李录与布鲁斯·格林沃尔德——中国价值投资

Over the years there have been many books about Warren Buffett, Charlie Munger and various other old-school value investors. Yet being 20 years into the 21st century only a few new value investors have been highlighted. In this three-part serious I will highlight the investor Li Lu. The first part is going to be this one with a transcription of his recent talk about value investing in China, the second one will be a transcription of his 2006 lesson at Columbia Business School and in the third one I will attempt to piece together the most important philosophies, investments and experiences of Li Lu.

Li Lu is a Chinese-born American investor and founder of Himalaya Capital. Being one of the student leaders of the 1989 Tiananmen Square protests he fled to the US. Li graduated from Columbia University and he was one of the first in Colombia's history to receive three degrees simultaneously: a B.A. in Economics, a M.B.A. and a J.D. in 1996. After graduation he founded Himalaya Capital and Charlie Munger became an investor in his fund and a mentor for Li Lu. He is the person who has shown Warren Buffet BYD, a Chinese battery and auto maker, which resulted in a 22x fold increase for Berkshire’s investment in BYD so far.

The following transcript is from a talk at the 13th Annual Columbia China Business Conference on 10th, April 2021. Li Lu talks with Bruce Greenwald, his professor during his time at Columbia, about value investing in China. The transcript has been rewritten to make sections easier to read and to understand. You can watch the talk here.

I hope you enjoy the talk as much as I did.

Bruce: Hello, I know this is going to be a rare privilege for everybody. I have known Li Lu for more than 20 years and not only is he a great investor, but also a great conversationalist. Why don’t we talk about how your investment philosophy has changed? Value investing is an evolving field, so please tell us what has changed in your approach after you started 20-25 years ago.

Li Lu: More like 28 now. Time really flies

Bruce: How has it evolved? How have you been influenced by people like Charlie Munger?

Li Lu: I got into this field after hearing Warren Buffet speaking at the first lecture of professor Greenwald’s class. As a business student, I later took all the courses that professor Greenwald offered, learned a great deal and made a lot of money. Thank you.

The philosophy is relatively simple and hasn’t changed all that much for me. The practice is the hard part. Before I got exposed to value investing, my life was set at similar lines. The idea of buying at a discount, that is worth more is simply intelligent. All forms of intelligent investing involves some kind of value investing. Your focus on value evolves over time and different individuals tend to focus on different areas. When I started as a value investor 28 years ago, I didn’t know much about business. I was born and raised in China during the cultural revolution. There wasn’t much of a private business or open market economy back then and I had to learn everything. At the beginning I looked for obvious value primarily on the balance sheet in the classic style of Benjamin Graham. Searching for a cigarette butt, a statistically cheap business and ignoring what the business really is. That approach served me well and over time I evolved to understand smaller businesses. I was intensively curious how business is run and even invested in a dozen startup companies. That experience has taught me what constitutes a good, bad or mediocre business, which led me to look for great companies in Asia with an enduring competitive advantage and a long growth trajectory ahead of them. Instead of the philosophy, the places where we are looking for value evolves over time as your core competence is growing.

I have been very fortunate to be influenced by the investment giants of Buffet and Munger, who later became an investor in 2003 and we have been partners since then. He has been a mentor, investor, business partner and a great friend all those years. For many year up until the pandemic we had dinner every Tuesday night, so obviously I was greatly influenced by him. The greatest influence from Charlie however, was really beyond investing. He was more of a role model and the way he conducts himself in real life. For every profession one should have role models in life. We find them among the eminent dead, because it is safer. It is risky to pick a role model that is still alive, because they have the risk of disappointing you. I got lucky that my role model never failed and instead continues to inspire me , right into his current 97th year. His attitude towards life and his ability to keep equanimity in a phase of turbulence and maintaining that rational composure, commonsense approach to all problems in both investment and life inspires me. He is probably the most influential person in my life in that regard.

