Berkshire Short List Announced?

I was reading a Li Lu talk over at the always excellent Street Capitalist, and immediately something jumped out at me. The talk itself, is, predictably, full of lots of insight into intelligent investing from Lu, one of the best investors in the world. I encourage you to read it. That’s not what caught my eye, though.

Professor Bruce Greenwald, (a famous value investor in his own right*) introduced Mr. Lu to the class. In his introduction, Greenwald stated that,

“Warren Buffett says that when he retires, there are three people he would like to manage his money. First is Seth Klarman of the Baupost Group, who you will hear from later in the course. Next is Greg Alexander. Third is Li Lu. He happens to manage all of Charlie Munger’s money. I have a small investment with him and in four years it is up 400%.”

*Greenwald is a professor of finance and teaching in the value investing program at Columbia University. He’s also author of the excellent book, Value Investing, From Graham to Buffett and Beyond.

Of course Greenwald doesn’t say that these are the people in the running to be the next Chief Investment Officer at Berkshire Hathaway. He doesn’t know. Only a few people know those names. I have no indication that Greenwald would be one of them. This is good information, though.

Buffett says that these are the people he would trust to manage “his” money. Most of Buffett’s money is in Berkshire Hathaway. It may have just been a compliment for the sake of the compliment, I don’t know. I prefer to believe that we’re being given a series of elaborate clues;)

What We Know About the Candidates

Seth Klarman is one of the best investors in the world. He’s extremely conservative, keeping large cash positions. He’s generally pessimistic, and because he keeps large cash reserves, he’s ready to pounce when there’s blood on the streets, so to speak. He’s also a writer, having written the now out of print Margin of Safety, which now sells for crazy prices on eBay and has become something of a collector’s item among investors.** I’ve written about Klarman, often, on this site. I’ve followed him into a couple of trades and I’ve kicked myself a couple of times when I haven’t followed him. He’s the gold standard of hedge fund managers right now. He’s the perfect candidate to invest money at Berkshire. My only question would be whether he would want the job. He could stay at Baupost, stay a little smaller, and earn better returns. There are more people out there who can do a good job of managing $1 billion than $100 billion. He’s already a huge name, with loyal investors. I’m not sure he would have anything to gain by going to Berkshire.***

**The title of that article is the $700 used book. You can’t even find it for that anymore. An updated article would likely be called, the $1200 used book.

***Buffett has expressed in his shareholder letters that all the candidates are relatively young, independently wealthy, and want to come to Berkshire for reasons that have nothing to do with money.

We’ve written about Li Lu here before as well. He manages the personal wealth of Charlie Munger, Buffet’s 1A in command. At the meeting, when asked about the use of leverage to boost returns, Charlie boasted that one of the candidates used no leverage and made returns of about 200% last year. Buffett quipped, “that certainly narrows it down.” Speculation has led many to believe that the only person they could have been talking about was Li Lu. Li Lu, like Klarman, is a focused investor, preferring to invest in a few position that he knows very well, rather than many positions that he only knows a little about. Both are bottom-up investors. Both are well known. Lu has had an interesting life and is extraordinarily self-made. He was famously a leader among the protesters at Tiananmen Square and has lived a very interesting life.**** He’s the kind of guy I would bet on. It has also been widely reported that Lu was an early investor at BYD and brought Munger and Buffett on board, eventually leading to Berkshire’s investment in the company.

****Read this article for more about Lu’s rags to riches story.

I don’t know anything about Greg Alexander, except that he works for Ruanne, Cunniff and the Sequoia fund. When Buffett shuttered his original partnerships – this is where he suggested that investors put their money. Bill Ruane was till alive then, though, and was widely considered to be leading the charge over there. Alexander has been with the firm since 1985. If Buffett is that impressed with him, I assume he’s a rare talent. This is from a 1996 letter to shareholders, written by Bill Ruane:

“Twelve years ago, Greg Alexander joined us out of Yale where, despite his economics degree, it appears that he spent most of his time reading annual reports. He is highly creative and still spends at least eight hours a day consuming annual reports. I don’t know anyone who processes more ideas with greater analytical depth and he is excellent at cutting through to the heart of an issue. He is a master of chewing through immense detail to reach original insights and judgments about our portfolio companies.”

Anyway, I just found this interesting. Take it for what it is, speculation. I’ll keep an eye out for more info on Alexander. Thanks for reading.