Welcome to the Education/Bill Gates/Buffett Succession Edition...
Following up on the speculation in the last email, it has been confirmed by Charlie Munger that Li Lu is indeed a likely Buffett successor as CIO at Berkshire. (Link here; full story at the bottom.) Note that this is still a ways off, as Buffett says he has no intention of stepping aside, and that the CIO role could be split two ways or more. But it sounds like Berkshire may make some sort of formal announcement, which might reduce some of the uncertainty that makes certain people so nervous on the topic of succession.
"Untangling Skill and Luck" -- a great article from Michael Mauboussin. Exceptionally important insights for investing, business and sports.
"When Money Dies" -- a synopsis of the hard-to-find book on inflation in Weimar Germany. It turns out that Buffett has never heard of it despite rumors that he was recommending it. Charlie Munger has definitely made references to the economic conditions in Weimar Germany as a leading cause of WWII and less concretely as a signpost of "what could have been" in the most recent/ongoing economic crisis. Either way, I can't vouch for the accuracy of this article as it pertains to the actual book, but it is worth reading.
"Overconfidence, Under-Reaction, and Warren Buffett" -- a fairly interesting (by academic standards) study of Buffett and market (in)efficiency.
Facts and Figures
Consumer spending is more than two-thirds of our economy, but that spending is highly skewed. The top 5% of earners (those making more than $210,000 per year) account for about one-third of all consumer spending.
Financial Reform for Morons, by Morons (link only) -- This is just amazing. Wow. Who, exactly, is the intended audience here? Kindergartners with ADD and a penchant for nauseating political spin? And if you recognize the narrator's voice...yep, it's Kumar. I honestly spent about 10 minutes trying to convince myself that this was actually from The Onion. Sadly, it's not. Your tax dollars at work.
Graham "P/E10" chart (attached) -- shows Graham's version of the P/E ratio (current price over the average earnings over the trailing 10 years) for the S&P 500. More info and the chart itself are here.
"An Economy of Grinds" -- some love from David Brooks, who also has some great points about a key problem in the economy right now: the lack of innovators. (Here's another brilliant column, this one about the importance of books and the negative impact of computers on low-income kids' intellectual development.)
Bill Gates' recent speech at a high school graduation. I don't know if this is legit -- it's probably not -- but it's still good and I think every high school student and plenty of adults could benefit from hearing it.
"The Man Who is Tutoring Bill Gates" -- I like the sounds of this Professor Smil character. I just ordered his latest book. An interview with him here (link only).
"Gates Bets Billions Reviving U.S. Schools to Mixed Results" -- There is an article here about teachers in Illinois making six-figure incomes. In a vacuum, I think great teachers are generally underpaid to a significant degree and should be paid $100k or more (in districts capable of actually affording it, which is, of course, an entirely separate story), but only if they're truly great teachers. Likewise, I've never understood why everyone else with a job has a boss capable of terminating employment, yet somehow teachers are "different" and merit job tenure for life. (For a decent article about tenure at universities click here.) We all know some teachers are just flat-out terrible; in those undeniable 5-10% of cases, remind me again why they shouldn't be fired...? I realize that distinguishing among teachers is difficult and inherently somewhat arbitrary, and relying exclusively on test scores is a bad idea, but just eliminating the true bottom-feeders would be a huge improvement. To that end, this effort from the Gates Foundation makes plenty of sense to me. "[The Gates Foundation]
has since shifted its considerable weight behind an emerging consensus -- shared by U.S. Education Secretary and Gates ally Arne Duncan -- that quality of teaching affects student performance and that increasing achievement is as simple as removing bad teachers, identifying good ones and rewarding them with more money." And here's an interesting take on the other side. (link only) Also, here's an interesting article about a study of the value of kindergarten teachers.
"The Retirement Nightmare: Half of Americans Have Less Than $2,000 Banked for Their Golden Years" -- looking good, America!
"Sow the Seeds of Long Term Growth" -- a good op-ed on economic policy. I like all five points.
Paul Woolley's "Manifesto" -- this is aimed at institutions, but still some very worthwhile thoughts for everyone else too. And as much as I love some rare common sense from an academic, particularly one focusing on real-world applications of proper incentives and the problem of short-termism, I would have to disagree with a complete avoidance of private investments and with his Rubini-esque declaration that "unless action is taken quickly along these lines, the next crisis will spell the end of capitalism as we know it." I'm also more than a little skeptical of targeting a benchmark or specific levels of returns improvements large funds would achieve if they adopted these principles. However, he more than makes up for any shortcomings by being the leader of the eponymous Paul Woolley Centre for the Study of Capital Market Dysfunctionality.
An Economy of Grinds
By DAVID BROOKS
If you go to business conferences, you know that at lunch it is definitely better to be seated next to a prince than a grind. Princes, who can be male or female, are senior executives at major corporations.
They are almost always charming, smart and impressive. They’ve read interesting books. They’ve got well-rehearsed takes on the global situation. They can drop impressive names as they tell you about their visits to the White House, Moscow or Beijing. If you’re having lunch or dinner with a prince, you’re going to have a good time.
Grinds, on the other hand, tend to have started their own company or their own hedge fund. They’re often too awkward to work in a large organization and too intense to work for anybody but themselves.
Over lunch, they can be socially inert. You try to draw them out by probing for one or two subjects of interest to them. But as often as not, you find yourself playing conversational ping-pong with a master of the monosyllabic response.
Every once in a while you’ll run into one who can’t help but let you know how much smarter he is than you or anybody else in the room. Sitting at this lunch is about as pleasant for him as watching a cockroach crawl up his arm. He’d much rather be back working in front of his computer screen.
Since the princes are nicer and more impressive, it is easy to be seduced into the belief that they also are more trustworthy. This is false. During the last few years, for example, the princes at Citigroup, Bear Stearns, Goldman Sachs and Lehman Brothers behaved with incredible stupidity while the hedge fund loners often behaved with impressive restraint.
As Sebastian Mallaby shows in his superb book, “More Money Than God,” the smooth operators at the big banks were playing with other people’s money, so they borrowed up to 30 times their investors’ capital. The hedge fund guys usually had their own money in their fund, so they typically borrowed only one or two times their capital.
The social butterflies at the banks got swept up in the popular enthusiasms. The contrarians at the hedge funds made money betting against them. The well-connected bankers knew they’d get bailed out if anything went wrong. The solitary hedge fund guys knew they were on their own and regarded their trades with paranoid anxiety.
In finance, as in other realms of business life, social polish doesn’t always go with capitalist success. Often it is the most narrow, intense, awkward people who start the best companies, employ the most people and create the most value.
Sadly, this recovery has been great for princes and horrible for grinds. The people who work at the big corporations are critical of the Obama administration, but the fact is they are doing very well. The big companies are posting excellent earnings. They’re sitting on mountains of cash.
The aspiring grinds, meanwhile, are dead in the water. Small businesses are not growing. They are not hiring. They are struggling to stay alive.
Princes can thrive in a period of slow, steady growth, but grinds need a certain sort of psychological atmosphere. They need a wide-open economy with plenty of creative destruction. They need an atmosphere of general confidence, so bankers will feel secure enough to lend them money, so big companies will feel brave enough to acquire their start-ups, so they themselves will feel the time is ripe to take on their world and show their brilliance to all of humanity.