Bruce: In this concentration of now investing into great businesses. Can you be specific about what kind of business you look for, what are the characteristics of a great company and what detailed characteristics do you look for, and how do you put a value on those businesses?

Li Lu: Great businesses are the ones who have an above average return of invested capital, but that kind of business usually attracts imitators and competitors. Everybody strives for above average returns on invested capital. Truly exceptional businesses are the ones that can fend off competitors, who have an enduring competitive advantage and keep the higher than above average return on capital and have a long runway of continuous growth. Those are the businesses we’re looking for and they can be found in all industries and in all shapes and forms. But they’re rare, scarce. To have a business that generates above average returns over a long period in a compounded fashion is against the natural order of things. Only a small slice of all businesses and companies belong in that category. If you are lucky enough to find one of those long-term compounders, all you have to do is to own them for a long period of time. It helps if you buy them at a time where they are treated at a discount to their intrinsic value, so if you were wrong, you don’t lose money and if you’re right you get higher returns over time. If you own them through the ups and downs, your return roughly approximates the actual business return to the capital we invested in the business itself. Over the long time the two tend to converge closely. Understanding the study and the nature of that business, it’s dynamics and competition is of utmost importance as an investor. There isn’t a set of rules that makes them that way. Every business builds their fortress slightly differently and you have to be honest with yourself and study them from every possible angle until you are convinced that they are truly enduring and have a long runway ahead of them. And then you have to stay invested in them through the ups and downs, thick and thin.

Bruce: Can we talk about those businesses? In limiting competition, you’re really interested in moat - that is the barrier of entry into the business. If you think about a moat, there are probably two elements to that. One is economies of scale. How big do you have to get, how big a market share do you have to capture in order to be viable as a competitor. The global automobile market is massive, so if you get a one to two percent share, you’re going to be fine. In other markets like the local distribution of caffeinated soft drinks you need to get to 20 or 25 percent of the market to support the infrastructure needed to compete. The first thing is economies of scale and the second is how hard it is to get to that market share, which is all about customer captivity in a contested environment. Suppose you’re going to get to 25 percent share, and we know for caffeinated soft drinks that two tenths of a percent share changes hands every year in a contested market, to get to 25 percent we’re talking about a 125 year moat. Do you do a calculator like that for the companies you’re looking at? Do you look at those two elements explicitly?

Li Lu: A little bit of that and more.

Bruce: What’s the more?

Li Lu: The scale is important, but not everything has a scale economy. Sometimes the scale becomes a contract point which makes it more difficult to manage. In a scale economy, the scale does become a competitive advantage, but the dynamics change after a certain scale. Automobiles are an interesting example, because we know what happens in the different phases of the industry. The consumer side is also important in a sense that if you have a consumer addiction for certain products and brand loyalty, that can be an advantage until it isn’t. Things can change. New products categories come along and people get tired of the old products. New generation doesn’t like to have the same taste as their parents and grandparents.The most interesting aspect of businesses is that the only constant is the constant change. All great businesses change of time and no business can remain that competitive edge forever, but some can keep it for a long time. If there is a change, it is upon the management team to reallocate capital towards those businesses that now enjoy a robust competitive definition. Taking Berkshire as an example, it started out as a lousy textile business in New England, but Charlie and Warren skillfully took the last bit of the cash flow and invested it into other businesses and companies on the right side of the trajectory. Over time some of those businesses began to lose their competitive advantage and they took their capital and allocated it to new ones. The management capability of allocating that capital plays a vital role. If you have a culture of the company in an industry that is rapidly changing, which allows you to stay ahead of your competitors, that can also become an enduring competitive advantage. As long as the culture endures. What makes a specific business successful is different and changes over time. That is the most fascinating aspect of the competitive dynamics and the most fascinating dynamic of being an investor.

Bruce: As of today, how do you do this differently than most other investors? Are there things that you look at specifically? Are there ways on how you approach companies? When I started investing with you, and I am honored to say I made a lot of money doing it, what appealed to me is what you mention in your introduction: Small businesses or small markets are necessarily markets where you have to get a big share. One firm can dominate and that’s not something that most investors look at. In what other ways do you do things differently from most other value investors and investors in general?

