The WSJ has a more full profile of Li Lu (subscription required), the Chinese-born hedge-fund manager 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 profile discusses Li Lu’s investment in BYD:
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. Mr. Li’s hedge funds have garnered an annualized compound return of 26.4% since 1998, compared to 2.25% for the Standard & Poor’s 500 stock index during the same period.
…
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.
The test for BYD, one of the largest Chinese car makers, will be whether it can deliver on plans to develop the most effective lithium battery on the market that could become an even bigger source of power in the future. Even more promising is the potential to use the lithium battery to store power from other energy sources like solar and wind.
Says Mr. Munger: “The big lithium battery is a game-changer.”
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.
As impressive as that investment is, the WSJ says that Lu’s record is unremarkable without the investment in BYD:
But hiring Mr. Li could be risky. His big bet on BYD is his only large-scale investing home run. Without the BYD profits, his performance as a hedge-fund manager is unremarkable.
It’s unclear whether he could rack up such profits if managing a large portfolio of Berkshire’s.
What’s more, his strategy of “backing up the truck,” to make large investments and not wavering when the markets turn down could backfire in a prolonged bear market. Despite a 200% return in 2009, he was down 13% at the end of June this year, nearly double the 6.6% drop in the S&P-500 during the period.
…
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.
Greenbackd 
I have listened to Lu’s lectures at Columbia and was impressed. The WSJ article suggests he could be a one-trick pony: “But hiring Mr. Li could be risky. His big bet on BYD is his only large-scale investing home run. Without the BYD profits, his performance as a hedge-fund manager is unremarkable.” I disagree.
What impressed me is the way he thinks. He has a very sound investment process, very much grounded in the principles of Buffett and Munger. It’s not just about the outcome – but about how much risk was taken to achieve it. Li only invests when there is a huge margin of safety and he does an incredible amount of homework before investing. He views himself as a kind of deep-research journalist.
Picking Lu would also be a bet on the person and his track record – which Buffett likes to do as extraordinary people are rare.
Lu is clearly a special guy having risen from poverty to earning three degrees at Columbia and starting a successful hedge fund. Along the way he emerged as a leader in an important human rights campaign within China. On top of that, he managed to impress Charlie Munger, who is not easily impressed.
“When I call Charlie with an idea,” according to Buffett, “and he says, ‘That is really a dumb idea,’ that means we should put 100% of our net worth into it. If he says, ‘That is the dumbest thing I’ve ever heard,’ then you should put 50% of your net worth into it. Only if he says, ‘I’m going to have you committed,’ does it mean he really doesn’t like the idea.”
It speaks volumes that after meeting Lu, Munger gave him a portion of his wealth to invest.
If you’re interested, I’ve got a link on my blog to an excellent article written by Lu about Munger which gives further insight to his thinking. http://gregspeicher.com/?p=346
LikeLike
Greg, I agree with you. The WSJ is taking the BYD investment out of context.
Street Capitalist has an article from back in May where Li Lu talks about his investment in Timberland. Timberland’s stock produced a return of 700% after 2 years, and when Li Lu was asked about sizing, he said that while most people would size the company at 50 basis points, he’d size the company at 22% of his portfolio. If you run the numbers, that’s a 24.7% year-over-year return on his entire portfolio from that one stock. If you can find a stock that is trading at 12.5% of its intrinsic value, you certainly should “back up the truck” on that investment. If you leave the remainder of your portfolio, 78%, in cash, I’d say you sleep a heck of a lot better than a fully invested manager even if their “risk” is spread over 25-30 holdings.
It’s very much like how Taleb used to run his investment company while waiting for black swans. Taleb would keep a vast majority of his portfolio in cash/Treasuries while slowly bleeding out on way out-of-the-money calls and puts. The difference here is merely that you apportion the “bleed out” up front, and you’ve got a little better visibility on pricing of your security — since derivatives are not exactly amenable to intrinsic value calculations.
LikeLike