李录访谈，格雷厄姆与多兹维尔

Graham & Doddsville An investment newsletter from the students of Columbia Business School Issue XVIII Spring 2013 Inside this issue: CSIMA Conference P. 3 Preston Athey Li Lu — Omaha Trek P. 4 — Holding Know What You Winners Longer Don’t Know Moon Lee Prize P. 5 Preston Athey P. 10 Li Lu ’96 is the founder of Himalaya Capital, an invest-Li Lu P. 24 ment partnership focused on both public and private opPershing Square portunities in Asia and North Finalist Pitches P. 36 America. Mr. Li grew up in China and was a student Li Lu Paul Isaac P. 46 leader in the 1989 Tianan-men Square protests. Prior to founding Himalaya Capital in 1997, Mr. Li worked in investment bank-ing. He earned his B.A. in economics from Columbia College, a J.D. from Columbia Law School, and Editors Preston Athey an M.B.A. from Columbia Business School.

Jay Hedstrom, CFA MBA 2013 Preston Athey is a vice (Continued on page 24) president of T. Rowe Jake Lubel Price Group and has led MBA 2013 the $8 billion T. Rowe Paul Isaac — Know Your Style and Price Small-Cap Value Sachee Trivedi Fund since 1991. During Enjoy the Ride MBA 2013 that time, the fund has returned nearly 11.9% per Paul Isaac is the founder Richard Hunt year after fees, making it of Arbiter Partners, a MBA 2014 a superior performer New-York based hedge among its peers. Prior to fund and nephew of Stephen Lieu joining the firm in 1978, noted value investor MBA 2014 he was a contract Walter Schloss. Prior to administrator on Admiral Arbiter, he was the Chief H. G. Rickover’s staff at Investment Officer at the U.S. Atomic Energy Cadogan Management, a Visit us at: Commission. Preston fund of funds. Mr. Isaac www.csima.org earned a B.A. in began his career at the economics from Yale Allied International-University and an M.B.A. American Eagle Trading from Stanford University.

Corporation. He He has also earned the graduated from Williams Chartered Financial College with Highest Analyst designation and is Paul Isaac Honors in Political a Chartered Investment Economy and was a Counselor. Thomas J. Watson Foundation Fellow. (Continued on page 10) (Continued on page 46) Li Lu (Continued from page 1) money.” I wasn’t sure what through right out of the G&D: How did your it was all about. I just re- gate. And I thought this unique experience as a member thinking that there fellow was just so intelligent Tiananmen Square protest was a “buffet” involved. So I – he could put very com-leader lead you to where assumed that it was some plex ideas into such simple you are today, running kind of talk with a free terms. I was immediately Himalaya Capital? lunch! I said it was a good drawn to value investing.

By combination – a free lunch the time the lecture was Li Lu (LL): When I first plus a talk about how to over, I thought that this was came to Columbia Universi- make money. So I went. what I was looking for; I ty, I was dirt poor. I did not To my dismay there was no could do this. choose to come here – I Li Lu just ended up here because I At the time, I couldn’t really had nowhere else to go, start companies, and I didn’t having just escaped from want to work in a big com-China after Tiananmen. I pany because of the differ-was in a new country where “There are few ences in language and cul-I didn’t understand the lan- ture. Investing, on the othguage, didn’t know anybody, people that switch in er hand, sounded like it re-and didn’t have a penny to between or get it quired a lot of reading and my name.

So I was desper- mathematics, hard work, ate and afraid. In retro- [value investing] and good judgment – I was spect, that is good inspira- confident that I could do tion for trying to figure out gradually. They those things well. And the how to make money! I just fundamental principles of wanted to know how to either get it right value investing appealed to survive. me – buy good securities at away or they don’t a bargain price. If you’re For the first couple of years, get it at all. I never wrong, you won’t lose a lot, I really struggled with the but if you’re right you’re language, but I eventually really tried anything going to make a lot. It fit became much more com- my personality and temperfortable. I always had this else. The first time I ament very well.

Warren fear in the back of my mind used to say, “Value investing of how I was going to make heard it, it just made is like an inoculation – ei-a living here. I didn’t even ther it takes or it doesn’t.” think about success at the sense; and I heard it I totally agree with him. time – I just wanted to pay from the best.” There are few people that my bills. I grew up in Com- switch in between or get it munist China and never had gradually. They either get it much money to my name, right away or they don’t get and then all of a sudden I it at all. I never really tried had giant student loans. So lunch. [laughs] There was anything else. The first time naturally I tried to make a just a guy with the name I heard it, it just made buck or two.

