September 20, 2024 • 1hr 16min

TIP661: Betting Big on China & Lessons from Bear Markets w/ Richard Lawrence

We Study Billionaires - The Investor’s Podcast Network

In this episode, host Clay Finck interviews Richard Lawrence, founder and executive chairman of Overlook Investments. Lawrence shares insights from his 30+ year career investing in Asian markets, including navigating major crises, identifying great businesses, and working with management teams to improve capital allocation. He also discusses his views on China, ESG investing, and lessons learned from other great investors.

0:00

-0:00

Key Takeaways

Richard Lawrence founded Overlook Investments in 1991, which has compounded capital at 14.3% per year over 30 years by investing in Asia's best companies
The 1980s was a transformative period for Asia as manufacturing shifted from Hong Kong to mainland China, creating huge investment opportunities
Lawrence prefers investing in simple, focused businesses that are easy to understand rather than complex conglomerates
The Asian Financial Crisis of 1997-1998 was an "economic nightmare" that obliterated stock markets and currencies across Asia
Overlook shifted heavily into Chinese A-shares in the mid-2010s, seeing it as a "stock picker's paradise" with many undervalued companies
Lawrence believes investors need to be "macro aware" and pay attention to factors like current account deficits when investing in emerging markets
Environmental, social and governance (ESG) factors, especially climate change, will be increasingly important for investors to consider

Introduction

In this episode, host Clay Finck interviews Richard Lawrence, founder and executive chairman of Overlook Investments. Lawrence shares insights from his 30+ year career investing in Asian markets, including navigating major crises, identifying great businesses, and working with management teams to improve capital allocation. He also discusses his views on China, ESG investing, and lessons learned from other great investors.

Topics Discussed

Early Career and Move to Asia (1:53)

Lawrence describes how he ended up in Hong Kong in 1985 after traveling around Asia for a year. He started working as an analyst for a small investment firm, visiting companies and learning about the manufacturing boom happening in southern China. This was the beginning of China's special economic zones under Deng Xiaoping.

"Hong Kong at the time was a manufacturing center that was going to become a large financial center, one of the global financial centers. And all that manufacturing was first going to move into Shenzhen and then go into Guangdong and Dong Guan, and then up north, up Shanghai, and outside of Shanghai. And the boom was on," Lawrence explains.

Chinese workers were incredibly hardworking and labor was very cheap, making China highly competitive globally
Many manufacturing stocks were trading at just 3-4x earnings at the time
Lawrence saw huge opportunities as manufacturing shifted from Hong Kong to mainland China

Investment Philosophy and Approach (7:10)

Lawrence discusses key aspects of his investment approach, which was influenced by his father and other mentors:

Focus on simple businesses that are easy to understand
Work for clients first, putting their interests ahead of personal gain
Love the process of investing and learning, not just the money
Take a long-term view and be patient

He gives examples of successful investments in simple businesses like Unisteel (screw manufacturer) and Cafe de Coral (Chinese fast food chain) that generated strong returns over many years.

"There are enough risks in the world that we deal with, enough volatility that we deal with. And leveraging complicated, unfocused businesses, leveraging debt on top, leveraging unhedged dollar debt, leveraging businesses that don't really understand corporate governance and capital management, that's just complicating your life," Lawrence explains.

Lessons from Early Investments (12:23)

Lawrence shares a story from the mid-1980s when he worked as an analyst in Hong Kong and had his apartment ransacked after publicly criticizing a company's management. This taught him to be more careful about public disputes in Asia and to handle issues with management privately and confidentially.

Avoid investing in pyramid ownership structures that disadvantage minority shareholders
Be cautious about publicly criticizing companies in Asia due to the concept of "face"
Work with management teams privately to address issues

The Asian Financial Crisis (13:17)

Lawrence vividly describes the devastation of the 1997-1998 Asian Financial Crisis:

Asian economies had been borrowing heavily in US dollars to fund growth
When currencies collapsed, dollar-denominated debt ballooned
Stock markets fell 80-90% in countries like Thailand and Indonesia
Real estate values plummeted over 95% in some markets
Overlook's fund declined about 65% from peak to trough

"To do that, I calculated you go down 80% and then you go down another 80% and then you go down another 80%. That's what going down 97, 98% is like. And so it was just a complete obliteration," Lawrence recalls.

