Li Lu

Learning

“Poor Charlie’s Almanack is by far the most comprehensive publication that captures the essence of Charlie’s philosophy. When the first edition was published in 2005, I treated the book as a treasure and read it cover to cover multiple times. Each time I read it, I learned something new.”

“In the age of the modern civilization, the value created by the division of labor and by exchange is further increased because human knowledge can be accumulated. Compared to goods and services, human knowledge is easier to accumulate. Exchanges of ideas often result in a 1+1>4 equation. When different ideas are exchanged, the parties not only retain their own ideas, they also obtain the ideas of others. Moreover, sparks can fly during exchanges, creating entirely new ideas. When ideas are having sex with each other, they become very productive.”

“Tremendous insight is built from intense curiosity and study for your whole life.”

“I learn and I’m curious about all businesses. That’s why when opportunities come, within a few seconds you can smell it.  How can you develop that smell? The only way to really do that is just reading page after page.” 

“Most of your time being a value investor is as an academic, a researcher, a journalist actually, to have insatiable curiosity and try and figure out how just about everything works. Because in investing the more you know the better off you are.”

“You have to be naturally interested and curious about everything – any kind of businesses, politics, science, technology, humanities, history, poetry, literature, everything really effects your business. It will help you. And then occasionally you will find a few insights out of those studies that will give you tremendous opportunities that other people couldn’t think of.”

“Start by learning from the best – listening, studying and reading.”

“The game of investment is really continuous learning.”

“As I look at the past fifteen years, I’m amazed at how much I havelearned and how far along I’ve come. I’d have remained an investing ape without continuous learning.”

“You’ve got to learn everything. I started with physics and mathematics and I got into economics, history, law and politics. I like everythingand that’s what you need. You might need models from biology.”

“I feel very lucky that in the last twenty years I could study value investing under the tutelage of the great masters, and to learn and practice under their watch.”

“I always view this job as investigative journalism

“This year, I stumbled into two such great titles: Matt Ridley’s ‘The Rational Optimist’ & Ian Morris’s ‘Why the West Rules – For Now’. Even for a self-professed bookworm like me, this is rare. They both touched on the two key movers for the future: innovation & China. Both books have influenced the way I think about the future and I enthusiastically recommend them to those who are interested in these subjects. From time to time, I have shared books that I find particularly insightful. I have talked about ‘Guns Germs & Steel’ ‘The Rational Optimist’ and ‘Why the West Rules – for Now’. For this year, my book recommendation is ‘The Social Conquest of Earth’ by EO Wilson.”

“To be honest, it is still too early for me to assess the entire value of Mungerisms, because every time I talk to Charlie and reread his lectures, I learn something new.”

“Like millions of Warren Buffett and Charlie Munger admirers around the world, the teachings of these two teachers and Berkshire Hathaway’s amazing performance have shaped my investment career… I found all the books written about Buffett, including his annual letters to Berkshire shareholders and articles about him. I also learned that Charlie Munger was Buffett’s decades-long partner. I spent nearly two years studying them.”

“Finding an edge really only comes from a right frame of mind and years of continuous study.”

Value Investing

“In the last few decades, as far as I know, there has been every kind of investment style. And as far as I can observe and speak to with statistics, there has only been one style which has reliably and safely brought investors exceptional long-term returns: value investing. Every era has value investors who can produce good, long term results. Today, Buffett has a 57-year track record.  Others have twenty or thirty year records. Without exception, these people are all value investors.”

“There are few people that switch in between or get it [value investing] gradually.  They either get it right away of they don’t get it at all.  I never really tried anything else. The first time I heard it, it just made sense; and I heard it from the best.”

“When we look at the US trading records for the long-term, we cannot find successful long-term investments that are based on short-term-oriented theories and strategies. The great long-term investments have all been made by value investors.”

“Being a value investor means you look at the downside before looking at the upside. Before becoming an investor, you need to look at how you can fail in this game. There are all sorts of ways you can fail.”

