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Investing Principles From 'The Chinese Buffett'
We review how Li Lu built a successful investing career with several billion of AUM.
Li Lu is a prominent investor and fund manager known for his value investing approach and successful investment track record. Born in China in 1966, Li Lu attended the prestigious Peking University and became one of the student leaders during the 1989 Tiananmen Square protests. He eventually moved to the United States and graduated from Columbia University School of Law.
He started his investment career by working with renowned investor Charlie Munger, the vice chairman of Berkshire Hathaway and a long-time business partner of Warren Buffett. Munger recognised Li Lu's investment talents and invited him to join the investment team at his company, Munger, Tolles & Olson.
Li Lu's investment strategies draw heavily from the principles of value investing, which involve identifying undervalued securities and holding them for the long term. In addition, he emphasises a thorough understanding of a company's fundamentals, including its competitive advantages, management team, and financial health.
One of his notable investment strategies is focused on investing in China. He recognised the growth potential of the Chinese economy early on and has been actively investing in Chinese companies for decades. Li Lu's fund, Himalaya Capital, has successfully invested in Chinese companies such as BYD, a leading electric vehicle manufacturer, and Xiaomi, a prominent technology company.
Li Lu also places significant importance on "intelligent investing." He believes that successful investing requires financial analysis and a deep understanding of human behaviour, psychology, and the broader socio-economic landscape. Furthermore, he emphasises the importance of maintaining discipline, patience, and a long-term investing perspective.
While he is known for his successful investment track record, he keeps a relatively low profile compared to other prominent investors. However, his investment strategies and insights have gained recognition and respect among value investors and those interested in the Chinese market.
How to handle a stock market crash — Li Lu stated, “Our attitude is a financial crisis will happen all the time.” To survive the expected boom-bust cycles, Lu said he “looks for businesses which can get through crises and even thrive. If you hold through the ups and downs, your return will roughly equal the business’s return on invested capital.” To be a great investor, you need to have the right temperament, be able to watch your portfolio fall by 40%, and not make irrational, reflexive decisions.
When to buy stocks — Li Lu has a disciplined value investing approach, as he identifies great businesses he wants to own and happily waits “for the price to come into our strike zone” before buying. This strategy provides a significant margin of safety and is reminiscent of Warren Buffett’s idea of “waiting for the right pitch.” He also prefers “to buy stocks when they are trading at a discount to intrinsic value” and is happy to buy more if the stock goes down further.
Characteristics of great businesses — What is a great business for Mr Lu? He says he looks for companies with above-average returns on invested capital. The return on invested capital (ROIC) represents how much a company is earning on its investment. It is calculated by dividing net operating income after tax by invested capital, and it’s a good indicator of profitability and a sustainable business model.
Competitive advantages — Great businesses don’t need just an above-average ROIC but must also have “the ability to fend off competitors,” according to Li Lu. To accomplish this, a company must have “an enduring competitive advantage” and a “long runway of growth.” He says these businesses are scarce, and only a small percentage of companies belong in that category. Finally, he added, “If you’re lucky enough to find a long-term compounder, own them for a long time.”
Excellent management — The importance of excellent management cannot be understated. Mr Lu wants to see management with a business owner’s mentality and the ability to exercise intellectual honesty in allocating capital to achieve high rates of returns.
Munger’s friendship — Li Lu said that Charlie Munger is the most influential person in his life and is inspired by his ability to “maintain rational composure and a commonsensical approach to all problems in business and life.” He stressed the importance of having a role model and a mentor from which to learn.
Generalist vs Specialist — Li Lu says as investors, we should read widely and gather inspiration from many areas as a generalist, but ultimately, we should aim to be a specialist. Ideally, investors should be experts in the company/industry they are investing in and know more than others to gain a competitive edge.
Investing in China — Chinese stocks have been battered, but Li Lu is bullish on the country and says Chinese companies will continue to become an essential part of the global economy. According to him, trade propelled the Chinese economy up until ten years ago. It’s now becoming a consumer-driven economy as more Chinese citizens enter the middle class and have disposable incomes. Chinese consumers spent $6 trillion in the retail market in 2020 versus $5.5 trillion in the U.S. He said, “China is emerging to become the most dynamic, fastest-growing consumer market in the world, and that is likely to continue for many more decades to come. As a result, China remains one of the best markets for value investors.”
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