The princes can thrive while the government intervenes in the private sector. They’ve got the lobbyists and the connections. The grinds, needless to say, don’t.
Over the past decade, professionals — lawyers, regulators and legislators — have inserted themselves into more and more economic realms. The princes are perfectly at home amid these tax breaks, low-interest loans and public-private partnerships. They went to the same schools as the professionals and speak the same language. The grinds try to stay far away and regard the interlocking network of corporate-government schmoozing with undisguised contempt.
The upshot is that we have an economy that is inching toward recovery but that is not creating much in the way of new innovations and new jobs. It’s not that the overall labor markets are shrinking. It’s just that very few grinds are bringing new ideas to scale and hiring workers to enact their us-against-the-world schemes.
For jobs to recover, the grinds have to recover, but it’s hard to see how that will happen so long as households are still so leveraged, government debt is still so unnerving and the business climate is still so terrible for entrepreneurs.
We’ve been mired in debates over macroeconomic models recently. But maybe the real issue is how we are going to light a fire under the country’s loners, its contrarians and its narrow, ambitious outsiders.
Bill Gates recently gave a speech at a High School about 11 things they did not and will not learn in school. He talks about how feel-good, politically correct teachings created a generation of kids with no concept of reality and how this concept set them up for failure in the real world.
RULE 1: Life is not fair - get used to it.
RULE 2: The world won't care about your self-esteem. The world will expect you to accomplish something BEFORE you feel good about yourself.
RULE 3: You will NOT make $60,000 thousand dollars a year right out of high school. You won't be a vice president with car phone, until you earn both.
RULE 4: If you think your teacher is tough, wait till you get a boss. He doesn't have tenure.
RULE 5: Flipping burgers is not beneath your dignity. Your grandparents had a different word for burger flipping they called it Opportunity.
RULE 6: If you mess up,it's not your parents' fault, so don't whine about your mistakes, learn from them.
RULE 7: Before you were born, your parents weren't as boring as they are now. They got that way from paying your bills, cleaning your clothes and listening to you talk about how cool you are. So before you save the rain forest from the parasites of your parent's generation, try delousing the closet in your own room.
RULE 8: Your school may have done away with winners and losers, but life has not. In some schools they have abolished failing grades and they'll give you as many times as you want to get the right answer. This doesn't bear the slightest resemblance to ANYTHING in real life.
RULE 9: Life is not divided into semesters. You don't get summers off and very few employers are interested in helping you find yourself. Do that on your own time.
RULE 10: Television is NOT real life. In real life people actually have to leave the coffee shop and go to jobs.
RULE 11: Be nice to nerds. Chances are you'll end up working for one.
The man who’s tutoring Bill Gates …
... is a remarkable Canadian thinker you’ve never heard of
Vaclav Smil: 'We are structurally cooked'
The most-published and least-known thinker in Canada doesn’t want to be interviewed. He says he has 77 deadlines to meet (perhaps an exaggeration, but probably not) before he flies off to a scientific conference in Europe. Besides, he thinks media interviews are pointless. He detests our sound-bite culture, which shrinks enormously important and complex subjects into meaningless bits of info-kibble. “All I want is to be left alone to write my books,” he insists.
That may be one reason why hardly anyone in Canada has heard of Vaclav Smil. But Bill Gates has. He believes Prof. Smil is one of the smartest guys around today. He plugs several of Prof. Smil’s recent books on his website, and says that he has “opened my eyes to new ways to think about solving our energy and environmental issues.”
The sometimes irascible Prof. Smil hangs his hat at the University of Manitoba (which may be another reason everyone east of Winnipeg ignores him). He is a distinguished professor in the faculty of environment, but really, he is an incorrigible interdisciplinarian. His interests encompass the broad areas of energy, the environment, food, population, the economy and public policy. He seems to know a lot about almost everything. He has published 20-something books and hundreds of academic papers, and has another four books coming out this year. He is (almost) resigned to the fact that our great debates about energy and the environment are largely pointless, because they are hugely distorted by politics and sadly uninformed by basic facts. We are a culture of scientific ignoramuses.
For example, take the notion (heavily promoted by Al Gore) that we could wean ourselves off fossil fuels in a few years if only we really wanted to. This is about as realistic as the notion that we could fly to the moon on gossamer wings if we really wanted to. Some day it may be possible – but not any time soon. “We are structurally cooked,” he recently explained. “Every new technology takes 40 to 50 years before it captures the bulk of the market. As of today, there are no clean-energy technologies that can replace fossil fuels on a large scale.”
Prof. Smil is an expert on the history of technological innovation. He points out that the U.S. energy industry – which includes production, processing, transportation and distribution, coal and uranium mines, oil and gas fields, pipelines, refineries, fossil-fuel fired, nuclear, and hydroelectric power plants, tanker terminals, uranium enrichment facilities, and transmission and distribution lines – constitutes the world’s most massive, most indispensable, most expensive and most inertial infrastructure. Its principal features change on a time scale measured in decades, not years. That’s why “we’re going to be a fossil-fuel society for decades to come.”
A lot of us don’t want to hear that. Yet the facts don’t care whether we like them. Prof. Smil methodically sets out to show that the facts do not support either the romantics, who think we’ll be saved by wind turbines, or the techno-optimists, who think that electric cars are right around the corner. Along the way he demolishes peak oil theory, biomass for fuel, carbon sequestration, and various other energy myths. He believes that weaning ourselves away from fossil fuels would be a good thing. But we need to understand that the transition from fossil fuels will be complex, protracted and nonlinear, and will require enormous investments. “Wishful thinking,” he writes, “is no substitute for recognizing the extraordinary difficulty of the task.”
Meantime, he argues, there’s plenty we should do to reduce demand. North Americans are the energy hogs of the world. Our industries are super-efficient, but our lifestyles are ruinous. “Most of the energy in North America is just consuming – Wal-Mart, shopping centres, government offices – or personal consumption: houses, cars, flying to Hawaii, gambling in Las Vegas,” he said during a recent appearance at Canada’s Perimeter Institute. “We could live affluent lifestyles with half as much energy. Are people so unhappy in Kyoto or Lyons? Is it such a terrible punishment to live in Bordeaux?” He himself drives a modest car and lives in a super-energy-efficient house. “If the world wants to replicate the two biggest wasters in the world, the U.S. and Canada, there is no hope for anybody.” What is the likelihood that people will cut back voluntarily? “Very slim.”
Prof. Smil, born and educated in the former Czechoslovakia, has the kind of hard-headed skepticism you often find in Eastern Europeans. He and his wife, Eva, landed in the United States in 1969. But Canada was more congenial, so they settled here in 1971. As someone who was rigorously schooled in all the sciences, he regrets people’s widespread ignorance of science, technology and basic economics. As he told energy writer Robert Bryce, “Without any physical, chemical, and biological fundamentals, and with equally poor understanding of basic economic forces, it is no wonder that people will believe anything.”
Prof. Smil’s 24th book, Global Catastrophes and Trends: The Next 50 Years, has just been published in Canada. It offers a numbers-heavy but compact guide to all the main things we should be worrying about (or not), from natural disasters to population trends. Although he deliberately stays away from predictions, he concludes from the evidence that climate change is nowhere near the top of the list. What is? A genuine flu pandemic, which, he says, is a 100 per cent certainty. What we can’t predict is how bad it will be. Prof. Smil is no alarmist, but he warns that even a least-worst-case epidemic “would pose challenges unseen in most countries for generations.”