“Stocks aren’t just little pieces of paper that you buy and sell. Each one is in fact a certificate bestowing fractional ownership of a company.”

Understand the role of the market. Stocks represent fractional ownership of businesses, but are also tradeable securities which can be bought and sold at any time. In this market, there is always someone quoting a price. How should we understand this phenomenon? Value investors believe the market is only there to serve you.”

“Investing is inherently about predicting the future. But predictions can never reach 100% accuracy; they can only fall between 0 and something approach 100%. So when we make a judgement, we need to leave a large buffer. This is called the margin of safety.”

“Through unremitting hard work over a long period, investors can build up their own circle of competence. This can give them a deeper understanding than others of a company or an industry, and allow them to make better judgments of future performance. Your unique strength lies within this circle.”

Stocks as Business Ownership

“Stocks aren’t just little pieces of paper that you buy and sell. Each one is in fact a certificate bestowing fractional ownership of a company.”

“You have to think of yourself as an owner of a business, rather than an owner of a piece of paper. You own a small piece so therefore you really don’t control the business. So it’s almost self-defense to demand a large margin of safety because whatever value you perceive may not be there because you can’t control it.”

“We view ourselves primarily as owners of businesses, and typically hold our positions for a very long time with very low turnover. Thus, the operating results and valuation characteristics of ‘HCI Holding Co’ is a very close proximate to that of the actual fund portfolio”

Mr. Market

“What is the point of the market?  As far as market participants are concerned, it is to discover the weakness of human nature.  If there are things that you don’t understand, or if you have any kind of psychological or physiological weakness, there will be a situation in the market which exposes you.  Anyone who’s been in the market before will understand exactly what I’m talking about.”

“As long as we remain human, we will always have ups and downs in the marketplace.”

Market price is the price the stock is currently trading at.  It is determined by supply and demand of sellers at a point in time and may have no relationship with private market or intrinsic value.”

“The market exists to expose the human weaknesses of its participants. Your lack of understanding, as well as psychological or physiological frailties, will be laid bare in the market.”

“Most people behave more or less as Graham recommended in markets where the assets are not easily traded, such as houses, farms, mines or privately held cos. However as soon these are chopped into small pieces & can be traded freely, participants behave in the opposite way

“In investing, much as in life, one does not need to check temperatures everyday but one should be aware of seasonal fluctuations and be on high alert for possible climate change.”

“Technological advances, the expansion of markets & tradable products, rapid dissemination of information have not made the markets any more efficient. If at all, it has probably made it more short-term orientated, thus more incapable of rational thinking.”

Margin of Safety

“If you buy stock with a sufficient margin of safety, the probability is with you.”

“Use an appropriate margin of safety to manage risk.  This way, you will not lose too much when you are wrong, and you will make much more when you are right.  This way you can let your portfolio generate higher than market returns with less risk, in a sustainable and stable way.”

“There are plenty of things I don’t know but they don’t factor into the purchase because I am using a huge margin of safety. Buying a dollar at 50 cents. So if things turn against you, you will be okay.”

“Borrowing a euphemism from advertising, I know at the beginning of any time period that 50% of all my predictions will not pan out; I just don’t know which 50%… This is why in selecting securities we always demand a large discount in valuation and employ a moderate amount of diversification in order to give us ample margin of safety.”

Circle of Competence

“If you stray outside of your circle of competence, or if your circle has no boundaries, or if you don’t know your boundaries – there will be some moment when the market takes you to the cleaners

“In his fifty years of practice, Buffett added one more principle; through unremitting hard work over a long period, investors can build up their own circle of competence.  This can give them a deeper understanding than others of a company or industry, and allow them to make better judgements of future performance.  Your unique strength lies within this circle

“The true insights a person can get in life is still very limited, so correct decision-making must necessarily be confined to your “circle of competence.” A “competence” that has no defined borders cannot be called a true competence. How do you define your own circle of competence? Charlie [Munger] said, if I want to hold a view, if I cannot refute or disprove this view better than the smartest, most capable, most qualified person on Earth, then I’m not worthy of holding that view.”