Li Lu: Thank you for your continued trust and confidence. Back then we were looking for smaller companies, because those were the businesses that I feel I could understand. As we evolved, we began to look for bigger companies we can also understand. The bigger business comes with a whole set of advantages and problems. While size is one consideration it’s not the most important and certainly not the determining factor when we’re looking for businesses. There are big companies that are still growing at a robust pace and are becoming even more entrenched as they become bigger with long runs of growth. The most recent phenomenon of the technology platform is the network effect. Some of the companies fit that characteristics and while they don’t grow forever, they will likely do so for a while.

Bruce: By what other dimensions do you do things differently today than other investors who are less successful?

Li Lu: I don’t spend my time studying a hundred people doing that. We spend most of our time studying industries and specific companies. We’re looking for the ones that are already successful and try to answer what makes them that way and if that success can be continued. Sometimes we have answers, but a lot of the time we don’t and we continue to study them until we have an answer. One thing that is important is intellectual honesty. Knowing what we really don’t know and what we do. In other words if you claim a circle of competence you have to understand the edge of it. You have to be very honest with yourself. We insist on knowing a particular business inside and out, to the point where we are able to predict the outcome in the next ten years. At least I want to know what the business looks like in 10 years in the worst case scenario. I want to see whether I can predict that time frame with a high degree of confidence given all different contingencies. Most of the time we don’’t have an answer and we keep at it, sometimes for years before we really understand it. After that we still have to wait for the price to come to our striking zone, and when they don’t it makes our selection difficult. When we do select and buy, we tend to own those companies for a very long time. Because we understand them and they are great businesses we buy a lot more as they go down. So that is the definition of whether we understand them.

Bruce: What about the market today? It seems highly valued. If you look at fixed income, it is even unprecedented. Does the market today remind you of any historical period you’ve lived through in good or bad ways and do you have advice on how to navigate it?

Li Lu: We usually don’t study the market too much, except when they are extreme. Today is one of those more extreme periods and in many ways we are in uncharted territories. The amount of liquidity that has been printed, the level of interest rates and the slow pace of growth. All those are quite remarkable. How do you deal with them? We don’t think that history repeats itself, so every time is slightly different. Instead of guessing the patterns of history we focus on selecting companies that can live through the tick and thin. Whatever the environment, business will continue and somebody will do well. We want to invest in companies that are capable of dealing with those extraordinary set of uncertainties and I guess we’ll be doing fine.

Bruce: How much is management a part of that and how do you look for management that has those capabilities?

Li Lu: In most companies management will make a big difference, but in the small set of experiences management doesn’t matter a lot. The best companies are, where the strength of the business itself has a dynamic of its own, so that nearly everybody can run it. Those businesses are rare and you can probably count them on one or two hands. You really have to look at each specific company and ask the appropriate questions and study them so you can understand them. You want to understand them enough so you can predict the next ten years even with ups and downs in the macro environment.

Bruce: In your 24 years running Himalaya, you’ve lived through a number of major financial crises: The Asia crisis in 1997, the tech bust in 2000, the financial crisis in 2008 and last year the Covid-19 situation. Are there specific things you learn about management or companies that you look for in those crises?

