Friday, June 26, 2009

The Man Who Paid $2.11 Million to Have Lunch with Warren Buffett

Zhao Danyang, president and founder of the Hong-Kong based investment management firm, Purheart Asset Management, bid $2.11 million last year to have lunch with billionaire investor Warren Buffett.

They had that lunch on Wednesday in New York City at the restaurant Smith and Wollensky's. I sat down with Danyang on Thursday to find out why someone would bid $2.11 million to have lunch with Buffett, and to find out what they talked about.

The first thing I noticed about Danyang was his genuine entusiasim for the investment methodology that Buffett uses. Before our meeting I suspected that the bid was a way for Danyang to gain attention for his fund, and while that might be one of the goals, Danyang is clearly a big fan of Buffett's. He attributes his long-term success to applying Buffett's methodology on stocks in China.

In 2003, Pure Heart China Growth Investment Fund showed a return of 46.51% (versus 29.7% for the Hang Seng Index). In 2004, a return of 23.86% (versus 13.5% for the Hang Seng Index). In 2005, a return of 31.64% (versus 4.5% for the Hang Seng ndex). In 2006, a return of 141.75% (versus 34.2% for the Hang Seng index). In 2007 a return of 10.70% (versus 37.02% for the Hang Seng Index) .

Not only does it appear that Danyang has captured Buffett's investment style, but also Buffett's openness about his investments. Danyang seemed to be willing to spend as much time talking about his losses as he did his gains. In 2007, Danyang saw the froth in the market and put much of his fund into cash, late in the year. This resulted in his showing a loss of only 18% in 2008, while the Hang Seng Index dropped by more than 70%. But, of that 18% loss, Danyang actually lost 10% by poor timing in trying to profit by selling stocks short. Danyang says he has learned his lesson and will no longer short stocks.

As for his lunch with Buffett, he says Buffett brought up BYD Co., China’s biggest maker of rechargeable batteries. Buffett through a subsidiary owns 9% of the company. Buffett also brought up PetroChina, a company Buffett once owned a stake in.

He said Buffett now considers oil stocks and other natural resource stocks too volatile, and that Buffett now prefers companies that have steady to increasing pricing like Coca-Cola.

Buffett is clearly very bullish on China. Danyang brought his five year old son along to the lunch with Buffett. At one point Buffett recited his long standing point that he was born at the right time and in the right place, then he pointed to Danyang's son and said he is likely to also have been born at the right time and in right place.

When I asked Danyang if there were many money managers in China that applied Buffett's approach, he said there were a few. He then smiled and said that he was the best.

Danyang gave Buffett a stock tip, Wumart Stores Inc. It is Beijing’s largest supermarket chain and it is the largest position held in Danyang's funds. Danyang told me that he thought Wumart could become the Walmart of China.

He also told me that he likes the stock of Tsingtao Brewery, makers of the internationally popular Tsingtao Beer.

When asked if he thought Hong Kong or Shanghai would become the premier money center in China, he said that China was big enough to support both as top money centers.

Danyang told me he has launched a new fund that is available to American investors through Citibank. He told me that most of his investors have been Chinese, who live throughout the world, everywhere from the United States to Switzerland. He roughly has about $130 million under management.
UPDATE: The name of the new fund is Pure Heart Natural Selection Fund (Non-US feeder fund). For US investors, they can subscribe to Pure Heart Natural Selection US Fund (US feeder fund).

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