Intellectual Honesty

“The more honest you are intellectually, the more prosperous you tend to be. I have never met intellectually arrogant people who can successfully practice the game of investment”

“Investing is about intellectual honesty. You want to know what you know. You want to know, mostly, what you don’t know

“If you do this simply for the purpose of making money, it is almost impossible to achieve extraordinary long-term performance.”

“Have the highest degree of fiduciary duty and imagine that every dollar you take from a client is coming from your own middle-class parents who are entrusting their life savings to you.”

“I put all of my investment capital into my funds. So it’s a true partnership”

“Investing is about predicting the future, and the future is inherently unpredictable. Therefore, the only way you can do better is to assess all the facts and truly know what you know and know what you don’t know. That’s your probability edge. Nothing is 100%, but if you always swing when you have an overwhelming better edge, then over time, you will do very well”

Compounding

“We focus effort on rare long-term compounders. We wait patiently for prices to fall into our comfort zone, then buy aggressively & hold for the long term. You can do this in any market, but it’s much more profitable in markets where u have an enduring edge & fewer wise competitors”

“2017 marked the twentieth anniversary of our fund. From our humble beginnings, we now manage more than $9 billion dollars with the gross investment return since inception now being above 50 times.”

“One bonus about this profession is you get better over time. Most professions, as you get older, you get out of the game. Take the example of competitive sports. If you are a figure skater or gymnast, after your teenage years you are out of the game. With investing, if you are doing it the right way, you get better over time. Your knowledge accumulates exponentially. When I look back at everything I have done, I would have done it all slightly differently, but that is because I am better at it today. So if you approach it in a fundamentally sound way, as you mature, you become better and better. That process and progression is like compounding money. In fact, you can compound knowledge faster than money. If you truly love this game, I would suggest that you don’t take short cuts. It might take longer but it is more rewarding.”

“We focus effort on the rare long-term high compounders.”

“Our way of doing things has worked well for us for the first 20 years. However, it won’t work too well if we stop learning as the game gets harder to play. If we can, we must compound our knowledge and competence as fast as our assets grow.”

“Here is the result: 1 US dollar in stocks, after discounting for inflation, experienced an appreciation of 1 million times the original value over the past 200 years! Its value today would be 1.03MM US dollars. Even the remainder of this number is bigger than the return on every other class of assets. What are the reasons behind such an astonishing performance? The answer lies in the power of compounding. The average annualized rate of return for stocks, discounting inflation, is only 6.7%. No wonder Einstein called compound interest the eighth wonder of the world.”

Management

“Even if you meet with management, you may not learn something. Obviously, actions speak louder. You want to see what they have done. Everything being equal, the more you know about management, the more honest and upfront they are, the more motive they have, the better the situation is and the deeper the discount.”

“Management always has a big influence on your success, no matter how good or how bad the business is itself.  Management is always part of the equation of making the company successful, so the quality of management always matters.”

“Our opinion of a management team rarely remains unchanged after our ownership – it either gets progressively better or worse. Over the long term, the character and quality of a management team will have a major impact on the success of our investment in its company, and this is particularly true among seemingly similar companies in the same industry.”

On Munger

“Charlie [Munger] constantly collects and researches the notable failures in each and every type of people, business, government, and academia, and arranges the causes of failures into a decision-making checklist for making the right decisions. Because of this, he has avoided major mistakes in his decision making in his life and in his career. The importance of this on the performance of Buffett and Berkshire Hathaway over the past 50 years cannot be emphasized enough.”

“When Charlie [Munger] thinks about things, he starts by inverting. To understand how to be happy in life, Charlie will study how to make life miserable; to examine how business become big and strong, Charlie first studies how businesses decline and die; most people care more about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market. His way of thinking comes from the saying in the farmer’s philosophy: I want to know is where I’m going to die, so I will never go there.”