Bill Gates has read it, and says it’s great.
Gates Bets Billions Reviving U.S. Schools to Mixed Results
2010-07-15 21:17:02.260 GMT
By Daniel Golden
July 16 (Bloomberg) -- It’s been two years since Bill Gates left his day-to-day role at Microsoft to concentrate on supervising the Bill & Melinda Gates Foundation -- and his new enterprise is booming.
Headquartered in a converted check-processing center in Seattle’s Eastlake neighborhood, the 10-year-old foundation plans to move into a 900,000-square-foot campus and visitors’
center near the city’s Space Needle next spring, reports Bloomberg Businessweek in its July 19 issue.
The Gates Foundation opened a London office this year; it also has offices in Washington, Delhi, and Beijing, and 830 employees around the world, up from about 500 in 2008. With assets of $33.9 billion as of Dec. 31, 2009, and America’s two richest people, Gates and Warren Buffett, as trustees, the foundation plans to spend $3 billion in the next five to seven years on education. If there’s such a thing as a charity behemoth, the Gates Foundation is it.
While its efforts in global health are widely applauded, its record in America’s schools has been more controversial.
Starting in 2000, the Gates Foundation spent hundreds of millions of dollars on its first big project, trying to revitalize U.S. high schools by making them smaller, only to discover that student body size has little effect on achievement.
It has since shifted its considerable weight behind an emerging consensus -- shared by U.S. Education Secretary and Gates ally Arne Duncan -- that quality of teaching affects student performance and that increasing achievement is as simple as removing bad teachers, identifying good ones and rewarding them with more money.
On this theory, Gates is investing $290 million over seven years in the Tampa, Memphis and Pittsburgh school districts as well as a charter school consortium in Los Angeles. The largest chunk of money, $100 million, will go to Tampa’s Hillsborough County school district, the eighth-largest in the U.S., with 192,000 students and 15,000 teachers. These carefully selected programs, which will favor or penalize teachers depending on whether students make larger or smaller gains than their test scores in prior years would have predicted, are intended as models that, if proven successful, can be rolled out nationwide.
The Gates agenda is an intellectual cousin of the Bush Administration’s 2002 No Child Left Behind law, which required all public schools -- though not individual teachers -- to make "adequate yearly progress" on student test scores.
Some opponents of No Child Left Behind questioned its faith in data; are scores too narrow a gauge of how well kids are learning? Gates sees nothing wrong in relying on quantitative metrics. "Every profession has to have some form of measurement," he said in a late June interview with Bloomberg Businessweek. "Tuning that, making sure it’s fair, getting the teachers so they’re enthused about it" are the keys.
Still, the prospect of such measurement makes some educators and academic researchers uneasy. They contend that factors such as school leadership and culture exert a powerful influence on student achievement. Moreover, rating individual teachers based on their classroom’s test results may be better suited to little red schoolhouses than today’s large urban schools, where teachers team up, aides and tutors pitch in, and students come and go frequently.
While cities such as Denver and Cincinnati have experimented with paying teachers for performance, the Gates initiative--called Intensive Partnerships for Effective Teaching--marks the largest and most comprehensive effort to evaluate teachers in all grades and subjects based on student test gains.
"The people at Gates believe there is a window right now," says Michael S. McPherson, president of the Spencer Foundation, which supports education research. "They have in Washington an Administration that’s broadly sympathetic to their view. They have the attention of the American people, wanting dramatic improvement in the schools. Bill and Melinda Gates want to see results--not just in their lifetimes, but in the next few years."
The last thing you’d expect from an organization headed by Bill Gates is a math mistake. Yet, according to Wharton School statistician Howard Wainer, the foundation may have misread the numbers when it arrived at its first prescription for American education. Wainer, who used the foundation as a case study in his 2009 book, "Picturing the Uncertain World," says it seized on data showing small schools are overrepresented among the country’s highest achievers and started pouring money into creating small high schools and subdividing big ones.
Tom Vander Ark, a former schools superintendent in Washington State who was tapped to oversee the foundation’s educational arm, was, and remains, a booster of small schools.
The Gates Foundation declined comment on Wainer’s assertion and research.
From Pierre S. du Pont, who gave more than $6 million to train teachers and build 120 public schools in Delaware in the 1920s, to the Rockefeller family, which funded child development research that helped lay the groundwork for the Head Start program, corporate leaders have long promised to ride to the rescue of public education. One of the highest-profile efforts came in 1993, when publisher Walter Annenberg gave $500 million- -matched by $600 million in gifts from other sources--to strengthen urban, rural, and arts education, only to be stymied in some school districts by rapid changes of leadership and direction.
In the past, says University of Michigan historian Maris A.
Vinovskis, benefactors "were not as prescriptive about how they wanted their money spent."
Now a new generation of philanthropic billionaires, including Gates, homebuilding and insurance entrepreneur Eli Broad, members of the Walton family that founded Wal-Mart Stores, and former hedge fund manager Julian Robertson, want public education run more like a business. Charter schools, independent of local school districts and typically free of unionized teachers, are one of their favorite causes.
"We don’t know anything about how to teach or reading curriculum or any of that," Broad said last year at a public event in Manhattan. "But what we do know about is management and governance."
Small schools promised an alternative to the impersonal bureaucracy of traditional high schools, which Gates in a 2005 speech proclaimed "obsolete." But according to Wainer, adherents overlooked a troublesome fact: Small schools are overrepresented among the lowest as well as highest achievers.
Why? Because the smaller a school, the more likely its overall performance can be skewed by a few good or bad students.
Wainer says big high schools, for all their problems, outperform small ones. Scale lets them offer more advanced classes, electives, and extracurricular activities. With Gates funding, one Denver high school split into three and lost so many students that it shut down in 2006. It reopened a year later as a single school, without the foundation’s support.
In November 2008, Bill Gates publicly backtracked, acknowledging in a speech in Seattle that "simply breaking up existing schools into smaller units often did not generate the gains we were hoping for." Still, the foundation has not renounced its original mission. Gates credits smaller schools for their proficiency at boosting attendance and decreasing violence.
"So we absolutely believe in the small schools thing," he says. "Calling that a failure is not fair."
The experience taught the foundation the value of humility.
"The Gates people are dramatically more attentive to evidence," says McPherson of the Spencer Foundation, "and more willing to consider that they need to keep learning than they were when they started out."
As it became clear that small schools alone weren’t the solution, Gates installed new leadership, naming Vicki Phillips, who served as Secretary of Education for the State of Pennsylvania and superintendent of schools in Portland, Oregon, to replace Vander Ark in 2007.
After a yearlong reassessment, Phillips swung the foundation behind the next big wave in education reform -- evaluating teachers based on student test-score gains.
One of her key moves was enlisting Harvard University economist Thomas Kane as deputy director of education for data and research. Kane had co-authored an influential 2006 study of 150,000 students in grades 3-5 in Los Angeles that analyzed just how vital teacher quality is to student performance. Having a teacher ranked in the top 25 percent four years in a row "would be enough to close the black-white test score gap," the study found. It made a strong recommendation seemingly borrowed from corporate America: Teachers who ranked in the bottom quarter after their first two years in the classroom should be fired.
