Li Lu

A Discussion of Modernization (2014)

Chapter 1—Old Problems and the New History

• The waning of the East and the dominance of the West during the past 200 or more years has consistently been a core concern for world elites from various walks of life both in China and the West, but to this day a consensus has yet to be achieved.
• Written historical records cover less than one percent of mankind’s entire evolutionary history, which is clearly insufficient for tracing and interpreting the entire course of human evolution. Moreover, traditional historiography itself has biases and limitations.
  • <> language cannot exhaust everything
  • <> one cannot get away from one’s constraints
• Traditional historiography has been fundamentally transformed over the past several decades, as a series of breakthroughs in scientific disciplines have provided completely new tools which enable us to understand a much longer span of history
  • tech influences our understanding of the past <> knowing the past is as impossible as predicting the future
• In 2012, biologist E.O. Wilson formally suggested a complete theory of human origins, which he published in his work The Social Conquest of Earth. This was one of the greatest developments in the study of human evolution since Darwin
• Milankovitch cycles
• The new historiography is a methodology which constructs a new interdisciplinary interpretation of humankind’s long history by utilizing cutting edge scientific developments in various fields. Its great breakthrough is its ability to study much earlier periods in history without the limitation of only using written records.
  • <> multidisciplinary
• Ian Morris provided the best answers in his 2010 work Why the West Rules for Now, and its 2013 companion work The Measure of Civilization
• My work in investments over the past twenty-odd years has added an occupational need to predict China’s future, and during this time, I have been able to accumulate some knowledge and ideas
  • <> study and own, then study further (reflexive)
• This series will start by primarily looking at the results of Jared Diamond and Ian Morris’ studies and integrating them with some of my personal views and interpretations.
  • Ch. 2~
• Next, from a Chinese perspective, I will analyze quantitative charts complied by Professor Morris’s team covering some 16,000 years of human evolutionary history, describe the major stages of human development, and point out the rules of this development with a focus on the genesis of modernization.
• Then I will focus on the nature of modernization and China’s path to modernization, and predict the future of China. The contents of this section will consist predominantly of my own humble opinions.
• Finally, I will touch on the impact of China’s modernization on the West and explore the common future of the human race.

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15

• The first constraint is the Iron Law of Civilization 3.0. Once a robust international market has been formed, no nation will be able to leave it. Any nation that does so will fall behind, and the longer it stays away, the more quickly it will fall behind, until it is finally forced to rejoin.
  • <> challenge this
• The second constraint is due to the fact that in the age of nuclear weapons, major powers all possess nuclear strike capabilities that can destroy each other many times over, and in the process destroy all the living things on earth. Thus in this era relations between the great powers are guided by the principle of mutually assured destruction (MAD). Under such a mechanism, an all-out war with no bottom line is unlikely between major national powers.
• The third constraint comes from the unique challenges posed by the age of Civilization 3.0 to the entire human race.
  • E.g., climate change
    • This will require the joint efforts of all countries
      • I don’t think so—free market should be able to resolve thisrevisit
• Today, competition between countries mainly takes place in the economic arena. The most important competitions are often invisible, and they are over the levels of science and technology, the attractiveness of institutions, market capacities and educational levels. The most successful countries will be the ones that can maximize the potential of their citizens and attract the most talented people from around the world. But where there is competition there will be winners and losers, and there will be conflicts.
• China’s current economic and political systems are transitional ones. In the coming decades, China will more likely implement a fully free market economy and develop a political system with Chinese characteristics, one which combines Keju with constitutional democracy.
• From China’s vantage point, the next few decades will be the best period for comprehensive modernization.
• Because science and technology are the foremost economic drivers of Civilization 3.0, the leading status of the US in the global economy will remain unchanged for many years to come. Although China may eventually have the world’s largest economic output, the U.S. will still lead in GDP per capita and S&T development. China’s manufacturing capability and market depth all complement those of the US.revisit

Chapter 16

• Future developments in science and technology will turn differences between people into personal preferences and choices
  • <> preference notes
• The ultimate questions which religion must answer are those of a fundamental world view: where do humans come from? what is their inherent nature? what is the raison d’être of human existence? where do people go after they die? Science will provide increasingly good answers to these, and may even one day take the place of religion in answering them
  • <> where science slips, religion comes in for rescue, as it weredevelop
• The commonality in all religions which will survive is empathy between people, particularly compassion
• The Iron Law of Civilization 3.0 will create a single global common market, and as a result, it will be necessary to manage the challenges of a common global economy
  • <> fragmentation memos and notes
• A new global state is not only a possibility, but a necessity
  • <> challenge this
• Another long term challenge involves resources. All of today’s civilization is based on a foundation of electricity. All of Civilization 3.0 is based on the use of fossil fuels, and the reason why S&T 3.0 is so powerful is because fossil fuels have a much higher energy conversion rate than photosynthesis. Fossil fuels were also originally formed through photosynthesis, but they were stored underground for hundreds millions of years as organic debris and underwent chemical reactions. Their very high energy density per unit is a result of millions or even hundreds of millions of years of accumulation and concentration. They are a precious legacy given to humanity by the earth after being stored up for hundreds of millions of years.
  • <> Deutsch would likely argue that Li Lu’s contention here is, if he were to use Li Lu’s own words, not S&T enough
• The global common market of Civilization 3.0 will also deepen our common interests, and the challenges shared by all humanity will have to be dealt with jointly. Hence a global government will be the inevitable result.
  • I don’t think this is inevitable
• E.g., 中華統一 and EU
• Within a few decades the intelligent computing power of silicon-based materials will be comparable or even superior to that of a human brain
  • only if you look at the hardware—we are still yet to figure out the software
• From a population of twenty thousand over a hundred thousand years ago, the human population has grown to 7 billion today, which is already an enormous change.
  • specifically, 350,000x
• We can imagine that if life expectancy can be infinitely increased, then within hundreds or thousands of years, the earth’s capacity will at some point reach a state of saturation. At that time, people will have to leave the earth to seek living space on other planets, just as they left Africa some 60,000 years ago.
• As (Ian) Morris says, history is indeed created “by lazy, greedy, frightened people looking for easier, more profitable, and safer ways to do things.” All animals are like this, but we differ from all other animals because of the extraordinary tools we use. The powerful creativity and spirit of enterprise unleashed by human brains and the extraordinary spiritual power expressed through art allowed us to embark on a very long journey from the time of our earliest ancestors in Africa.
  • <> humans do stupid things

2019 piece on practicing value investing

“The Practice of Value Investing”, BY LI LU
NOVEMBER 29TH, 2019

1.  The Theory and Practice of Value Investing (20251203)revisit

After five years, I am delighted to have this chance to return to this course at Peking University’s Guanghua School of Management to speak with you all again.  Today is Thanksgiving in the United States, so let me take this opportunity to thank Professor Jiang Guohua of the Guanghua School of Management, Mr. Gene Chang of Himalaya Capital, as well as all the students and supporters of value investing in the audience.  Thanks to all of you for your help these past few years spreading the word on value investing in China and supporting its practice. 

I’ve had some regrets since my first lecture here five years ago because I focused then primarily on the basic theories of value investing and whether they suited China.  But value investing is a practical art and I didn’t talk enough about its practice.  So this time, I will talk about the practice of value investing.  I’d like to first discuss my understanding of value investing’s practical framework and then leave lots of time afterwards for your questions. 

There are only four basic concepts in value investing:

1.      Stocks confer part-ownership of a business.  They are not just pieces of paper to be traded.

2.      Margin of Safety:  At its heart, investing is about making predictions of the future.  However, we can only obtain some indication of probabilities as the future is inherently unpredictable.  Therefore, we must leave ourselves a margin of safety.

3.      Mr. Market:  The market is there to serve you, not to guide you. 

4.      Circle of Competence:  Investors must build their own circle of competence through long-term study and then stick within it when investing. 

This is value investing’s basic intellectual framework.  Its logic is simple and clear, and it’s not hard at all to understand.  Moreover, this is the only investment style I know which can deliver superior risk-adjusted returns to investors over the long-term.  For this reason, a lot of people have some knowledge of value investing, particularly thanks to Warren Buffett, its most famous practitioner.  His success over the last sixty years has attracted a phenomenal amount of attention from all over the world.  However, according to empirical research, only about 5% of market participants practice value investing.  Why then do so many people understand value investing but so few practice it?  Today I will therefore discuss why value investing is easier said than done, and where its difficulties lie.  Also, why do people so easily revert to other investment styles when they encounter difficulties in their practice? 

Let’s analyse those four concepts together one by one.

The first concept is that stocks represent part-ownership of a business.  This is in fact a question of social institutions and the rights afforded to equity.  If personal property rights are protected under a given regime, then the use of personal property and the exchange of those rights should also be protected.  If personal property cannot be freely exchanged, then it’s hard to say you have any ‘rights’ over it.  For example, cash is clearly a form of property because we can freely use it whenever we wish and exchange it for the things we want.  In this way, the protection a society affords to the exchange of equity is an important indicator of its attitude towards personal property rights.  Value investing can only exist if a society has such an institution.  If we look around today, we can see that it does indeed exist in China, and that the exchange of equity has been permitted.  The condition that stocks represent part-ownership in a business has therefore been fulfilled. 

• but how does seizeability etc come into play?revisit

Second, the Margin of Safety.  This is really a question of methodology as there isn’t any ambiguity in the concept.  Price is what you pay, value is what you get.  Because value is uncertain, it should be purchased at the lowest possible price.  I trust everyone agrees with this.  The main difficulties in practising value investing must therefore come from the other two concepts:  Mr. Market and the circle of competence. 

• <> buy cheapest and sell dearest note

Let’s recall Mr. Market and how Benjamin Graham first described him.  Graham said that we could imagine the stock market as an energetic figure who while not necessarily malicious, does not possess good judgement or great intelligence.  The first thing he does when he wakes up each morning is to call out all sorts of prices to you, regardless of whether you’re interested or not.  But Mr. Market has a manic personality; there will be times when he is particularly optimistic and so his prices will be high.  Then there will be times when he is particularly pessimistic and so his prices will be low.  For the most part, you can just ignore him.  But when Mr. Market becomes extremely worked up – either excited or depressed – you can use his extreme emotions to buy and sell. 

• <> be fearful when others are greedy

Now here’s the problem.  When you are at school and hear about Mr. Market, you might think it all sounds reasonable.  But as soon as you begin work and enter the market, you will realise that there are real people on the other side of every transaction.  These people are all well-educated, have more money than you, have more power than you, and have more experience than you.  They are highfalutin’, highly accomplished and often in positions of seniority.  In other words, they don’t at all resemble Graham’s Mr. Market.  In the process of transacting with them, you will often look wrong – at least in the short-term.  After some time, you will have been continuously scolded by your boss and frustrated by your mistakes.  You’ll begin to feel that you’re the sucker at the table, and so will start to doubt everything you once believed.  This is the first difficulty we encounter practicing value investing and the reason many people go no further. 

The second difficulty is defining our circle of competence.  Where are its edges?  How can you prove that you really understand something?  When the market swings and all your stocks are down while everyone else’s are up, how do you know that you’re right and they’re wrong? 

Today I will focus on four questions relating to the challenges of Mr. Market and circles of competence. 

The first is the difference between investing and speculating.  The second is to define what is a circle of competence.  The third is “temperament”, which both Warren and Charlie have said is an investor’s most important attribute.  Some of your temperament is innate and some is cultivated.  So what does it look like and how can you cultivate it?  Fourth, how can an ordinary person protect and grow their wealth if they don’t want to become a professional investor?  I hope that these four questions will cover the majority of issues you will encounter in your practice. 

2.  The Stock Market:  A combination of Investment and Speculation (20251206)revisit

When we invest in the stock market, we must first face the market.  What is it?  What kind of people operate there?  And how do they behave?  How do value investors fit in to this?

Let’s first recall the history of the stock market.  The modern stock market appeared about 400 years ago, which isn’t a long time in the grand scheme of things.  Before then, there weren’t many commercial opportunities and so there wasn’t a need for the stock market to exist.  The most important thing to happen in that time was the discovery of the New World (i.e. the Americas) 500 years ago, which went on to bring one to two hundred years of high-speed economic growth to the whole of Europe.  Along with the age of colonisation, there appeared a few proto-companies.  From where did the concept of a company come?  Because founding colonies and trading across oceans was both risky and capital-intensive, the earliest colonial enterprises relied on the support and financing of the richest European monarchs.  However, these monarchs were soon also unable to afford the money required and so partnered with the nobility.  From this was born the earliest joint stock companies, whose ownership was dispersed and widely held.  These companies grew fast and soon needed even more money, leading the monarchs and nobility to further disperse ownership and to allow ordinary people to use their savings and participate too. 