Long/Short

“A short cannot be a fundamentally long-term position. In the long game, the upside is unlimited. Your downside is 100%. In shorting it is opposite. Shorting is also essentially borrowing, so you need money and time on your side. If time is not on your side, you can be right but lose all your money. The best kind of short usually has some kind of fraud. In those situations, management is determined to keep the fraud. Look at Bernie Madoff, 20 years time. You cannot afford to borrow money for 20 years. So shorting is a short term game. When those positions go against you, there is huge leverage that can utterly crush you.”

“Three things about shorting make it a miserable business. On the long side, you have 100% downside but unlimited upside. On the short side, you have 100% upside and unlimited down-side. I do not like that math. Second, the best short has some element of fraud. However, a fraud can be perpetrated for a long time. Of course you borrow to short, so they could really just wear you down. That’s why I could be 100% right and bankrupt at the same time. But, you know what, you go bankrupt first! Lastly, it screws up your mind. Shorts just grab your mind and take away from the concentrated effort that is required to do proper long investing. So, those are the three reasons why I just stay away from shorting. It was a mistake on my part. I shorted for a couple of years. I don’t discard people who are really doing well at shorting – it’s just not me. If I want to add a fourth reason, it is that the economy overall has been really growing at a compounding rate for 200-300 years, ever since the modern science technology era. So, naturally, the economic trend favors long positions rather than short.”

Macro

“I don’t ever want to profit from a bubble. Soros does that, that is just not my game. I don’t profess any ability to understand how long a crowd will buy into a bubble. I invest in things that appear to be compelling values that continues.”

“The best way for any nation to build up its own strengths is to abandon all its tariff barriers

“Regardless of macroeconomic conditions, our strategy is to own exceptional companies at prices deeply discounted from value. We think this will work very well for our investors long term. I believe such a strategy will probably work better if there is a lot of turmoil.”

“Christopher Davis’s grandfather used to say that you make the most money out of a bear market financial panic – you just don’t know it at the time. It’s always the case.”

“In order to understand stock performance in the past 200 years, and the next 20 years, we must be able to understand and explain the basic trajectory of human civilization. Otherwise, it will be hard for us to remain rational when a stock market crash occurs. We will think the world is coming to an end whenever we encounter a crisis similar to that of 2008 and 2009. Predicting the future lies at the heart of investing.”

“When we examine the past 200 years, we see a continuous upward trajectory [in US GDP].If we take a year as the unit of measurement, GDP grew almost every year. This is real, long-term, cumulative and compounding growth… The economic pattern of sustained, long-term compounding growth is a modern phenomenon, which had never previously occurred in the recorded human history of the past 16,000 years.”

Fundamental

“My checklist is… Is it cheap? Is it a good business? Who is running it? What did I miss?  I go through all the checklist. When I go to ‘what did I miss?‘, it is hugely important to understand psychology and human cognition.”

“You need to get into the frame of mind of thinking about what really makes one business more successful than others. What is their advantage, why are they making more money, and some doing just less. Why is it? The only way you can find that is studying the ones that are already established.”

“It goes back to understanding the business. Once you have that understanding you can extend it to understanding an industry. A certain industry might have characteristics that make it different than others. In certain industries you might have better prospects than others. Find the best of the players in the industry and the worst players. And see how they perform over time. And if the worst players perform reasonably well relative to the great players — that tells you something about the characteristics about the industry. That is not always the case but it is often the case. Certain industries are better than others. So if you can understand a business inside out you can then eventually extend that to understanding an industry. If you can get that insight, it is enormously beneficial. If you can then concentrate that on a business with superior economics in an industry with superior economics with good management and you get them at the right price — the chances are that you can stay for a very long time.”

“A company’s intrinsic value is primarily derived from the earning power of its operations. It is also contributed to by non-operating assets, net of liabilities. Corporate governance plays an important role as well, because it determines how much of a firm’s value can be claimed by minority shareholders. The same goes for the general political and legal environment in which the firm operates. Enhancement of a firm’s intrinsic value can come from improvements in its earning power, resulting from its strengthening competitive position, new business innovation, better use of its operating and non-operating assets, improvements in its corporate governance as it relates to minority shareholders and the macro environment.”