The Gates-funded plan in Tampa will put teachers on the spot starting this school year. Of the $100 million that the foundation is pouring into the Hillsborough County school system, at least $60 million will go to teachers. With that cash comes a new evaluation system: 40 percent of the grade will be based on student learning gains as measured by standardized tests, 60 percent on observations by the school principal and teachers from elsewhere in the district. Highly rated teachers could earn as much in their fourth or fifth year as colleagues with 20 years’ experience who opt to stick with the traditional pay scale.
The aim is to spur teachers to adopt best practices and learn from colleagues who are more effective in handling disruptions or instilling particular concepts, according to Gates.
"It’s an incentive to identify the exemplars," he says.
Teachers at the bottom will have to improve or face immediate consequences. "We anticipate there will be teachers who are no longer in the profession in Hillsborough County," says schools superintendent MaryEllen Elia. "They will be told, ‘This is not the place for you.’"
Hillsborough currently terminates one-half of one percent of its teaching force annually. More than 99 percent of Hillsborough teachers were rated satisfactory or outstanding in 2007-2008, and 98 percent of those eligible received tenure. So how will a group that’s received almost nothing but positive reviews react to a more rigorous evaluation based on student improvement?
One logical response is to narrow instruction to the content and techniques needed to pass tests, at the cost of encouraging creativity, curiosity, or complex analysis.
"This is likely to take teaching to the test to a new level," says Harvard education professor Daniel Koretz.
Wainer, the statistician who spotted the mathematical fallacy behind the small schools movement, is also skeptical.
"It’s conceivable you could get a value-added score to work at an elementary level, but how can you do it at a high school?" he asks. "How should my physics gain score match against your French score? Was Mozart a better musician than Babe Ruth was a hitter?"
Judging teachers on student performance creates a litany of such practical problems, from how to assess progress in subjects such as art, shop, or phys ed to accounting for the mobility of inner-city families.
In Memphis, where Gates has invested $90 million, schools superintendent Kriner Cash says one-third of students move during the year, which means their gains can’t necessarily be credited to one school, much less one teacher. Giving several tests a year can sort out each teacher’s contribution, he says.
Still, ratings may be tainted if frequent transience requires teachers to integrate newcomers and adjust to departures.
Studies of teacher effectiveness show much variability. Few instructors stay at the top or bottom statistically year after year. A study of five Florida districts from 2000 to 2005, including Hillsborough, found that only half the teachers ranked in the top 20 percent one year were in the top 40 percent the next.
Tying teacher jobs to student gains "isn’t as simple and straightforward as some people think it is," says Gene Wilhoit, executive director of the Council of Chief State School Officers in Washington, a recipient of Gates funding. "We’re a bit concerned that others aren’t raising these kinds of issues.
We’re also concerned, if you do raise these issues, it’s seen as making excuses or pulling back from commitments."
Gates’ approach risks alienating teacher unions, which typically have negotiated pay based on seniority and advanced degrees. In April, under union pressure, Florida Governor Charlie Crist vetoed a plan that would also have tied teacher salaries to test score results. When Bill Gates addressed the national convention of the 1.5 million-member American Federation of Teachers on July 10 in Seattle, a small group of teachers walked out, though he also received several standing ovations.
"One of the things that we learned through the small schools initiative is that we’ve got to work with the unions,"
Melinda Gates told Bloomberg Businessweek. "That takes a lot of up-front work, but it’s absolutely crucial."
As a condition of funding, the foundation required Hillsborough and the other districts to cooperate with local unions. In a union-friendly move, Hillsborough agreed to tell teachers in advance when peers will observe their lessons, making positive evaluations more likely. By contrast, in a nationally acclaimed program in Cincinnati, teachers give two lessons before evaluators without prior notice.
"If you tell teachers ahead of time that they’re going to be observed, they’ll just say to the class, ‘O.K., kids, somebody’s coming in, I expect you to behave, raise your hand when you ask a question, and if you do well we’ll have a party the next day,’" says JoAnn Parrino, a teacher at Chamberlain High School in Tampa. "The only way to tell a good teacher is to go into their classroom spontaneously."
David Steele, chief information and technology officer for the district, says the decision to notify teachers was made because it didn’t want to "play gotcha." Also, he says, a pop- in can waste the evaluator’s time: "What if the teacher is showing a movie that day?"
Despite the opportunity to increase their income, teachers nationwide are skeptical of Gates’ agenda. In a national survey of 40,000 teachers co-sponsored by the Gates Foundation and released in March, 36 percent said that tying pay to performance is not at all important in retaining good teachers, while only
8 percent said it’s essential. And 30 percent said it would have no effect on student achievement -- triple the proportion that said it would have a very strong impact.
"The Gates Foundation was very surprised," says Randi Weingarten, president of the American Federation of Teachers.
"They asked the question in a way they thought they’d get a positive result, and they got a very negative result." On the contrary, says Gates spokesman Christopher Williams, the foundation was heartened that a significant portion of teachers do believe in merit pay.
In 2007, a year after the foundation gave $21.6 million to Chicago public schools, Melinda Gates toured the system with its then-chief, Arne Duncan. "I was extremely impressed with what he was doing," she says. "We started our relationship then."
Today, the Gates Foundation and Education Secretary Duncan move in apparent lockstep. Two of Duncan’s top aides, Chief of Staff Margot Rogers and Assistant Deputy Secretary James H.
Shelton III, came from the foundation and were granted waivers by the Administration from its revolving-door policy limiting involvement with former employers. Vicki Phillips, who heads the foundation’s education programs, and Duncan participated from
2004 to 2007 in the Urban Superintendents Network, a group of a dozen school leaders who met twice a year at weekend retreats co-funded by Gates.
When the federal government made $4.35 billion in federal Race to the Top awards available -- favoring applicants that agree to link teacher pay to test score gains, increase the number of charter schools and adopt common curriculum standards
-- the Gates Foundation paid for consultants to prepare applications for 24 states, as well as the District of Columbia.
One of two winners announced so far is Tennessee, which had help from Gates. The state will receive about $500 million from the Obama Administration.
The Gates Foundation, which bankrolled development of the common curriculum standards, is also funding outside evaluations
-- by the Thomas B. Fordham Institute in Washington and the Massachusetts Business Alliance for Education -- of those same standards. The Boston-based business group is expected to release its report before the Massachusetts Board of Elementary & Secondary Education meets on July 21 to choose between the new standards preferred under Race to the Top and revisions to existing state criteria, considered among the most rigorous in the country.
Williams, the Gates spokesman, says the foundation frequently pays for independent assessments of its programs and doesn’t seek to dictate their conclusions.
"The Gates folks are well aware of our independence and, I think, incorruptibility," says Chester E. Finn Jr., president of the Fordham Institute, a nonprofit education think tank.
Still, Finn says, the alliance between the government and the country’s richest foundation could discourage dissent. "I’ve become suspicious of the phrase ‘public-private partnership,’"
he says. "It comes off the tongue as an undisputed good thing.
It’s actually a disputed good thing."