“Buffett.” sense; and I heard it from the best. I guess it turned One day, about two years Mr. Buffett really made a lot out better than a free lunch. after I arrived, a friend of of sense during that talk. It mine who knew my issues was like a punch in my eyes. G&D: How did your in-said, “If you really want to It was like I had just woken vesting process develop make money you have to up and a light had switched differently from Buffett’s? listen to this fellow. He on. His honesty came (Continued on page 25) truly knows how to make Volume XVIII Page 25 Li Lu (Continued from page 24) against the best counterar- LL: Oh, there are so many. LL: Part of the game of gument of the smartest op- We share a fundamental investing is to come into ponent.”

He is right about ethos about life and about your own. You must find that. approaching investing. So I some way that perfectly fits learn more about how to your personality because Investing is about predicting conduct myself personally as there is some element of a the future, and the future is much, if not more, than zero sum game in investing. inherently unpredictable. investing.

If you buy, somebody else Therefore the only way you has to sell. And when you “There is some can do it better is to assess G&D: How would you sell, somebody has to buy. all the facts and truly know define your circle of compe- element of a zero You can’t both be right. what you know and know tence?

You really want to be sure what you don’t know. sum game in that you are better in- That’s your probability edge. LL: I let my own personal formed and better reasoned Nothing is 100%, but if you interests define my circle of investing. If you than the person on the oth- always swing when you have competence. Obviously I er side of the trade. It is a an overwhelmingly better know something about Chi-buy, somebody else competitive game, so you’re edge, then over time, you na, Asia, and America – going to run into a lot of has to sell. And will do very well. those are things that I am very intelligent, hardworking really familiar with. I have when you sell, fellows. G&D: How did you be- also over the years expand-come friends with Charlie ed my horizon [in terms of somebody has to The only way to gain an Munger?

Do you have a analyzing businesses]. edge is through long and friendship with Warren Buf- buy. You can’t both hard work. Do what you fett as well? I started out looking for love to do, so you just natu- cheap securities. When you be right. You really rally do it or think about it LL: Charlie and I have start out, you really have no all the time, even if you are want to be sure some very close mutual choice. You don’t have relaxing, and even if you’re friends. Over time, we enough experience, and you that you are better just walking in the park. started talking about busi- don’t want to lose money, Over time, you can accumu- nesses, and then it evolved so what do you do? You informed and better late a huge advantage if it into a strong bond.

I view end up buying dirt-cheap comes naturally to you like him as a mentor, teacher, securities. But over time, if reasoned than the this. The ones who really partner, and friend, all in you are interested in busi-figure out their own style one. I am also friendly with nesses in addition to securi-person on the other and stick to it and let their Warren, but not nearly as ties, you begin to become a natural temperament take side of the trade.” close as with Charlie be- student of businesses. over will have a big ad- cause Warren is in Omaha. vantage. I admire him, and I learn Eventually, one thing leads more about him from his to another and you begin to The game of investing is a writings and deeds than learn different businesses. process of discovering: who through interpersonal inter- You learn the DNAs of you are, what you’re inter- actions.

I have a lot of in- businesses, how they proested in, what you’re good teraction with Charlie, so I gress, and why they are so at, what you love to do, know him both as person strong. Over time, I really then magnifying that until and through his writing and fell in love with strong busi-you gain a sizable edge over personal deeds. nesses. I morphed into find-all the other people. When ing strong businesses at bar-do you know you are really G&D: Do you have a fa- gain prices. I still have a better? Charlie Munger al- vorite Charlie Munger streak in me that favors ways said, “I would not feel quote? finding really cheap securi-entitled to a view unless I (Continued on page 26) could successfully argue Li Lu (Continued from page 25) the people who bought the ty.

We learned quickly that ties – I just can’t help it! business from us. we couldn’t really compete But over time, I’ve become with Bloomberg. more attracted to looking I like win-win situations. I for great businesses that are do not complain about sell- G&D: You don’t short inherently superior, more ing Capital IQ too early. stocks at Himalaya, correct? competitive, easier to pre- We made a lot of money on dict, and with strong man- that investment, and we LL: That’s right; not any “The only way to agement teams. I’m just not contributed a great deal. I more. That change oc-quite satisfied with the sec- remain friends with the curred nine years ago. gain an edge is ondary market. As I said, founders. That aspect gave Shorting was one of the there is an aspect of the me enormous pleasure.