“All our top holdings are powerful companies, often the undisputed leaders in their industry. They all have long histories of successes. They have enjoyed many years of growth through good & bad times & in all likelihood will continue to grow for many more years to come”

“Our major holding companies all have unique business strengths that enable them to shine during good and particularly tough times. They are anti-fragile. In our view, their competitive advantages are sustainable for the forseeable future.”

“Most of the time, users in this industry don’t know anything about its products, and how to discern their quality. This sets the investment industry apart from almost all others.”

“In our hunt for good investments, we scrutinize the basic aspects of a company; the character of its industry, the competitive position it has or will soon have in that industry, the quality of its management and corporate culture, the price you pay to acquire its shares… & the larger mostly external factors influencing the environment of the company. Ideally you want to find companies that are leaders in growing industries with super-managers & hard-working honest workforces & whose shares are available at price substantially below intrinsic value (which is also growing at a very nice clip)”

“We usually own stocks in large established businesses with some defensible competitive edge, which we bought at prices so advantageous that we had little chance of permanent capital loss.”

“Making predictions about the future is also very difficult.  Investing is the ability to predict the future. You really need to understand a company and its industry and assess their outlook for the next five or ten years. It isn’t easy.  Before investing, we need to know at a minimum what a company will look like in ten years and how it will behave in a downturn. Otherwise, how can you judge that the value of this company won’t decline? To know what a company’s future cash flows are worth today, we must know approximately what those cash flows will be in ten or twenty years.”

“Every company in today’s age is a technology company somehow, but the technology may not be cutting edge, and may not play an important role in the success or failure of the overall business. Successful technology companies are the ones that are capable of reinventing themselves and dealing with change.”

Portfolio Management

“I don’t have a preconceived notion about allocation. I let the opportunity dictate where I end up.”

“Nothing makes the job of a portfolio manager easier & happier than owning a basket of companies with untapped pricing power at discounted prices. If he is patient, he needs no other virtue.”

“My goal as your portfolio manager is to populate our portfolio with companies possessing ‘winner DNA’ in great businesses of favorable industries and that we can purchase at a substantial discount to their intrinsic value.”

“As I have stated here before, I view my job here as first and foremost to preserve our partners’ collective purchasing power and then to expand that power at a satisfactory rate.”

“For our portfolio, I select only securities whose businesses are entrenched, predictable & whose intrinsic values are most likely to appreciate over time. This way, time is on our side – no matter how long the waiting period, we are likely to come out very well in the end”

“Overall, I believe our portfolio companies not only have the staying power to get through this period of economic difficulty, they’re likely to do very well in spite of it. Thus, the loss our fund sustained last year is probably temporary & quotational” Li in 08 (08 -42%/09 +206%)

“I know of no better hedge against an uncertain world than owning a well-selected basket of common stocks in high quality businesses at deeply discounted prices (under normal circumstances) and ignoring the unknowable and the uncontrollable, which is exactly what we do.”

“To different degrees, our companies all possess characteristics of what economist Nassim Taleb termed ‘anti fragile,’ meaning they tend to benefit from chaos and disorder.”

“Just as I don’t expect the best companies to show their excellence every quarter (or whenever they report operating results), I don’t expect our investment results to be any smoother. In fact, our investment approach almost necessitates a very bumpy ride. Nearly all great investors who I admire achieved high long-term returns through bumpy rides. There surely will be times, even extended periods, that we underperform our markets and may have negative results. But just as I expect our portfolio companies to do very well over time, I expect our investment results to approximate their operating results over time.”

“In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.”

“As a bottom up investor, our investments over the long haul will largely mirror the performance of the underlying companies we invest in.”

