Warren Watch: Listener learned well

Those hundreds of hours of discussions with thousands of college students may pay off for Warren Buffett in a big way.

The most direct dividend may be a 44-year-old Californian who is a possible candidate to make investment decisions for Berkshire Hathaway Inc. after Chairman and CEO Buffett.

Li Lu was in the audience in 1993 when Buffett talked to about 80 Columbia University graduate students in New York for a class on value investing taught by Bruce Greenwald. Buffett answered questions for more than two hours, explaining his investment methods and ways of thinking about money.

Buffett still speaks regularly to business students, saying he believes his ideas can influence how they think about the business world, among other benefits.

About 15 years later, there’s Lu himself, in a video posted by DailyMarkets.com, as guest speaker in Greenwald’s class. The professor, introducing Lu, praised his mastery of the rigors of value investing: learning about companies and industries; calculating their value; and making good decisions.

“Nobody, I think, over the last eight to nine years has done that significantly more successfully than our speaker tonight,” Greenwald said.

Lu told the students he was “accidentally” brought to the class session with Buffett that evening in 1993 and wasn’t even enrolled in Columbia’s business school at the time.

“I was pretty desperate, you know, recently escaped from China,” said Lu, who had been a student leader in the 1989 Tiananmen Square protests in Beijing. “I didn’t know anybody. I had very little connection whatsoever. I didn’t have any money. In fact, I was deep in debt.

“And I was horribly worried about, ‘How do I ever make a living in this country?’ And I really didn’t grow up with the capitalist culture, either.”

As the class got under way, he said, “the speaker has a funny name that reminds me of some kind of buffet lunches. Anyway, in the middle of the speech, listening to Warren, a light bulb kind of just went off. And I figured that I could do something in this business.”

Hearing Buffett in the class, he said, “really changed me fundamentally.”

Over the next hour and 45 minutes, Lu explained his investment ideas, which he said are modeled after Buffett and Berkshire Vice Chairman Charlie Munger.

Comparing the video and a World-Herald account of the 1993 class, Lu and Buffett seem to be reading from the same page.

Buffett: “Over time I evolved more into trying to find the wonderful business. And if you find one, the best thing to do probably is not to sell it. It will go on and on usually, even if it looks a little overpriced.”

Lu: “That’s the good thing about really buying a good business. The business takes care of itself. You’re riding up and down with the strength of the business.”

Lu told the students that only about 5 percent of people are cut out to be value investors, with “insatiable curiosity” about almost any subject and the drive and ability to build up encyclopedic knowledge and to leap into the right investments.

“You have to be very, very comfortable being very much by yourself,” he said, since nearly everybody else follows different investing ideas. “It probably means that you’re somehow genetically mutated through the process of evolution. ... You have to know you’re right because your evidence shows it’s right.”

Once in a great while, he said, all that research turns up an outstanding investment idea that everyone else misses.

“When the thing happens, you have to just devote day and night into it,” Lu said. “You have to do everything complete. You have to do it fast. And that’s why you have to train yourself all those times. ... When the opportunity comes, you have to jump on it.”

Lu earned three degrees from Columbia and operated the Himalaya Capital Partners hedge fund on Wall Street before moving to the same office building as Munger in Pasadena, where he runs an investment fund.

It was Lu, some say, who introduced Munger to BYD Inc., the Chinese battery and auto manufacturer. Munger, in turn, persuaded Buffett to invest Berkshire money in BYD, and Munger has mentioned Lu favorably in recent months.

There’s no public word yet from Berkshire on who might be candidates for future investment decision-making. Buffett has said the Berkshire board knows his preferences, should the need arise.

‘Buffett worship’

Buffett’s testimony before the Financial Crisis Inquiry Commission last week, which drew some criticism from commentators, was not voluntary. He turned down an invitation and appeared only because the committee issued a subpoena.

He told Fox Business News he had requests from eight government panels to attend hearings in the past year or so, possibly in part because those holding the hearings wanted to get media attention by having the internationally known investor testify.

Instead, Buffett said he offered to answer all questions by phone from Omaha, which he did with a commission on American International Group last week.

“If I went to one without a subpoena, I’d have a hard time explaining to the other eight why I don’t show up in Washington, and I have a job at Berkshire in Omaha,” he said.

The hearing topic was the rating agencies — Moody’s, Standard & Poor’s and Fitch — that judge the quality of various investments. The agencies missed the collapse of the housing market, giving high ratings to bonds backed by home mortgages that soured.

Investment groups bought the bonds partly because of the high ratings, and when the housing market collapsed the bonds became worthless and helped trigger the financial collapse and cause the resulting recession.

Afterward, Felix Salmon of Reuters called Buffett’s testimony a “PR disaster” and “arguably the single worst day of Buffett’s life.”

Ryan Chittum wrote in the Columbia Journalism Review: “And so the spectacle of the hero of American capitalism defending the indefensible is beyond disappointing. Add Buffett to the long list of fallen institutions you can’t trust anymore. It’s yet another reason for the press to back away from its Buffett worship.”

The criticism centered on Buffett’s unwillingness to blame the rating agencies for the financial crisis, saying that while they gave high ratings to mortgage-backed securities, almost everyone missed the impending housing industry collapse and the financial crisis and recession that followed.

Although Berkshire is the largest shareholder of Moody’s, Buffett didn’t have much to add about how Moody’s works, especially since Moody’s CEO Raymond McDaniel appeared beside him and answered questions.

Buffett said he met McDaniel once three or four years ago but wouldn’t recognize him and had never been to Moody’s offices. Even for a big investor, that’s not unusual, since many, including Berkshire, keep a hands-off approach with the corporations whose stock they own so that they don’t become insiders, subject to stock trading restrictions and other securities rules.

Buffett has cut Berkshire’s Moody’s holdings from 48 million shares to about 30 million in the past year. He said he sold the shares because he thought Moody’s franchise is not as well-protected as it once was. It must have been an awkward experience, sitting next to a guy while selling off shares of his company’s stock.

Once he was summoned to New York, Buffett made the best of it, appearing on the “Today” show with son Peter to talk about Peter’s new book and making appearances on Fox, CNBC and Bloomberg Television.

Expensive lunch

Buffett will have lunch with you and your guests in New York City if you’re the winning bidder in an auction that will benefit the Glide Foundation, a San Francisco charity that provides social services for the homeless and others.

But beware: Last year’s winning bid was $1,680,300, submitted by Salida Capital of Toronto and its three main partners, Courtenay Wolfe, Danny Guy and Brad White.

Bidding starts today and ends at 9:30 p.m. CDT Friday. To bid, you must pre-qualify. See the eBay site on the Warren Watch page of Omaha.com’s Money section.

Contact the writer:

444-1080, steve.jordon@owh.com

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