Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with management of the highest integrity and ability. Then you own those shares forever. I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.

August 21, 2011

Should Investors Follow Charlie Munger Into Byd Company?

The recent questionable trading of former Berkshire Hathaway (BRK.B) employee David Sokol brought forth the fact that Charlie Munger owned Byd Company (BYDDY.PK) long before Berkshire took a large stake in the company. Of course, owning a stock for years before Berkshire bought it is quite a bit different than owning a stock for a few weeks before pitching it to Berkshire as an acquisition target.
Byd Company is a Chinese battery, mobile phone and electric car company. It was started in 1995 by Wang Chuan-Fu, a chemist and Chinese government employee, with $300,000 he raised from relatives with the intention of manufacturing rechargeable batteries. By 2000, Byd was one of the largest manufacturers of cell phone batteries and in 2003 entered the electric car market by acquiring a Chinese state-owned car company. The electric car venture was also quickly a roaring success as Byd’s F3 sedan became the best-selling sedan in China in 2009.
Munger apparently was introduced to Byd by money manager Li Lu. Lu manages an investment fund that Munger is the largest shareholder in. According to this article from Reuters, Munger invested $50 million with Lu in 2004, and a great deal of that money was invested in Byd Company.
In 2008, Munger encouraged Sokol, then-manager of Berkshire subsidiary MidAmerican, to look into Byd as an investment opportunity for Berkshire/MidAmerican. Munger thought that if he could get Sokol convinced that Byd was a great opportunity, it would be more likely that Warren Buffett could also get interested. Long story short: Sokol was impressed -- and so was Buffett, as Berkshire bought 10% of the company.
And that investment has worked out pretty well for Berkshire. At December 31, 2010, Berkshire’s stake in Byd Company was worth $1.182 billion versus an original cost of $232 million. The current share price of the unsponsored ADR $6.98, however, is off significantly from its high of $22.24 reached in 2009, and from the December 31, 2010 price of $10.95.
So that starts to get a little interesting. Buffett thought enough of the long term prospects of Byd Company to not sell when the stock reached $22.24. And now we have an opportunity to buy at $6.98. But my issue is that I have no business investing in an electric car company. I don’t know anything about the technology that Byd uses and its superiority over competitors. What I need is a sign from someone much, much smarter than me.
Perhaps we have one from Munger, who -- as you are likely aware -- is a bit of a curmudgeon who is very hard to please. He carries this over into his investing style, as he invests seldom and only in what he believes are exceptional opportunities. When he ran his hedge fund back in the 1960s and early 1970s, he favored a very concentrated portfolio, and his conviction in concentrated investing has seemingly only strengthened over time. And not only is Munger concentrated, he is really good. So if something gets his attention and I get a shot to buy at the same price, I’m interested.
Consider how he has managed the finances of the Daily Journal Corporation (DJCO). At its 2008 year end, the Daily Journal had roughly $21 million in cash and US Treasuries. One year later, the Daily Journal had $8 million of cash and US Treasuries and $54 million in marketable securities. Where did the additional 40 or so million come from? It wasn’t operations; cash flow for the year was about $8 million. It was from Munger investing virtually all of the $21 million held at the 2008 year end in Wells Fargo (WFC) in early 2009.
The link to the 10K filing is here; check out note 2, which discloses a $15 million equity investment during the year which, by year end, was worth almost $48 million.
Since that investment in early 2009, Munger hadn’t bought a single share of anything for the Daily Journal. Until the most recent quarter, that is. According to the most recent quarterly filing, the Daily Journal purchased over $10 million of two “foreign manufacturing companies.”
Anyway, given how much Munger admires Byd, what are the odds that one of those companies isn’t Byd? And given that Munger hasn’t bought a single share of anything since early 2009, what are the odds that he is making a rash, not well-thought-out investment decision now ?
Byd Company’s share price is now considerably lower than the January to March 2011 period, where Munger was likely buying. How can one resist getting to piggyback on his investment and at a better price?

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