As a private entity that doesn’t answer to voters, Gates can back initiatives that are politically dicey for the Obama Administration, such as uniform standards, says Jack Jennings, director of the Center on Education Policy. In the past, states’
rights advocates have blocked federal efforts for a national curriculum. Gates "was able to do something the federal government couldn’t do," Jennings says.
At the same time, the rapport between the federal government and the largest private education funder is raising concerns that competing ideas are getting squeezed out.
"It’s like a mind meld between Arne Duncan and the Gates Foundation," says former U.S. Assistant Education Secretary Diane Ravitch, whose 2010 book, "The Death and Life of the Great American School System," criticizes Gates for exerting "vast power and unchecked influence" over American education.
If she had access to resources like Gates’, says Ravitch, she’d save parochial schools that have been effective for inner- city kids but are suffering from church cutbacks.
The alliance between the Gates Foundation and the government raises other issues, too. Drew Gitomer, a researcher with the Educational Testing Service, says the foundation may be rushing a $45 million study that involves videotaping math, English, and biology lessons by nearly 3,000 teachers in the just-ended and upcoming school years. (The project lets teachers watch their lessons--and student reactions to them--to identify effective techniques, like football coaches breaking down game
The foundation plans to preview its findings this fall, which could help state Race to the Top winners design teacher evaluation programs.
The study "is very much fast-tracked," says Gitomer, whose role in the study is to assess teachers. "There’s a feeling this is the opportune time. In a better world, it might have been nice to pilot some of these things. There’s some risk associated with moving that quickly."
Phillips says the foundation maintains "appropriate firewalls." While members of its staff testify before Congress and keep tabs on federal and state policy, the foundation doesn’t lobby or influence government decisions on grants, she says.
Asked whether the appointment of Brad Jupp, a senior program adviser at the Education Department, to an advisory committee for the Gates teacher videotaping study violated the foundation’s firewalls, Phillips said, "It’s one of those fine lines we walk constantly."
When the foundation approached Jupp, he initially expressed interest in serving on the committee, he said in an e-mail.
After Bloomberg Businessweek asked Phillips about it, Jupp declined the position. He said he changed course on the advice of the department’s ethics counsel.
Both Melinda and Bill Gates contest the notion that there is anything amiss in the foundation’s relationship with the federal government. All the foundation wants is results, says Bill Gates, however they are achieved.
"If people have particular ideas for improving schools, those experiments will get funded," he says. Duncan’s spokesman, Peter Cunningham, says the foundation’s agenda "is very much aligned with the Obama Administration agenda. We partner with them on a whole host of things."
If Hillsborough district official Anna Brown had been graded on her May presentation to teachers at Tampa’s Chamberlain High School about the Gates plan, she would have gotten an incomplete.
One teacher of 12th graders wanted to know if she would be penalized for senior slump. Music instructors questioned the district’s decision to evaluate them on their students’ grasp of music theory instead of instrumental proficiency. Brown got thoroughly grilled about the new system and didn’t have all the answers.
Kathy Jones, a 35-year veteran who teaches Advanced Placement world history, asked how the district could measure her students’ improvement since they don’t take a prerequisite course or a pretest. When Brown said PSAT scores as well as exams in other social studies courses could provide a baseline, Jones scoffed: "I don’t see how it’s even possible."
The testy atmosphere illustrates the challenges for Hillsborough -- and the Gateses -- as they translate theory into practice. The foundation has worked hard to bring teachers on board. Gates is paying $1,500 apiece to more than 600 Hillsborough teachers whose lessons are being videotaped. Says Cassie Schroeder, an eighth-grade language arts teacher at Giunta Middle School in Tampa: "I put it toward my credit cards."
Hillsborough teachers complain that they already have a pay-for-performance plan, and they don’t like it: the State of Florida’s Merit Award Program, which gives 5 percent bonuses based on student test score gains in the prior year. Because of limited funding, teachers within each subject compete for awards. Arlene Castelli, principal of Giunta, says teachers are embarrassed to win the bonuses. "If you can’t boast about an award, what good is it?" she asks. "I don’t like pitting teachers against each other."
That, in the end, is one of the major worries about the Gates plan: that it will encourage teachers to think narrowly in their own interests, to not only "teach to the test" but also refrain from the cooperative efforts that are essential to the education process.
At Giunta, two-thirds of the 1,134 students in sixth through eighth grades are black or Hispanic, almost three- fourths come from poor families, and low achievers in math take two classes, regular and intensive, with different teachers.
Before state testing in March, students on the bubble of passing or failing--about 20 percent of each grade--attend extra sessions with teachers who drill them on their weaknesses. Like a baseball player who won’t bunt to advance a teammate, a teacher may think twice about giving a student extra help if a colleague gets the credit -- and the pay raise.
"We don’t want teacher evaluation to get in the way of student achievement," says Castelli. "Who’s to say the parents didn’t work with the children at night? Who’s to say the child didn’t mature? Or the child blew off the test the year before?"
Shrugging off "the commune-type approach," Bill Gates says that excellence demands individual accountability. In his speech to the American Federation of Teachers, Gates struck an evangelical tone as he appealed for faith in his initiative.
"You owe it to your profession and your students to make sure that tenure reflects more than the number of years spent in the classroom," Gates said. "It should reflect the quality of the work you do in the classroom." Later, he added: "Sometimes the most difficult act of leadership is not fighting the enemy; it’s telling your friends it’s time to change."
The Retirement Nightmare: Half of Americans Have Less Than $2,000 Banked for Their Golden Years
By Scott Thill, AlterNet
The days of quietly retiring with a nest egg built up from years of savings from a long career on the verge of disappearing. For tens of millions of Americans, facing rising costs, shrinking incomes and growing debts they already have disappeared.
"One out of three working Americans does not have retirement savings beyond Social Security, and about 35% of those over 65 rely almost totally on Social Security alone," Dallas Salisbury, president of the Alliance for Investor Education and the Employee Benefit Research Institute (EBRI) , explained to AlterNet. "Of the remaining two-thirds of working Americans that have some retirement savings, 27 percent report less than $1,000, 16 percent between $1,000 and $9,999, 11 percent between $10,000 and $24,999, 12 percent between $25,000-$49,999, and 36 percent $50,000 or more." Perhaps the most shocking number is that half of Americans have $2,000 or less saved for retirement.
Crunch the numbers and you end up with a retirement myth, rather than a money-maker. We face a colder economic reality: Not only are there no astronomical retirement returns coming down the financial pike, but what nuts and nest-eggs families have set aside for their futures have been mostly sucked dry.
"Individuals need to follow the advice of the ages," said Salisbury. "Spend less than you earn by 25 percent, and save for your future. This keeps your lifestyle from getting ahead of your income."
While saving 1/4 of our shrinking incomes sounds nigh on impossible in this economic climate, many are watching their savings getting squandered by bad fund managers. One retirement Ponzi scheme starting to worry the Senate Special Committee on Aging, according to an aide who asked not to be named, are target-date funds, a financial instrument . They're basically mutual funds that try to play equities and stocks in their early years before settling into more conservative investments like cash and fixed-income before maturing, so as not to give their investors heart attacks on the date of their retirement. As imagined, given our wheezing global economy, target-date funds are leaking money to managers who are charging insane fees before the house of cards crashes. In July, the SEC proposed new rules to make target-date funds more transparent, but lately the SEC has been proposing much while the banksters and executives that really run the country have continued to fund everything from Barack Obama's election to the Republican Party itself.