The problem was though that ordinary people did not know how to value this equity.  They simply didn’t understand how these companies made money.  It was decided therefore to divide the equity into as small a unit as possible to reduce the amount required to invest.  It would also facilitate people to buy and sell at any time.  This design suited the baser instincts of human nature:  our greed, laziness and desire to get rich quick.  If there is a way, we all want to use the minimum effort to gain the maximum reward.  This is why we are willing to take risks and gamble, and why gambling has existed throughout human history. 

• tendency to save energy output <> nothing is good objectively

The earliest design of the stock market pandered to these baser instincts and proved very successful.  The most important Dutch companies at the time were the East and West India Companies, with the former being especially well-positioned for a long-term period of growth.  The money raised by selling equity was quickly used to grow the company’s operations, earning investors even greater profits – and thus starting a virtuous cycle.  However, more and more people were also attracted to the ability to trade at any time in the stock market.  This liquidity created its own dynamic as people went from guessing the East India Company’s results to guessing how other traders would behave.  Speculation made the early stock market very popular, and this helped more and more companies to flourish. 

• symbol <> stupidity (inevitable) <> memes variation (inevitable)

The stock market had another wondrous function:  as more people participated in the market, more companies were attracted to list.  If these companies operated in a growing economy, they could raise money through the stock market to expand their production capacity, create more products and more value.  The wealth this created enabled people to increase their consumption, closing the loop of the economy’s virtuous cycle.  Even though the stock market first made use of people’s desire to gamble, once the number of participants and companies had reached a critical mass, the mechanism of this virtuous cycle could continue indefinitely as long as the economy itself could continue producing more such growing companies. 

• self-actualization?revisit

About 400 years ago, another type of system slowly came into being:  the modern capitalist system and its modern market economy.  At this time, science and technology were themselves also undergoing revolutionary change which would continue for hundreds of years right up until today.  The combination of the Scientific Revolution and the market economy produced a phenomenon never before seen in human history:  continuous, compound economic growth.  This has continued for three to four hundred years, lifting human civilisation to an unprecedented level.  Compound growth is an astonishing concept whose power most people don’t understand.  Imagine a company growing its earnings every year at 6-7%.  While this doesn’t sound too high, after 200 years or more, those earnings will have grown by more than a million times.  That is the power of compounding!  (For statistics on the American stock market from 1802 onwards, please refer to Page 5 of my speech, “The Prospects for Value Investing in China”).

These kinds of returns will attract more and more people to the stock market, in turn attracting more and more companies to list.  This is the wondrous way in which the stock market works to mobilise all elements of society, even if it was never the original intention.  Therefore, from the very start, the stock market had two types of participant:  investors and speculators.  Investors forecast companies’ future performance, while speculators forecast other market participants’ short-term behaviour. 

• the stock market itself is an emergent phenomenon
• if you care about others’ positioning, you’re a speculator

What is the difference between these two groups?  Is there any difference in their results?

If you invest in a company in a sustainably growing economy, your company’s profits and your investment return will also grow sustainably.  If you speculate on other people’s short-term trading behaviour, there can only be one result in the end:  gains and losses must equal because this is a zero-sum game.  If you add up the gains and losses of all speculators in the market, they will sum to zero.  This is the biggest difference between investing and speculating.  I’m not denying that there are some speculators whose chances of winning are higher and who can go on winning for longer; equally there are some who will always be the sucker at the table and never strike it rich.  If you give it enough time though, when you add the winners and losers together, the net result will be zero.  The reason is that speculating on short-term behaviour in the market adds nothing to the economy nor to corporate earnings growth.  Some people say they use a mixed model of “80% investment, 20% speculation”.  If they do 70-80% of their work correctly, then such participants’ returns will reflect the compound growth of the modern economy.  However, the remaining portion will be caught up with all the other speculators and their result will be the same – zero. 

• knowledge about positioning is not positive-sum (since positioning is speculation and since speculation is zero-sum)?
• <> do what matters

Now that you know this result, will you choose to be an investor or a speculator?  This is a personal choice and there is no right or wrong answer.  The only difference is the impact you will have on society.  Investors will help all parts of society enter modernity’s virtuous cycle – the stage in which it enjoys continuous compound growth.  If you are interested and would like to learn more about this, you can refer to my monograph, “Discussions on Modernisation”.revisit

Relatively speaking, the speculative part of the market verges on being a casino.  From a social welfare point of view, we do not want this casino to be too big.  However, without it, the market would not exist.  We should therefore see speculation as a necessary evil – and a part of human nature – which cannot be removed.  We cannot deny the parts of human nature which love to gamble and speculate but we cannot let them overwhelm us.  Otherwise, society will sooner or later face the consequences.  The wounds of the 2008-2009 Global Financial Crisis from which we have just emerged are still fresh in our memories.  And once you understand the principle of a zero-sum game, you will begin to see these speculators as Mr. Market. 

• there is no perfect market <> there is no perfect money
  • which would be equivalent to assuming you can use symbols without its arbitrarinessrevisit

Now, there will be some speculators who do well in the stock market and will make a great success for a while.  They will have more money than you and more influence.  But you will know in your heart that everything they do will ultimately amount to nothing.  If your values are to contribute to society, then there is no need to pay them any notice, even if they seem better than you in every way.  This is a question of principle.  However, if you don’t understand this principle or don’t share these values, you will always feel like you are missing out, that these people know more than you and that they are right.

• <> FOMO

Given that the aggregate results of speculation are zero and it does not create any real value, why does it continue to exist?  This goes back to a special feature of the asset management industry.  Even though this is a service industry, there exists severe information asymmetry:  it’s hard to identify the differences between investment and speculation.  Speculators possess many theories.  While the “K-line” has become passé and been supplanted by AI (artificial intelligence), both are fundamentally the same thing.  When speculators pitch these theories, they always leave most people feeling perplexed. 

• nothing represents anything objectively

While the principles of investing and speculation are quite straightforward, I’ve never seen them discussed in any academic work.  Why is that?  I think most people have intentionally overlooked them because they have something to gain.  And what might that be?  Well, you can collect a tax – an ignorance tax, otherwise known as an “information exploitation tax”.  This ignorance tax is the main reason the asset management industry exists.  Most people in this industry owe their living to the “information exploitation tax”.  Regardless of future performance, you only need to show some short-term profits, market yourself and invite the whole world to come and invest.  After that, you can collect your 1-2% management fee.  Once you’ve raised money, you will have a steady profit irrespective of how well you do.  The industry really is like this, with all fee structures set the same.  If this mechanism really worked, then wouldn’t the most skilled investors earn more?  And the least skilled less?  Unfortunately, it’s not like that in reality as everyone earns the same fees.  Because no one can really say upfront which investment manager is better, we need a long period of time to assess.  Moreover, everyone’s investment principles are complicated, making it hard to judge immediately if they are right or wrong. 

• picking investment manager might be more difficult than picking stocks?

Therefore, it is very important to understand the difference between investment and speculation, as well as how to identify Mr. Market.  If you don’t want to pay the “information exploitation tax” or if you don’t want to make your living by it, then you must endure and persevere.  If you believe in reasonable returns and contributing to society, you will be willing to be an investor from the get-go.  Even if you can’t do it, try your best to avoid paying the “information exploitation tax” to a speculator.  This is why it is so important to understand the concept of Mr. Market.  Because when you start work, you will be bombarded by other ideas.  And if you don’t understand this concept now, you will think that what other people are saying sounds right and what you thought you knew must be wrong.  You will be led astray by Mr. Market. 

If you can just understand why speculation is a zero-sum game, you will understand why there are no speculators with long-term track records or who manage large amounts of money.  There are some who do well in the short-run but most of these rely on legalised front-running.  You can always make money through market manipulation but it is illegal.  You can use AI to anticipate what people are going to trade.  For example, you might purchase stocks before they are included in an index fund – like before A-shares were added to the MSCI indices.  This might earn you some money but you won’t be able to scale it up.  Even if you could scale it up, society wouldn’t be very happy with you.  So you see, all speculative strategies are limited in size and can’t work over the long-term.  In general, investors are the only people who can scale up and have long-term track records. 

• <> play for the long-run
• <> scalability <> growth has its limits <> explanation cannot rely on infinity <> knowledge creation is inherently unbounded

Let me in passing just comment as to why index investing is acceptable.  Index investing is basically the summation of investing and speculation.  Since the net result of speculation is zero, the remainder must be the results of investing.  Isn’t that right, mathematically?  Long-term index investing works therefore but only in some places, namely those that have entered the modern age and can endogenously produce continuous compound growth.  Moreover, for this to work, the index must represent all companies in the economy to capture its overall economic and commercial performance. 

• if people who invest in index consist mostly of speculators, then it’s more an index speculation, rather than index investment

3.  The Circle of Competence (20251207)revisit

Next, I’d like to discuss a question:  assuming you don’t want to collect the “information exploitation tax” or participate in a zero-sum game, the way forward is to become a proper investor.  But how do you do it?

This goes back to the concept of a circle of competence.  When we invest, we use fundamental analysis to forecast a company’s future economic performance.  We have to understand why and how a company earns money; how much it will earn in the future; what kind of competition it faces; and its competitive positioning.  I call this process building your circle of competence. 

• circle of competence is about understanding

The next question is, how do you start building your circle of competence if you have only just started studying value investing?  How do you learn to analyse a company?  Even after looking at lots of different companies, how do you know from where to start?  And after doing some research, you will have built up a certain understanding of a company.  But how will you know if it’s enough?  How long do you have to wait before you buy shares?  And at what price should you buy them?  The questions students ask like this are all very specific.  Even practitioners will have similar questions.  Can you use the valuations issued by sell-side analysts?  From a sell-side analyst’s point of view, they will use whatever price they think can get you interested in the stock.  It doesn’t matter if it’s right or wrong because it’s not their money.  But your money is your money and you won’t feel the same.  So you can see that the circle of competence really is the core issue for investors. 

When will you have built your circle of competence?  This will be different for every person because everyone’s competencies are different.  To illustrate, I’ll share my own experience. 

I stumbled into this profession.  It was about 27 or 28 years ago when I was studying at Columbia University.  I had just gone to America and was under a mountain of student loans.  I didn’t know anything about business or how to earn money, so every day I worried about how I was going to repay my debts.  None of the students from China at that time had any money so when we suddenly arrived in America and started racking up these student loans in US dollars, the numbers just seemed astronomical.  Therefore, I always mulled over how to make money.  One day a classmate told me that someone was coming to give a guest lecture on how to earn money, and that this guy really knew what he was talking about.  The poster mentioned a free lunch, so I decided to go.  But when I went, the classroom looked like the one we’re in today and nothing like what I’d seen before when there was a free lunch.  Those normally would have long tables for 20 or 30 people with lunch on the side and the speaker at the front.  I asked where the lunch was and my classmate told me that that was the speaker’s name.  I had just started studying English and confused the spelling of buffet with the speaker’s actual name, Buffett, which had an extra ‘t’. 

But I stayed anyway since I thought that if this guy had the audacity to call himself “Free Lunch”, he must know something.  After listening for a while, I suddenly felt that what he was saying was far better than any free lunch.  Before, I understood the stock market to be like what was described in Cao Yu’s play “Sunrise” – that is, the dog eat dog world of stock traders in 1930s Shanghai.  I thought anyone who dealt in stocks must be a bad person.  But this Mr. Free Lunch didn’t seem like a bad guy at all.  He seemed smart and what he said was very interesting.  His principles were clear and easy to understand.  I don’t know why but during that lecture, I suddenly felt like this was something I could do too.  I didn’t think I could do other things but this would be alright because it was studying numbers.  And that would be fine because coming from China, my mathematics, physics and chemistry were all OK. 