But worst mistakes I’ve made. through long and securities business that is the venture side is hard to hard work. Do zero-sum. And that’s the scale; you must put in a lot G&D: Is your lack of a area in which I don’t feel of effort. So, over time, I short book due to your what you love to entirely comfortable. I’m gradually moved into helping desire to be a constructive more interested, by my na- in a different way. Even in third-party for companies do, so you just ture, in win-win situations. public securities, you can and their management still be very helpful and con- teams? naturally do it or I want to create wealth to- structive. So, that’s who I gether with the business am. I’m still learning, and LL: Yes.

But also, you can think about it all operators and employees I’m still interested. I’m still be 100% right, and you the time, even if when I invest. So that led young, and still incredibly could still bankrupt yourself. me to venture businesses. I curious. So, who knows? That aspect of shorting just you are try to apply the principles of Hopefully, I will continue to frustrated me too much! intelligent investing there, gradually expand my circle [laughs] relaxing...Over but I actually can contribute of competence. quite a bit, so it becomes a Three things about shorting time, you can win-win situation. G&D: How were you able make it a miserable busi-accumulate a huge to figure out that Capital IQ ness. On the long side, you Over my career, I’ve had would become so success- have 100% downside but advantage if it the satisfaction of building a ful? unlimited upside.

On the number of different venture short side, you have 100% comes naturally to businesses. Some of them LL: In the beginning it was upside and unlimited downbecame enormously suc- Bloomberg. We wanted to side. I do not like that you like this.” cessful, even after we sold create something just like math. Second, the best them. You could say we Bloomberg, and in the pro- short has some element of sold them too early! I was cess, we grew to appreciate fraud. However, a fraud can the first investor in Capital Bloomberg much more be- be perpetrated for a long IQ, and then look at what cause it was so hard to time. Of course you bor-happened. If we would have compete with them. Then row to short, so they could kept it, we would have been we realized the investment really just wear you down. far richer!

It’s not like we banking side was not fully That’s why I could be 100% didn’t make a lot of money penetrated. right and bankrupt at the in that investment. We did. same time. But, you know [laughs] But I like it that So we basically applied what what, you go bankrupt first! way. I like to create some- we learned about Bloom- Lastly, it screws up your thing that everybody finds berg and created a similar mind. Shorts just grab your useful. We created employ- product for the investment mind and take away from ment, and we created a banking side. Over time, we the concentrated effort that beautiful product that’s sus- also penetrated different is required to do proper tainable, and everybody businesses like private equi- (Continued on page 27) made a lot of money, even Volume XVIII Page 27 Li Lu (Continued from page 26) bunch of different problems. feel comfortable with.

They long investing. So, those are So you have to admit the have that $11 billion invest-the three reasons why I just record is impressive. They ment in IBM, which, I can stay away from shorting. also happen to be in the argue, is a technology com-right industry and the right pany. But I can guarantee It was a mistake on my part. environment, and they get that’s not how they think I shorted for a couple of the right support from the about things. It has nothing years. I don’t discard peo- Pictured: Christopher Davis government. Their engi- to do with whether it’s a of Davis Advisors at the ple who are really doing neering culture consistently technology stock or not. 2013 CSIMA Conference. well at shorting – it’s just demonstrates its ability to not me.

If I want to add a tackle big, difficult problems. G&D: Buffett admitted in a fourth reason, it is that the It works. So it’s hard not to 2009 Fortune article that he economy overall has been be impressed by the record doesn’t really understand really growing at a com- the guy has. At the time we BYD. pounding rate for 200-300 invested, we had quite a bit years, ever since the mod- of a margin of safety. LL: That is true. Warren ern science technology era. and Charlie have a great So, naturally, the economic partnership and Charlie trend favors long positions knows more about BYD rather than short. than Warren. But I would not bet against the collec-But you cannot live life tive track record of those without making a mistake. “...you cannot live two. It’s not that they don’t Every time I make a mistake make errors from time to I learn something. life without making time.