In related news, the Supreme Court ruled that corporations are free to spend, pardon the pun, as much as they want to buy political candidates In other words, even if your target-date fund survives the banksters' scams by the time it finally matures, there's no guarantee it can't be downsized by them at a moment's notice. To quote Wikipedia, "almost all target date funds do not have any guarantee." The banksters and the SEC know it, and now so do you.
But what can we do about it? Nothing, if we don't accept the fact that we're quickly turning into a world of freelancers in search of our next check. Which, of course, we'd all like to divide accordingly to live comparatively well and invest in a nest-egg for a more convenient future. But in an economic environment that is alternately unable to provide job growth or security, and is infested by market-makers armed with supercomputers and math and Ph.Ds, that's unlikely and illogical.
"I think Americans will no longer have retirements that demand no additional work," Sara Horowitz, executive director of the nonprofit Freelancers Union, explained to AlterNet. "They will lessen work in old age. In other words, retirement will increasingly mean becoming an independent worker."
Living like freelancers would go a long way to ameliorating our dependence on investment banks and other entities whose traditional function was to take our money and stash it smartly, where it could feed on modest interest rates that were not the plaything of freelancing hedge funds and their proprietary algorithms. But in today's hyperspeeding electronic market, there are just too many easy marks in the matrix.
"Goldman Sachs in the 401k world is no better or worse than the others," said Horowitz. "We need to move away from the idea that individuals will go by themselves to for-profits and be OK. They won't be OK. They're little bitty consumers dealing with giant corporations. Instead, they should band together and spread the costs for experts and lawyers to level the playing field. In the 1970s, freelancers were the first to lose the employer's safety net, so they've been working this way for several decades. Instead of being isolated individuals, they form strong networks for information, community and benefits. Freelancers have to be more disciplined at setting money aside to pay taxes and benefits that traditional workers expect their companies to pay. And they have to purchase their own safety nets -- health insurance, unemployment, and retirement -- which makes it that much more difficult to save."
In short, they have to live in a real world of diminished returns, expectations and impact. Which is a good thing, given the new millennium's spiraling hyperconsumption. If the gushing oil bleeder in the Gulf of Mexico is a sign of anything, it's of our excessive appetites. Today, it's time pay up, especially if we want to retire later. Our messy ways and means have to be choked off and cleaned up. If we're smart, live well below our lucky means, and stop trashing the planet, and its political processes, then we might just get lucky enough to dodge the guilty bullets.
"I think freelancers will actually be better off in many ways than traditional workers," concluded Horowitz. "Because a future without a safety net has been their reality for the last 25 years."
Sow the seeds of long-term growth
By Jeffrey Sachs
The world economy is entering a new phase after the failure of fiscal stimulus to create a sustained recovery in either the US or Europe. In the US, consumers have retrenched, housing starts have crashed and a double-dip recession is possible. In Europe, fiscal retrenchment is under way after intense market pressures. A new approach to recovery is needed.
The striking feature in the current debate about austerity and stimulus has been the lack of attention to investment. Consumers will not provide the engine of recovery, nor should they after overspending for a decade. Instead, the US and Europe should be using the recent corrective boost in saving rates to promote long-term investments in physical and human capital as the proper way back to sustained growth.
Despite the evident need for a rise in national saving after 2008, President Barack Obama tried to prolong the consumption binge by aggressively promoting home and car sales to already exhausted consumers, and by cutting taxes despite an unsustainable budget deficit. The approach has been hyper short term, driven by America’s two-year election cycle. It has stalled because US consumers are taking a longer-term view than the politicians.
By contrast, the administration’s interest in boosting investment has been haphazard. Mr Obama has shown a strange inability to articulate an operational and forward-looking policy framework in signature areas such as healthcare, energy, climate change, and long-term fiscal policy. At a time when China is building hundreds of miles of subway lines, tens of thousands of miles of highways, a couple of dozen nuclear power plants, and a network of tens of thousands of miles of high-speed intercity rail lines, the US struggles to launch a single substantial project. China saves and invests; the US talks, consumes, borrows, and talks some more.
It is wrong in this context to believe that the only choice is further fiscal stimulus versus a repeat of the Great Depression. Further short-term tax cuts or transfers on top of America’s $1,500bn budget deficit are unlikely to do much to boost demand, while they would greatly increase anxieties over future fiscal retrenchment. Households are hunkering down, and many will regard an added transfer payment as a temporary windfall that is best used to pay down debt, not boost spending.
Businesses, for their part, are distressed by the lack of direction. The US Chamber of Commerce was not simply lobbying when its director of government affairs recently declared to the Financial Times that: “When businesses try to plan out what their tax liabilities will be next year, or game out credit availability or the investment climate, they just don’t know what it will look like. Uncertainty is a real killer.”
A proper US investment recovery plan has five parts. The first is a significant boost in investments in clean energy and an upgraded national power grid. These should be promoted through guaranteed price subsidies to clean energy to be financed by gradually rising carbon taxes, as the clean energy capacity comes on line during the coming decade. The alternative cap and trade system is cumbersome, unnecessary and politically dead.
The second is a decade-long programme of infrastructure renovation, with projects such as high-speed inter-city rail, water and waste treatment facilities and highway upgrading, co-financed by the federal government, local governments and private capital. Such projects are complex, requiring government leadership in land management, project design, public-private co-operation and partial subsidy or credit guarantees. New tools can help, such as a national infrastructure bank – championed last year before plans were strangely downplayed.
The third component is more education spending at secondary, vocation and bachelor-degree levels, to recognise the reality that tens of millions of American workers lack the advanced skills needed to achieve full employment at the salaries that the workers expect. The unemployment crisis is largely a structural crisis of job skills. It is hitting young workers – many of whom should still be learning – and older workers who lack a degree.
The penultimate part of the plan is boosting infrastructure exports to Africa and other low-income countries. China is running circles around the US and Europe in promoting such exports of infrastructure. The costs are modest – essentially just credit guarantees – but the benefits are huge, in increased exports, support for African development and a boost in geopolitical goodwill and stability.
The fifth and final element should be a medium-term fiscal framework that will credibly reduce the federal budget deficit to sustainable levels within five years. This can be achieved partly by cutting defence spending by two percentage points of gross domestic product, meaning ending the Iraq and Afghanistan occupations and cutting wasteful weapons systems. Other measures should include gradually phasing out the tax subsidy on high-end health insurance, taxing Wall Street bank profits and bonuses, raising high-end marginal tax rates and, if necessary, introducing a small value added tax. Public investment costs could be financed mainly by public tolls, gradually rising carbon taxes and by repayments of international loans to finance the export of infrastructure.
The Obama administration and Republican opposition are both guilty of irresponsible short-termism and lack of forward-thinking. Both would dangerously prolong the budget deficit, the first through a combination of increased fiscal transfers and tax cuts, and the latter through even larger and more unsustainable tax cuts. Neither would do what America needs and China is doing better: investing for the future through serious attention to sustainable energy, cutting-edge infrastructure, enhanced labour-force skills and the promotion of international development through the export of infrastructure.
