Keep an eye on Lu, who may help fill Buffett's post one day

July 4, 2010 12:36 am

LI LU is a name many people may not know. But that could change.

Lu appears to be a strong candidate to someday take over Warren Buffett's position as Berkshire Hathaway's chief investment officer. For value investors, that's the pinnacle of the profession.

Buffett, 79, is in good health and doesn't plan to retire. So it may be more than a decade before anyone takes his seat as Berkshire's chief investor. He favors giving the position to a relatively young person who can hold the job for many years, so the replacement candidate could change depending on how long Buffett keeps the job.

Once Buffett does leave the company he built, the plan is to split his job into two--a CEO in charge of operations and at least one chief investment officer.

Most Buffett-watchers believe that David Sokol, who oversees Berkshire's growing energy-related portfolio, will take over as the company's CEO. Buffett has said that the company has three candidates for the investing position, and it's possible that more than one or even all three would be hired.

Lu appears to be one of the three candidates, and perhaps the leading one. He is a Chinese-American investor who runs the value-based Himalaya Capital Management. Born in China in 1966, he was one of the student leaders of the 1989 Tiananmen Square protests before leaving for the U.S. in 1990. He enrolled in Columbia University, where within six years he had earned an undergraduate degree in economics and graduate degrees in law and business.

At Columbia, Lu studied the career of Buffett, who attended business school at the New York institution. It was reportedly Lu who brought the Chinese battery and electric-car manufacturer BYD Co. to the attention of Charlie Munger, Buffett's partner and Berkshire's vice chairman. Berkshire later bought a 10 percent, $230 million stake in the company. The investment's value has since soared tenfold.

Lu manages Munger's money, and his Himalaya fund is inside the same Pasadena, Calif., building where Wesco Financial Corp. is headquartered. Munger is chairman of Wesco, which is 80 percent owned by Berkshire. Lu wrote the introduction to the Chinese translation of "Poor Charlie's Almanack," a compilation of Munger's speeches and a history of his career.

This past April, Lu spoke at a Columbia investing class taught by Bruce Greenwald. The professor reportedly said at the class that Lu is one of three people whom Buffett would like to manage his money; the others were Seth Klarman of the Baupost Group and Greg Alexander of the Sequoia Fund.

Lu's remarks were straight out of the Buffett textbook (thanks to streetcapitalist .com for the transcript):

"A stock is not a piece of paper, it is a piece of ownership in a company."

"You need a margin of safety so if you are wrong you don't lose much."

"In the market, most people are in it for the short term. It allows you a framework for dealing with the day-to-day volatility."

"Finding an edge really only comes from a right frame of mind and years of continuous study. But when you find those insights along the road of study, you need to have the guts and courage to back up the truck and ignore the opinions of everyone else. To be a better investor you have to stand on your own."

"So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it."

Constantly read and study multiple disciplines. Before investing, figure out what could destroy a business. All you need to achieve great success is to find a few stellar businesses over a career and stick with them.

It remains to be seen whether Lu does in fact someday shift his talents to Berkshire. But even if he doesn't, his track record is sufficiently stellar to make him an investor worth following and studying.

Staff reporter Bill Freehling writes this weekly column on business, personal finance and investing. He can be reached at 540/374-5405 or
Email: bfreehling@freelancestar.com.