The first thing I did after the lecture was to go to the library to study Mr. Buffett.  The more I studied, the more I felt like this was something I could do.  He was strong in theory and in practice, and I could understand everything he wrote in his shareholder letters.  I started thinking of ways to find companies offering a margin of safety – which meant they had to be cheap.  I didn’t know much about business at the time but it didn’t take more than primary school arithmetic to analyse a balance sheet.  I started reading Value Line which presented ten years of summary financial information for thousands of companies.  Value Line organised these companies into different categories, one of which highlighted the cheapest stocks according to their PB and PE ratios.  I focused on balance sheets because I still didn’t understand these companies or their PE ratios.  I looked at net assets and their value relative to the stock price.  I didn’t even understand what business the first few stocks I looked at were in but I did know they weren’t losing money.  Some had cash on their balance sheets, some owned property and some held stock in other companies.  All had net assets worth significantly more than their market price, with some worth multiples more.  Perhaps because I hadn’t worked at that point, nor had I met those highfalutin’ folks on Wall Street, I believed in Mr. Market.  Then I made a point to visit a few companies located near New York to see if they were real or not, if the assets on their books were real and if they were still doing business (even if I didn’t know what that business was).  This is how I came to start investing in a few companies whose net assets were valued at about twice their market price.  Because their value was high enough and their price low enough, I could muster the courage to buy. 

Later, I realised something else:  after I had made my investments, I became even more interested in the companies.  It was completely the opposite of what typical theories will tell you.  Before it had just been an almost academic exercise; I had been an armchair general.  I never felt a close connection with these companies and so never studied them in depth.  But after I bought the stock, I felt like these companies belonged to me.  I devoutly believed in Buffett’s principles of value investing, especially the first which says that stocks confer part-ownership of a business.  Buying the stock therefore made these my companies.  And whenever I could, I would head over for a look to try and learn what these companies did because I still hadn’t figured it out. 

• <> do it before ready
• <> ownership
  • when you own it, you’ll invest in it <> there’s no substantial difference between investment and learningrevisit

For example, one of the earliest companies in which I invested was headquartered in Pennsylvania.  It had sold its primary Cable TV assets to the then largest Cable TV company, TCI (Tele-Communications Inc.) in exchange for TCI stock.  My company’s remaining assets included a telecommunications company which owned many licences.  Although its income was low, the income my company received from its subsidiaries was totally out of proportion with the market value of its stock.  During my research, I realised that my company had paid a lot for these licences.  It had also done so some time ago, such that their true value likely exceeded their reported book value.  I didn’t know how much they should be worth but I did know that the value of my company’s stake in TCI was alone worth three times my company’s market cap.  Going by my company’s PB ratio, I thought it should be worth at least twice as much – and even then, it would still only be worth half as much as the value of its stake in TCI. 

Not long after I made my investment, TCI’s stock began to rise because it had acquired many other Cable TV operators.  I became very interested in Cable TV companies because I thought TCI also belonged to me.  These companies basically operate a local monopoly; if a company has a licence for a territory, other companies cannot enter.  Subscribers paid their bills one month in advance, making income easy to forecast and allowing these companies to take on leverage.  Moreover, costs were very low.  Mathematically, this was a very simple business.  TCI was a large-scale listed company and could use its stock to buy unlisted Cable operators for a low price.  Its EPS would increase every time it made an acquisition, and its stock would go higher.  This was just mathematics and was relatively easy to understand.  TCI was the predecessor to today’s AT&T Cable and has since become America’s largest and most successful Cable TV operator.  But at that time 20 some years ago, it had just started to become apparent how different it was from its peers. 

In line with TCI’s rising stock price, my company’s stock price also started to rise.  What’s interesting is that a novel product called the mobile phone appeared which suddenly made my company’s telecommunications licences very valuable because they could be used to build a national mobile wireless network.  My company hired the President of the then largest telecommunications company to become its CEO, turning it from a relatively unknown entity into an overnight sensation.  This is when I got lucky.  All of a sudden, my company’s stock became very valuable, not only surpassing the value of its stake in TCI but skyrocketing several times higher after that.  I was at sixes and sevens because I didn’t think there was any margin of safety left, and so I sold.  Naturally, the stock continued to climb after that but at the time, I hadn’t figured out what the wireless internet business was about – in fact, I still haven’t even today. 

This experience taught me a lesson:  if there is enough margin of safety, I will dare to buy.  Additionally, I also realised that people’s mentality changes after they invest in something.  When value investors say that stocks confer part-ownership in a business, it is also a psychological concept.  I only understood this after I had made my own investments.  Theory doesn’t do the feeling justice.  As soon as I had bought shares; as soon as I had become an owner, I realised I cared about everything.  I remember one weekend I visited my company but the security guard wouldn’t let me in.  So in the end, I spent an hour talking to him with great interest.  How was he hired?  What was he paid?  Etc. etc.  I truly saw myself as an owner.  I was very interested, and it greatly helped my understanding of the company.  Thanks to my company, I started researching Cable TV companies and found them very interesting too.  Later, it was the same when I researched telecommunications companies. 

• <> start from where you can <> widen your moat

As a result, I started researching similar companies one by one and it greatly increased my understanding of the whole industry.  I made my investment because there was a margin of safety but I later developed a real interest in the business itself.  The experience taught me that my company’s value wasn’t just on its balance sheet; in fact, its main value was in its earnings power.  I didn’t understand large companies so I found a few small ones, the best of which were located close to where I was living in New York at the time so that I could visit them.  Talking with anyone was fine, including the security guard at the entrance.  After all, it was my company that hired them.  This is how I realised that after making an investment in a stock, people’s psychology changes and they become interested in its every aspect.

• ownership can boost your curiosity
  • <> reflexivity

There was another company at the time which taught me something revealing.  This company owned a lot of gas stations, and so I became interested in gas stations.  There were two gas stations near where I lived, one on each side of the same intersection.  However, I realised that one gas station had many more customers, and that cars would come to it regardless of which direction they were heading.  Both gas stations had the same price and their gas was the same as it was made to the same standard.  I felt this was very strange and since it was my company’s gas station anyway, I went to have a look.  The gas station which attracted all the customers was run by a family of Indian immigrants, who all lived there too.  As soon as a customer arrived, they would come out to offer him a glass of water.  Whether you wanted it or not, they would always offer it to you first and then strike up a conversation.  If the kids were home from school, they would come out and help you tidy up your car.  The other gas station was run by a typical American.  He wasn’t a bad guy but the gas station didn’t belong to him.  He was just an employee hired by the real owner, so he wouldn’t come out from the store and nor would he pay much attention to what was happening outside.  Thanks to this one difference, I calculated that in a given period, one gas station attracted almost four times as much traffic as the other. 

• owners care

From then on, I realised it was important to know whether a company’s manager had an owner’s mindset.  Through this, I began to gradually understand how a company could earn money and why it could earn more than others.  The example of the two gas stations is a perfect illustration because they sold the same product and were otherwise identical.  However, one’s service was slightly superior to the other’s and so it received four times as much traffic.  What motivated that Indian fellow?  He was an immigrant, like me.  He needed money and if he couldn’t bring in business, he would have financial difficulties.  The other manager could be indifferent because he could just take his salary while pretending to do his job.  This was the difference.  I therefore began to take great interest in how a company is run, its competitive advantages, and the sustainability of these competitive advantages.  Later, amongst those small companies I could understand, I found one or two which had a real competitive advantage and so could earn a good return.  And later still, I applied this understanding big companies, thereby growing my circle of competence again. 

I raise these examples to explain that if my experience offers any universal insight, it is that if you want to build your circle of competence, you must invest in things you truly understand.  The margin of safety is very important.  You only need to understand that which is related to your margin of safety; the rest isn’t important.  This is the first point.revisit  

• viz., the margin of safety provides you the time and psychological comfort by which you can deepen your understanding of the companies you’ve invested in
• “The margin of safety is very important.  You only need to understand that which is related to your margin of safety; the rest isn’t important.”
  • What does he mean here?revisit

The second point is that when you start looking at business with an owner’s mindset, your perspective will be completely different.  The ideal is to be able to look at something as if you owned it without having to actually go and buy it.  Unfortunately, this is very hard psychologically without using a few tricks.  Why do we treasure our own things even if they aren’t the best?  It’s just human nature once something becomes ours.  Therefore, once you start seeing yourself as an owner, you will instantly be full of the energy needed to go and study the business.  When I ask my analysts to look at a company, the first thing I tell them is to assume they have a long-lost uncle who died suddenly, leaving the entire company to them.  What must they do next?  This is the mindset they need to embrace in their research.  Of course, it’s never going to be the same as actually owning a company.  When I first started investing, my own net assets were negative because all my money was borrowed.  This was a powerful motivation.  It’s the same now though; when we talk to anyone, we always do so with the mindset of someone who owns 100% of the business.  When we visit a company, we talk with everyone.  If we bump into a security guard, we stop for a chat.  How’s work going?  What was the hiring process like?  What are our company’s HR policies like?  We care about all these questions. 

The third point is that knowledge accumulates gradually but only if you maintain intellectual honesty.  This is important because it is hard for humans to be completely objective and rational.  We are emotional creatures and so are likely to be biased towards things in which we believe or in which we have self-interest.  We always predict that events will work in our favour.  But objectively, that’s not the way the world works.  Intellectual honesty is therefore vital.  When you have the right approach and are doing the right things, you will see that your knowledge accumulates in the same way the economy grows.  It’s a process of compounding.  All your past experiences will corroborate and reinforce each other so that you gradually develop a firm grasp of some topics. 

• because economy grows by exchanging knowledge
  • and past experiences corroborate because there is no objective pastrevisit
    • <> study history

Another important point is to let your passions and opportunities guide your research.  Don’t let yourself be led by what others are buying.  Their stocks and opportunities are their business and of no bearing on you.  You only need to take care of your business well.  If something interesting comes up, go and look into it.  If you take an interest in something, do some research into it.  These passions will carry you forward and let you accumulate knowledge step by step.  Don’t worry and don’t rush it. 

The end result is that no two people’s circle of competence will be the same.  Every value investor’s portfolio will be different and that’s OK.  You don’t need to communicate too often with other people.  You don’t need to invest in too many things.  Because you need to understand everything in which you invest, you can expect it to take a long time.  It will be the same for every stock and every company.  The circle of competence you ultimately build will be small, as will the number of companies whose future you can predict with a high degree of certainty.  If something is beyond your understanding, don’t spend time on it.  Your circle of competence will inevitably be small.  Making money doesn’t depend on how much you know; it depends on whether what you know is right or wrong.  If what you know is right, then at the least, you won’t lose money. 

• if can’t be done well, don’t do itrevisit
• <> Mark Twain quote

4.  The Value Investor’s Temperament (20251203)revisit

The next question is, what kind of person suits being a value investor?  Do value investors share any common traits or a special temperament?  Warren and Charlie have always said, what makes a value investor successful isn’t IQ nor his experience; it’s his temperament.  What does this mean?  I will now share my understanding.  From my many years of experience, I agree with them.  There are some people who are not suited to being value investors; and there are some who are just naturals. 

First, this person must be relatively independent.  He should judge himself by his own yardstick, and not others’.  For example, there are some people whose sense of happiness is derived from what others think of them.  If the handbag they buy isn’t admired by others, it loses any meaning.  Other people are different.  As long as they like the handbag themselves, they’ll be happy.  Independent people aren’t influenced by others.  This is an innate characteristic.  Independence is especially important for investors because they will face temptation every minute of the day.  Comparisons also create jealousy.

• <> nothing is objectively good <> know what your goals are <> otherwise any road will take you there <> narrative fallacy

Second, this person should be relatively objective and unemotional.  Of course, we are all emotional beings and so cannot completely escape our emotions.  However, some people make the search for objectivity and rationality into a value and a moral pursuit.  These people are better suited to value investing.  Investing is about objectively analysing all sorts of problems and assessing events far out into the future.  This is inherently very hard.  If we look from the perspective of a company’s income statement and not its balance sheet, then competition is the most important thing to consider.  Profitable companies will attract competitors who will try to snatch market share and profits.  It is therefore hard to forecast whether a company which is doing well today can maintain its profitability ten years from now.  Even if management can’t necessarily answer this clearly, those above the fray usually can.  It is therefore vital for you to maintain an extremely objective stance and be willing to learn continuously. 

• <> heat is analog <> be the outsider

The next attribute is relatively special.  You must be both extremely patient and extremely decisive, even though they are in contradiction.  When there are no opportunities, you might go for years without taking any action.  But as soon as an opportunity arrives, you must be able to become extremely decisive and act without hesitation.  I have been Charlie Munger’s investment partner for sixteen or seventeen years now.  We meet for dinner at least once a week and I’ve developed a deep understanding of him.  Let me tell you a story about his investments.  Charlie subscribes to Barron’s, a weekly magazine about the stock market published by the Wall Street Journal.  He’s read this magazine for approaching 40-50 years for the purpose of finding investment ideas.  And how many has he found in this time?  One!  There has only been one and he only found it after reading the magazine for more than thirty years.  And he hasn’t found another in the ten years since.  This hasn’t stopped him from continuing to read the magazine every week though.  He is extremely patient and can go for a long time without doing anything at all.  But when he finds an opportunity, he will go all in.  And this particular investment made him a lot of money.  So this is what’s required of an exceptional investor:  he must have extreme patience and stay focused even when there are no opportunities.  When an opportunity does come, he must then have the ability to move swiftly and decisively. 

