While it is true that Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) has limited exposure to renewable energy and green stocks, Buffett and his partner, Charlie Munger (Trades, Portfolio), were actually some of the first investors in electric vehicle technology.
Buffett and BYD
Thirteen years ago, Munger convinced Buffett to invest in a relatively unknown Chinese car company called BYD. Munger believed in the company's management, and he thought the business was incredibly well-positioned to capitalize on the changing automotive industry.
In an interview with Fortune Magazine in 2009, Munger described the entrepreneur behind BYD, Wang Chuan-Fu, as 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."
According to the article, on hearing this, Buffett asked another of his trusted lieutenants, David Sokol (who was later fired from Berkshire), to go and check out the firm's operations in China. Buffett, who said he didn't understand the car industry, trusted Munger and Sokol. This was enough to convince him. As the article noted:
"In acquiring a stake in BYD, Buffett broke a couple of his own rules. "I don't know a thing about cellphones or batteries," he admits. "And I don't know how cars work." But, he adds, " Charlie Munger (Trades, Portfolio) and Dave Sokol are smart guys, and they do understand it. And there's no question that what's been accomplished since 1995 at BYD is extraordinary."
Berkshire spent $232 million buying 10% of BYD. Buffett reportedly initially tried to buy 25%, but the founder wasn't going to allow that, a trait Buffett believed was a good sign.
The value of this investment has risen substantially over the past 12 years. According to the conglomerate's 2020 report, Berkshire's 8.2% stake in the automaker held a market value of $5.9 billion at the end of 2020. This made it the eighth the largest holding by market value at the end of last year.
What's interesting about this trade is the fact that Munger and Sokol saw the potential of the business before anyone else. This allowed Berkshire to build a substantial stake in the business without paying over the odds.
Today, the electric vehicle space is incredibly crowded and, some might argue, tremendously overvalued. BYD itself has been making the most of this increased investor enthusiasm.
At the beginning of 2021, the Chinese carmaker raised $3.9 billion from a stock sale. This was its largest equity financing since the company was listed in Hong Kong in 2002. In the space of a year, shares in the company have increased more than 400%.
Only time will tell if this kind of performance is sustainable. Some analysts have speculated that the ESG boom is driving equity valuations of companies with impressive ESG credentials to lofty levels. Some companies may never be able to grow into their valuations.
This is something Buffett does not have to worry about because he got in early. That's not really his style, but the investor has always been happy to back eager and devoted managers. Buffett does not have a reputation as a venture or early-stage growth investor, but he has always been willing to support managers he trusts, even paying a high price to do so.
Buffett has always been looking for long-term winners. That's why he backed BYD in 2008. He thought the company had tremendous potential at a low price. The trade has paid off, but it could have easily gone the other way.
Unfortunately, the stock, along with other names in the EV industry, may not have the same risk-reward profile today.
Disclosure: The author owns no share mentioned.
Read more here:
- Warren Buffett: The Benefits of Good Capital Intensive Businesses
- Buffett's Berkshire Increases Share Repurchases to $25 Billion
- What We Can Learn From Warren Buffett's Latest Multi-Billion Dollar Mistake
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