"The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly." -- Warren Buffett
Superinvestor Warren Buffett is rightly labeled a financial genius for his ability to spot undervalued companies where no one expects. Buffett's fluency with numbers is astounding, but he hasn't thrashed the market for an average 20% gain for over 40 years with financial wizardry alone. He's also relied heavily on trust, which has limited his downside and helped him avoid the "permanent loss of capital" that he so highly dreads.
As I've argued before, being able to trust the management of your companies is absolutely central if you're looking to earn Buffett-size returns in global investing.
Often we think of managers only as a secondary concern when investing our hard-earned cash, instead relying solely on the numbers to tell a company's tale. But ultimately, you have to rely on dependable managers to protect your stake and grow it well into the future. For Buffett, trustworthy management is a fundamental cornerstone in an investment. That was especially true when the Oracle of Omaha purchased shares of a Chinese company with which he was not particularly familiar.
The decision to invest in BYD, a Chinese maker of batteries, mobile phones, and electric cars, was prompted by Charlie Munger, longtime vice chairman at the Buffett-run Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) . For Munger, the investment was as much in BYD as it was in its founder, Wang Chuan-Fu. "This guy is a combination of Thomas Edison and Jack Welch -- something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it," Munger enthused to Fortune. Founded in just 1995, BYD already supplies its batteries to the rigorously produced Apple iPod. Management matters. Tremendously.
After such effusive praise, Buffett sent David Sokol, the chairman of Berkshire subsidiary Mid-American Energy, to investigate BYD and its founder and chief further. Sokol was as impressed as Munger. Buffett confided, "I don't know a thing about cellphones or batteries. And I don't know how cars work. [But] Charlie Munger and Dave Sokol are smart guys, and they do understand it." Shortly thereafter, Buffett was writing a check for $230 million for a 10% share of the company.
For an investor who has shunned "sure-fire" tech companies, investing in a Chinese company that he doesn't fully understand is something of a coup. Buffett has tended to stick close to consumer franchises, such as top holdings Procter & Gamble (NYSE: PG ) and Coca-Cola (NYSE: KO ) , which have defensible brands and don't rely heavily on technology. Because of these qualities, Coke and P&G offer more secure future cash flows. Nevertheless, the Berkshire trio thinks BYD has the opportunity to become the world's largest automaker by selling electric cars, and to become a leader in solar panels. Their investment is a testament to their trust in Wang's character.
Sokol and Munger discovered a tireless manager working five or six days a week until 11 or 12 at night. Wang is uninterested in being wealthy, and lives a modest lifestyle. That's surprising, given that his company managed to grow revenue by 44% per year over the last five years, to more than $5 billion. In 2008, he earned just $265,000, a trifle compared to what an American CEO earns at a comparably sized company. Wang even transformed his personal luxuries into practical benefits for BYD. He owns a Mercedes and a Lexus, whose engines he disassembles to discover how they operate.
Such frugality has been transferred to the company as a whole, and Buffett has long coveted parsimonious managers, whether they be at Wal-Mart (NYSE: WMT ) , with its ruthlessly efficient supply chain, or the Nebraska Furniture Mart, run by the legendary cost-slasher Mrs. B. Executives at BYD had long flown coach exclusively, until recently. When they attended the Detroit Motor Show, they rented a house in order to avoid the cost of a hotel. It's impossible to imagine Ford and GM so rabidly focused on costs.
When Wang finally met Buffett, the Oracle was concerned about how BYD, which was dependent on technology for its competitive advantage, would maintain its lead. Wang replied: "We'll never, never rest."
Getting to know managers -- how they operate the business, whether they're honest, and how they're likely to treat you -- is central to understanding whether they're going to maximize your returns. So it's important to read what they have to say in interviews, conference calls, and financial releases and observe how their companies are run. And that's doubly true when investing overseas. Buffett understands the value of meeting management and discovering whether they operate in the interests of shareholders, and it's an approach taken by the advisory team at Motley Fool Global Gains.
It's a matter of trust
Led by co-advisors Tim Hanson and Nathan Parmelee, the team at Motley Fool Global Gains travels the world looking for trustworthy managers to provide you with the next market-crushing stocks. That approach has led them to recommend such home runs as China Marine Food (NYSE: CMFO ) and China Green Agriculture (NYSE: CGA ) , which are up 150% and 500%, respectively, since they were first recommended.
China Marine offers tasty seafood snacks in mainland China and has grown earnings at an average annual clip of 27% over the last three years. China Green produces organic fertilizers -- a quickly expanding segment -- and has grown earnings at 46% annually over the last two years.
After they toured production facilities in China, Nathan characterized China Green's CEO as a "straight shooter" and noted the clear-cut approach from China Marine's managers. The team meets with managers of prospective investments to determine how they're likely to treat outside investors such as us, so that we can invest with confidence in the true gems of what the Oracle has proclaimed, "China's century." Of course, the team doesn't look just at China; they have traveled to meet with managers in Brazil, Mexico, India, Chile, and Argentina to find the world's greatest investments.
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Jim Royal, Ph.D., owns shares of Berkshire, Microsoft and Procter & Gamble. China Green Agriculture and China Marine Food are Global Gains picks. Berkshire Hathaway, Microsoft, and Wal-Mart are Inside Value recommendations. Apple, Berkshire Hathaway, and Ford Motor are Stock Advisor selections. Coke and P&G are Income Investor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Berkshire Hathaway and China Green Agriculture. The Fool has a disclosure policy.