As Smartphone Industry Sputters, the iPhone Expands Its Dominance; Buffett's success with Apple and my failure; No other investor has a life story quite as unbelievable as Li Lu; Treasury Bills Yielding 5% Are a Big Hit With Retail Investors; My daughter at Victoria Falls

1) In yesterday's e-mail, I shared the story of how one of the main reasons I was able to achieve so much success in the investment business (before ultimately screwing it up), despite not having "the requisite personal experience or learning from others," was that I did my best to learn from great investors like Benjamin Graham, Phil Fisher, Seth Klarman, Bill Ackman, Peter Lynch, Joel Greenblatt, and, most important, Warren Buffett and Charlie Munger.

This article from the front page of the business section of yesterday's New York Times underscores what a great investor Buffett is: As Smartphone Industry Sputters, the iPhone Expands Its Dominance. Excerpt:

There's a general rule about consumer electronics: The older a device becomes, the more competitors appear and prices fall. This was true for televisions, personal computers, and portable music players.

It was supposed to happen with smartphones. But the iPhone has defied gravity.

On Tuesday, Apple will unveil the 17th iteration of its flagship product. Remarkably, at an age in which most consumer devices have lost some of their appeal to users, Apple has increased its share of smartphone sales over less expensive rivals.

Over the past five years, the iPhone has increased its percentage of total smartphones sold around the world while expanding its share of sales in four of the world's largest regions: China, Japan, Europe, and India.

In the United States, the iPhone's largest market, the device now accounts for more than 50% of smartphones sold, up from 41% in 2018, according to Counterpoint Research, a technology firm. The gains have helped it claim about a fifth of the world's smartphone sales, up from a low of 13% in 2019.

Apple has expanded its smartphone empire as the broader industry has faltered. Over the past two years, sales of Android smartphones have plummeted, but the iPhone has suffered only modest declines because it's been winning new customers. It has done so despite being the industry's priciest device.

On a dollar-of-profit basis, Buffett's Apple investment ranks as one of the greatest of all time. Since he started buying the stock in the first quarter of 2016, Buffett has spent an estimated $36 billion for the 915 million shares Berkshire Hathaway (BRK-B) owns. Today they are worth $161 billion, a staggering gain of $125 billion (it's actually even more, as Buffett has sold a bit over time).

There are so many important lessons here...

It's astounding that a then-85-year-old man was able to overcome a lifelong, highly public aversion to tech stocks – plus a dismal experience with the one that he had purchased in 2011, IBM (IBM), which he eventually exited in 2017 – to buy any Apple stock at all.

Especially since, at the time Buffett first started buying it around $25 per share to $30 per share, it had risen 10-fold in the previous decade. (Few value investors are willing to buy into stocks trading at or near all-time highs... instead they tell themselves "I missed it" – a common and terrible mistake I wrote about in the August 26 Empire Financial Daily.)

And then Buffett kept buying and buying, making it a super-size position, which few investors are willing to do. And it's especially hard for value investors, who prefer to buy more of declining stocks because they appear cheaper (most, if they buy shares of a stock at $25, for emotional reasons are far more likely to buy more at $15 than $35).

Lastly, Buffett held onto nearly the entire position as it ballooned to become almost half (45.7%) of Berkshire's stock portfolio (see CNBC's real-time tracker here) – another thing almost no other investor is able or willing to do.

All of this might appear to be easy and obvious in hindsight... but I assure you, it's not.

Just look at me. I identified Apple's greatness 16 years earlier than Buffett did, buying the stock in 2000 at a price nearly 100 times lower – a split-adjusted $0.35 per share.

But Buffett made $125 billion and I didn't. Why? Because he had the right investment approach – invest in a few great companies and then hold on – plus the wisdom, discipline, and courage to carry it out, while I got impatient when Apple reported a bad quarter as the Internet bubble burst and sold...

2) Another investor who discovered Buffett and Munger and became a passionate disciple of theirs is my old friend Li Lu, who was profiled recently in this Financial Times article: No other investor has a life story quite as unbelievable as Li Lu. After being one of the student leaders in Tiananmen Square and fleeing China after the government crackdown, he studied at Columbia University, where he heard Buffett speak. Excerpt:

After arriving in the U.S., "I always had this fear in the back of my mind of how I was going to make a living here," Li told a student group many years later. And, at Columbia, he got a crash course in American capitalism. After attending a lecture given by Warren Buffett, Li started investing his student loan in the stock market, making significant returns...

By the time he graduated in 1996, Li had successfully integrated his student activism with the need to earn a living. He'd become well known among New York A-listers with an interest in human rights, his graduation earning him a short profile in The New Yorker. Wall Street institutions queued up to offer him a job. But within a year, Li opened his own hedge fund instead.

Hedge funds were booming, riding the 1990s economic surge in the U.S. with ever more creative and risky investment strategies. Managers such as John Paulson, Steve Cohen, and Ray Dalio became stars, and Li aspired to reach their ranks. It was practically unheard of for a fresh college graduate to strike out on their own, let alone to court high-profile investors such as Jerome Kohlberg, co-founder of the renowned private equity buyout firm KKR. But most graduates didn't have Li's life story. The decision to invest with him, Kohlberg told the New York Observer at the time, "wasn't my usual cautionary thing, but my admiration prevailed."