The author is director of The Earth Institute at Columbia University
Radical finance manifesto can increase investment returns and save society from destructive markets, argues banker turned academic
Investment funds should limit their annual turnover to 30 per cent and avoid any dealings with hedge funds or other forms of alternative investment, argues a radical new manifesto aimed at saving 'dysfunctional' markets from future crises.
The proposals are part of a 10-point manifesto which will be outlined by Dr Paul Woolley in a lecture at the London School of Economics and Political Science on Tuesday (25 May).
Dr Woolley, a former banker, IMF economist and founder of the Paul Woolley Centres for the study of Capital Market Dysfunctionality at the London School of Economics and the University of Toulouse , says if his policies are adopted by Giant Funds – his term for the world's biggest public, pension and charitable funds – they would boost annual returns for a fund (after inflation) by 25 per cent. Once widely adopted they would restore stability to the markets – giving funds another similarly-sized rise for an overall gain in long-term returns of 50 per cent or more.
He argues that policy-makers who see improved regulation as the means to prevent future crises are adopting a negative approach based on restrictions that can be side-stepped by bankers. Instead, he argues for a positive approach that harnesses self-interest in avoiding the causes of financial dysfunction.
Dr Woolley, who said: 'Wide-scale adoption of these measures would secure private gains by increasing the profits of funds from an annual return of four or five percent to six or seven per cent. But these measures would also deliver social gains by reducing the likelihood of bubbles and crashes, bringing faster growth and making finance less bloated and exploitative.
'Economic theory and received wisdom have brainwashed everyone into believing that capital markets are efficient, that prices are always right, capital markets are self-stabilizing and competition keeps banks and financial firms from earning abnormal profits The reality is very different. The finance industry is performing its utilitarian task of channelling savings into real investment badly and at punitive cost. And as soon as profits disappear, bail-outs are needed.'
His lecture, to be delivered at LSE's Old Theatre in Houghton Street, London, will set out the 10-point manifesto for the first time. It says that investment funds should:
1 Adopt long-term investment approach (future dividend flows), rather than momentum (short-run price change)
2 Cap annual turnover of portfolios at 30%
3 Understand that all tools now used to manage risk and return are based on the discredited theory of efficient markets
4 Adopt a stable benchmark such as growth of GDP plus a risk premium
5 Not pay performance fees
6 Not engage in alternative investments – Hedge funds, Private equity, Commodities
7 Insist on total transparency of agents' strategies
8 Ensure everything in the portfolio is traded on a public exchange
9 Secure full transparency of banking service costs incurred by companies you invest in
10 Provide full disclosure of compliance with these policies
Finance's failures, Dr Woolley argues, have their origin in 'principal/agent problems' which arise because agents (banks, investment managers, brokers and other financial middlemen) have better information than principals (the Giant Funds) and because the interests of the two groups are misaligned.
The consequences are first that delegation to agents is the source of momentum investing and short-termism which are the root cause of mispricing, bubbles and crashes and second, that agents are able to capture excess profits through constant innovation of complex products, lack of transparency and fee structures that encourage gambling.
The best remedy, he suggests, is for principals to change the way they contract with, and instruct agents. And he sets out three actions for policy-makers and regulators:
1 Call for the adoption of the manifesto by all public funds.
2 Withdraw tax-exemption rights for all funds that fail to impose limits on turnover or that fail to provide adequate reporting to their end-investors.
3 Issue GDP bonds as ideal investments offering growth, inflation protection and relative price stability
Dr Woolley said: 'Unless action is taken quickly along these lines, the next crisis will spell the end of capitalism as we know it'.
Chinese Investor Emerges as Possible Buffett Successor
By SUSAN PULLIAM
Twenty-one years ago, Li Lu was a student leader of the Tiananmen Square protests. Now a hedge-fund manager, he is in line to become a successor to Warren Buffett at Berkshire Hathaway Inc.
Mr. Li, 44 years old, has emerged as a leading candidate to run a chunk of Berkshire's $100 billion portfolio, stemming from a close friendship with Charlie Munger, Berkshire's 86-year-old vice chairman. In an interview, Mr. Munger revealed that Mr. Li was likely to become one of the top Berkshire investment officials. "In my mind, it's a foregone conclusion," Mr. Munger said.
[picture] From left to right: David Sokol of MidAmerican, Warren Buffett, Wang Chuan-Fu of BYD and Mr. Li.
The job of filling Mr. Buffett's shoes is among the most high-profile succession stories in modern corporate history. Mr. Buffett, who will turn 80 in a month, says he has no current plans to step down and will likely split his job after he leaves the company into separate CEO and investing functions. Mr. Li's emergence as a contender to oversee Berkshire investments is the first time a name has been identified to fill the investment part of Mr. Buffett's legendary role.
The development illustrates that Berkshire is moving toward putting in place—possibly sooner than investors anticipated—certain aspects of its succession plan.
The Chinese-American investor already has made money for Berkshire: He introduced Mr. Munger to BYD Co., a Chinese battery and auto maker, and Berkshire invested. Since 2008, Berkshire's BYD stake has surged more than six-fold, generating profit of about $1.2 billion, Mr. Buffett says. Mr. Li's hedge funds have garnered an annualized compound return of 26.4% since 1998, compared to 2.25% for the Standard & Poor's 500 stock index during the same period.
Mr. Li's ascent on Wall Street has been no less dramatic. He spent his childhood shuttling between foster families after his mother and father were sent to labor camps during the Cultural Revolution. After the Tiananmen Square protest, he escaped to France and came to the U.S. Investors in his hedge fund have included a group of senior U.S. business executives and the musician Sting, who calls Mr. Li "hardworking and clever."
From the Archive
Mr. Li's investing strategy represents a significant shift for Mr. Buffett: Mr. Li invests chiefly in high-technology companies in Asia. Mr. Buffett typically has ignored investments in industries he says he doesn't understand.
Mr. Buffett says Berkshire's top investing job could be filled by two or more managers who would be on equal footing and divide up responsibility for managing Berkshire's $100 billion portfolio. David Sokol, chairman of Berkshire unit MidAmerican Energy Holdings, is considered top contender for CEO. Mr. Sokol, 53, joined MidAmerican in 1991 and is known for his tireless work ethic.
In an interview, Mr. Buffett declines to comment directly on succession plans. But he doesn't rule out bringing in an investment manager such as Mr. Li while still at Berkshire's helm.
[picture] Li Lu (far right) with Chinese student leaders at Tiananmen Square in June 1989.
"I like the idea of bringing on other investment managers while I'm still here," Mr. Buffett says. He says he doesn't preclude making a move this year, though he adds that there is no "goal" to bring on an additional manager that quickly either. Mr. Buffett says he envisions a team approach in which the Berkshire investment officials would be "paid as a group" from one pot, he says. "I don't want them to compete."
Mr. Li fits the bill in some important ways, Mr. Buffett says. "You want someone" who "can think about problems that haven't yet existed before," he says. Mr. Li is a contrarian investor, loading up on BYD shares when they were beaten down. And he's a big fan of Berkshire, which may also help his cause. "We don't want them unless they have special feelings about Berkshire," Mr. Buffett says.
But hiring Mr. Li could be risky. His big bet on BYD is his only large-scale investing home run. Without the BYD profits, his performance as a hedge-fund manager is unremarkable.
It's unclear whether he could rack up such profits if managing a large portfolio of Berkshire's.
