., Combs is by birth a Floridian who graduated in 1993 from Florida State University with majors in finance and multinational business operations.

Once out of school he worked for Florida’s comptroller and later moved to Progressive Insurance, where he was involved in the all-important activity of setting automobile insurance rates. Progressive is an arch-competitor of Berkshire’s GEICO.

…Buffett describes Combs’ record through the financial crisis as “pretty good.” Combs’ hiring, in fact, clearly indicates that Combs has had a performance with which Buffett is satisfied.

Meet the leading contender to manage Berkshire’s billions (Fortune)

Performance-wise, Todd Combs looks like a sharp financials investor. According to Bloomberg Castle Point’s fund gained 6.2 percent last year, fell 5.7 percent in 2008, rose 19 percent in 2007 and climbed 13.6 percent in 2006. If you look back over the same period, most financials-focused funds have not had that level of performance. Most took a beating back in 2007 and 2008 and have returns that are closer to the S&P over the same period, if not lower (about -5%).

One of the things I wondered about, back when Li Lu was discussed as a potential CIO candidate (he has since taken his name out of the running) was whether the penchant for betting big and winning huge would be an applicable strategy for Berkshire Hathaway. It’s a practice preached by Charlie Munger, but if you look out at what Buffett has done over the last 30 years, the only big bets have come via the form of acquisitions.

Some of the best plays from Berkshire’s investment portfolio have come from the preferred deals during the financial crisis and the convertible deals back in the 1987 bear market. In both cases, the investment returns had fixed-income properties, returns were capped for the most part, even though he could convert to equity or exercise warrants. These were mostly bets on survival, not on the overall ability for companies to thrive after crisis periods. An investor could have earned a much higher rate of return by purchasing common stocks near their all time lows during either period (similar to David Tepper), but it’s a strategy that Buffett did not pursue. I think that’s pretty telling.

Looking back at Todd Combs’ portfolio, we can see that he was not trying to bet big on any particular direction for financials. He was not doing a Michael Burry/Steve Eisman short the market and make 500% play. I think that is a quality that Buffett was looking for, someone who would perform well but not bet big. Maybe that’s due to the unpredictable nature of financial markets or maybe it’s because he wants the investment side of Berkshire to take a back seat to the operating businesses when he’s no longer around.

Some people have questioned whether investing in Todd Combs, someone with a short track record, makes any sense. To me, the fact that Combs performed so well during a period when most financials investors have gotten crushed is pretty telling. It’s not like we were looking at 5 years of performance during a bull market. So even though 5 years is typically too short of a short timespan, in this case I believe it’s enough to discern whether or not someone is a good investor.

You can view Todd Combs’ top 10 portfolio positions here:

Tom Combs Castle Point Portfolio

For a full look at his Castle Point Capital portfolio, click this link, to view a google docs spreadsheet with his entire list of positions as of the latest 13F-HR.

Or, view his portfolio embedded in the iFrame below:

The Joys of Compounding

Most new investors forget about spending time on studying compound interest. They end up thinking that the best way to get rich is to do so quickly, so they seek out opportunities where they can earn massive returns without looking at their true downside risk.

I thought the following charts from East Coast Asset Management’s 3Q 2010 letter demonstrate the power of compound interest quite well:

The Joys of Compounding

And this:

The Joys of Compounding

And of course, opportunity costs:

The Joys of Compounding

Full article:
East Coast Asset Management 3Q2010 Letter

Thoughts on Gold

Lately I’ve been seeing a real uptick in the articles on gold. Even a few enterprising reporters at NPR have invested in it. I don’t own any gold and I don’t have any exposure to it via miners or other companies. But I often think about the metal and how investors are increasingly fixated on it.


Recently, Ben Stein had a chance to interview Warren Buffett and got his thoughts on gold:

My first question, as I sit there on the couch in his office, is: “What about gold? Is this a classic bubble or what?”

“Look,” he says, with his usual confident laugh. “You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

Okay, so gold is not a screaming buy to Buffett. What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?