• <> absence of evidence <> good opportunities

Fourth, how could Charlie persist in this for 40 or 50 years?  It’s because he is intensely interested in business.  Warren and Charlie always talk about having money sense – that is, an intense interest in business and a natural predisposition to mulling over questions like, how does this business earn money?  Why does it earn money?  What will competition be like in the future?  Can it still make money in the future?  These people always want to get to the bottom of these questions, and their passion is their main motivation. 

These attributes aren’t especially common but when they are found together, they can make for an exceptional investor.  Some of them are innate and some can be cultivated.  For example, you can develop an interest in business over time.  However, some cannot be developed, like extreme independence, patience and decisiveness.  After reading Barron’s for thirty years without reward, the average person would have given up.  Moreover, if they found an idea, they would expect another in short order.  Not Charlie though.  We’re very close and I can tell you that he really is like this.  It’s not easy to be independent because most people will be judged by society or mind what others think of them.  However, these people will struggle to succeed as value investors. 

In contrast, your IQ and education are not that important.  If they were, then Newton would have been a stock market genius.  However, Newton invested his life’s savings into the South Sea Company at the top of the bubble, almost leaving his family destitute.  It’s no use therefore, even if you think you’re smarter than Newton.  You absolutely do not need such a high IQ or to be so clever.  Nor did you need any kind of outstanding education or experience.  I’ve seen too many smart people with good educations and outstanding experience fail as investors.  More often than not, they will give in to speculation.  Naturally, they all say they combine fundamental analysis with some understanding of the market.  At any rate, they can use all sorts of theories to rationalise what they do.  The more educated they are, the more convincing it sounds.  But in reality, the worse it really is.  You don’t need professional training or an MBA but you must have an intense interest in business.  If you aren’t interested in business, an MBA won’t help. 

I have a friend who is an extremely good investor who says that investing is like playing golf.  I agree.  You must maintain your equilibrium.  If your heart isn’t still, you won’t swing well.  There is also no relation between the last hole and the next hole because each is independent of the other.  If you hit a birdie in one hole, it does not mean you will do well in the next.  The risks and reward of every hole should be considered on its own merits.  How well you do on each will not in itself determine how well you do overall.  And you get to keep trying for as long as you want until you retire.  Similarly, the record you leave in this life will be your legacy.  The longer you live, the harder it is to do well.  Golf can therefore help you develop this mindset for investing.  Meditation is also of benefit as it can help you identify your blind spots.  Bridge can help you train your patience too.  Etc. etc.  There are some things which can help you cultivate these attributes, especially those I described which are not innate.  However, like golf, these are things which you will lose if you don’t train or put them into practice.  Once you leave the world of business, you will gradually lose your acumen. 

• <> multiplicative <> but some stuff are not path-dependent <> uncorrelation

If someone says they don’t possess this temperament, what should they do?  My advice is not to force yourself to do something for which you’re not suited.  You can find someone with the right temperament to help you.  Everyone should always focus on their strengths and their passions as this is the only way you will be happy and find the motivation.  You must do what’s right for yourself and not for others. 

• <> investment is about others, but for one’s sake
• <> 1% building 99% investing note <> do what you are best at note

5.  How can an ordinary person protect and grow their wealth? (20251203)revisit

Next, we will discuss how an ordinary investor who perhaps doesn’t want to become a professional investor – or doesn’t have the opportunity – can protect his wealth and gradually increase it. 

First, don’t forget that your alternative is always cash.  A decision to invest in cash can be the result of fundamental analysis.  When you haven’t found any investments which satisfy your opportunity cost, cash is a good choice.  At the least, it’s better than throwing your money around speculating. 

Second, if the stock market roughly reflects the overall economy, then index investing can also be useful.  If the economy itself is growing at 2-3% in real terms, then it should be growing at 4-5% in nominal terms once we allow for inflation.  The average profit of large companies should grow faster still thanks to their scale, perhaps at 6-7%.  And as we said earlier, if you grow at this rate for more than 200 years, your return will be greater than a million times.  Even in your own lifetime of 30 to 40 years, this return will deliver a very satisfactory result.  So there is no need to listen to anyone who promises you a return greater than 10% every year or to double your money, because they are mostly speculators.  Investment must be reliable.  What kind of things are reliable?  Things that are sustainable.  If something isn’t sustainable, don’t listen to it.  Index investing is therefore a good choice when the index reflects the economy’s overall performance. 

• <> explanation cannot rely on infinity
• does the index reflect the economy’s overall performance?revisit

Of course, it’s even better if you can find an exceptional investor.  However, this is not easy, especially in China today.  We’d really like to establish a value investing community in China like “Graham and Doddsville”.  There would be some core members and everyone would volunteer to share a record of their returns and how they earned them.  This way, we could see their long-term results.  There are lots of investors these days who more often than not call their funds “products”.  I struggle to understand this as it feels like they’re coming out of a factory.  Managers will run dozens of products at a time.  It seems almost like if you don’t have one or two hundred products under your management, you cannot call yourself a successful investor.  And in the end, there is no way to determine these investors’ real results.  For the last 23 years, I have managed a single fund in which basically all my money is invested.  This way, you can easily judge my results.  If you can find an investor worth trusting who does things the right way, then this can be a very good choice. 

• <> fwdable insight <> make it measurable

Ordinarily, the first thing you must when choosing an investor is confirm whether they are a speculator or not.  Then they must possess an investor’s temperament.  Next, they must possess a deep understanding of their profession and a relatively long track record of investment returns.  After that, you must look to see if their chosen circle of competence is in an intensely competitive area.  If it’s not, then it’s more likely they can achieve good results.  You can then look to see if their fee structure is reasonable and fair, and if their interest in any way conflicts with yours.  Finally, this person shouldn’t be too old so that there is ample time for them to compound your wealth.  If you can find someone who meets these criteria, consider yourself lucky. 

• <> avoid competitions
• <> get right incentives

The biggest taboo for personal investors is to be like Newton and be seduced by the market:  to buy at the market’s hottest peak and to sell at its most depressed.  If you don’t participate in speculation and stick strictly to investing in what you understand, then you won’t lose money.  Some people insist on investing for themselves but since your time is limited, your portfolios must be concentrated in the few ideas you really understand.  This level of concentration is very important as it reflects the inevitable concentration of your time, energy and experience on a small field of possible investments.  Through hard work over a long period of time, a personal investor can reach this level.  The worst thing you can do is to pay the “information exploitation tax”.  If the fee structure on an investment fund isn’t fair, don’t even consider it.  Anything that works only in the manager’s favour will certainly have issues.  

• get right incentives <> if not worth doing, don’t do it at all <> second-order thinking

If you believe in these few basic principles, you can protect your wealth and grow it gradually.  With compound interest and the right approach, then even at a modest rate, your wealth will grow steadily and in time become quite sizeable.  Most people don’t believe in the power of compounding though because it is not something we see in everyday life.  For example, our own wisdom and experience have the highest chance of compounding.  But due to the way most people study, their knowledge will age and never accumulate.  Therefore, they won’t see even the most basic compounding.  The average person will almost never see this kind of compounding.  They don’t think about it either because it’s so hard to conceive.  But if you’re interested in investing, you must already understand the power of compound interest, Einstein’s so-called ‘Eighth Wonder of the World’.  The more you understand the power of compound interest, the more you will understand how hard it is to obtain.  So when you find an opportunity offering compound interest – even at a rate of six, seven, eight or nine percent – you will seize it because you know this could be the most important opportunity of your life.  This is my advice for the average person. 

• <> it gets easier (network effects)
• <> go at it with bit more courage

6.  Value Investing and Life (20251203)revisit

To close, I will try to summarise value investing.  Is value investing a kind of faith?  I think it might be because it manifests itself in a set of beliefs.  You aren’t willing to exploit others; you won’t participate in zero-sum games; you will only pursue your fortune in a way that also benefits society.  You won’t be someone who counts on gambling to make money.  The next time you see speculators, you won’t need to wish them good luck because you know good luck can’t last forever.  Instead, you’ll simply wish them to have fun!  When people go to play at the casino, they are trying to buy happiness.  But it’s a waste of money because you can’t buy happiness.  It even seems like a waste to go to the casino because so many people come back feeling down and out.  In the worst case, you might even become addicted and lose it all.  If you say you’re only going for some fun, that’s OK.  But if your values are different from those of a gambler, you will keep your distance from gambling when in the stock market.  You will not invest in things you don’t understand.  And remember that understanding something means being able to make accurate forecasts over a long period of time with a high degree of confidence.  If you can’t satisfy this condition, you won’t do it.  So yes, from this perspective, value investing is a set of beliefs.  So yes, you can call it a faith.  

• <> increase the pie
• the meaning of understanding somethingrevisit

And if it is a faith, then you must seek proof.  In the process, you will experience the test of despair.  Your feelings will rise and fall from top to bottom, at least at the beginning.  But gradually, these values will become a part of your being.  The emotional tumult will gradually be replaced by a feeling of stoicism.  Thanks to your intense interest in business, you will gradually build your own circle of competence.  Then within your circle of competence, you will move with skill and grace.  You will achieve a single-minded focus on your work and rise above the noise.  I’ve seen that the most successful investors all tend to leave the financial centres behind.  In fact, their results tend to be better the further they live from these places.  Omaha, for example.  Having less interaction with people from financial centres like Beijing, Shanghai, New York and Hong Kong might actually help you.  All those highfalutin’ trading theories are just noise.  Why is it called noise?  Because it ultimately produces next to nothing.  If you remember anything from what we’ve discussed today, it should be the idea of a zero-sum game.  The net result of all speculation is zero.  Although it’s not often raised, this fact is a simple mathematical concept.  If you remember this the next time you come across one of those highfalutin’ theories, you will be able to see those folks as Mr. Market.  You’ll see that Graham’s description of Mr. Market was very apt. 

• <> avoid zero-sum <> say no thanks

My journey as a student of value investing has been especially meaningful to me on a personal level.  In seeking a livelihood, I gate-crashed this profession by good fortune and without any forethought.  Later, I realised I had stumbled upon something wondrous.  This profession is an incredible thing.  It lets you spend every minute studying new things.  It won’t just be your assets that grow through compounding; you will also feel your knowledge, practical experience and judgement compounding at the same time.  It is especially meaningful to see in the investment industry the phenomena of compound interest working twice, and in a way which isn’t often seen in real life.

When I was young, I always wondered about the meaning of life.  Later, I gradually came to realise that the meaning of life is the pursuit of true knowledge.  True knowledge can change your life and your fate; it can even change the world.  Moreover, mankind is completely different from what else we can observe in the material world.  The world we can see is one in which entropy increases.  Energy flows from high places to low places; big things devour small things.  If a large celestial body hits a smaller one, it will crush it.  The entire planet and our universe are to a certain extent heading towards annihilation. 

• <> knowledge does affect the world
  • Li Lu meets Deutsch here

But the world of man is not the same.  Mankind can turn the world into one in which entropy decreases.  We can reverse entropy’s course.  Through study, man can go from ignorance to erudition; through self-cultivation, man can become a virtuous person who contributes to society.  Man can create things which were previously unimaginable.  Since man’s arrival, the earth has changed.  Today, we can even leave this planet for the stars; it is entirely possible that we go on to change the universe.  As I mentioned earlier, the first investment I made was related to the wireless telephone.  At the time, I hadn’t really figured out what that was.  Twenty-six years later, who can bear to part with their mobile phone?  Mobile phones, the internet and all these things were game changers born of knowledge.  The internet is based on TCP/IP which is a protocol.  At their heart, computers are permutations and combinations of 0s and 1s combined with a diode which uses silicon and electricity to tell those 0s and 1s apart.  This is how knowledge can create changes which turn our world upside down. 

Speaking for myself, the experience of investing has allowed me to truly experience mankind’s ability to reduce entropy.  Investing – especially if it is the true path of value investing – is a person’s journey to reduce entropy.  Along the way, you can help create new things; and you can do so in a win-win way.  You won’t just be helping yourself; you’ll be helping those around you.  The insights in which you believe can separate mankind’s world from the material world inhabited by other living things.  I think this is a wondrous thing and I want to share this feeling with you all.  I hope that we can all go far on the road of value investing.  Thank you everybody!