The crisis taught important lessons about currency risks and macroeconomic factors that Lawrence still applies today. It also created opportunities to buy great businesses at very low valuations once markets stabilized.

Importance of Macro Awareness (22:33)

Lawrence explains why he regrets following Warren Buffett's advice to ignore macroeconomic factors:

Current account deficits are a key warning sign for emerging markets
Unhedged foreign currency debt can devastate companies when exchange rates move
Investors need to be aware of factors like loan growth, government deficits, and forex reserves

"If I could roll back my whole entire investment career, I would have hedged those currencies on June 30 of 1997," Lawrence admits.

Working with Management Teams (23:51)

Lawrence describes Overlook's approach to engaging with company management, using the example of Taiwan Semiconductor (TSMC):

Focus on corporate governance and capital allocation issues
Work privately and confidentially with executives
Helped TSMC improve dividend policy and share issuance practices
Built a strong relationship with TSMC founder Morris Chang

"We talk very clearly to our executives about buybacks and when they're appropriate and when they're not appropriate and what they can achieve," Lawrence explains.

Views on Dividends vs Buybacks (38:55)

Lawrence generally prefers dividends over share buybacks, especially in Asia:

Dividends provide a more reliable return to shareholders
Many executives are not skilled at timing buybacks effectively
Asian tax policies don't favor buybacks like in the US
All companies in Overlook's portfolio pay dividends

Investing in China (44:33)

Lawrence explains why Overlook dramatically increased its allocation to Chinese stocks in the mid-2010s:

Valuations became extremely attractive as the market declined
Many high-quality companies had no foreign investors
Overlook was often the first foreign investor to meet with management teams
Found opportunities in sectors like renewable energy (e.g. China Yangtze Power)

"We started going into the A shares, and literally, in a lot of cases, we were the first foreign investor to walk in the door," Lawrence recalls.

Current Macro Situation in China (50:49)

Lawrence gives his perspective on China's current economic challenges:

Balance sheets are generally strong with high forex reserves and household savings
Main issue is lack of confidence due to real estate market declines
Geopolitical tensions with the US are creating uncertainty
Government needs to show more commitment to economic reforms

"We need more commitment to reform than we've had. There'll probably be more rounds of stimulus. You have to understand that the Chinese do stimulus differently. We don't open the helicopter and throw the money out. They're very tactical on how they stimulate," Lawrence explains.

Misconceptions About Investing in China (58:55)

Lawrence believes many US investors underestimate China's economic strength and technological capabilities:

China is not as weak or technologically behind as some assume
Efforts to restrict semiconductor access may accelerate China's development
More dialogue is needed between US and Chinese officials

ESG and Climate Change Investing (1:00:35)

Lawrence credits investor Jeremy Grantham with opening his eyes to the importance of climate change for investors:

Overlook has been carbon neutral for 15-16 years
They avoid investing in certain high-emission industries
Look for companies that are part of climate solutions
Lawrence believes ignoring climate risks will be costly for investors long-term

"I think portfolios need to be prepared, particularly for the environmental, I mean, the governance and the social. We've been dealing with that forever, but the climate is changing. We need to be prepared and it's going to have an impact," Lawrence argues.

Conclusion

Richard Lawrence's 30+ year career investing in Asian markets offers valuable lessons for investors on navigating emerging market risks, identifying great businesses, working with management teams, and considering long-term factors like climate change. His disciplined, company-focused approach combined with macro awareness has allowed Overlook to generate strong returns through multiple market cycles. While challenges remain, especially in China, Lawrence continues to see opportunities for patient, value-oriented investors in Asia.