Everybody is capable a mistake. Every of doing that. They have a G&D: How were you able few, but very, very few over to get Charlie Munger inter- time I make a a long investment career. ested in a company like BYD [a Chinese company mistake I learn G&D: Do you see the which manufactures electric quality of BYD cars improv-cars, batteries, electronics something.” ing? and solar equipment] given that Berkshire Hathaway LL: This company is a typically shies away from learning machine. Think technology-oriented compa- about it – they really didn’t nies? get into industry until 10 years ago. They didn’t proLL: I don’t think that War- They play in a big field with duce their first car until ren and Charlie are ideolog- open-ended possibilities and eight years ago. They are in ical.

Neither am I. It’s real- have a reasonable chance of a market where every single ly how much you know. being successful. As I said, international major brand is The story of BYD is rela- nothing is a sure thing, but competing, with an all-out tively simple. This guy, who this strikes me as having as effort, because it’s such a is a really terrific engineer, good of a chance as any. big market. So they never started the business from Charlie was equally im- had any home advantage just a $300,000 loan with no pressed by the company, whatsoever because China’s additional money until the which then led to the in- auto market started out IPO. He created a company vestment. Berkshire is not completely open with every-with $8 billion in revenue ideologically against technol- body competing.

Yet and 170,000 employees and ogy stocks. They’re just there’s a little car company tens of thousands of engi- against anything they don’t (Continued on page 28) neers. He solved a whole Li Lu (Continued from page 27) tomers, suppliers, and man- LL: Well, management with very little money, and, agement? always has a big influence on in less than 10 years, it’s your success, no matter selling more than half a mil- LL: All of them. I don’t how good or how bad the lion cars a year and has talk to as many investors – business is itself. Manage-carved out a position for very few. I am more inter- ment is always part of the itself. You have to say, the ested in talking to people equation of making the record is not too bad, and who are actually running company successful, so the so there’s something to it. businesses and entrepre- quality of management al-They also have an engineer- neurs or CEOs or just good ways matters.

But to assess ing culture and a can-do businessmen. I read all of that quality is not that easy. spirit. They consistently the major newspaper publi- If you can’t assess the quali-demonstrate that they’re ty of management, you may able to tackle really com- have to make a decision in plex engineering problems spite of that. That’s just and come up with very part of the process. So you practical solutions faster, “You can recognize have to figure out other cheaper, and better than ways such as looking at the most other people. That is good ideas by quality of the business, the an advantage in the manu- valuation, or something else facturing economy. reading a great deal until you can justify an in-vestment. G&D: Can you talk about and also by studying your investment process?

If you do have a way to as-a lot of companies sess the quality of the manLL: Ideas come to me from and constantly agement team, either be-all sources, principally from cause you’re an astute stu-reading and talking. I don’t learning from dent of human psychology, discriminate how they or you have a special rela-come, as long as they are intelligent people – tionship with the people, good ideas. You can recog- then you’ll take that into nize good ideas by reading a hopefully more consideration. Why would-great deal and also by study- n’t you? The management ing a lot of companies and intelligent than you team is part of what really constantly learning from are, especially in makes a company. intelligent people – hopeful-ly more intelligent than you their field.” But, it’s not that easy.

It’s are, especially in their field. not that easy to have an in-I try to read as much as I depth, solid understanding can. I study all of the inter- of the management team. esting and great companies, Very few people are able to and I talk to a lot of intelli- cations and annual reports do that. I admire people gent people. You know of the leading companies. I that say, "Hey, look. What-what? In some of those get a lot of ideas out of ever the information, what-readings or conversations, those too. ever the kind of presenta-ideas just click. Then you tion they make, I will never do more research and then G&D: How do you assess be able to learn about man-you get comfortable or you if the management is being agement beyond that.

I don’t get comfortable. forthright with you? How know it’s a show for me, so useful is it to speak with the I might as well just discard G&D: Are the people that management? it." I respect that. you talk to fellow investors (Continued on page 29) or are they people like cus- Volume XVIII Page 29 Li Lu (Continued from page 28) tunity cost. That’s my goal, and there-fore the compensation Investing is about intellectu- G&D: Is your fund open to structure of the fund re-al honesty. You want to new investors? flects that. Over time, I know what you know. You switched into the best com-want to know, mostly, what LL: The fund has been pensation structure I knew you don’t know. If under- closed to new investors for in the industry, the original standing the management nine years.

