Charlie Munger Accurately Predicting The Success Of BYD

Key Concepts

• BYD Investment: Berkshire Hathaway's stake in BYD, its attractiveness as an investment, and Chairman Wang Chuanfu.
• Product Launch Delays: BYD's recent pattern of unexplained delays and their impact on confidence.
• Oil Market Sentiments: The current state of the oil market, potential for a bubble, and investment strategies (holding, shorting, exiting).
• Finite Resources: The concept of oil as a finite resource and its long-term price implications.
• US Oil Production: The number of producing oil wells in the United States and the role of "stripper wells."
• Concession Deals: How smaller countries are becoming smarter in granting oil concessions.
• Commodity Hedging: Berkshire Hathaway's policy on commodity hedging and its subsidiaries' practices.
• Dollar Devaluation: The expectation of the US dollar becoming less valuable over time and its impact on asset prices.
• Productive Assets vs. Speculation: The argument for investing in productive assets over speculating in commodities or fixed-dollar investments.
• Investment Edges: The difficulty of having an edge in commodity trading compared to investing in common stocks or distressed bonds.

BYD Investment and Operational Concerns

The discussion begins with a question regarding Berkshire Hathaway's (BH) investment in BYD, initiated in 2008. While both Warren Buffett and Charlie Munger expressed a positive view of BYD and its chairman, Wang Chuanfu, at the time of the stake acquisition, the question probes whether BYD remains as attractive now. Munger acknowledges that the current price is significantly higher than BH's acquisition price, making it "not quite as cheap." He attributes potential "delays and glitches" to BYD's aggressive growth strategy, which involves moving "as fast as BYD does and on as many fronts." Munger states he is "quite encouraged by what's going on" and expects such issues to persist. He specifically mentions BYD's past trouble in auto distribution, where they attempted to "double auto sales every year for six years," a strategy that succeeded for the first five years. Buffett adds that he has "nothing to add" to Munger's assessment.

Sentiments Regarding Oil and Investment Strategies

The conversation then shifts to a question from Katherine Borude, an investor primarily in commodities and commodity equities, who has a history of successful oil trading, including shorting oil in 2008 and buying it back in 2009. She expresses concern about the current state of the world and oil prices, questioning if it's another oil bubble, if oil has reached its peak, and whether she should maintain her holdings, short oil, or exit the market entirely.

Buffett acknowledges Borude's success, stating she has "done a whole lot better than we have." He mentions that BH "did take a position in oil" a long time ago, specifically when it was "$10 a barrel," clarifying that this was in the 1990s, though they have seen oil even cheaper, citing "East Texas oil sold for a dime a barrel in 1932."

The Nature of Oil as a Finite Resource

Buffett admits they "really don't know" the future direction of oil prices. He highlights that oil is a "finite resource" and notes that global daily consumption is currently "getting pretty close to 88 million barrels a day." He emphasizes that this is a significant amount to extract daily and, despite new frontiers being found, "you are you've suck a lot of straws into the world into the earth and there it is a finite number." Therefore, he "almost promise[s]" that oil will "settle for a lot more someday."

US Oil Production and Concession Deals

An interesting statistic is shared: there are "something like 500,000" producing oil wells in the United States, including "stripper wells" that have been operating for a century. Buffett also points out that smaller countries where oil is now being discovered are "quite a bit smarter about how they grant their concessions" compared to 50-100 years ago, leading to "much more intelligent deals."

Hedging Policies and Dollar Devaluation

Buffett explains that BNSF (Burlington Northern Santa Fe), a BH subsidiary, traditionally hedged a certain amount of oil due to its significant diesel consumption. However, he suggested to them that if they couldn't "guess the price of oil," they didn't need to run the railroad, implying that guessing commodity prices is not a core competency for running a business. He states that for Berkshire Hathaway's parent company, they "don't hedge anything in the way of commodities," although some subsidiaries do.

A strong conviction expressed by Buffett is that "the dollar will become less valuable over time." This implies that the "dollar price of most things will go up and maybe go up very substantially." However, he cautions that whether these nominal gains translate to the same purchasing power after taxes is a separate question.

Productive Assets vs. Commodity Speculation

Buffett advocates for focusing on "assets that productive assets rather than than than than uh uh speculating in commodities or or uh when for that matter fixed dollar investments," though he admits this is his "own bias."

Munger's Perspective on Commodity Trading

Charlie Munger strongly agrees with Buffett's sentiment, stating that if they had "done nothing but oil from the very beginning, I am confident that we would not have done nearly as well as we have." He finds the idea of having an "edge in that sort of activity" (trying to figure out when to be long or short oil, natural gas, copper, or cotton) to be highly improbable. Munger believes he knows people who have a "very significant edge in in investing in common stocks and maybe distressed bonds for that matter, too," but not in commodity trading. He humorously adds, "trading oil worked best of all for the people who bribed Nigeria. That's not our millia."

Conclusion

The discussion highlights that while BYD's growth strategy presents challenges like product launch delays, its long-term prospects remain encouraging for Berkshire Hathaway, despite the increased valuation. Regarding oil, the speakers express uncertainty about short-term price movements, emphasizing its finite nature and the likelihood of higher prices in the long run. They strongly advocate for investing in productive assets over speculative commodity trading, citing the difficulty of consistently predicting commodity price fluctuations and the superior potential for generating returns through equity and debt investments. The expectation of dollar devaluation further supports the idea that the nominal prices of real assets are likely to increase over time.