Li Lu: As you said we have gone through several of those crises. Each time it was made out to be the once in a century crisis. It probably was, but it happened in the time frame of every five to ten years. The financial market boom and bust has been a constant phenomenon since the beginning of financial markets several hundred years ago and is driven by human nature. As long as human nature remains the same, those cycles will continue to happen. Humans as a product of evolution aren’t run in a very rational way. We are excellent at rationalization, but we aren’t good at being rational. We are wired by hard coded instincts looking for zero-sum, fast money and get scared when things go against us. We have the basic sense of greed and fear, which drives the financial markets up and down. When it comes to money it tends to evoke the primal part of human nature. That natural tendency becomes extreme and as a result the financial markets have been characterized by boom and bust. One way to deal with such an environment, and that is our attitude, is to be on the look-out all the time. People will always be driven by euphoria and fear. Looking for companies that are capable of leading through those cycles, companies that are ant-fragile. That way up and down becomes friendly for us, when our favorite companies go on sale, which allows us to buy more of them. The hallmark of a good investor is if you can watch your portfolio go down 50% and not be affected at all. One the other side you need to be equally unaffected when everyone around you is making fast money and you seem to be left behind. That is part of the temperament that most people don’t have and why not everybody can succeed at this game of investment. To succeed one needs a certain temperament and a certain understanding of human nature. Investment returns will mirror the actual business return and we know that real companies don’t change hour to hour, day by day or even month to month. It takes years for them to rise and to fall. You should expect your investment results to come slowly and gradually over a long period of time. The short-term phenomena should not impact you. If you have those principles both euphoria and crush can serve you well, which really goes back to Ben Graham’s basic concept or Mr. Market. In the real game of investment those ups and downs tend to be quite extreme and testing. Another thing that is testing is that you need to understand the business itself. If you are driven by anything other than deep understanding you will be tested. The financial markets seem to be there to catch human weaknesses. If you don’t understand something, and just pretend to, you will be busted at some point. Only when you truly understand you will be able to add when the security is down 50 percent or more.

Bruce: One of the things you talked about was the stability of these companies and their management in the face of a crisis. So crises tell you a lot and one company that recently has done extremely well is John Deere. If you looked at John Deere in 2000 demand fell by five percent and their profit margins fell to zero. If you look at what happened in 2013/14 demand fell by 35 percent and their margins stayed at roughly half of what it was, which is higher than it had been historically. Clearly that’s a company that has changed in the face of catastrophic external conditions and has gone from doing quite badly to doing much better. Do you have examples of that from the companies you’ve invested in where you’ve seen them perform through a crisis?

Li Lu: I do, but we normally don’t talk about specific companies.

Bruce: But could you share maybe a historical experience of that, so that the students in the audience have a sense of what to look for?

Li Lu: Bruce, we tried this multiple times in your class. There is a simple logical reason we don’t do that. Once you achieve a certain notoriety in a certain field, the people tend to really copy that. This is not the behavior we want to encourage. Instead of giving people fish, it is much better to teach them how to fish.

Bruce: OK. Do you prefer to be a generalist or a specialist investor and would one work better in the Chinese market than the other?

Li Lu: You always want to be a generalist in terms of being a student of business. You need to have an innate intensive curiosity about the company and all kinds of businesses. It doesn’t mean you get to the bottom of it, and a lot of the time you won’t. By the time you invest into the companies you better become a true specialist to the point where you know hopefully better than anybody in the world including the management team. The management team tends to be vested in their own biases and maybe doesn’t look at the business as objectively rational as you do. You want to be a specialist in the company you choose to invest, but a generalist of business. That way your circle of competence can constantly evolve and enlarge over time. If I knew as much as when I first started investing, we wouldn’t have gotten the results we both enjoyed. We continue to expand, to learn and it is fascinating to see how business evolved in the last few decades and how it will continue to do so. I’m lucky to get paid in this field to satisfy my curiosity, learning about great people and great enterprises serving society. I feel grateful everyday doing what I do.

Bruce: Let’s talk about the evolution of the markets. In particular at a 2010 panel at Columbia Business School, you mentioned that Asia’s role in the global financial systems was becoming increasingly important. Looking back, how has Asia’s role evolved over the last ten years and what about China’s role going forward in both the world’s business economy and in the financial?

Li Lu: It has gone exactly as we predicted. Asia has indeed become more important and in particular china. In the next few decades I would say that the Chinese market and Asia in general will become even more significant. The dynamics that are already set in place will continue to play out in a robust way. The Chinese security market in general and the Asian economy will become an ever more important component of the global market.