However, we “Buffett partnership formu-team is not in the cards, it’s will open it up a bit this la”. We don’t take any not in the cards. year. We have more op- management fee. We proportunities than we have vide a 6% return for free to G&D: What is your do- money around, but that’s our investors and then take mestic versus international 25% after that. I don’t in-allocation? vest anything outside of the “That way we’re all fund. I put all of my investLL: I don’t have a precon- ment capital into my funds. ceived notion about alloca- So it’s a true partnership. in the same game tion. I let the opportunity There are very few conflicts dictate where I end up. I together. … That between the general part-just happen to have more ners and the limited part-interest in Asia and the U.S., ethos is what makes ners. so that’s where I end up.

I do not feel that interest in Charlie and Warren That way we’re all in the Europe. I do not feel that in same game together. I have Africa. But I approach it so special. They zero incentive to take new with an open mind. I want money for the sake of taking believe in to really find the best com- new money because I don’t pany at the best price, run fundamentally take things off the top. The by the best people and avail- minute that new money able to me at the time I am earned success. arrives, it begins to com-looking. Those don’t neces- pound 6% on an annual basis sarily always meet, and it’s That’s why, despite against me, so I better be OK. able to find something that their enormous is worthwhile and doing You start out by holding better.

When I make mon-success, nobody cash, and that is a pretty ey, I feel like I earn it, and good opportunity cost, be- criticizes them very when my investors make cause it doesn’t go down. money, they earn it. It is So any time you find an in- much.” just a better way to struc-vestment, it has to be an ture a business – you feel improvement on an overall rare. I usually don’t want to that everybody’s success is risk-adjusted basis. You increase our size. My ambi- deserved. That ethos is may find some very interest- tion has never been to run what makes Charlie and ing things, and now you’ve the largest fund. I never Warren so special. They got a basket of a few inter- wanted to earn the most believe in fundamentally esting securities plus cash. money out of a fund.

I just earned success. That’s why, That is a pretty good oppor- wanted to have, by the time despite their enormous suctunity cost, and the next I finished my career, one of cess, nobody criticizes them time you add another secu- the best track records on a very much. When you crerity, it better make the risk-adjusted basis. ate the hundreds of billions portfolio better than the If I achieve that, I will feel in wealth for everybody existing one. You just con- very good about myself. (Continued on page 30) stantly improve your oppor- Li Lu (Continued from page 29) 10 years from now? panies are the ones that are while taking a salary of capable of reinventing them-$100,000 per year for more LL: Most businesses are selves and dealing with than 40 years, it’s hard to subject to change if you stay change.

Take the example criticize them. with them long enough. of Intel. The whole business There’s not a single business changes every 18 months.

G&DAre there industries that I know of that will nev- Failure to change leads to that you completely stay er change. That’s the fasci- quite a substantial disad-away from? nating thing about business. vantage and yet they’re able Successful businesses have to build their culture based LL: I’m not ideologically some combination of things on that change. opposed to anything. I am against any ideology. Take Samsung – their early [laughs] memory chip business de-creased in price by 1% every There are lots of things I “I think you want to week, and yet they really don’t know. I’ll be the first developed a culture that one to admit. But it doesn’t avoid wrong precisely deals with that mean that I’m not curious decisions as much change. So when they apply from time to time.

Maybe I the same culture to some-know some aspect of the or more than you thing like a cell phone, they story. That little aspect get ahead very quickly. might even constitute the want to get it Now they’re outselling Ap-investment. I don’t know. I ple. So culture really plays don’t want to rule it out, approximately an important role in those but I can say that when you faster-changing environ-present me an idea, I can right. If you avoid ments, enabling certain quickly tell you whether it’s the wrong decisions, companies to always surge a “no” within a few minutes. ahead of everybody else. you’ll probably There are basically three G&D: Do you need to buckets that Charlie has. come out okay over understand the technology “Yes”, “no”, or “too hard”. on an engineering level to Most of the things fall in time.” have a good sense of the "too hard."

Some get a risk/reward? quick “yes” or “no”, but if it’s too hard, it’s too hard. LL: It certainly is a plus, So you end up not doing a that enable them to adapt but not a must. If you were lot. You end up really con- to changes better than any- really a great engineer in the centrating on the ideas one else. In each situation, product the business is sell-where you truly have the it’s slightly different. ing, obviously it’s a plus. time and energy to fully But it’s certainly not a must understand the situation Every company in today’s because no matter how better than anybody. age is a technology company good you are at a certain somehow, but the technolo- area, you’re not so good in G&D: How to you get gy may not be on the cut- other areas.