The hedge fund, Himalaya Capital, got off to an inauspicious start. He had sought opportunities in Asia but, after the 1997 financial crisis in the region, Himalaya lost 19% of its value in its first year. One of its largest investors withdrew not long after. Li soon tired of day trading and short selling, which exposed him to unlimited downside risk and could spell the death of a small fund if a target stock soared. Taking stakes in Japanese and Korean stocks that had been battered by the crisis helped Li recover and, by the mid-2000s, he had around $100mn under management. His one-man shop started hiring...

In 2003, Li was invited to Thanksgiving lunch at the Santa Barbara home of a woman he'd met through human rights work. The host's husband was a director at Berkshire Hathaway, the conglomerate Buffett built up as he became the most successful investor in the history of capitalism. Charlie Munger, Berkshire's vice-chair and Buffett's right-hand man, was there too. Munger and Li struck up a conversation about stocks and were still talking a few hours later. It was the beginning of a partnership that would last 20 years. "He was a very intelligent, self-confident young man," says Munger, who is 99 and still vice-chair of Berkshire. "He so liked being a principal instead of being an agent working for somebody else. That was immediately obvious to me and, of course, that's how I am. So, I naturally had considerable sympathy for him. I tried to get him to work at Berkshire, but I was fighting against nature."

Li's drive impressed Munger. "I'm not interested in revolution," he says. "I'm a capitalist. It was his capitalist aptitude that attracted me, not his revolutionary history."

At the outset, Munger advised Li to fully remake himself as an investor in the Buffett mold. This meant ditching adrenaline-fueled trading in favor of a longer-term form of "value investing." Buffett's approach emphasized funding undervalued assets that could be cultivated to grow over decades. Li had arrived from China with a very different view. "My impression of the stock market was that of Shanghai in the 1930s as depicted by Cao Yu's play Sunrise – full of cunning deceits, luck and bloodshed," he wrote years later in a foreword to the Chinese edition of Poor Charlie's Almanack: The Wit and Wisdom of Charles T Munger. Adopting the Buffett philosophy, Li's mantra became "accurate and complete information." Complete sometimes meant going to extraordinary lengths to get a read on the CEO of a company being researched by Himalaya, such as by attending their church or talking to their neighbors, according to contemporaneous articles.

After Li started a new fund in 2004, Munger entrusted him with $88mn of family money. It was a boon to the young Chinese money manager, who would have otherwise had to hustle to fundraise while demonstrating monthly returns. "We made unholy good returns for a long, long time. That $88mn has become four or five times that," says Munger. For example, Li bought Kweichow Moutai early. The brand of distilled liquor became the official national libation shortly after the communist revolution. As China boomed, Moutai became the drink of choice for toasting foreign dignitaries and the bribe of choice for high-ranking bureaucrats. As a stock pick, it is legendary in Asian investment circles, akin to buying Apple in the late-1990s. At times it's been the biggest listed company in China. "It was real cheap, four to five times earnings," says Munger. "And Li Lu just backed up the truck, bought all he could and made a killing."

If you don't have an FT subscription to read the full article, excerpts are in this Business Insider article: Charlie Munger invested nearly $90 million of his family fortune with Li Lu. The 'Chinese Warren Buffett' has turned it into about $400 million. Excerpt:

Li's most famous stock pick is undoubtedly BYD. He invested in the battery- and electric-vehicle maker in 2002, paving the way for Buffett and Munger to purchase their own stake six years later. The wager has been one of Berkshire's best performers in the past 15 years.

"It worked so well, the early investment in BYD was a minor miracle," Munger told the newspaper.

3) In my August 21 e-mail, I wrote that I had recently, in my personal account, been buying "a mix of one-, two-, three-, and six-month U.S. Treasury bills, all yielding over 5%." As this Bloomberg article notes, I'm not the only one: Treasury Bills Yielding 5% Are a Big Hit With Retail Investors. Excerpt:

A seemingly insatiable demand for cash is rippling through markets.

Everyone – from moms and pops to corporate treasurers and the mega asset managers – is piling in, won over by a unique opportunity: To lock in a 5% yield, and protect themselves from uncertainty over the U.S. economy.

With rates on cash and cash-like instruments at the highest in more than two decades and offering more income than benchmark U.S. debt or stocks, assets in money-market funds have swelled to a record. But nowhere is that appetite for liquid, high-yielding instruments more apparent than in the market for T-bills where investors have snapped up more than $1 trillion of new notes in just the last three months.

4) In Monday's e-mail, I shared the funny texts I sent to my youngest daughter, 21-year-old Katharine, encouraging her to give me grandchildren to play with as soon as possible.

She's doing a semester abroad at the University of Cape Town in South Africa and just took a trip with some of her classmates to the magnificent Victoria Falls, the largest waterfall in the world, on the Zimbabwe/Zambia border. They did the famous swim in the Devil's Pool at the edge (as usual, she only lets us know after she survives) (someone just outside the picture was holding her foot in the first picture):

If you want to take this trip (or any other), my middle daughter Emily, who recently started a new job at Magma Global Travel, will happily arrange everything for you! Just e-mail her at emily@magmagt.com.

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.