“Equities,” Buffett answers without a moment’s hesitation.

Warren Buffett: Forget gold, buy stocks (Fortune)

My problem with gold is that I think an investment in it requires you to accurately gauge the anxieties and fears of the investors who are buying it. I don’t think I have any talent for doing that. I’ve read a bit on George Soros because his theory of reflexivity seems applicable to playing gold — and Soros has indeed said he intends to keep buying gold, but it’s not a concept I’ve mastered. Maybe mere mortals like us can’t master it. He goes into his theory of reflexivity in detail with his book The Alchemy of Finance which I’ve read. While I wouldn’t make an investment decision with his theory, I can see why it works for him.

But, I think the dollar is facing real problems. So finding investments that will protect your purchasing power makes sense.

A lot of people complain that gold is not a productive asset and that’s true. Owning gold is not like owning a business, it probably wont make you rich. I think that beyond supply and demand issues, an investment in gold is really an act of speculation. Gold investors tend to have these specific fears about the economy and see gold as this one commodity that keeps on rising. Inevitably, they must expect that when the time comes they’ll sell to another person at a higher price. That’s momentum investing and it’s a pretty tough game.

However, for some people buying might make sense. A friend, upon hearing what Buffett said that even though all the world’s gold would fill a cube 67 feet in each direction, with its high density it can easily be formed in coins. Plus, with its high value-to-weight ratio, gold can be easily moved. Now contrast that with owning an oil company. You can’t move an oil field and even if you own it, countries can come in and nationalize it or take away your permits. The same goes for farmland. I think it’s for these reasons that gold has remained a store value for so long, even if productively, it’s not very useful.

If you are ultra-wealthy and worth $100M, putting $1M-$5M in gold might make sense as some kind of disaster insurance. If things get really bad, you might be able to flee the country and use your gold holdings to start a new life. From an asset allocation stand point it might make sense. At the same time though, I wonder. If things got so bad that you needed to flee the US, maybe you would be better off investing in guns, ammo, survival training, and canned food.

So would I ever buy gold? Probably not. While I do think the US will face some difficulties such as an elevated level of inflation going forward, I have a hard time wrapping my head around the idea that we’ll be in such bad shape that fleeing the country will be the only option. I’ve seen investors such as Seth Klarman use gold as a disaster hedge without actually owning it. Instead, he used out of the money options which inexpensively gave him exposure to sharp movements in its price. I’m a fan of cheap insurance like that.

I respect the macro though and lately have devoted most of my time recently to finding special situations and event driven value investments. These tend to be more market neutral and have defined catalysts in place, making them easy to test. Right now, to me, that’s a much more appealing strategy than simply buying and holding.

Warren Buffett buys Johnson & Johnson

If you’ve been following the blog lately, one of the trends you will have noticed is the increasing amount of attention I’ve been giving to large cap blue chip stocks. I’ll be the first to tell you that these are not exciting companies. There is no event driven catalyst. But as best in class companies, they remain cheap and pay out strong dividend yields. Johnson & Johnson (NYSE:JNJ) is one that I’ve constantly talked about on here. The story is all rather simple – you are getting a best in class business at a 8.7% earnings yield and 3.7% dividend yield. Yesterday, I saw in the Berkshire Hathaway filing that Buffett has been a buyer as well:

OMAHA (AP) — Berkshire Hathaway partly rebuilt the stake in Johnson & Johnson it had reduced in the last two years to raise cash for other investments, and increased its investment in Wal-Mart Stores in the second quarter.

Berkshire, the holding company run by Warren E. Buffett, detailed its $46.4 billion stock holdings Monday in a filing with the Securities and Exchange Commission.

The document revealed several changes in the company’s portfolio from March 31 to June 30, including decreases in Kraft Foods, ConocoPhillips, Procter & Gamble and M&T Bank. Berkshire also increased its stakes in Becton Dickinson & Company, the Nalco Holding Company and Sanofi-Aventis. The biggest change was in its Johnson & Johnson stake, which grew to 41.3 million shares at the end of June, from 23.9 million shares in March. In 2008 and 2009, Mr. Buffett sold some of its stock in the company to help pay for other investments.

