Superman, the Oracle, and the Value of a Long View

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(Bloomberg) -- The richest man in Hong Kong, Li Ka-shing, hosted his final shareholder meeting as founder and chairman of the Cheung Kong group last week. Hundreds of investors turned up to see the businessman known locally as Superman in action for the last time.

In a career of 60-plus years building a conglomerate that ranges from property development to utilities, from telecommunications to retail, and from aircraft leasing to life sciences, Li has drawn broad praise for his management, dealmaking and market-timing skills. Sometimes overlooked are the investment returns he has generated for shareholders.

Since the initial public offering of Cheung Kong (Holdings) Ltd. – now CK Hutchison Holdings Ltd. – in 1972,  its shares have generated a return of 5,000 times, including reinvested dividends. That’s equivalent to an annualized compound rate of 20.3 percent over 46 years.  

By comparison, Warren Buffett has generated an annualized compound rate of 20.9 percent since he took over Berkshire Hathaway Inc. in 1965. While Li’s and Buffett’s investment results are almost identical, the Oracle of Omaha’s longer and slightly better track record enabled him to provide a return of 24,000 times. Such is the magic of compounding.

The two have much in common. When Buffett tells investors to seek a “margin of safety” in an investment, Li warns them in Chinese of the “risk of failure.” Buffett talks about “economic moats” in a business; Li’s equivalent is predictable “recurring income.”

Both caution individual investors to avoid debt. Yet both understand the value of financial leverage, and have used it directly or indirectly to maximize returns.

Buffett’s greatest success came from his investments in insurance companies. By controlling the “float” – premiums that are collected immediately and only paid out many years later – Buffett effectively obtains an interest-free loan for investment.

Li, on the other hand, stumbled upon a utility business in the 1980s, when British companies were pulling out of Hong Kong before the territory’s 1997 handover to China. In 1985, he bought a controlling stake in Hong Kong Electric (now Power Assets Holdings Ltd.) from British-controlled Hongkong Land Holdings Ltd. After the acquisition, Li took his very visible and stable cash flow to banks, which effectively granted low-cost loans to his business empire. Part of the genius of both Li and Buffett lies in their access to sources of cheap funding. 

Buffett, too, recognized the favorable economics of utilities with the 1999 acquisition of MidAmerican Energy Co.

But why didn’t Li enter insurance? One explanation may be that the addressable market size is much smaller in Hong Kong than in the U.S. and elsewhere. For example, the territory’s total premiums were less than $1 billion in the 1990s, and regulations limited investments by the float mainly to bonds. In Buffett’s home state of Nebraska, significant equity investments were permitted.

As Li turns 90 and Warren Buffett approaches 88, they can be seen as icons of Eastern and Western success. They have one more quality in common: Neither pays himself much. Buffett draws a $100,000 salary, while Li last received $650.

There’s a lesson from the pair for the rest of us: Do your homework, take a long view, and juice returns with a bit of leverage.

©2018 Bloomberg L.P.

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