The pace of comfortable with the risk/ ting edge, and may not play change is such that whatev-reward of a high tech com- an important role in the er you are now specialized pany like BYD that is under- success or failure of the in will become obsolete. going pretty rapid techno- overall business. But that doesn’t disqualify logical change? Do you you from making a judgment think you have a good sense Successful technology com- (Continued on page 31) of what BYD will look like Volume XVIII Page 31 Li Lu (Continued from page 30) that don’t appear to be very your sell decisions? on how a company can de- stable actually turn out to velop a culture to deal with be. LL: One should make sell that. Successful companies decisions on one of three are able to deal with change I think you want to avoid occasions.

Number one, if consistently by hiring the wrong decisions as much or you make a mistake, sell as right people, building the more than you want to get fast as you can, even if it’s a right culture, and staying it approximately right. If correct mistake. What do I Pictured: Mason Hawkins of ahead of their competitors. you avoid the wrong deci- mean by a correct mistake? Southeastern Asset Manage-That’s the aspect that really sions, you’ll probably come Investing is a probability ment at the 2013 CSIMA makes them successful. And Conference. game. Let’s say you go into that’s kind of a predictable a situation with 90% confi-aspect of businesses. dence that things will work out one way and a 10% There is always a certain “The most chance they work out an-element that is unpredicta- other way, and that 10% ble.

And there is a certain important thing in event happens. You sell it. element that is predictable. our business is Then there’s a mistake that You want to have a little of your analysis is completely both. But overall, I think intellectual honesty. wrong. You thought it was you’re right. In a business 99% one way but it was that is subject to rapid What I mean is four actually 99% the other way. change, it is a lot more diffi- When you realize that, sell cult to make a reliable fore- different things: as fast as you can. Hopeful-cast. There is no question ly at not too much of a loss, about that. But it doesn’t know what you but even if it is a loss it mean an investor cannot know, know what doesn’t matter – you have make a few predictions that to sell it. could indicate that the odds you don’t know, are in your favor.

You want The second time you want to play when you feel very know what you to sell is when the valuation comfortable that the odds swings way too much to the are in your favor. Many don’t have to know, other end of the extreme. I times, that’s searching don’t sell a security because among typically stable busi-and realize that it’s a little overvalued, but if nesses where something has there is always a it is way overboard on the changed all of a sudden. other side into euphoria, possibility that ‘you then I will sell it. If you are Take Eastman Kodak for right and hold a company example. It used to be one don’t know that you for a long time, you have of the best companies; it accumulated a large amount invented photography.

But don’t know.’” of unrealized gains. A big look at where they are now. portion of those unrealized Take Bell Labs and AT&T. gains act like borrowings They used to really have all from the government inter-the power. They had mo- out okay over time. But, I est free and legally. So nopoly businesses. Where agree with you, it’s not easy when you sell that position, are they now? Just a name. and it’s not precise or a you take all the leverage and That is the nature of brutal science at all. Hopefully one you take a bunch of the capitalism. It’s the nature of improves overtime. capital out, so your return the business. Things that on equity has just become a appear to be predictable G&D: How do you make (Continued on page 32) and stable are not.

Things Li Lu (Continued from page 31) possibility that “you don’t the whole country could go little less. know that you don’t know.” down!” Everyone was con-Those four things are dis- stantly in crisis mode. All of The third occasion when to tinctly different. In a crisis, the things come out that sell is when you find some- things emerge that test you you don’t normally care thing that is better. Essen- on all four categories. about and normally don’t tially, a portfolio as I said is pay attention to. Normally Pictured: Tom Russo of opportunity cost. Your job Gardner Russo & Gardner For example, during the you think, “Well, that has as a portfolio manager is to nothing to do with my in-and Timothy Hartch of constantly improve on your vestment in this company.”

Brown Brothers Harriman at the CSIMA Conference basket. You start with a Then all of the sudden, you in February 2013. high bar. You want to in- “The most say, “Oh Jesus, it has every-crease the bar higher and thing to do with my compa-higher. You do that by con- important thing in ny.” Well, you are right or stantly improving the oppor- you are wrong. That crisis tunity costs; you find some- our business is will put those questions to thing better. Those are the intellectual the test. three reasons that I would sell. honesty. What I That’s why people freeze in the midst of a crisis. People G&D: In your 16 years mean is four freeze because they were running Himalaya, you’ve not intellectually honest experienced three major different things: before. They never quite financial crises: the Asian distinguished certain issues financial crisis of 1997, the know what you or questions and put them dot com bubble burst in know, know what into the appropriate basket.