Berkshire held 64.3 million shares of Johnson & Johnson at the end of 2007.

Buffett Filing Shows Details of Holdings (AP)

Over the last few quarters I saw Buffett reducing his exposure to JNJ. I figured this was because he needed to raise his cash balance in his portfolio due to the preferred share deals he struck during the crisis and the Burlington Northern Santa Fe acquisition.

With most of that over, I think he is rebuilding his JNJ stake for a few reasons. One, JNJ is large enough to provide the kind of liquidity that is necessary for Buffett to increase his stake without distorting the stock price. Two, JNJ pays a heavy dividend yield that creates cash flow for Buffett to redeploy elsewhere. It’s much better than cash or most of his fixed income options. Finally, JNJ has the kind of long term prospects that Buffett likes in a business. They make products that people will need for a long time. This is a company that managed to survive even the Great Depression. There aren’t a whole lot of companies still around that can boast that fact. That does not mean JNJ or any other large cap blue chip is impervious to sharp market draw downs. Typically, these stocks will fall just like everything else. Sometimes the fall is a little less pronounced because capital flees riskier stocks and enters into some of these more defensive names.

On the credit side of things, JNJ seems to be doing well. The company just placed 10 year bonds at historically low rates:

Johnson & Johnson sold $1.1 billion of bonds at the lowest interest rates on record for 10-year and 30-year securities amid surging investor demand for the highest- rated corporate debt.

The drugmaker, in the first offering by a nonfinancial AAA rated company in 15 months, sold $550 million of 2.95 percent, 10-year notes and the same amount of 4.5 percent, 30-year bonds, according to data compiled by Bloomberg. That’s the lowest coupons for those maturities on record, according to Citigroup Inc. data going back to 1981.

“Even though some faith in the rating agencies has been blown, the triple-A is still sacred,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia.

…In J&J’s most recent debt sale, it sold $900 million of 5.15 percent, 10-year notes that paid 103 basis points more than similar-maturity Treasuries and $700 million of 5.85 percent, 30-year bonds at a 113 basis-point spread in June 2008, Bloomberg data show.

J&J Sells $1.1 Billion Of Debt At Record-Low Rates (Bloomberg)

So why might JNJ be undervalued? I think that with all the analyst attention JNJ garners, a sort of short term mindset comes into play. JNJ had a few recalls which reduced sales and in turn forced analysts to lower their estimates. I see these as short term problems, the company has dealt with product recalls in the past. If the company can prove that they can resume their sales growth or simply boost their dividend, I could see the stock begin to trade back up towards its highs from the last few years.

Li Lu Emerges as Possible Buffett Successor

Two of my most popular posts on Street Capitalist have been about Li Lu. The first post was: Li Lu: Berkshire Hathaway CIO Candidate? I followed up with a second post, transcribing a lecture that Li gave to Columbia students in 2010 (Li Lu’s 2010 Lecture).

In the first post, I speculated as to whether Li might emerge as one of the Berkshire CIO candidates:

This past weekend was the Berkshire Hathaway (NYSE:BRK.A / BRK.B) annual shareholder meeting. At one point during the Q&A, a questioner asked Warren Buffett about the status of Berkshire’s CIO candidates. Charlie Munger remarked that one candidate who he is particular close with was up 200% in 2009 with 0 leverage. Some people think that the person Munger is referring to is Li Lu, a fund manager who turned Munger and Buffett onto BYD.

Li personally owns at least 2% of BYD, which rose 400% in 2009. I don’t know anything about his investments beyond that one position, but I know he is a huge believer in taking concentrated, high conviction positions. If that is the case here, BYD’s spectacular results must have contributed a lot to his returns for 2009 which may make a 200% for the year possible.