Bruce: Let me give you some data that I don’t think is widely appreciated. The Chinese numbers are obviously difficult to interpret, at least the official numbers. Whenever you see that, the data you want to look at is where there is a reliable counter. The trade data is reliable, partly because every Chinese export has to be an import in another country and every Chinese import has to be an export from another country. Over the last eight to ten years China’s trade has grown only about two and a half percent a year, less than one percent faster than the US trade. What does that say about Chinese growth? It is clearly much slower than the trade growth prior to 2010. It has been fluctuating but if anything it has been slowing down. What does that say about China’s future?

Li Lu: It tells you that the characteristics of the Chinese economy has changed fundamentally. What propelled the Chinese growth up until 10 years ago was international trade. Back in 2010 the net trade, so export-import netted out was roughly about nine percent of GDP. That means that the Chinese economy was heavily dependent on the global market. As a result they were growing at a double-digit rate, when the rest of the world’s growth factor was a fraction of that. At a certain point once you become the world’s largest trading nation it becomes harder to grow. Another thing that is happening that after the citizens become middle-class, their demands change. As you point out roughly around ten years ago the Chinese economy has slowly evolved into a more consumer-driven one. Last year was a watershed year, in a sense that the total volume of retail sales for the first time overtook the US. China was the largest racial market in the whole world at 6 trillion $ compared to the 5.5 trillion of the US. Granted it was a special year, due to the pandemic. However, China is emerging to become the most dynamic, fastest growing consumer market in the whole world and that is likely to continue for many decades to come. Wanting to sell to the consumers, the middle class in China will make China even more attractive to the global economy. The characteristics of the economy will continue to change and provide interesting, unique opportunities for global investors.

Bruce: The thing about developed economies is that they’re overwhelmingly service economies and not good economies. On that dimension it doesn’t look like China is doing particularly well. The export data one would understand to slow down, but the fact that the import data has slowed down just as much or more, tells you something about the nature of domestic growth in China. What about the challenges in the service sector in China?

Li Lu: You’re right that at the current stage the service sector has yet to become as powerful and dominant as it is in most mature, developed economies in the west, but that’s really an amazing set of opportunities for the decades ahead of them. It isn’t that much different than all other developed economies at a comparable stage of the development state at around 10.000$ per capita GDP, which is where China is today. One can see that both consumption and services are basically the areas that are growing the fastest. Overall trade internationally is still growing at a robust rate, but not as fast as the domestic side of the economy. That is why their share of the GDP has gradually begun to shrink. It just tells you the different stage of the economy and where it is today.

Bruce: Where do you see the unique challenges and opportunities of value investing in China?

Li Lu: China remains one of the best markets if you are a value investor. The market is still underdeveloped and as a result not representative of the real economy compared to the US. The traders and investors are also not as mature and there's still a mentality of fast trading and high turnover. That results in some of the companies going through a faster pace of the boom and bust circle, which in turn provided opportunities for those who are mature and patient investors. The service sector or the economy when it comes to financial services is still yet to be developed. China is right at that stage where the financial service industry is about to take off in a big way. It also just so happens that the Chinese government is quite keen in making macroeconomic policies quite conducive for the development of the financial service industry. They began to open up to the global firms in a way that they have never done before. All those confluences of factors make the market more attractive today, than it was before.

Bruce: Financial services is the sixth largest service sector after housing, medical care, education, wholesale and personal services. What about those sectors in China? Do you see opportunities there?

Li Lu: Absolutely we do. We see opportunities in virtually every industry as they go through a robust growing stage, some more than others. Even if the industry is not growing as fast, you can still find interesting companies. Different people tend to focus on different aspects of the industries and different aspects of the growth profile. If you are a true good investor you can find value anywhere, but you are probably more capable of finding values in a dynamically growing economy such as China. Then there is still an enormous amount of inefficiency in the security market. The combination of those two make it enticing. Add a whole series of government reforms and that transition period to become more efficient will offer even more opportunities. This is a good time for global investors and for US investors as well.

