He is the second richest man in the world. Legendary investor. Investment guru. A name spoken with reverence by everyone who has even thought of investing. We are talking about none other than the Oracle of Omaha, Mr. Warren Buffett.
But this time, we are not going to talk of his many success stories. We will instead refer to an investment that may be on its way to doom. The investment we would talk about is his US$ 232 m investment in China based BYD Co. Ltd. The company Buffett had invested in during the peak of the financial crisis in the company. BYD is the short for 'Build Your Dreams'. The company specializes in handset batteries and electric cars. It is the world leader in nickel batteries, handset batteries, cell-phone chargers and keypads. It wasn't surprising that BYD's share value soared after the legendary investor's investment.
However, Buffett's famous statement "When a good management takes over a bad company, then it is the reputation of the company that remains intact" seems to be playing out in this case. BYD has been suspected of openly copying competitors and putting other companies' logos on its own vehicles, just to increase its own market share. Worse, it has also been suspected of dubiously selling cars with a higher safety standard marking than what was actually present.
Fortunately for the company, Chinese laws are not very strict in terms of infringement. This is a sad truth that all global auto players have come to realize. But what is surprising is that Buffett who has always valued the quality of management would invest in such a business. Chinese auto companies do have a bad reputation for copying the designs of even their own auto partners. It is not exactly a secret.
While the guru still maintains that it was the high-tech technology of the company that had attracted him into investing in the same. However, the fact still remains that the company has been accused of copying designs. And unfortunately, the global courts would not be as easy as the Chinese courts. If the company were to go into a legal battle, then the value of the investment would erode.
Maybe it would be good to go back to the basics at this time. It is important to look at a margin of safety in terms of pricing power. It is also important to look at the fundamental strength of an investment. But all the efforts would be wasted if the management were to be dubious. Hopefully this is just one rare mistake of Buffett. After all, even the best is allowed to go wrong once in a while.