Idea Generation

“The first thing I always check is the new low lists, lowest book, lowest P/E etc. That attracts me more than the new high list”

“Till this day, the vast majority of individual investors and institutional investors still follow investment philosophies that are based on “bad theories.” For example, they believe in the efficient market hypothesis, and therefore believe that the volatility of stock prices is equivalent to real risk, and they place a strong emphasis on volatilitywhen they judge your performance. In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not risk, but it is an opportunity. Where else do you look for cheap stocks?”

“Ideas come to me from all sources, principally from reading and talking.  I don’t discriminate how they come, as long as they are good ideas. You can recognize good ideas by reading a great deal and also by studying a lot of companies and constantly learning from intelligent people – hopefully more intelligent than you, especially in their field. I try to read as much as I can.” 

Time Horizons

“In the short term, there will always be winners and losers. But in the long term, there are very few winners.”

“Short term results often benefit from luck and have no connection with skill. For example, take a short period, not even one or two years long. At any time, even one or two weeks, there will always be some rock stars. But in the long term, there are very few winners. One, two, or three year track records, even three to five years, or even five to ten year track records –are seldom any use for predicting future results. If someone tells me they’ve had good results, say over five or ten years, if I can’t see their actual investment results, I still won’t be able to judge if it’s down to luck or skill –this is one of the core problems judging value investing –is it luck or skill? The market can deliver 14% CAGR’s over consecutive periods of 15 years. In those times you don’t have to be a genius; its enough to just be there. But there are other times when returns are negative. Having a good track record in those years is not the same. So its very hard to judge performance without seeing the context. But if someone can produce outstanding results over fifteen years or more, we can probably say they’re something exception. It’s safe to say there’s more skill than luck over that time.”

“The most profitable kind of investing is long-term investing.”

“Most businesses are subject to change if you stay with them long enough.  There’s not a single business that I know of that will never change.”

The Game of Investing

“The game of investment is really continuous learning.”

“The art of investment is the discipline of inaction in the absence of a good opportunity, but aggressive action when one is identified.”

“It’s not easy and it’s not precise or science at all”

“Part of the game of investing is to come into your own. You must find some way that perfectly fits your personality.”

“I am more interested in my nature, in win-win situations.”

“The only way to gain an edge is through long and hard work.”

“We have a few basic principles to guide us in doing the right thing. We try to treat our investors in such a way that if our positions were switched, I’d be delighted to take the other side. We treat a stock position as a piece of the business involved… We focus effort on rare long-term compounders. We wait patiently for prices to fall into our comfort zone, then we buy aggressively & hold for the long term. You can do this in any market, but it’s much more profitable in markets which you have an enduring edge & fewer wise competitors… We try to buy stocks only at a price that affords a margin of safety. We use market volatility as a useful tool, not an instructor. We patiently build up core expertise that allows us to evaluate the long-term prospects of the businesses we are interested in”

“I believe there are four basic competencies a good investor must constantly improve. They are: 1) the ability to understand competitive dynamics far into the future for particular businesses and industries because nothing impacts outcomes more than competition. 2) the ability to read through accounting reports and footnotes to develop an educated sense of the company, it’s culture and businesses. 3) understanding the people who run the company. 4) a habit of constant learning in the hope of occasionally finding some insights and skills to make one more trusted and admired by interesting people who can provide opportunities.”

“I started out looking for cheap securities… Over time, I really fell in love with strong businesses. I morphed into finding strong businesses at bargain prices.  I still have a streak in me that favors finding really cheap securities –I just can’t help it. But over time, I’ve become more attracted to looking for great businesses that are inherently superior, more competitive, easier to predict, and with strong management teams.”

Common Sense

Common sense is the least common commodity”

“If you make a mistake, sell as fast as you can.”

“You cannot live life without making a mistake.  Every time I make a mistake, I learn something.” 

“We should see the world the way it is, which is the same as seeking truth from facts.”

“In making investments, I have always believed that you must act with discipline whenever you see something you truly like.”

“To this day, failure to act when I should have remains the most costly mistake of my career.”