2019 Q&A (~20251208)

1.      I’ve been a sell-side analyst for more than ten years now.  What challenges do you think there are for me to become a value investor?  How do I get in?  Can you teach an old dog new tricks? (20251208)

Li Lu:    Switching from the sell- to the buy-side requires a change in mindset.  I have a business owner’s mindset because after I bought my first stock, I thought the company belonged to me.  This is human nature:  we think the things which belong to us are special.  It’s similar on the sell-side.  If you’re incentivised to pitch a certain stock, you’re always going to be inclined to put lipstick on a pig – perhaps even to describe it as a unicorn.  Of course, you might be responsible for pitching a company that is fundamentally sound in the first place, like Moutai.  But you will still have the mindset of wanting to pitch it and make the sale.  As they say, “He who pays the piper calls the tune” – and this is very hard to change.  Because if you didn’t act this way, you wouldn’t fit in and [wouldn’t be able to progress your career].  The problem is that many folks who transition from the sell-side to the buy-side can’t shake off their old mindset – they can’t stop selling.  They’re so good at it that they’ve [fooled] themselves.  I’ve seen this many times with friends who worked in investment banks but who never really succeeded as investors.  People are like this.  [As Richard Feynman said], “you must not fool yourself – and you are the easiest person to fool”.  When you are able to sell something especially well to other people, it’s usually because you’ve persuaded yourself too.  This is why I see the most important thing is to stay objective and rational. 

• <> assume no self <> we perceive ourselves by what we do repeatedly <> throw in randomness

How do you stay objective and rational then?  You must change your mindset.  I therefore think the best thing for you would be to spend some time making investments on your own account.  Feel the difference in psychology [between pitching and owning].  After a while, you will really feel that these companies belong to you.  Your frame of reference will begin to change dramatically.  The way you gather information will change.  It’s like your antennae changes direction.  And once it does, you will realise that the information you gather is different too.

• <> skin in the game

This is why I think the first step must be to change your mindset.  The best thing for you to do before becoming a professional value investor is to make some investments on your own account.  But you must do so as a value investor and not as a sell-side analyst.  A sell-side’s analyst approach is to talk up whatever it is they want to pitch.  Because if you don’t, you won’t succeed on the sell-side.  When you meet an insurance salesman, they’ll always want to recruit you as a ‘down-line distributor’ (i.e. a subordinate in a multi-level marketing scheme).  Why do they see everyone as a potential recruit?  Because this is the only way for them to succeed!  Therefore, the most important first step for you is to change your mindset.  When you feel like you have, you will be on the road to leaving behind the shackles imposed on you by working on the sell-side. 

Your knowledge of business and companies will still be useful, however, and something on which you can build.  When you use your owner’s antennae to re-organise all this information, you will find you’ve tuned into a different channel.  You will still posses your original knowledge base but the way you organise it will change in a subtle and important way.  Unless you go through this process, it will be very hard to transition directly to the buy-side. 

2.      Studying mistakes can help us understand success.  Have you seen any determined young people fail in the end as value investors because they were unable to stick with it?  Even if they possessed the temperament you described earlier?  If so, why do you think they failed? (20251207)

Li Lu:  I’ve seen many different people fail for many different reasons, the most important of which is passion.  For someone to stick with something and get good at it, they must be interested and passionate.  The easiest way to succeed is to be passionate about something and good at it.  Say for example you have someone with a value investor’s temperament but who is more passionate about other things.  After studying value investing for a little while, they will turn their attention elsewhere.  This is totally understandable and actually quite reasonable.  In my opinion, the most important thing isn’t to think about in which pursuit you can earn more money.  Because if you do, you’ll always be jumping around since there will always be people who earn more money than you.  If you measure your life based on how much money you can earn, you will always be miserable.  You must therefore follow your passions.  If you are interested in value investing, you will go further the longer you stick with it.  But you won’t stick with it if you’re not really interested.  That’s been the case in the majority of instances I’ve seen.  Of course, the things you learn as a value investor can be useful elsewhere provided you have the right temperament. 

• be good at it and love it <> do what you love <> read what you love until you love to read <> digitization

3.      How do I know if I really understand a company?  Is there an objective benchmark to test my understanding? (20251208)

Li Lu:  We’re in the business of forecasting.  So determining whether you understand a company or not is simply a matter of assessing whether your forecasts were right or wrong.  However, the answer won’t immediately reveal itself.  You’ll have to wait many years to get it.  If you are intellectually honest, you will insist on knowing the answer and so will naturally learn if you really understood or not.  I hold my employees to a standard:  if they really understand a company they’re researching, then they must be able to say what will be the worst case for that company after ten years.  The best case scenario will usually take care of itself.  You must therefore understand what the worst possible case could be after ten years.  If you can’t do that, then you can’t really say you understand the company.  But if you can, your forecasts you should have a very high chance of proving correct.  And you must go back after ten years to see if you were right.

• <> think about what goes wrong first <> amara’s law
• <> Hall of Shame <> post-mortem <> feedback speed matters, but some things take time

This is therefore a very hard question.  How come?  Because people possess many cognitive biases.  Charlie Munger listed 25 of these cognitive biases in “Poor Charlie’s Almanac” and there may be even more in reality.  The reason they exist is because our minds are the product of natural selection, and their main function is for us to survive and procreate.  However, our living conditions today are the result of cultural evolution.  We live in a civilised society, many of whose rules do not fit with biological evolution.  As a result, many of our innate cognitive biases serve us poorly, making it hard for us to be objective and rational in our judgement.  This is why we will encounter the problem raised in this question in our studies and research.  You might think you understand something but you don’t understand your innate blind spots, nor the way they mislead you into a view which ultimately proves wrong.  In other words, you didn’t actually understand. 

• <> skeumorphism <> arbitrage
• Munger’s emphasis on individual psychology is applied in Li Lu’s emphasis on divergence between the relics from Civilization 2.0 and the reality of Civilization 3.0

So when you think you understand something, you must first understand what you don’t know because our knowledge is limited.  The most important concept in the circle of competence is its boundary.  It is a bounded circle.  If you do not know where its boundaries lie and believe you know everything, then you certainly do not.  You also need to understand that when you know something is right, you must also know when it will go wrong.  Munger has a standard which I think is immensely useful.  He says that if you want to hold an opinion, then you must be able to refute it better than the smartest person you can find who disagrees with you.  If you can’t, then you don’t deserve to hold it.  This is a good standard which you can use to judge whether you really understand something.  If you can do this, then there is a chance that you understand this thing.revisit

• <> idea maze
• apply this to investment thesesTODO

But you must know when your understanding is wrong.  In other words, you must know that your competence is bounded.  If you don’t know the limits of your competency, then you can’t possibly understand as there is no way you understand everything.  This sounds a bit abstract but it will be very clear once you have a specific question.  There are some colleagues from our company here today and each one of them has gone through my questioning.  My questions will push you to your limits and if they don’t, then there’s no way you really understand something.  This depends on intellectual honesty and requires continuous training.  It is very hard to do immediately.  Without this way of thinking, it is very hard to develop a true understanding of something.  But if you can develop the habit, it will stand you in good stead for the rest of your life. 

• <> no theory can exhaust reality

4.      You just spoke about how to achieve real understanding.  You also spoke earlier about how value investing is a learning process.  Could you please talk a bit about which learning methods can help us compound our knowledge? (20251207)

Li Lu:  Knowledge must fulfil several basic conditions to be considered useful.  First, it must be able to be verified.  It must be supported by logic and the facts you can see for yourself.  Moreover, it should confer a high degree of explanatory power.  At the same time, it should be helpful for making predictions.  When we look at real life, it is scientific knowledge which best meets these standards.  However, many of the phenomena we encounter in real life have no foundation in scientific theory because they relate to people.  And in the case of people, we must think in terms of a distribution of probabilities.  When you study mathematics, statistics is far more important than calculus, so you must study it well.  This is because virtually all problems in the real world are statistical problems.  Let’s go back to the question then.  How should we go about studying real world problems?  You still need to use scientific methods but you must understand that all you will get are rough results.  Of course, it’s better to be roughly right than precisely wrong.  And yet scientific methods remain the most effective means with which to compound your knowledge. 

• Li Lu meets Sherlock and Deutsch here
• statistics is important because the reality is the multiverse
  • but some things are not statistically measurable (e.g., see Aaronson’s argument on Knightian uncertainty)

Another useful method is to let your passions be your guide.  When you become really interested in something, you can accumulate knowledge about it faster, more effectively and better than anyone else.  At the end of the day, you will be using this knowledge in a competitive environment.  Your judgement must be better than someone else’s.  When you’re really interested in something, you will keep pursuing it even when others have given up.  When others are satisfied, you will keep inquiring.  This is what will give you an edge.  So in the end, the only reliable approach I’ve seen is to accumulate your knowledge piece by piece by letting your passions be your guide, using a scientific approach and maintaining intellectual honesty. 

• <> knowledge is about knowing the edge

5.      It seems there are two models for success in our circle.  The first looks at the big picture and puts their trust in exceptional companies run by honest managers.  They then step back completely and let management do the work for them.  The second hopes to understand the company even better than management itself, with nothing too big or small.  What do you think of these two styles? (20251208)

Li Lu:  These styles are actually both a part of acquiring knowledge.  The quality of management is a big variable for companies.  When a company is in its early stages or growing rapidly, its founder and senior managers have an enormous impact on value creation.  This is especially true when we look over a long time horizon – and the longer the time horizon, the more important this becomes.  However, many companies are driven more by the competitive dynamics of their industry, not any single person’s determination.  No matter how good someone is, they will not be able to produce exceptional results in a terrible environment.  However, even a person of modest abilities can produce exceptional results in the right settings.  For example, there are some exceptional [Chinese] state-owned enterprises whose senior managers have no experience doing business.  And yet this in no way impacts their ability to produce good results.  Each industry’s conditions are different and must be analysed on their own merits.  However, the standard we use should be the same:  your knowledge should allow you to make reasonably accurate forecasts with a high degree of certainty about what conditions will be like many years in the future.  No matter how you go about doing it or from what angle you look, you must cover each and every aspect.  If you want to understand a company, you must understand its management and the basic drivers of its industry.  This is one of the reasons why value investing is so hard:  there are many, many things you must understand. 

• <> get out leaking boats fast
• <> people who converge upon truth converge upon each other <> prediction in the sense of predicting the outcome is not the same as predicting the probable distribution of outcomes (the latter is about the multiverse and about counterfactuals—excluding what can’t happen)
• <> everything is connected

This is therefore why we must have a margin of safety.  I haven’t talked much today about this concept but the reason we have a margin of safety is because our forecasts are limited, as is our knowledge.  If you have a sufficient margin of safety and enough protection in the price, then you can still make a lot of money even when you don’t fully understand something.  Why did I raise the example I did during my lecture [of the cable company]?  Even though I knew next to nothing about its business using my standards today, I got very lucky and made many times my money.  But I only invested because I had a margin of safety.  And after I invested, I went on to learn many more things.  The margin of safety is therefore especially important.  When the future isn’t clear, you must choose those opportunities which are especially cheap.  And when you are choosing amongst multiple opportunities, the bottom line is that they should be cheap. 

• second-order thinking demands a margin of safety

6.      Can you please tell us what are the most important sources of a company’s moat?  Is it a brand, the management team or its business model?  What types of moat do you value most? (20251208)

Li Lu:  This all depends on your investment horizon.  The longer your investment horizon, the more important industry dynamics become for protecting your moat.  The shorter your investment horizon, the more important people become.   

The source of each industry and each company’s competitive advantage will be different, as will the degree to which they can protect their moat.  We hold ourselves to the same standards and use the same analytical methods when looking at each industry.  However, after spending much time on our research, we ultimately reached the conclusion that most companies are too hard and predictions about them cannot be made.  The changes in many companies themselves do not make for sustainable competitiveness.  Take the simplest example, restaurants.  At any time, there will always be a group of restaurants in Beijing with the best business.  And some cuisine will always be the most popular.  However, you will see that after not too long, these will change.  Because even though they’re doing well now, it’s hard to guarantee that they will still be in the future.  You can spend a lot of time on industries like this and ultimately realise the same thing:  they are too hard to predict. 