Li Lu: Berkshire Hathaway CIO Candidate? (Street Capitalist)

Li Lu
(From left to right: David Sokol of MidAmerican, Warren Buffett, Wang Chuan-Fu of BYD and Li Lu. Photo: David Yellen)

Today, Susan Pulliam has a great article in the WSJ which sheds light on Li Lu, speculating that he might be a CIO candidate. Pulliam managed to interview Charlie Munger and get some of his thoughts on Li Lu:

One of Mr. Li’s human-rights contacts was Jane Olson, the wife of Ronald Olson, a Berkshire director and early partner at a Los Angeles law firm Mr. Munger helped found. Mr. Li began spending time at the Olsons’ weekend home in Santa Barbara, Calif., and on Thanksgiving 2003 met Mr. Munger, whose home is nearby.

Mr. Munger says Mr. Li made an immediate impression. The two shared a “suspicion of reported earnings of finance companies,” Mr. Munger says. “We don’t like the bull—.”

Mr. Munger gave Mr. Li some of his family’s nest egg to invest to open a “value” fund betting on beaten-down stocks.

Two weeks later, Mr. Li says he met again with Mr. Munger to make certain he had heard right. In early 2004, Mr. Li opened a fund, putting in $4 million of his own money and raising an additional $50 million from other investors. Mr. Munger’s family put in $50 million, followed by another $38 million. Part of Mr. Li’s agreement with Mr. Munger was that the fund would be closed to new investors.

Chinese Investor Emerges as Possible Buffett Successor (WSJ)

The company that got people talking about Li Lu, as a potential successor to Buffett is BYD. Most people thought it was strange that Buffett would be investing in an automaker, based out of China of all places. But, I think that one of the allures for early investors in BYD was the fact that it is known as one of the best manufacturers of batteries in the world. Wang Chuan-Fu, BYD’s founder and CEO had to work hard to build his company with limited access to capital and technology. As a result, he fostered a corporate culture that thrived on thriftiness and ingenuity. That’s the kind of corporate culture Berkshire likes to invest in. Pulliam gives us details on Li Lu’s timing on BYD:

Mr. Li’s big hit began in 2002 when he first invested in BYD, then a fledgling Chinese battery company. Its founder came from humble beginnings and started the company in 1995 with $300,000 of borrowed money.

Mr. Li made an initial investment in BYD soon after its initial public offering on the Hong Kong stock exchange. (BYD trades in the U.S. on the Pink Sheets and was recently quoted at $6.90 a share.)

When he opened the fund, he loaded up again on BYD shares, eventually investing a significant share of the $150 million fund with Mr. Munger in BYD, which already was growing quickly and had bought a bankrupt Chinese automaker. “He bought a little early and more later when the stock fell, which is his nature,” Mr. Munger says.

In 2008, Mr. Munger persuaded Mr. Sokol to investigate BYD for Berkshire as well. Mr. Sokol went to China and when he returned, he and Mr. Munger convinced Mr. Buffett to load up on BYD. In September, Berkshire invested $230 million in BYD for a 10% stake in the company.

BYD’s business has been on fire. It now has close to one-third of the global market for lithium-ion batteries, used in cell phones. Its bigger plans involve the electric and hybrid-vehicle business.

One of the interesting aspects of having Li as a CIO candidate is that because of his international focus, particularly on China, he might be able to find the next great wave of global businesses. In his 2010 lecture, Li talks about analyzing BYD by looking at the early history of GM:

Q: I read that when you look at an industry, you look at the most miserable failures of that industry to see whether you will invest in it. Can you talk a bit about that?

Li Lu: It goes back to understanding the business. Once you have that understanding you can extend it to understanding an industry. A certain industry might have characteristics that make it different than others. In certain industries you might have better prospects than others. Find the best of the players in the industry and the worst players. And see how they perform over time. And if the worst players perform reasonably well relative to the great players — that tells you something about the characteristics about the industry. That is not always the case but it is often the case. Certain industries are better than others.