Bruce: As the Chinese financial markets are developing, do you have certain reforms you would be interested in seeing implemented? Do you have a top development that you would like to see happen in the Chinese financial markets or even in the Chinese economy?

Li Lu: In a sense that is already happening. For years the Chinese security market was not representative of China’s economy. This is partially because the IPO process is based on what they call an approval model. You have to go through approval layers in order to be listed. The ones that are approved by the government are often not market driven. Compared with other markets such as the United States, which is more market driven and as a result more representative of the true economy. As the Chinese economy moves from an export-import driven one into a more consumer-demand economy, entrepreneurial companies are increasingly playing a larger role. The financial markets have to reflect that change in dynamics. The Chinese government is determined to reform this IPO process into one that is much more similar to the one we can see in the United States. We are probably still early in that process, but another big one is happening at the same time. More than 80 percent of the financing is done through the banking sectors, and over time that will transform to direct financing through market driven dynamics such as fixed income and equity. We see the overall financial model in China evolve into a more direct one. This will open up the financial service industry both for domestic and global players. The financial markets will be more mature in a few decades and more institutional players will come in. The financial market service will become a lot bigger than it is today, which bodes well for investors who understand what they are doing in China.

Bruce: In a service industry, the services are overwhelmingly locally produced and concerned. There are very few global universities,high schools, or hospitals. If you look at the developed economies like the United States, the firms which tend to be local, tend to be locally financed. Local banks in the United States are much more profitable than the big global ones. Do you see a comparable trend developing in China that you can take advantage of?

Li Lu: Yes and No. Chinese regulation for banking is different. There are only about 15 banks that have the mandate to take deposits on a national basis and the rest of the financial institutions are only able to do so on a small well-defined local region. As a result the dynamics of the larger national versus local regional banks and other financial institutions is driven by regulation in China, compared to the market driven model in the United States. That makes the comparison of the banks quite different and difficult.

Bruce: Would somebody investing in a Chinese bank have to be an expert in Chinese regulation?

Li Lu: Absolutely. If you want to invest you better become a specialist, but if you truly understand them it can be very profitable to own them over a long period of time.

Bruce: Let’s talk more broadly about new trends in investing. Among the many popular and rising technological fields such as 5G, Bitcoin and AI - has any of that attracted your interest as a value investor and why?

Li Lu: If you are an investor you want to find out what influences change in your companies. If there is one big prominent force, it is the fast acceleration of technological changes and you need to be aware of those trends. What really started that change was the development of the integrated circuit 50 years ago. That led to personal computers and the evolution of communication technologies and the internet. This resulted in the rise of artificial intelligence and the current data economy as a result. This wave of technological development has fundamentally altered the business landscape. So whether you invest into companies that are well insulated from those changes or in companies whose management teams are leading or enabling those changes, you need to make sure that those changes are on your side. Unless you are a venture capitalist you don’t need to be a true expert to the point of being an engineer, but you need to be broadly aware of what is happening and how it impacts the industries and companies you are invested in. We are still in the middle of that technological wave. The current form of AI based on neural networks is just the most recent iteration. The data economy is the news adaptation by industries in response to those new technologies and we’re going to see more of it.

Bruce: Do you see opportunities to invest in new technologies, do you have an example in your past where you invested successfully in a new technology?

Li Lu: Back when I was trying to learn about businesses, I invested in a number of startups. I am fascinated about the technologies and today we have a somewhat smaller exposure to that. It is not easy to predict the impact due to the pace of change. It does require a different aptitude and domain expertise. We just had easier opportunities.

Bruce: Many smart people believe that renewable energy is the next big revolution. Since you’ve done a lot of work on battery technology and BYD, is that something you think about beyond batteries? What is your outlook for the electrical vehicle industry say in the next five years or is it overheated now? Where is Tesla going?