So speaking for myself, I put all of my efforts into looking at industries about which predictions can be made.  Within these industries, I then look for exceptional companies – and not just exceptional because of their industry but on their own merits.  I define exceptional as having returns on capital well in excess of their competitors.  Within these companies I then look for things which really interest me, which I think I have the ability to research or which are already within my circle of competence.  The companies which make it through this selection process are the ones I will then go and spend time on.  There are about 100,000 listed companies around the world but you shouldn’t ever try to study more than five to ten at a time.  Your most important work is therefore to find a way to cut this number down.  There are many things you can ignore and many which are outside your circle of competence.  The most important thing you can do then is to ensure that when an opportunity comes up which is within your circle of competence and fits, you don’t miss it!  But if an opportunity doesn’t fit, you can completely ignore it. 

• <> inversion
• <> digitization
• <> focus on the few variables <> inversion
• <> good opportunities are rare <> it gets easier
  • Buffett and PG meets here

Go back to what I said at the start.  You must understand yourself relatively well and then you can be picky in your choices.  Once you understand a company, you can just sit and wait until an opportunity comes when the price gives you sufficient margin of safety.  At that point, you won’t lose money even if you’re wrong.  This is when you can go all-in.  This is why you should focus your research on things that you can understand well and understand clearly.  And since you will only be choosing a few companies, you might as well choose the very best ones.  Of course, you can also choose the smallest companies or those whose price is already cheap.  If you understand them well and there is sufficient margin of safety, you will not lose money.  In short, you want to invest in certainty and avoid uncertainty.  When price can give you certainty, then price becomes the most important consideration.  When your own knowledge, ability and judgement can give you certainty – especially when you have been researching truly exceptional companies – then you don’t need to constantly change your watchlist every few years.  You can just keep going and let the companies own compounding do the work for you. 

• margin of safety protects you from the downside
  • <> margin of safety <> downside protection
• you can be courageous when you understand things
  • Li Lu elaborates here what Buffett means when he says be courageous when you see good opportunities and how that relates to knowing about your circle of competence (and subsequently narrowing down your focus onto something which you can make predictions relatively easier)
• when you invest in money, you’re investing in uncertaintyrevisit
  • research means lessening your uncertainty as much as you can with your knowledgerevisit
• “When price can give you certainty, then price becomes the most important consideration”revisit

7.      Thanks to your speech, we now know a bit more about the special traits a value investor needs – particularly in terms of temperament.  Amongst the entrepreneurs on whom you focus, what kind of special traits do they possess? (20251207)

Li Lu:  I’ve been a generalist for some 26 or 27 years.  I’ve seen both successful and unsuccessful entrepreneurs of all stripes.  I’ve realised that market economies have a very special property:  they can release a person’s true potential.  Many successful entrepreneurs actually have all sorts of “issues” in their ordinary lives.  Before they were discovered by the market economy, you might not have wanted to associate with them.  And if they had been in another industry, the odds are they would have failed.  However, a market economy can allow any special or uncommon person – any outsider – to ultimately succeed within their niche. 

• <> digitization

I’ve therefore never believed that someone who fits the conventional mould can become an exceptional entrepreneur in a market economy.  The market economy enables people to set up businesses which reflect their unique traits, and then to go on to great success.  For this reason, my conclusion is that there is no uniform standard for identifying what kind of person will go on to succeed. 

• <> everything for everyone means nothing for nobody

At the level of the individual company though, it’s not just about analysing people.  You can analyse why a person chose to build the company the way he did, and why that enabled its success.  For example, Jack Ma [of Alibaba] might not have managed detailed operational matters.  But he knew very well how to manage people and use them.  The kinds of people he used would then be very focused on the details – like [Alibaba’s CEO] Daniel Zhang.  Every person will therefore find the company which bests fits him.  And when you are evaluating that company, you must not jump to the conclusion that because someone is like such and such, then the business will succeed.  I’ve seen many people who tick all the boxes but whose businesses are very average.  I’m sure you’ve all had the same experience.  If you think about the people you know, I’m sure there will be some who are particularly talented and look like they have a lot of potential.  But in the end, they don’t do particularly well.  This kind of thing happens everywhere.  I therefore think that every company must be assessed on its own merits, with proper analysis done on its own unique circumstances. 

• <> it’s in relation

8.      As a student hoping to enter the investment industry after I graduate, is it best to work for an institutional investor as my first step?  Do I need to apprentice myself to a teacher? (20251207)

Li Lu:  When I was studying at Columbia University, I also attended a value investing class like this.  At the time, Columbia was the only university to offer this type of course and Buffett would come once a year to speak.  Someone would always ask him this question and he would always say, the best way to learn is to go and work for the person you admire the most.  This way you will learn especially quick.  After his answer, I decided to found my own company.  Just kidding!  The real reason I founded my own company was because I couldn’t find any other work. 

No people are the same.  Some people will learn faster under someone else’s tutelage.  However, there really aren’t many people who practice value investing and so there aren’t many value investing firms either.  Moreover, these firms don’t usually need to hire too many people.  Take Buffett’s company, for example:  it has more than 100 subsidiaries and employs more than half a million people but his head office only has about 25 people.  Until seven or eight years ago, there were only two investors managing some USD500bn in capital:  Buffett himself and Munger.  It’s therefore hard to go and work for him.  My company is the same and only has ten or so staff.  So while it might be good to go and work for a value investor, the opportunity to do so is exceedingly rare – especially since the most exceptional investors seldom need to hire anyone.  This is a paradox.

• capital allocation skill scales <> wealth = usage x size (of the team who produced the result)
• <> knowledge has to be created individually

This is the reason why we started this class and also hope to found a community of Chinese value investors.  We want a ‘whitelist’ of investors who have a long track record of independent results managing a single fund to a single style – not like those investors who launch a hundred or more ‘investment products’.  We need to find these kinds of people.  Then everyone will be able to see that these kind of results are indeed real and possible.  If I had never seen Buffett in the flesh, my understanding of stocks would have been stuck on the impression I gained from [Chinese author] Cao Yu’s play, “Sunrise”.  I would never have joined this profession.  Naturally, I also wanted to work for Buffett.  But he wasn’t hiring.  Now, we also don’t hire people.  I therefore think the best way to learn is self-study; that and having some contact with more experienced investors can go a long, long way. 

I generally don’t speak in public, with the only exception to return to my alma mater, Columbia, to talk with the students of that same value investing class.  Before this class was launched at Peking University, I had never given a lecture in China before; even today, this is only my second time speaking in China.  Why don’t I speak more often?  It has to do with investing and my own personal biases.  Going back to the question on the difference between the sell- and the buy-side, it is our natural human instinct to sell.  Everyone always wants to dress things up to seem better than reality, otherwise why would we spend so much on our clothes?  Similarly, we always want to present ourselves as having superior knowledge and judgement.  Humans have a bias towards self-aggrandisement which is very hard to change.  And we intensify this each time we speak publicly, especially if it is about some specific stocks.  It’s important to maintain a healthy scepticism because no one can ever be 100% certain.  If you get to 80% or 90%, that’s already pretty good.  But when you go out and speak in public as if you had 100% certainty, you fool yourself into thinking you have 200% or even 300% certainty.  You lose even the slightest doubt in yourself.  And the more you speak, the worse it becomes.  This is why I generally don’t like to speak in public.  There’s only one exception and that’s when I can speak with students – and that’s only because this is such a rare opportunity.  I don’t talk about specific companies but can share my experiences. 

• <> we perceive ourselves by what we do or speak repeatedly
  • silence is a virtuerevisit

So in summary, your first choice should be to go work for someone you admire.  The second choice is to study by yourself, and in the process to also reach out to people you look up to.  You must stay in touch with them.  Classes like this are a good example; there are people here today who have flown in from all over the country – perhaps even some who have flown in from the US.  It’s actually very helpful and I would certainly do it too if I were in your position.  What we’ve discussed today should be especially useful in practice because after all, value investing is a practical art.  Furthermore, value investing is a solitary pursuit in which you must be responsible for the decisions.  If you add more people to the discussion, it will become a committee and you will lose your objectivity.  Group dynamics will take over and impair your judgement.  Our innate biases are an astonishing impediment to investing.  Our minds have not evolved in a way which suits investing so you must train yourself.  If you can work with a great investor, treasure the opportunity and seize it!  But if you don’t, you can still make your own opportunities.  At the end of the day though, self-study is the most important thing.  You must experience these things for yourself.   

• <> Naval: “Group search for consensus—and it doesn’t matter”
• In Li Lu’s parlance, investing is Civilization 3.0 act, and not that of 1.0 or 2.0revisit

9.      I’d really like to go and buy stock in a cheap company to study it and learn more.  But before I do, I’d just like to ask:  what kind of margin of safety can research into a company’s balance sheet provide? (20251207) 

Li Lu:  I can tell you are keen to buy a stock, or keen to research one and buy some more.  Don’t get the order wrong though:  do your research first and then buy.  I think your question relates to companies with a low price to book ratio, right?  In today’s market, there aren’t many stocks like that – except in Asian markets, that is.  I assume you can invest globally.  There are about 100,000 stocks around the world which are traded daily.  In Asia, there are still many companies you can look into.  For example, the company may be profitable now and for many years into the future.  You can verify the value of its assets, be they stocks, financial securities or real estate.  You can then subtract liabilities to derive a net asset value.  If we say the NAV is 100, there are companies which transact at about 50.  Although this kind of opportunity is more rare now than when I started, they still exist!  It’s strange but the market always has nooks and crannies where you can find opportunities like this.  If I was going to start again and didn’t know anything at all, I might well start here again.  I can grasp the concept.  I can see what I’m doing and even feel it.  Even if I don’t understand anything else about the company, I won’t lose money this way.  However, in today’s market and with the scale of money we manage, I can’t look into this kind of company anymore.  So I’m not really an expert and I’m sorry to say that I cannot give you a satisfactory answer.  I know this kind of opportunity exists in other markets but I really don’t know about China, apologies. 

10.  Can you please describe the experiences and traits which shaped Munger’s investment philosophy?  As far as you understand, how was Munger’s investment philosophy formed? (20251207) 

Li Lu:  First, many of Munger’s concepts were already deeply ingrained before he began investing.  For example, he was already very interested in understanding how the world works – especially at a practical level.  He wanted to figure what works in this world and what doesn’t, and studiously avoid the things that don’t.  This had nothing to do with investing; it was just an interest he had pursued from childhood.  On reflection, I was the same.  Before I heard Buffett speak for the first time, I already had some preconceptions in my mind.  For example, I already had a visceral dislike of speculation.  So after I heard Buffett speak – even though I would meet a lot of them later – I never had any interest in those Wall Street schools of investment thought, the men of the hour or all those successful people.  [Buffett has said that value investing is like a vaccine which either takes or it doesn’t.  Buffett has never seen anyone – and neither have I – who began speculating, had an epiphany one day and then became a value investor.  In any case, I haven’t seen a single example of this.  The concepts which made Munger successful therefore took shape long before he began investing.  These concepts then went on to influence Buffett.  Because Munger was interested in whatever worked, he naturally became interested in exceptional companies.  Because these companies had figured out what worked, their ability to make money was far better than those otherwise cheap companies. 

• figure out what works (and what doesn’t) <> and repeat what works

Buffett worked for Benjamin Graham for two or more years early in his career and was profoundly influenced by Graham’s way of looking at things.  Because Graham’s theories were mostly formed during the Great Depression after he had failed spectacularly in the years leading up to 1929 doing some investing and some speculating.  After 1929, he drew lessons from this painful experience and began to systematise a new methodology, after which he began to perform better.  Graham primarily practiced in the period from 1929 to the 1950s.  After the market crashed in 1929, it took seventeen years until it recovered in the early 1950s.  Graham’s career therefore spanned the most disappointing period of the American stock market.  The stock market was in constant decline, not dissimilar from China’s A-share market.  He obtained excellent results in this period but even he couldn’t scale his strategy.  You can’t scale a strategy investing in what Buffett calls ‘cigar butts’. 

Graham’s ideas made him very successful at the time and so he obviously had a large influence on Buffett.  But when Buffett began investing himself in the mid- to late-1950s, America had already emerged from the era of the Great Depression.  The economy was on the rise and those exceptional companies were just beginning to come into their own.  For this reason, Munger’s influence on Buffett at that time was especially important.  Munger had reservations about Graham’s theories from the very beginning.  He wanted to figure out how the world works; what succeeds and what doesn’t.  He then wanted to repeat what worked and avoid what didn’t.  He never emphasised that these companies had to be bought at a discount because their excellence was in itself a discount as it would allow them to continuously surpass expectations.  Gradually, Munger’s thinking had an enormous influence over Buffett.  As Buffett matured, he therefore left behind the influence of the Great Depression and its method of survival.  However, he never relaxed his requirements on valuation and margin of safety.  From what I’ve observed of Buffett, these concepts are deeply ingrained.  I think I’m also like this, which probably has some connection to my personal history.  No one’s style is the same. 

