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September 6, 2024 • 1hr 24min
#363 Li Lu and Charlie Munger and Warren Buffett
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This episode covers the remarkable investing career of Li Lu, who went from surviving a horrific childhood in China to becoming a highly successful investor partnered with Charlie Munger. The episode draws from various lectures, interviews and writings by Li Lu over the past two decades to synthesize his investment philosophy and approach.
Li Lu's investing career was shaped by accidentally attending a lecture by Warren Buffett while a student at Columbia University. This led him to intensively study Buffett and Charlie Munger's approach, which he then adopted and implemented with great success. The episode explores how Li Lu thinks about investing, business analysis, and building a career aligned with one's strengths and passions.
#363 Li Lu and Charlie Munger and Warren Buffett
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Key Takeaways
- Study the greats and emulate their approach - Li Lu's investing career can be summarized as: 1) Studied Buffett and Munger, 2) Did that. He read everything he could about Buffett and Munger and adopted their investment philosophy.
- Focus on finding great businesses - Over time, Li Lu shifted from looking for cheap securities to focusing on finding strong, inherently superior businesses with enduring competitive advantages.
- Do extensive research - Li Lu advocates doing extremely thorough research on companies, including reading all available documents, visiting locations, and talking to people connected to the business. This level of effort gives you an edge.
- Concentrate on your best ideas - Great investment opportunities are rare. When you find one, bet heavily. Li Lu says you may only get 5-10 great insights in your lifetime.
- Think like a business owner - Approach investing by thinking like you own 100% of the business. This mindset shift changes how you analyze companies.
- Build a business authentic to you - Find work you're passionate about that fits your personality and temperament. This allows you to gain an edge through sustained effort over time.
- Continuously learn and adapt - Business is constantly changing. The most successful companies and investors are able to continuously learn and adapt better than others.
- Be rational and think independently - You need the temperament to trust your own judgment and not be swayed by others, especially during market panics.
- Take a long-term view - Short-term trading is not Li Lu's game. He looks to hold great businesses for very long periods as they compound in value.
- Avoid envy, resentment and self-pity - Li Lu emphasizes guarding against negative emotions that can be counterproductive to long-term success.
Introduction
This episode covers the remarkable investing career of Li Lu, who went from surviving a horrific childhood in China to becoming a highly successful investor partnered with Charlie Munger. The episode draws from various lectures, interviews and writings by Li Lu over the past two decades to synthesize his investment philosophy and approach.
Li Lu's investing career was shaped by accidentally attending a lecture by Warren Buffett while a student at Columbia University. This led him to intensively study Buffett and Charlie Munger's approach, which he then adopted and implemented with great success. The episode explores how Li Lu thinks about investing, business analysis, and building a career aligned with one's strengths and passions.
Topics Discussed
Li Lu's Background and Early Career (14:01)
Li Lu describes how attending a lecture by Warren Buffett at Columbia University changed the trajectory of his life:
- At the time, Li Lu was a recent immigrant from China with no money or connections
- Buffett's approach to investing as owning businesses resonated with Li Lu
- This led Li Lu to embark on an intensive two-year study of everything related to Buffett
- Li Lu realized the stock market was not designed for the type of long-term, concentrated investing Buffett practiced - this is where the opportunity lies
"What Buffett said about investing really was just so different from my perception of the stock market. The more I thought about it, the more I thought, well, gee, this may be something that I can do." - Li Lu
Developing Your Investment Approach (20:02)
Li Lu emphasizes the importance of developing an investment approach authentic to your personality:
- Experiment to find what fits you - Li Lu initially worked at an investment bank but realized it wasn't for him
- Build something authentic to you - You need to enjoy the process to sustain it over decades
- Be comfortable being in the minority - Value investing requires going against the crowd
- Develop your own style - Let your natural temperament and interests guide your approach
"You have to ask yourself, how do you wanna spend your time? And for me, I wanna spend most of my time or your time truly being an academic researcher instead of being a so called professional investor." - Li Lu
Li Lu's Investment Process (28:03)
Li Lu walks through his process for analyzing potential investments:
- Start with valuation - If valuation doesn't fit, don't go further
- Think like a 100% owner of the business
- Understand why the opportunity exists - Why is the stock mispriced?
- Do extremely thorough research - Read every document, visit locations, talk to people
- Assess the quality of management - Are they good operators and capital allocators?
- Determine if there's a defensible competitive advantage
"You've got to have a very active, very curious mind. A mind that wouldn't be satisfied with any bogus answers. Otherwise, you can't be in this business." - Li Lu
Concentrated Investing in Great Businesses (40:05)
Li Lu advocates concentrating capital in a small number of great businesses:
- Truly great investment opportunities are rare - maybe 5-10 in a lifetime
- When you find one, bet heavily - "put a shitload on it" in Li Lu's words
- Great businesses produce positive surprises and compound value over time
- Look for businesses with pricing power and high switching costs (e.g. Bloomberg)
- Be willing to hold for very long periods as the business compounds in value
"Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." - Warren Buffett
Developing Investment Judgment (54:07)
Li Lu discusses how to develop good investment judgment:
- Build an encyclopedic knowledge base - Read extensively about businesses and industries
- Study past examples of great businesses and investors
- Pick one business and understand it inside out - This teaches you how to analyze companies
- Extend your knowledge to understanding entire industries
- Learn to think independently and trust your own judgment
- Be willing to go against the crowd - Great opportunities often arise during panics
"The process and progression is like compounding money. In fact, you can compound knowledge faster than money." - Li Lu
Li Lu on BYD and Charlie Munger (1:08:08)
Li Lu discusses his investment in BYD and partnership with Charlie Munger:
- BYD founder started with just $300,000 and built an $8 billion revenue company
- BYD has a strong engineering culture able to tackle difficult problems
- Charlie Munger became Li Lu's investment partner and mentor in 2003
- Munger is not ideologically against tech stocks, just anything he doesn't understand
- Li Lu puts all his own investment capital into his funds to maintain focus
"The company is a learning machine." - Li Lu on BYD
Adapting to Change (1:16:09)
Li Lu emphasizes the importance of adapting to change:
- There is not a single business that never changes
- Successful businesses are able to adapt to changes better than competitors
- The future is excessively hard to predict - be humble about forecasting
- Continuously learn and be willing to change your views as new information emerges
"Successful companies are able to deal with change consistently." - Li Lu
Li Lu's Reflections on Turning 50 (1:20:10)
Li Lu shares some life lessons and reflections upon turning 50 years old:
- Success comes from showing up and persevering, even when the path is unclear
- Guard against negative emotions like envy, resentment, and self-pity
- Regularly examine your life and be willing to change and reinvent yourself
- Find work that aligns with your temperament and experiences
- Continuously learn from others, including those younger than you
"Having done relatively well in additions in my life, I'm slowly learning the art of subtraction and focus." - Li Lu
Conclusion
Li Lu's remarkable journey from surviving a traumatic childhood in China to becoming a highly successful investor partnered with Charlie Munger demonstrates the power of continuous learning, independent thinking, and aligning your work with your strengths and passions. His investment approach of thoroughly researching great businesses, concentrating capital in his best ideas, and taking a long-term view has produced exceptional results.
The key lessons from Li Lu's career include: 1) Study and emulate the greats like Buffett and Munger, 2) Do extremely thorough research to develop insights, 3) Focus on finding superior businesses with enduring advantages, 4) Think independently and be willing to go against the crowd, 5) Continuously learn and adapt as businesses and conditions change. By following these principles and developing the right temperament, Li Lu believes investors can achieve outstanding long-term results.