June 9, 2024 • 53min

TIP636: Billionaire Investing Legend Li Lu w/ Clay Finck

We Study Billionaires - The Investor’s Podcast Network

In this episode, host Clay Fink explores the investment approach and philosophy of billionaire value investor Li Lu. Li Lu is the founder and chairman of Himalaya Capital, a value investing firm managing around $14 billion in assets as of September 2023. He is known for being close friends with Charlie Munger, who referred to Li Lu as the "Chinese Warren Buffett" and invested a significant portion of his personal fortune with him. Li Lu has one of the most fascinating backstories of any investor, overcoming tremendous adversity in China before coming to America with nothing and building a highly successful investment career. This episode draws insights from Li Lu's lectures, writings, and publicly available information to paint a picture of his investment strategy and thinking.

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Key Takeaways

Li Lu's background: Born in China, survived hardships including an earthquake and political persecution, escaped to the US with no money or English skills
Education and early career: Earned 3 degrees simultaneously from Columbia University, started investing successfully as a student
Investment philosophy: Value investing approach inspired by Benjamin Graham, Warren Buffett and Charlie Munger
Four key principles:
- Stocks represent fractional ownership in real businesses
- Understanding Mr. Market and using price fluctuations to your advantage
- Buying with a margin of safety
- Investing within your circle of competence
Investment approach: Thorough research, high conviction bets on undervalued quality companies
Notable investments: BYD (up ~50x since 2002), Alphabet (largest current US holding)
Views on China: Believes in long-term growth potential despite short-term challenges
Relationship with Charlie Munger: Close friends and investment confidants

Introduction

In this episode, host Clay Fink explores the investment approach and philosophy of billionaire value investor Li Lu. Li Lu is the founder and chairman of Himalaya Capital, a value investing firm managing around $14 billion in assets as of September 2023. He is known for being close friends with Charlie Munger, who referred to Li Lu as the "Chinese Warren Buffett" and invested a significant portion of his personal fortune with him.

Li Lu has one of the most fascinating backstories of any investor, overcoming tremendous adversity in China before coming to America with nothing and building a highly successful investment career. This episode draws insights from Li Lu's lectures, writings, and publicly available information to paint a picture of his investment strategy and thinking.

Topics Discussed

Li Lu's Early Life and Background (1:27)

Born and raised in China during tumultuous times
Parents sent to labor camps, moved through multiple orphanages
At age 10, survived catastrophic earthquake that killed 240,000 including his adoptive family
Participated in student protests at university, ended up on government's most wanted list
Escaped China through underground channels and made it to the US
Arrived in New York with no money, English skills, or connections

Education and Early Investment Career (3:35)

Learned English in one summer before enrolling at Columbia University
One of Columbia's first students to earn 3 degrees simultaneously (Economics, MBA, Law)
Used student loans as float to invest successfully while in college
Graduated with around $1 million from investment gains
Started Himalaya Capital right out of college in 1997

Li Lu's Investment Philosophy (6:46)

Inspired by Benjamin Graham, Warren Buffett and Charlie Munger
Focus on being long-term owners of high-quality companies with:
- Substantial economic moats
- Great growth potential
- Trustworthy management
Compares investing to Ted Williams' baseball approach - only swing at your best pitches
"You should consider it a moral duty to compound your knowledge and ability." - Li Lu

Four Key Investment Principles (8:28)

Li Lu adheres to four core principles in his value investing approach:

Stocks represent fractional ownership in real businesses
- As company value increases over time, shareholder wealth increases
- Few people truly understand stocks in this manner
Understanding the role of Mr. Market
- Stock market is like an auction to buy/sell fractional ownership
- Let Mr. Market serve you, not dictate value
- Buy when Mr. Market offers good deals, sell when overpriced
Buying with a margin of safety
- Leave wide margin for error when making purchases
- Minimizes losses when wrong, maximizes gains when right
Investing within your circle of competence
- Build deep knowledge in specific areas through reading and experience
- Allows for more accurate predictions about a company's future

Li Lu's Investment Approach (13:37)

Extremely thorough research process
- Reads every available document, court filing, etc.
- Investigates management thoroughly, including talking to neighbors
High conviction bets on undervalued quality companies
Concentrated portfolio - only 5 US holdings as of Q1 2024
Willing to make large bets (>10-20% positions) when very confident
"If you figure out that you have virtually no downside and tremendous upside, then you might as well bet big on it." - Li Lu

Notable Investments (19:38)

BYD
- Invested in 2002 before company produced a single car
- Up ~50x on initial investment
- Now best-selling EV brand in China
Alphabet (Google)
- Largest current US holding - over $800 million invested
- Added to position in 2022 when shares were $90-$120
- Now trading around $173 per share

Views on Investing in China (29:36)

Believes China is still in process of modernization and economic growth
Sees misunderstanding in West about China's commitment to free market economy
Notes disconnect/dislocations due to high retail investor participation
Optimistic on long-term growth prospects despite short-term challenges
"We don't think history repeats itself because every time is slightly different. Instead of guessing the patterns of history, we focus on selecting companies that can live through thick and thin." - Li Lu

Relationship with Charlie Munger (40:41)

Close friends and investment confidants
Munger referred to Li Lu as the "Chinese Warren Buffett"
Had monthly lunches with Munger and Mohnish Pabrai to discuss investments
Munger invested $88 million of family money with Li Lu in 2004
Part of Munger's $2.5 billion fortune was invested with Li Lu at time of death

Overview of Alphabet (Google) (44:52)

Li Lu's largest current US holding
Search business still growing and highly profitable
- 419 billion paid clicks in 2023, up from 240 billion in 2019
- 7.1 trillion search queries in 2023
Strong financials
- 27% return on invested capital in 2023
- Highly cash generative
- Buying back ~3% of shares annually
Potential risks/challenges
- AI disruption to search business
- Increasing capital expenditures for data centers/AI
Current valuation appears slightly above fair value based on host's analysis

Conclusion

Li Lu's journey from a penniless Chinese immigrant to a billionaire value investor is truly remarkable. His investment approach, heavily influenced by Benjamin Graham, Warren Buffett, and Charlie Munger, focuses on thorough research, high conviction bets, and a long-term ownership mentality. Li Lu's success with investments like BYD and his current large position in Alphabet demonstrate his ability to identify quality businesses trading at attractive prices.

While Li Lu is optimistic about China's long-term economic prospects, he acknowledges the challenges and misunderstandings that exist. His close relationship with Charlie Munger speaks to the respect he has earned in the value investing community.

For investors looking to learn from Li Lu, key takeaways include:

The importance of continuous learning and expanding one's circle of competence
Viewing stocks as partial ownership in real businesses
Having the courage to make high conviction bets when opportunities arise
Focusing on high-quality businesses with strong competitive advantages
Maintaining a long-term perspective and ignoring short-term market noise

Li Lu's story and investment philosophy offer valuable insights for both novice and experienced investors seeking to improve their approach to value investing in today's market environment.