How Warren Buffett turned $230 million into $8 billion with BYD

When Berkshire Hathaway Inc. started trimming its stake in BYD Co., theories swirled about the prospects for China's largest electric-vehicle maker. Turns out, it's less about the company and more about Warren Buffett being Warren Buffett.

Berkshire has begun shedding BYD stock, dragging down the firm's shares as traders feared an exit by its most notable backer. For BYD, with profit that just tripled and a nearly 30% share in China's expanding electric-car manufacturing market, the stock sales struck some as puzzling.

But the share sales probably don't reflect concerns about BYD's fundamental business, and rather underscore the billionaire investor's relentless focus on intrinsic value, according to analysts. Buffett, Berkshire's chairman and chief executive officer, has made billions of dollars from the holding since he invested around $230 million in 2008. The stake is now worth north of $8 billion.

"Berkshire has benefited greatly from what BYD's done -- they've made wonderful money," said Cole Smead, president of investment firm Smead Capital Management. "He's watched it grow and now based on the price the open market is giving right now, he's saying: I'm willing to take money off the table to go elsewhere."

Berkshire didn't immediately respond to requests for comment.

BYD shares plunged 7.9% in Hong Kong on Wednesday, the most in seven weeks and the worst performance on the benchmark Hang Seng Index. The selling followed Berkshire's filing to the exchange late Tuesday saying its holding of BYD's Hong Kong-listed shares had fallen to 19.92% from 20.04% on August 24.

Buffett is a disciple of the value strategy, which focuses on long-term intrinsic value with a goal of buying shares in good firms at reasonable prices. That way investors avoid fast-growing firms with expensive stocks and the fickle gyrations of the market. Berkshire has held stakes in Coca-Cola Co. and American Express Co. for decades.

It's a strategy that's served him well, with Berkshire shares outpacing the S&P 500 Index since 1965, when Buffett took over the company.

In recent years, though, analysts note there's been more of a "trading component" to Berkshire's equity portfolio, which Buffett's investing deputies Todd Combs and Ted Weschler help run. Berkshire has held certain stocks for shorter periods, according to Meyer Shields, an analyst with Keefe Bruyette & Woods Inc.

"There's an increased willingness to adjust things down when they're less attractive," Shields said. "Their sense is, if this is now above intrinsic value as we assess it, it may be good to sell the stock. Given where the BYD price is, that has to be the conclusion they're drawing."

Buffett has certainly ridden the BYD wave. Shares in the company gained 31% last year and surged 423% in 2020, as it benefited from China's shift from gasoline and diesel-powered cars to electric vehicles. BYD also produces semiconductors and is now the world's third-largest producer of batteries for EVs, with 14% of the market.

Theories about Buffett's plans for the electric-car maker have percolated since a 20.49% stake - identical to the size of Berkshire's last reported BYD position in Hong Kong as of the end of June - entered the Central Clearing and Settlement System in July, a sign to investors a sale may be imminent. That triggered the biggest slump in BYD stock in nearly two years.

The appearance of that stake in the clearinghouse likely means Buffett eventually intends to exit, according to Smead.

After trimming its stake further, Berkshire has now jettisoned 3.05 million BYD shares, or 1.4% of Buffett's known 225-million-share holding. Its interest in BYD's Hong Kong-listed stock has now fallen to 18.87% from 19.02%, with the latest securities sold for an average of HK$262.72 apiece. It'll likely continue to sell chunks this way, Smead said.

"If your ultimate goal is to exit the investment altogether, it doesn't look good in the eyes of the Chinese regulators for Buffett to come in and sell aggressively and disrupt the market," he said. "If they want to do future investments with China, they are better off selling this way."

Berkshire started investing in BYD after Buffett's long-term business partner Charlie Munger - who bought the stock with Himalaya Capital's Chairman Li Lu - recommended the investment. Li, once a contender to manage Berkshire's investments and a BYD shareholder for more than a decade, cut his stake to about 5% last year, representing a 28% reduction.

Munger has been bullish on China, even amid worsening relations between Beijing and Washington. At Berkshire's annual meeting this year, Munger said he invested in the country because he was "willing to take a little bit of risk to get into the better companies at the lower prices."

Berkshire invests in BYD stock through its energy business, which also fully owns utility companies throughout the US. Energy is a "core pillar" of Berkshire's operations, according to Bloomberg Intelligence analyst Matthew Palazola. Berkshire last month won approval from US regulators to buy as much as 50% of Occidental Petroleum Corp., after spending months snapping up its shares.

Whatever the fate of Berkshire's BYD stake, Palazola estimates it represents about 2% of Berkshire's investment portfolio.

"For moving the needle on the financials of Berkshire, it's minuscule," he said.