2000, and the financial crisis If you make an overall judg-of 2008. How have you you don’t know, ment, for example, of how navigated these crises as a the U.S. is going to perform fund manager, and what know what you over time through ups and have you learned from downs, and you go into it them? don’t have to knowing that there is a pos-know, and realize sibility something much LL: That’s an excellent worse could happen. Maybe question. You know every it’s small, but when it hap-that there is always time that that happens, they pens, it happens. At that always bill it as “once in a a possibility that time, the question becomes century,” except these ma- “Is it an unknown unjor events happen every five “you don’t know known,” or do you know years in my case. [laughs] that you don’t have to What is interesting about that you don’t know?

You absolutely will crisis is that it puts your be asked that question. intellectually honesty to the know.” test. So the financial system might be in trouble. Yes, a The most important thing in Asian financial crisis, all of business needs financing, but our business is intellectual the sudden the world was I suppose if life goes on, my honesty. What I mean is saying, “how much debt do business will be there, how-four different things: know these companies have?! Oh ever it will end up. So the what you know, know what my goodness, they really question then becomes, you don’t know, know what have that much of a depend- “Do I have to know how you don’t have to know, and ence on debt! Oh my God, (Continued on page 33) realize that there is always a Volume XVIII Page 33 Li Lu (Continued from page 32) force in our global market- China and the U.S. together the financial system will sort places because of the sheer would make the Pacific Ba-out its problems for me to size of it and the path that sin somewhat of an eco-predict my business?” they’re on. nomic center the same way That’s the question and that the Atlantic Ocean was that’s the question that you China is on a historic path around Europe and the U.S. want to answer before a of continuing to grow into a A lot of opportunity will financial crisis hits. modern economy.

They emerge. That doesn’t mean that it’s a one-way street or If you can answer that ques- a smooth pass. All sorts of tion honestly and correctly, things could happen. It you will do more after the doesn’t mean you’re going financial crisis. Christopher “China is so big. It to make money guaranteed. Davis’s grandfather used to But it does offer a tremen-say that you make the most has all sorts of dous amount of opportunity money out of a bear market to those who can navigate financial panic – you just extreme this development. The im-don’t know it at the time. phenomena. Yes, portance of China cannot be It’s always the case. Less ignored. intelligent investors will be there are ghost sorted out. Intelligent in- G&D: Do you have any vestors are the ones who towns, but there concerns on a real estate are always intellectually bubble in China?

We saw a honest. They can distinctly are also towns that 60 Minutes piece about the know whether they know ghost cities in China, and it or they don’t know, and are utterly, utterly was very striking. know what they don’t have crowded … China to know, and that there China is so big. It has all exist unknown unknowns. is a case of sorts of extreme phenome-If you can really put things na. Yes, there are ghost into those categories cor- contradiction, as it towns, but there are also rectly, you will pass the test. towns that are utterly, ut-Otherwise, you will have has always been, terly crowded. I mean, eve-gotten yourself in trouble. ry space is occupied, and and will always be; there are towns seemingly G&D: In 2010 panel at you’ll always find out of nowhere that have an Columbia Business School, enormous number of high you mentioned that Asia’s evidence of every rises that are all occupied.

I role in the global financial remember, twenty years system is becoming increas- theory you want to ago that Pudong was viewed ingly important. Can you as a semi-ghost town. To-talk about this view for our prove.” day, you cannot help but be readers? impressed by the economic vibrancy there.

LLAsia will become an important economic force, still have a long way to go, We live in Manhattan, but not necessarily just in a fi- but they have come a long think about it: there are nancial sense. The financial way from the starting point. 10,000 high rises in Shanghai part is a derivative of Asia’s Because of the enormity of that are taller than thirty overall economic perfor- the size of China, it will have floors, multiple times that of mance. Asia, and particular- a huge impact in Asia and Manhattan – that is enor-ly China, is shaping up to the rest of the world. So (Continued on page 34) become a bigger economic Li Lu (Continued from page 33) things to worry me. energy is the next big revo-mous. Manhattan probably lution. You’ve done a lot of has the highest concentra- G&D: How do you view work on battery technology tion of high rises in the the overall attractiveness of and BYD, so is that some-whole world other than equities today? thing that you think about Shanghai. The scary part is beyond batteries? What do that China’s not done. So, I LL: I also put that into "too you think the energy revolu-say China is a case of con- hard" and "I know I don’t tion will look like? tradiction, as it has always have to know." I only think been, and will always be; LL: I pay attention to those you’ll always find evidence macro trends only in the of every theory you want to hope that I can have com-prove. fort that they’re a tailwind as opposed to a headwind.