• <> great business at fair price >>> fair business at great price

11.  You said earlier that index investing can be a suitable choice for the average investor so long as the index reflects the overall economy.  Assuming passive index investment funds continue to occupy a larger and larger share of the market, what consequences do you think this will have? (20251207) 

Li Lu:    This is a very interesting question, although perhaps less relevant in China because index funds do not yet comprise a large part of the market.  The situation is also different in China and the US.  In China, because we haven’t yet fully implemented [an effective system of corporate disclosure], nor do we have a strong policy for de-listing companies, our indices do not fully or fairly represent the underlying economy.  I think that the regulators will address this in the coming years.  We have transformed from a manufacturing- and export-led economy into a consumption-led economy.  In this new era, the means of financing may move from indirect finance to direct finance.  The role of the stock market will grow in importance, and this will require attracting more and more people to participate in it.  But if we want more people to participate, we will have to better control the market’s gambling and excesses, and increase the part of it which focuses on investment.  The best, fastest and biggest way to do the latter is through index investing, which means making indices better reflect the underlying economy.  One possibility would be to develop a good ETF to do so.  But there are many man-made factors involved which make this not the easiest course of action.  The best approach is to therefore use a market-based solution [and enhance regulation] so that the existing indices become more representative.  This is China’s challenge. 

America’s challenge is that indices comprise a higher and higher percentage of the market.  When they reach a certain point, will indices begin to have their own positive and negative feedback loops affecting prices?  The market needs investors because they are the ones who discover prices.  If a market lacks a price-discovery mechanism, it will distort all financing.  The biggest problem with passive investing is that it is price agnostic.  What proportion of investors does a market need to be effective?  This is the challenge currently faced by mature markets.  Index investing hasn’t yet reached a level in America where it influences the process of price-discovery.  However, if this trend continues, there is a possibility that investors are crowded out and the market loses its ability to discover prices.  A lot of people are talking about this but I’m personally not too worried.  Before the advent of index funds, the market always had a large element of speculation.  Value investors were always in the minority.  I look at value investors and fundamental investors separately here.  The former are a sub-set of the latter but are pickier and demand a greater margin of safety.  But otherwise, their thinking is similar.  My suspicion is that these people have always been in the minority in the market.  There was a Professor at the Columbia University School of Law called Louis Lowenstein who made a relatively systematic estimate of how many value investors there were in the market.  He estimated at the time that there were about 5%, which wasn’t scientific but I haven’t seen anyone else yet expand on his work.  But whether it was 5% or 7% or 4% or 10%, the proportion was not particularly high.  So before the advent of index investing, these people had long been the most powerful force in the market.  But while there had never been any large-scale disasters, bubbles remained an ever-present phenomenon.  2008-2009 was of course an extreme situation.  But overall, I don’t think this will be a big issue for many years to come. 

• Quantity wise: Value investors <<< Fundamental investors
• “Value investors were always in the minority” <> Carlo Cipollarevisit

However, this problem does not exist in China.  China’s problem is that today’s stock indices do not fairly represent the underlying economy.  Furthermore, there is no alternative ETF.  Whoever can create an ETF which better represents the underlying economy will make a huge contribution to common investors.  The regulators must do more work on this. 

• This lecture is from 2019—does Li Lu’s comment on Chinese indices apply to the U.S. in 2025?revisit

12.  Can you please share how value investing has shaped your thinking on health, family and life? (20251207) 

Li Lu:  I’ve thought a lot about this question, and perhaps I’m not the best person to answer it.  I’ve been divorced once and it wasn’t my choice to do so.  So in this respect, I’m far from being a lifelong winner.  However, I’ve kept a good relationship with my ex-wife and today, I still manage her money.  So I’m far from being an expert in this field and you mightn’t get the best results if you follow me.

I think investing is a very long-term pursuit in which short-term results are not useful at all.  The reason Buffett has won everyone’s admiration is because he has a track record approaching 60 years now.  It’s important to obtain a long-term track record and one of the prerequisites for doing so is keeping in good health.  Between Buffett and Munger, one is 89 and the other is 96.  Their passion has not diminished, and they still go to work every day.  I therefore think having a long life is the first important element of success.  And if you want a long life, one of the most important things is to do something that you like.  While of course you must maintain a good lifestyle and habits, you must also find serenity.  If you look at Buffett and Munger, they just don’t get anxious.  Because everything they do creates a win-win outcome, they just don’t feel any pressure.  For example, 50 years ago, they set their salaries at USD100k each.  And 50 years later, they are still paying themselves USD100k each.  Imagine how much they could earn if they set a 1% management fee on the USD500bn they manage?  Or how much they would have netted if they had charged a 20% performance fee?  However, if they had charged these fees, they would have had constant pressure to perform.  Likewise, they would have pressure from redemptions.  And they never could have done as they please.  Buffett currently has more than USD100bn in cash but has no pressure [to act].  He has arranged his life well so that he can live in Omaha.  If you go there, he might come visit you.  If not, he’ll just keeping doing what he does.  He eats the same thing every day.  He “tap dances to work”.  And this is what has allowed him to accumulate such a long track record.  Moreover, everything he does with other people is done in a win-win way.  He wholeheartedly pays attention to other people.  We’ve known each other for so many years, [and I can say that] he genuinely cares about other people.  He genuinely goes out of his way to help them.  He has no malintent.  That’s not to say he doesn’t make judgements or that there aren’t people he dislikes – he just avoids awkward situations.  He has arranged his life to be especially stable and especially sustainable – this is very important.  This is to say that it’s very important to have a good family life and an environment in which you are surrounded by love. 

• ==no second-guessing = no anxiety== <> sustainable → compounds
• <> wisdom is prevention
• make it some it can compound

It’s important to be well-intentioned with your colleagues and your friends, and no to have any ill will.  Whatever you do, you must do it in a win-win way.  We’ve never taken a management fee and don’t charge anything for the first six percent return.  So if you earn an index-like return, you would never pay a dime to us.  And on the money you earn over and above the index-like return, everyone hopes to make more money.  On this, we borrowed Buffett’s early approach and fee structure – the Buffett formula.  This allows us to live in a very stable way.  I have no pressure, and this is very important.  I could even come here and speak with you today.  Our colleagues are all warm and cordial with each other.  We are all very open and transparent, and shun any rivalry.  The relationships we have with other people are all mutually beneficial. 

We don’t beat ourselves up.  We only do things we truly understand, and refuse to do what we don’t.  In this way, we can act with no misgivings and avoid the markets ups and downs from affecting our emotions.  You will only be able to accumulate a long track record if you can live this way.  Having a calm mindset is therefore extremely important.  It’s critical to turn your life and your relationships into ones of mutual benefit based on love.  It is important to give back and to help others; in fact, this can help everyone to feel better and appreciate what they have.  Buffett’s definition of happiness is, “to have the people I want to love me actually love me”.  I think this definition is pretty good.  Using this kind of method to arrange your life will allow you to build mutually beneficial relationships with people over the long-term.  In turn, this knowledge can allow the capital you manage to accumulate gradually, allowing the people who have entrusted it with you to have the means to help others.  We only offer our services to university endowments funds, charity funds and family offices focused on charity.  We are very picky with our clients and do not manage money simply to make the rich richer.  This is how we feel like we are contributing to society.  If you arrange your life in this way, you will be more at ease and less anxious.  You will be able to walk through life unhurried and at your own pace. 

• the Control Structure exists even within asset management companies

A lot of investors have told me that they want to invest like I do but their clients won’t let them because they’re always thinking about how much money they can make in the next hour or so.  I personally think that you should not take these kinds of people as your clients.  They then say that if they didn’t have these clients, they wouldn’t have any clients.  And then how would they go about finding clients like mine?  I didn’t have any investors when I started, only the money I had borrowed.  My net assets at the time were negative.  Munger likes to ask, how do you go about finding a good wife?  The first step is to deserve a good wife, because a good wife is no fool.  Clients are the same.  When our fund started, it was my own money for many years plus some from a few close friends who believed in me.  Over time, as you accumulate more experience and build your track record, suitable people will naturally find you.  And amongst them, you can choose the most suitable.  You can do it this way very gradually with no need to rush – and with no need to compare yourself to others.  The most important thing is therefore to be able to let things come as they are.  You must have faith in the power of compounding and the power of gradual progress.  Compound interest is a gradual force:  7% compounding over 200 years will give you a return of 750,000 times, right?  That’s not too bad at all.  But this is the power of compounding. 

Whoever would have thought when China began its Reform and Opening 40 years ago that we would end up here today?  Growth during this time has averaged about 9%, which doesn’t sound too high.  But in forty short years… and some people sitting here today weren’t even born forty years ago!  We can truly say that heaven and earth have been turned upside down during that time.  You must therefore keep faith in the power of compounding.  Don’t get anxious; nor is there a need to struggle with others, or compare yourself to them.  People who suit each other will find each other.  Don’t worry even if you can’t.  If you have patience, can take things with tranquillity and do things gradually – you will do even better instead.  I made the comparison with golf because golf requires you to keep your emotions still.  If you get anxious, you will immediately hit the ball wrong.  The results come quickly when your emotions change.  If you can keep your heart still, you will do things better and better the more you try. 

• <> people who converge upon truth will converge upon each other

==Live in moderation; train your body; seek mutually beneficial outcomes; use the Golden Rule to arrange your life; don’t beat yourself up; do what you love.  These all sound like common knowledge but are hard to live by when you’re young.  People are anxious, especially when they’re young.  Why is that?  Because they’re always comparing themselves to others.  Which of your old classmates are doing better or worse?  Etc. etc.  That’s their lives; what business is it to you?  Every person must live their own life.  And in fact, our lives are very short.  Time feels like it passes slowly when you are young but when you get to my age, it flies past.  A year can come and go in the blink of an eye.  You must therefore endeavour to live your own life as this is the only way to be happy.  In addition, living your own life is the only way to find real progress.  Don’t be worried if it takes time.  As Mr. Duan Yongping likes to say, “slow and steady wins the race”==.

Global Value Investing in Our Era (20241207)

I. The Predicaments

• Many Americans now believe that the U.S. has gained little in return
  • Partial reasons—cheaper labor outsource and debasement of the dollar

II. Reflections on These Predicaments

• Humanity has yet to establish a 3.0 model for managing international relations in the 3.0 science-technological civilization era
  • <> skeumorphic

Causes of the Predicaments

• When the early industrial takeoff phase concludes, the gap between compound economic conditions and the slower evolution, or lack thereof, in societal, psychological, and political governance inevitably leads to significant challenges
  • <> recalibrate <> expectation
  • <> deprival-superreaction tendency
  • <> science-tech native <> freedom native

Examples of Paradigm Shifts

1. The Concept of Land

• The failure to reconcile the old (e.g., land and population) and new (e.g., market size and the full circulation of productive factors) paradigms was a critical cause of WWI and WWII
  • <> it’s about relation (viz., market is about interconnectedness)
• Ironically, post-war reforms in defeated nations like Germany and Japan helped them achieve the very goals they failed to secure through war
  • <> error-correction
• In the 3.0 civilization era, the scale of the market and the free flow of economic elements, such as technology, labor, and capital, becomes the critical driver
  • <> free market has no boarder
  • This might explain why value investors focus on free cash flowrevisit

2. The Dichotomy of Virtual vs. Real Economies

<> representation

• As economies transition into stages 2.5 and beyond, the distinction becomes obsolete and even misleading
  • <> virtual-reality rendering notes
• NVIDIA has not manufactured a single semiconductor wafer itself. All production has been outsourced to TSMC.