So if you can understand a business inside out you can then eventually extend that to understanding an industry. If you can get that insight, it is enormously beneficial. If you can then concentrate that on a business with superior economics in an industry with superior economics with good management and you get them at the right price — the chances are that you can stay for a very long time.

Q: Did you have any specific example?

Li Lu: I have studied many over the years. As I have said, don’t copy other people’s insights because it doesn’t work. Automobiles are amazing. If you look at the early days it started with several players and concentrated with just a few players that became enormously profitable. Then they became miserable. You then see how the life cycle turns with new automakers in China and India. Everything has a reason. If you want a good idea — look at General Motors from the early days, look every 5 years and see how the performance metrics change. The Graham and Dodd Center should collect all the data and perform some kind of commentary on it…

If you have that data, the amount of insight that would yield would be astonishing. So instead of just accepting the conventional wisdom that the auto business is bad — that is just not true. Or if you say well those guys just unbelievable money machines — that is not true either. So if you can really examine those statistics and understand it that will give you an advantage for analyzing new situations like in China and India. That is really what turns me on. Understanding this gives you a tremendous leg up.

This to me, is one of the advantages in having a CIO candidate that is focused on international opportunities. As nations like China and India develop, they’re bound to naturally mimic the development of Western countries in certain ways. They might actually start to have great businesses that arise out of necessity, “repeating” what’s gone on in America. This is particularly true in areas such as logistics and transportation which become more and more essential as countries develop. In a few years there might be domestic versions of FedEx or Sysco in China and India — if there aren’t already.

Just how much did Li and Buffett make off of BYD?

BYD is a big roll of the dice for Mr. Li. He is an informal adviser to the company and owns about 2.5% of the company.

Mr. Li’s fund’s $40 million investment in BYD is now worth about $400 million. Berkshire’s $230 million investment in 2008 now is worth about $1.5 billion. Messrs. Buffett, Munger, Sokol, Li and Microsoft founder and Berkshire Director Bill Gates plan to visit China and BYD in September.

Pulliam ends the article with Li’s analogy between investing and soccer:

Mr. Li declined to name his fund’s other holdings. Despite this year’s losses, the $600 million fund is up 338% since its late 2004 launch, an annualized return of around 30%, compared to less than 1% for the S&P 500 index.

Mr. Li told investors he took a lesson from watching the World Cup, comparing his investment style to soccer. “You may very well work extremely hard and seldom score,” he says. “But occasionally—very occasionally—you get one or two great chances and you make decisive strikes that really matter.”

Li’s approach to investing is really similar to Buffett’s own advice to wait for the market to give you fat pitches. I think most investors mess up by lacking that kind of patience.

In environments where there aren’t a whole lot of bargains, some value investors will begin to relax their standards in order to participate more in the market’s rallies. This almost always ends in disaster. If you are not disciplined with value investing you can get yourself into tight spots. It’s a strategy that often encourages taking high conviction, concentrated approaches to investing. An investor without discipline might end up with a portfolio of only 8 stocks at really expensive valuations. When the bubble bursts, their portfolio will take a massive hit and usually perform worse than the market indices because of that level concentration.

In his 2010 lecture, Li emphasized the need to know what you don’t know when investing. That might sound a bit like a riddle, but it’s really about acknowledging that you can’t know everything and there are going to be risks that you cannot anticipate. If you accept that idea, you’re always going to be looking for businesses with strong competitive advantages and seek to buy at a discount to intrinsic value. That way you have some protection against those unknown risks. With that intellectual framework and a willingness to employ rigorous analysis, you should be able to identify good investments and profit immensely.

About Me

My name is Tariq Ali, I run Street Capitalist. I recently graduated from the University of Texas at Austin. There, I stumbled onto value investing via the school library. I read everything I could and now I'm here, writing out my thoughts and investment ideas.

I have a lot of heroes when it comes to investing, it seems like every investor has some kind of niche. Some, whose books and writings have had the biggest impact on me are: Warren Buffett, Benjamin Graham, Joel Greenblatt, Seth Klarman, and George Soros.

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