The Price Is Falling. Now What?

There is a familiar story about BYD.

In 2008, Berkshire Hathaway paid about US$230 million for roughly 10% of the Chinese battery and car maker, at HK$8 per share.¹ It became one of Berkshire's most successful investments outside the United States. But the Berkshire story came later.

Li Lu owned BYD first. He began investing in 2002 and spent years studying the business and its founder, Wang Chuanfu, before introducing the company to Munger.²

What followed is easy to admire in hindsight. It was much harder to live through.

BYD shares peaked at HK$85.50 in October 2009. By late August 2011 they had closed at HK$16.18, a decline of roughly 81%.³

Li Lu remained an owner.

He did not lose 81% on his investment. His entry was years earlier and far lower. But as a long-term owner, he watched most of BYD's quoted value disappear. And the share price was not the only thing going wrong. Vehicle sales weakened. Net profit fell 44% in 2011.⁴ In 2012 it fell a further 94%, to RMB81 million.⁵

That removes the easy explanation. This was not a nervous market overlooking a healthy business. The business itself was under pressure.

So what exactly had broken?

Li Lu's case never rested on one year of sales or earnings. It rested on the organisation. Its engineering culture. Its manufacturing discipline. Its battery expertise. A founder able to move into large new markets.

Those capabilities were under strain. The question was whether they had disappeared.

We know the answer now. Investors in 2011 did not.

In July 2021, Himalaya Capital sold about 10.8 million BYD H-shares for roughly HK$2.44 billion. It still held about 62.9 million shares afterwards.⁶ Nearly two decades had passed since the first purchase.

The interesting part is not that BYD eventually went up. It is what an owner was supposed to look at while the outcome was still unclear.

Amazon presents a different problem.

Today it is hard to separate Amazon from what it became. Prime, AWS, logistics and advertising are already part of the story. That makes it easy to forget what ownership felt like before the result was obvious.

Nick Sleep and Qais Zakaria ran the Nomad Investment Partnership from 2001 to 2014. By mid-2007, Amazon was roughly one sixth of Nomad's portfolio.⁷ It was already a substantial bet.

Then came 2008. Nomad fell 45.3%.⁸ Amazon fell with it.

Sleep did not answer with patience alone. He kept looking underneath the price.

He focused on what he called scale economies shared. As Amazon grew larger and more efficient, it returned part of those gains to customers through lower prices, better service and greater convenience. Done repeatedly, scale strengthened the customer proposition instead of simply widening margins.

That was what Sleep was watching.

On the busiest day of the 2008 Christmas run-up, Amazon's order volumes were still 16% higher than a year earlier. Industry-wide U.S. retail sales fell nearly 10% in December.⁹

The share price was deteriorating. The customer proposition was not.

A falling price tells an owner the market has changed its mind. It cannot tell him whether the business has changed with it.

Nomad held Amazon for close to a decade. The company first appears among the Partnership's investments in the December 2005 letter.¹⁰ The shares were finally sold in 2014, when Sleep and Zakaria wound up the Partnership and returned the money to their partners.

Even that sale was not a verdict on the business. Sleep later wrote that selling stakes built up over years felt wrong. They had a few superb businesses and no intention of selling them to fund something lesser.¹¹

Then there is Warren Buffett.

Coca-Cola. American Express. GEICO. The Washington Post. His record makes it easy to equate good investing with holding for a very long time.

Tesco shows why that is incomplete.

At the end of 2011, Berkshire owned about 292 million Tesco shares.¹² A year later, that had increased to about 415 million.¹³ Buffett had not merely waited. He had added.

Then his view began to change.

In 2013, Buffett became concerned about management and sold 114 million shares.

He could have sold more. He did not.

In 2014 the evidence became harder to ignore. Market share fell. Margins contracted. Accounting problems surfaced.

This was no longer a disappointing year. The competitive position was weakening. Management credibility was damaged. So was confidence in the reported numbers.

Berkshire exited with an after-tax loss of US$444 million. Buffett later wrote that an attentive investor would have sold earlier. He called his delay a big mistake.¹⁴

Tesco matters because it changes the lesson from the first two stories. Sometimes the difficult part is holding on. Sometimes it is recognising that the reason for holding has changed.

Ownership Requires Looking Again

Without Tesco, BYD and Amazon teach the wrong lesson. Hold on. Ignore the market. Be patient.

BYD had ugly earnings. Amazon had a falling share price. Tesco had both. The outcomes were different.

So the dividing line cannot be whether earnings fell or the price was down. It has to go deeper.

What is temporary damage? What is evidence that the thing you bought is disappearing?

That is much harder to answer. It is also closer to what ownership requires.

An owner does not simply wait. An owner keeps checking.

What was the original case? Which part of it mattered most? Has the competitive position strengthened or weakened? Has management behaved as expected? Is the capability that made the business attractive still there?

Those questions do not guarantee the right answer. They give patience something to rest on.

An investor in 2011 did not know BYD would recover. Buffett in 2013 did not yet know Tesco would not. The work was never to predict the ending. It was to decide which evidence still supported ownership.

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