Li Lu: The car industry is simultaneously being impacted by four or five big trends. The electrification, ride-sharing, autonomous driving and the intelligent design. All of those going on at the same time heated the competition. As a result the industry that lasted 100 years is being turned upside down. In the process competition is going to become very intense while still having characteristics of being a scale economy. The survivors or winners need to have a certain scale in order to come out on top. It is still early to predict who will win, but it is not early to predict those mega trends are here to stay. In five years there will be far more eclectic cars sold than today. European countries have declared a deadline to stop the sale of gasoline-powered cars. China will follow that up in due course. Five years from now those trends will be more prominent than they are today, but as new entrees are still entering it is hard to predict the winner. What is needed will be the scale and the right strategic focus to do well.

Bruce: Do you have a sense which companies those are?

Li Lu: Well I backed one, so I like my money to speak for itself. We’re not going to be the only one, there’s going to be a few. It is a gigantic industry.

Bruce: In terms of value investing education, you played a big role in promoting and advocating value investing. From the books to you underwriting in this class where I went to Beijing University for a guest lecture. What’s your vision for the kind of education that a new investor should embrace and where will that education be available?

Li Lu: Thanks for coming to teach at the Beijing University Value Investing class that my colleagues and I started six years ago and that is still running well. Our original inspiration was based on your class, which was a continuation of Ben Graham’s class. Ben Graham had among others Warren Buffet as his student, and I’m your student and there will be many more much brighter investors coming after us. We’re trying to do our part to pass on those philosophies and the practical art of value investing to the next generation. When I talk to young students I see several important things. The first is to always adopt the owner’s mentality. Imagine that one of your unknown uncle’s died and he handed over 100% ownership of the company to you. That’s the business you’re going to study. If you think you own 100 percent your mentality will be different. You want to know everything. A Lot of the things you won’t understand, but you’re going to continue taking in facts. If you adopt that mentality studying any business you have started the process to become a real value investor. That’s the first thing, the second thing is you want to maintain intellectual honesty. Be honest what you know, what you assume, what you pretend and what you don’t know. One of the things Charlie talks about is this quote: “I’m never entitled to have a view, until I can find the smartest people in the world who take the other side of that view and I can argue better for the opposition than they do. When I can do that, I would be entitled to have a view.” The same thing applies to investing. Intellectual honesty is a good life philosophy to being with and it is crucial, vital when it comes to investment. The security market exists to find your weaknesses, dishonesty, pretension and half-knowledge. If you don’t possess that fundamental attitude of intellectual honesty you will be destroyed at some point during your career by the financial market. It was almost designed that way to catch you.

Bruce: It is designed that way. Every time you buy a security, thinking it is going to do well, somebody else is selling you that security thinking it’s going to do badly and vice versa. One of you is always wrong. You’re better be sure that you’re the one that’s on the right side of the transaction.

Li Lu: There is some zero-sum aspect, but not always.

Bruce: It’s a hundred percent zero-sum. The average return to all investors in any asset class and therefore in all asset classes is the average return to all those assets.

Li Lu: You are arguing a slightly different view, but I’m never going to argue against my professor. Let’s just agree we disagree on that one. Another important aspect is that you want to really devote as much time as possible to studying the history of businesses and the history of great businessmen in the past. The more companies you study the better your judgement of good opportunities and fundamental characteristics of the companies will be. All three things are important. Start with the owner mentality, have a high degree of intellectual honesty and lastly be a thorough student of the history of businesses. These are the things that are important when you get into the field of investment or when you want to improve your game. That is my advice to your students.

Bruce: That is good advice. When you look back over your career, are there things that you would have done differently or that would have helped you to get to where you are today more quickly and more easily?