What's more, his strategy of "backing up the truck," to make large investments and not wavering when the markets turn down could backfire in a prolonged bear market. Despite a 200% return in 2009, he was down 13% at the end of June this year, nearly double the 6.6% drop in the S&P-500 during the period.
Mr. Li declines to discuss a potential Berkshire position, saying only that he feels fortunate to be a member of the Berkshire inner circle. "This is the stuff you can't conjure in dreams," he says.
Mr. Li was born in 1966, the year Mao Zedong's Cultural Revolution began. When he was nine months old, he says, his father, an engineer, was sent to a coal mine to be "re-educated." His mother was sent to a labor camp. Mr. Li's parents paid various families to take him in. He was shuttled from family to family for several years until moving in with an illiterate coal miner, with whom he developed a close bond, in his hometown of Tangshan. Living apart from his family as a child taught him survival skills, Mr. Li says.
He was reunited with his family, including two brothers, by age 10, when a massive earthquake hit his hometown, killing an estimated 242,000 people in the area, including the coal miner and his family. His nuclear family was spared, he says, but "most of the people I knew were killed."
At the time, he says he had no direction and was fighting in the streets. Mr. Li says his grandmother, who was among the first women in her city to attend college, inspired him to begin reading and studying. He later attended Nanjing University, majoring in physics.
In April 1989, he traveled to Tiananmen Square in Beijing to meet with students who were gathering to mourn the death of Secretary General Hu Yaobang, who was viewed as a supporter of democracy and reforms.
The students protested against corruption, among other things, and Mr. Li helped organize the students and participated in a hunger strike.
He and other students fled to France. Later in 1989, he traveled to the U.S. to speak at Columbia University, where human-rights activists embraced him as a hero. He spoke little English but landed an advance to write a book about his experiences.
Helped by financial scholarships at Columbia, Mr. Li quickly learned English. He simultaneously earned three degrees: an economics degree, a law degree and a graduate degree in business, according to Columbia.
With his student loans piling up, Mr. Li attended a lecture by Mr. Buffett at Columbia in 1993. At the time, the 1990s bull market was in full swing, and hedge funds were on the rise. Mr. Li says in China he didn't trust financial markets but hearing Mr. Buffett helped him overcome skepticism about stock investing.
He began dabbling in stocks using money from his book advance. By his graduation in 1996, he had built a sizable nest egg and says he thought he could retire. Instead he took a job at securities firm Donaldson Lufkin & Jenrette and then left to set up his own hedge fund. In 1997, he had set up Himalaya Partners, a hedge fund. Later he started a venture-capital fund to invest in U.S. technology companies.
It was a heady time on Wall Street. The Internet boom was beginning. Investors were clamoring to find hot stocks.
Through his human-rights contacts, Mr. Li quickly attracted well-heeled clients including Bob Bernstein, former chairman of Random House and founder of Human Rights Watch as well as the musician Sting. Other investors included financier Jerome Kohlberg, News Corp. director emeritus and Allen & Co. executive Stanley Shuman and hedge fund manager Jack Nash, Mr. Li says.
But Mr. Li bombed out in 1998, his first year as a hedge fund manager. His fund, which was invested chiefly in Asian stocks, was hammered by the Asian debt crisis, and lost 19%.
"I felt bad that people had trusted me," he says. "All they knew was I was a student activist and all they saw was losses."
His fortunes rebounded as the Asian crisis quickly faded. As 1998 began, so did a huge new bull market. By now, the hedge-fund industry was growing gangbusters, and by the end of 1999, Mr. Li's fund had regained its losses.
In 2002, hedge-fund giant Julian Robertson gave Mr. Li money to invest in his fund on the condition that the fund would make bearish as well as bullish bets on companies.
It wasn't a good fit. Mr. Li says he "hated" betting against stocks, complaining that he had to "trade all the time" to adjust his portfolio. (The remaining parts of the fund now are being unwound.) Mr. Robertson declined to comment on the business relationship.
One of Mr. Li's human-rights contacts was Jane Olson, the wife of Ronald Olson, a Berkshire director and early partner at a Los Angeles law firm Mr. Munger helped found. Mr. Li began spending time at the Olsons' weekend home in Santa Barbara, Calif., and on Thanksgiving 2003 met Mr. Munger, whose home is nearby.
Mr. Munger says Mr. Li made an immediate impression. The two shared a "suspicion of reported earnings of finance companies," Mr. Munger says. "We don't like the bull—."
Mr. Munger gave Mr. Li some of his family's nest egg to invest to open a "value" fund betting on beaten-down stocks.
Two weeks later, Mr. Li says he met again with Mr. Munger to make certain he had heard right. In early 2004, Mr. Li opened a fund, putting in $4 million of his own money and raising an additional $50 million from other investors. Mr. Munger's family put in $50 million, followed by another $38 million. Part of Mr. Li's agreement with Mr. Munger was that the fund would be closed to new investors.
Mr. Li's big hit began in 2002 when he first invested in BYD, then a fledgling Chinese battery company. Its founder came from humble beginnings and started the company in 1995 with $300,000 of borrowed money.
Mr. Li made an initial investment in BYD soon after its initial public offering on the Hong Kong stock exchange. (BYD trades in the U.S. on the Pink Sheets and was recently quoted at $6.90 a share.)
When he opened the fund, he loaded up again on BYD shares, eventually investing a significant share of the $150 million fund with Mr. Munger in BYD, which already was growing quickly and had bought a bankrupt Chinese automaker. "He bought a little early and more later when the stock fell, which is his nature," Mr. Munger says.
In 2008, Mr. Munger persuaded Mr. Sokol to investigate BYD for Berkshire as well. Mr. Sokol went to China and when he returned, he and Mr. Munger convinced Mr. Buffett to load up on BYD. In September, Berkshire invested $230 million in BYD for a 10% stake in the company.
BYD's business has been on fire. It now has close to one-third of the global market for lithium-ion batteries, used in cell phones. Its bigger plans involve the electric and hybrid-vehicle business.
The test for BYD, one of the largest Chinese car makers, will be whether it can deliver on plans to develop the most effective lithium battery on the market that could become an even bigger source of power in the future. Even more promising is the potential to use the lithium battery to store power from other energy sources like solar and wind.
Says Mr. Munger: "The big lithium battery is a game-changer."
BYD is a big roll of the dice for Mr. Li. He is an informal adviser to the company and owns about 2.5% of the company.
Mr. Li's fund's $40 million investment in BYD is now worth about $400 million. Berkshire's $230 million investment in 2008 now is worth about $1.5 billion. Messrs. Buffett, Munger, Sokol, Li and Microsoft founder and Berkshire Director Bill Gates plan to visit China and BYD in September.
Mr. Li is able to travel in China on a limited basis today, but he hopes to regain full travel privileges soon. It isn't clear how he is viewed by the Chinese government.
Mr. Li declined to name his fund's other holdings. Despite this year's losses, the $600 million fund is up 338% since its late 2004 launch, an annualized return of around 30%, compared to less than 1% for the S&P 500 index.
Mr. Li told investors he took a lesson from watching the World Cup, comparing his investment style to soccer. "You may very well work extremely hard and seldom score," he says. "But occasionally—very occasionally—you get one or two great chances and you make decisive strikes that really matter."