I have a good friend who has been living in China for a few weeks now.
Every day he sends me a short report. What he sees, what people talk about, what they buy. He is not an economist. He just walks around and looks. And what he sees is something most people in the West have missed.
During Covid and right after, home prices in China hit the highest level in history. People bought. They borrowed. A flat was the safest thing a family could own, because it had never gone down.
Then it went down.
My friend says that in his city, flats are worth 40% less than in 2021. Picture a worker in Beijing who bought a flat in 2021 for five million yuan. He put in all his savings and borrowed the rest. Today the flat is worth three million. His savings are gone, and he still owes the bank more than the flat is worth. His salary did not change. His life changed.
And here is what my friend tells me, word for word.
“Nobody buys anything here. People buy only what they have to buy. The things they cannot live without.”
Food. The phone. Insurance for the car. School for the kids. Everything else waits.
I wrote this down because it is the clearest description of a weak economy I have ever read. Li Lu sees the same thing. He grew up in China and managed Charlie Munger’s family money. Give him sixty seconds.
The same week I was watching the 2004 Berkshire meeting. Somebody asked Warren why he loves GEICO. His answer is the same sentence, said from the other side of the world.
“Virtually every American family wants to have a car. They don’t want to have insurance, but they can’t drive their car without insurance. So they’re buying a product they really don’t like very well. It’s not a luxury item, it’s a mandatory item.”
Look at the rest of the Berkshire portfolio with that sentence in mind. Coca-Cola. American Express. Apple. Railroads. Electricity. Candy. Every one of them is either something people love or something people cannot live without. There is nothing in there that depends on a good mood.
Apple is the interesting one. China is ahead of the US in some parts of technology. They build their own phones, good ones, cheaper ones. And still, in a country where nobody buys anything, the best-selling phone in China this spring was the iPhone 17 Pro Max. The most expensive one. Warren’s biggest position is a product that people in a housing crash still line up for.
That is the test. Would people still pay in a bad year.
I only want to own companies that pass it. Businesses people have to pay even in a deep crisis, when nobody buys anything else. That is the most important filter I have, and every company in my portfolio went through it. Then, a few days ago, I opened a filing from one of them. And I saw a red flag.
I sold every share I owned that same second. In the time it takes to blink.