Li Lu: When I look back, I feel extraordinary luck and feel nothing but gratitude. Lucky that I got into Buffet’s lecture at your class, that I got into business and have a great relationship with Charlie Munger. I feel fortunate to live in a period of time where both the United States and China are going through a fundamental economic growth period and provide enormous opportunities. I look back at my career and have nothing to regret. In terms of transitioning from the US to China. A lot of people, myself included, went through a period of time to understand the nature of the Chinese economy. One key learning is the role the Chinese government plays. If you have been a successful investor in the United States or in the developed market you tend to have a set of assumptions about the role of the government and the role of the market participants. If you look at the Chinese market with those assumptions you will find views that are inconsistent with your own experiences. Partially because historically the Chinese and the US or other western governments perform different roles. Investing in China requires a deeper understanding and systematic comparison to get rid of those biases. The other aspect is to understand the nature of the modern economy with its ability to generate sustained compounded economic growth. This is where we talk about the zero-sum versus a win-win type of mentality. For the longest period of time almost all natural or human affairs are characterized by cycles. We are born, grow and die, energy goes from hot to cold, order becomes chaos and great businesses lose their edge. That has been the nature of things, the economy goes through boom and bust. With the beginning of the industrial revolution we began to see the phenomenon of continued sustained compounded economic growth. That is when value investing became important and why you can have phenomenal records such as the one produced by Warren Buffet and a few others. The basic logic is that over the long term your investment return is likely to approximate the actual business returns. The fact that you’re capable of generating that long-term result is a reflection of the changing nature of the economy. What produced that phenomena is the combination of free market enterprise and the invention of modern science and technology, which creates a paradigm shift. What happened 40 years ago is that China finally stumbled onto that magic formula of free market economy, with Chinese characteristics of course, along with modern science and technology. Any economy that strikes that magic formula has begun to produce compound economic growth and reforms. But it needs to combine with the stability of the overall political environment for the market to release that power. Only then can a sustained investment record be possible in China. Most of the western observers believe that political democracy has to be a part of the equation, except they forgot that political democracy wasn’t there when that phenomenon began to take place in the west. The political democracy happened later almost as a result, but not because of it. That is another layer to understand the phenomena of investment opportunities in China.

Bruce: You’ve devoted effort to improve equality and welfare of Asian-Americans. Given the recent elevated attention on this community, what are you doing or planning to do or think ought to be done for that community?

Li Lu: Like many people from the Asian-American community, I was an American that is just utterly dismayed and heartbroken over the last year and a half. That new wave of Anti-Asian and hate crimes has statistically increased the last few years. The pandemic, the Trump policies, the US-China tensions and the systematic historical rut. Many people in the Asian-American community are living in fear today after being such an important part of the American experience. To the Chinese-American community it feels like after 150 years the Chinese exclusion act has come back again. I had a different experience when I came to America. America embraced me with an open warm heart and I had enormous opportunities by Columbia University and by all the great people I met along the way. I became successfully way beyond my wildest dreams when I came here as an immigrant. Not a penny, no connections and I didn’t speak the language. One thing that I always believe is that America is not defined by geography, race, culture or religion. America is defined by a set of ideas and ideals. Anyone no matter your race, religion, culture or background, if you sign up for that set of ideas and ideals can be American and I was one who believed in those and became successful in America. And I want that to continue. Now if we look at history that experience was often marked by cruel and malicious experiences especially with African-Americans and other minorities,but I think that America remains the only country on earth so inspired by a construct of ideas and ideals. In order for that to continue we need to restrict the worst instincts in all of us, we need to rise up and fight those instincts. I think the entire Asian-American and American community has to come together and fight this wave of discrimination. Along with a number of wonderful colleagues we are co-founding a new national organization whose mission is to serve Asian-Americans in their pursuit of belonging and prosperity, free from discrimination, slander or violence. Just 0.2 percent of all philanthropy in America goes to Asian-American causes and we want to fundamentally change that. With this new organization we hope we can change that picture. With the center of the global economy shifting from the Atlantic Ocean to the pacific Ocean, Asia-Americans who are 20 million strong are going to play an increasingly important role to position America as the new pacific economic power. People who are fully integrated as the very fabric of American society can help lead America to better integrate with the rising economic ties in Asia.

Bruce: That’s terrific and a great note to end on, unfortunately we have run out of time. Thank you very much for this encyclopedic and enlightening talk.

Li Lu: Thank you for teaching that class 28 years ago or I wouldn’t know what I would do today.

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