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What does Buffett’s Choice of Todd Combs Mean for Li Lu?

The surprising announcement yesterday that Todd Combs of Castle Point Management will manage a part of Berkshire Hathaway’s (BRK-B) investment portfolio brings up the obvious question of what it means for Li Lu. For more background on Combs, take a look at these two excellent GuruFocus articles:

Berkshire Hathaway Hires Todd Combs As Investment Manager

Berkshire Hathaway New Manager Todd Combs’ Top Purchases: BR, CIT, CLDT, FFBCW, HIG, LUK

While it’s widely assumed that David Sokol is the leading candidate to take over the operational side of Berkshire Hathaway, the investment side has always been a bit murkier. There has been speculation for years about some of the leading candidates. Fueling that speculation, Bruce Greenwald introduced Li Lu earlier this year by saying, “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 of the Sequoia Fund. Third is Li Lu. He happens to manage all of Charlie Munger’s money.” Hat tip to Tariq Ali of Street Capitalist for this recording. You can read a transcript of Lu’s April talk at Colombia here.

A little background on Li Lu for those who aren’t familiar with him: He is a Chinese born investor and founder and chairman of Himalaya Capital Management. Some years ago he met Charlie Munger and started managing his money. He introduced the Chinese battery making, and now auto company, BYD to Buffett and Munger. That investment alone has returned multiples for Berkshire.

Does the Combs selection mean that someone like Lu is now out of the running? I don’t think so. Buffett has said that he expects to bring in more than one portfolio manager and envisions them acting as a team. Of course, there always has to be a team leader. For now, obviously that would be Buffett, but the fact that Combs was the first one to be brought in suggests that Buffett wants to ensure Combs is steeped in the Berkshire culture and possibly groomed to be that team leader when Buffett is no longer able to fulfill his current role.

It would certainly be a surprise if Lu is not one of the team members in the future. Charlie Munger has even gone so far to say that it’s a “foregone conclusion” that Lu will join Berkshire at some point. Two things stand out to me with Combs and Lu. Combs is only 39 and Lu 44, both very young considering the ages of Buffett and Munger.

Why Combs over Lu right now, though? I think you have to look at the retirement of Lou Simpson, the investment manager at GEICO. Carol Loomis points out that one of Combs’ earlier jobs was at Progressive insurance setting rates. I don’t think that’s a coincidence. It seems to me that Buffett wants someone who understands the insurance industry, and it’s logical that a portion of the Berkshire portfolio to be managed by Combs will be the GEICO portfolio that Simpson used to do.

The selection of Combs right doesn’t mean that Lu won’t join Berkshire at some point in the future, but I think it does say something about the pecking order of a future Berkshire investment team. It will be interesting to see what Buffett says about the Combs selection in the coming weeks.

UPDATE: The wall Street Journal is reporting this morning that Lu was offered the job, but turned it down.

Disclosure: Long BRK-B

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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