But overall, the economy Now, how much they can still has a long way to go. “I pay attention to help if they’re a tailwind, or They still have a sense that those macro trends how much they can hurt if this is their time. It doesn’t they’re in my face, I don’t mean that they don’t have only in the hope know. But I want such mac-problems; they have an ro trends to be behind me enormous amount of prob- that I can have rather than in front of me. lems, but so does America, So that’s the extent that I and so did America over the comfort that want to know mega trends. last 200 years. they’re a tailwind as But as a concerned citizen, If you go through the Amer- opposed to a I’m intellectually curious ican Civil War, the country about it.

But it doesn’t killed two percent of its headwind. Now, mean that I’ll be able to population. And yet, not know for sure how a given only was it rebuilt, but it how much they can development is going to was rebuilt at a furious pace. come about. In fact, we And it went through two help if they’re a don’t know, and that’s why great world wars. After the free market with mil-World War II, if you tailwind, or how lions of participants acting in thought Japan and Germany much they can hurt their own self interests will were doomed, boy were figure out a way. To predict you wrong. if they’re in my ahead of time is not easy, and the good thing is that G&D: Do you think real face, I don’t know.” you don’t have to be able to estate has gotten a little do that. ahead of itself where there would be a need for a cor- If such trends are at your rection, or do you think back, that’s fabulous, espe-that demand will just catch about it when things go to cially if you don’t need them up? an extreme.

I don’t foresee to be at your back. If that as going to the ex- they’re really a headwind, LL: I put that in the "too treme, either way. In that you do want to examine hard” basket. I also put in case, I know I don’t have to them a little more. So that the basket of "I know I don’t know. is how I view this renewable have to know." It certainly energy issue. I know that at is “I don’t know”, but I also G&D: A lot of smart peo- some point, human civiliza-know that I don’t have to ple believe that renewable (Continued on page 35) know! I don’t want those Volume XVIII Page 35 Li Lu (Continued from page 34) gone through the discipline finances, how management tion will have to find some- of understanding one busi- makes its decisions, how it thing other than fossil fuels. ness as if you own 100% of compares to the competi-We don’t have enough fossil that business is very valua- tion, how it adjusts to the fuels, and we need to pre- ble. environment, how it invests serve them for agricultural extra cash, and how it fi-and food security reasons.

To start, take an easy-to- nances the business. We also can’t afford to have understand business. It the weather deteriorating could be a tiny business – a You should understand eve-the way it has been over the ry aspect of one business as last few decades. Eventually if you own 100% but you it will catch up to us. don’t actually run it. This “Start learning from causes you to be desperate So for multiple reasons I the best — to understand every aspect understand why we need to to protect your investment. figure out alternatives to listening, studying That will give you a sense of fossil fuels. But am I quali- a disciplined approach. fied to make an informed and reading. But That’s how you truly under-investment decision based stand business and investing. on that now?

Probably not. the most important Warren always says that to But if that one happened to be a good investor, you be at my back, hey I’m all thing in need to be a good business-for it. understanding the man, and to be a good businessman, you need to be a G&D: Do you have any investment business good investor in terms of advice for students who are capital allocation. interested in getting into is by doing it. investment management, Start by understanding one especially for those readers There is no thing within your control who can’t go and listen to that you can understand Warren Buffett speak during substitute for inside and out. That is a their lunch break? actually doing it. terrific starting point. If you start from that basis, you LL: If you do get a chance The best way to do are fundamentally in the to meet Mr. Buffett, I’d run right direction of becoming to it if I were you.

I would- it is to study one a great security analyst. n’t even take an airplane; I would just run to Omaha! business inside and G&D: It was a pleasure [laughs] speaking with you, Mr. Li. out for the purpose Start by learning from the of making the best – listening, studying, and reading. But the most investment.” important thing in under-standing the investment business is by doing it. little concession store, a There is no substitute to restaurant, or a small public-actually doing it. The best ly traded company. It way to do it is to study one doesn’t matter. Understand business inside and out for one business and what really the purpose of making the makes it tick: how it makes investment – you may not money, how it organizes its actually invest. But having