3. The Role of Government

• In transitioning from an agricultural to a modern science-technological economy, governments worldwide have evolved from command-andcontrol roles to collaborative, consultative, supportive, and service-oriented roles. This transformation aligns with the scale and complexity of modern economic systems.
  • <> ‘one-of-them’ (over the-one)
    • <> no special treatment in the multiverse
• To trade with every country and export half of its production overseas, the Chinese government must consider the interests, perspectives, and economic realities of these global stakeholders
  • ==it must be about other countries== <> market is all about others
• We need to repeatedly reassess and adjust the outdated ideas that hinder economic development
  • <> recalibrate

III. The Middle-Income Trap

• Every instance of free trade and exchange generates a synergistic effect, 1+1>2, while knowledge exchange can even achieve a multiplier effect, 1+1>4.
  • <> notes on exchange and knowledge creation, respectively
• The more frequent and unrestricted the exchanges of goods, services, and ideas, the greater the incremental benefits
  • goods, services, and ideas are essentially the same?
    • <> other equivalence notes (particularly on investment and writing)
• The savings rate has risen from 40% to about 50%. Most of these savings remain within the banking system, which is predominantly controlled by state-owned banks. Can this system adequately circulate these savings back into the economy?
  • This also applies to Japan
    • But what if the money was free market money? Then I assume the critique doesn’t really applyrevisit
• For savings to truly benefit economic growth, a modernized capital market and an efficient financial system are necessary to promote the effective allocation and circulation of capital.
  • This is necessarily the case with fiat money
    • <> escape velocity
• Venice relied primarily on finance and trade. Its narrow territorial base lacked agriculture and industry, and other nations were still in the agricultural civilization era. Thus, Venice was unable to develop a true 3.0 modern science-technological civilization, but the financial systems and tools it invented were further developed and refined in a larger nation—the Netherlands
  • <> constraints
• The ideal of “everyone for me, and I for everyone,” has actually been realized through the market economy. The market economy system, through the incentive mechanism of “everyone for me,” has achieved the social benefit of “I for everyone.”
  • <> solving problems for everyone
  • <> the multiversedevelop
  • <> NCTdevelop
• Entrepreneurs must feel secure about their personal safety to successfully run businesses
  • tech-based > state-based
    • but as of now, it seems we still need the latter
• Deng Xiaoping: “Practice is the criterion for testing truth, and whether it works depends on the results”
• The biggest driving force comes from the proportion of personal consumption in GDP
  • because where there is no demand, there is no supply?
    • but sometimes new supply creates new demand (e.g., Jobs)
  • would the argument still be valid even with free market money?
• Any of these nodes can start a chain reaction because they all interact with each other. Stimulating any node can ignite the entire economic chain … Facts prove that significant changes do not need to be planned in advance, nor can they be
  • <> start where you can (勝てるところから勝つ)
  • <> everything is connected
  • <> no masterplan
• In practice, I believe Mr. Lee Kuan Yew’s methodology is correct—resolutely replicate proven practices and avoid those that have proven unfeasible
  • <> repeat what works
• The system of credibility generated by the modern capital market is something a state-controlled banking system cannot provide, and it is not something banks can or should do. Banks cannot take on the role of making risk investments; if banks were to do risk investments, people would not feel secure putting their money in banks, and then banks would not exist
  • but isn’t this what happened during GFC, and also still ongoing in a sense with QE because the government is essentially “investing” in companies who “need” money?
  • relate with Voskuil

IV. How Should Global Value Investors Respond?

• In investing, we must take the world as it is, not what we wish it to be or what we want it to be. It is what it is, take it.
  • <> as is

On land and population

• Most nobles who only own land and castles are no longer wealthy; in fact, they have become relatively poor. Only a few nobles remain wealthy because they made other investments, not just relying on their original land and castles.
• While the labor cost has increased significantly, the output from the land itself has increased relatively less—these land and castles that have not been converted for industrial or commercial uses have become liabilities rather than assets for the nobles

Wealth is the share of your purchasing power

• Wealth is the proportion of your purchasing power within the entire economy
  • <> Deutschean wealth
• The faster the economic growth, the faster your wealth shrinks
  • is the premise here that cash equals fiat money?
  • does the argument still apply with sound money (i.e., free market money)?
    • e.g., BTC, ZEC, or gold (before Bretton Woods)
• Your effective wealth is the proportion of your purchasing power in the economy where you mainly choose to consume
  • the topology is similar to that of ownership, in the sense that what you think you have is not the same thing as what you actually have applies to what you think you can spend is not the same thing as what you can actually spendrevisit
• The measure of wealth is your percentage share in the economy, not the absolute number
  • <> know what to measure <> what gets measured gets managed
• As long as you maintain your share, you retain your wealth, even if the overall economic pie shrinks due to factors like war; if your share increases, your wealth grows. However, after entering modern civilization, the pie will grow in a wave-like, sustainable, compound manner, which is the most fundamental and defining feature of the modern economy.
  • → buy and hold?
  • how does this translate with market crash?
    • or with margin of safety concept?revisit
• As a value investor, you must understand what value is, what real wealth to pursue, protect, and grow—that is your share of purchasing power in the economy
• For global value investors like Himalaya Capital, as fiduciaries of other peoples’ capital, our responsibility is to maintain and increase our share of purchasing power globally.
  • Globally ≠ only in internet
    • viz., internet money doesn’t exhaust the whole economy
      • one being better than the other doesn’t mean the former will replace the latter exhaustively—remember Rothbard’s (or Lachmann’s) argument on how the current capital structure constrains the future capital structurerevisit
        • <> leverage what you know <> study history
    • but also remember the real-virtual economy distinction problem discussed above
• This means as a representative of investors, to find the most dynamic, creative companies in the world’s most vibrant economies, and secure our purchasing power by owning their stocks.

The macro is what we must accept; the micro is where we can and should make a difference

• Thus, as the entire economy grows, your wealth naturally increases. If your share increases, it means your growth exceeds the average. Even if the entire economy shrinks for various reasons, your wealth continues to grow as long as your share increases. With this understanding of wealth, you will better comprehend this statement: the macro is what we must accept; the micro is where we can and should make a difference. Maintaining this awareness allows you to calmly hold shares of the most creative and excellent companies without being shaken by macroeconomic fluctuations. Being able to sleep at night enables you to firmly hold your stakes, your purchasing power. This is why we first discussed the macroeconomic topics, but ultimately, we return to the core of investing.
  • <> accept the reality as is
  • <> build what matters and ignore what doesn’t matter
    • and remember that there is no substantial difference between building and investing
• The global economy continued to grow—Brazil and Argentina were once among the leading global economies but are now hard to find on that list. This is because, as they stagnated, other countries and the global economy continued to grow rapidly, causing their share in the global economy to continually slide.
  • <> you must evoke the whole to explain the parts
• As global investors, you need to invest in the most dynamic economies you believe in, but also pay attention to your actual needs so you can maintain your purchasing power where you consume. For global investors like Himalaya Capital, our goal is to select the most dynamic, creative, and competitive companies within the world’s most vibrant economies, own their shares, and thus achieve the goal of maintaining and increasing wealth globally. However, for individual investors, you need to maintain your purchasing power in the economy where you are willing and need to consume, as that is your real wealth. For example, many Chinese investors’ main purchasing needs are in China, and they may not need purchasing power in Europe or South America.
  • <> know your goals
  • his approach works for everyone <> capitalism has no boarders
  • he mentions “real wealth” because the government is urging domestic investment?
    • e.g., the statement makes more sense if the country’s law forbids capital outflow
      • what’s the implication for internet money, then?revisit

Value investors

• During Ben Graham’s time, the U.S. unemployment rate reached 25%, and the economy shrank by about one-third to one-half
• In such turbulent, confusing macro environments, value investing can particularly highlight its advantages and play its role. But you must understand what you need to protect and what your investment goals are.
• Keynes and Graham shared many conceptual similarities, but Keynes emphasized more on the quality of the companies themselves
• John Templeton, in 1939, during the war, when many U.S. stocks fell below one dollar, adhered to the principle that “cheap is the hard truth” by buying 100 shares of every stock trading below one dollar on the U.S. stock market

The fundamental principles of value investing

1. A stock is not just a tradable piece of paper; it represents part ownership of a company.
2. Mr. Market is here to serve value investors, not guide.
3. Investments must have sufficient margin of safety.
   • When everyone else is fearful, you can often find many opportunities <> fear <> opportunities
4. Investors should have a clear circle of competence.
5. Fish where the fish are.
   • Investors don’t need to understand every company, don’t need to master all macroeconomic parameters, government macro policies, nor do they need to accurately predict the next ten years
     • <> know everything <> get the basics
   • Lack of competition is an important reason for mispricing.revisit
6. Wealth is the proportion of purchasing power in the economy. The goal of value investing is to hold shares of the most dynamic companies in the most vibrant economies to preserve and grow wealth.
   • Even if the global economic pie shrinks at times, you can preserve your wealth by maintaining your proportion of purchasing power. Then, when the economy begins to grow again and the pie enlarges, you can preserve and continue to increase your wealth.
     • share + return (but share matters more than return) >>> only paying attention to return
       • <> the whole must be evoked to explain the parts

• The macro environment is what we must accept, and the micro environment is where we can and should make a significant difference. Engaging in value investing allows us to breathe in sync with the times and grow alongside it.
  • <> recalibrate <> accept the reality as is (otherwise reality will get in)

2024 Q&A

Question 1: In the process of holding high-quality companies, if the market offers a clearly overvalued price, to what extent would you consider reducing your holdings?

Question 2: Very few people can hold high-quality companies long-term and achieve sustained gains. Does this relate to luck and courage? How should young people make investment decisions amid uncertainty and insufficient information? When should they overturn their own understanding? Did you face such predicaments when you were young?

• Regarding selling, my considerations are as follows:
  • First, if I realize I have made a mistake, I will sell immediately.
    • <> error-correction <> to admit failure you need to know what failure would look like
  • Second, when there are better investment targets available that offer a superior risk-reward ratio and downside-upside ratio, I would opt to switch.
    • <> always go for the best
  • Third, when the market exhibits bubble-like extreme overvaluation
    • <> burryrevisit
• However, valuation is often a concept of timing and largely depends on the company’s long-term growth potential … Short-term overvaluation is less significant compared to long-term growthrevisit
  • <> focus on and build what matters
• Once you truly find and understand such a company, I generally advise against hastily selling it. Because if you sell it thinking it’s overvalued, and later try to buy it back, you’ll face the same issue that it’s still overvalued, and you’re back to waiting for it to be cheaper. During that waiting period, its growth could far exceed your original valuation estimates. If it’s a truly superior company, this scenario is even more likely.
• No matter how long you hold it, you must continue learning about it.
  • <> recalibrate
• Investing is not as simple as buying a stock and then resting easy. If it were that easy, everyone would be wealthy. Investing is not easy, but it is a fascinating and challenging job.
  • <> 99% investing 1% building note
• We adhere to the principle of not borrowing because only by doing so can we withstand a drop of 50% in the entire investment portfolio. Significant stock declines are a normal part of investing. If you haven’t been through such tests several times in your investing career, it’s hard to clarify whether your circle of competence is real or not, whether you truly understand, are truly brave, or just reckless and lucky.
  • <> testability
  • <> falsifiability
• The stock market truly tests human nature. If you don’t understand your investment targets, sooner or later, the market will defeat you. So, it’s crucial to gain true understanding, continuously deepen and expand your circle of competence, and commit to lifelong learning.
  • <> know what to measure
• Because only if the price is low enough can you comfortably hold long-term, giving you ample time to understand the business and the company. Only then should you own those truly excellent companies. The premise for long-term holding is true understanding, not just for the sake of holding long-term.revisit
  • <> inversion
• The core of value investing is understanding value. You pay a price to buy value, ideally a continuously growing value, at a price far below its intrinsic value. Build your circle of competence gradually. There’s no need to rush.

Question 3: How do you view the path to the 3.0 era for the United States? Apart from referencing the development of Hong Kong, can China also draw from some of the experiences of America’s rise? Additionally, in the process of reform and rise, to what extent do high-level decisions determine the success of economic development?

• We are a community of shared destiny
  • <> everything is connected
• The iron law of modern economic development is that the largest market will eventually become the only marketrevisit
• No one can do anything without anyone else
  • <> notes on exchange

Question 4: How do we understand what a “cheap” company is? Do we look at the P/E ratio? The P/E of a company varies and is related to the growth rate; how should we interpret?

• Buying cheap can sometimes bring unexpected gains, but you must research deeply after buying. The more you understand, the more value you can gain.revisit
• Using P/E as a metric to measure a company’s value requires a deep understanding of the quality of its earnings … Only after clarifying the quality of the earnings can you assess the company’s long-term growth prospects. Each company’s value is somewhat unique, and you must understand exactly what you are investing in.
  • <> there is no objective representation

Question 5: What are the characteristics of excellent entrepreneurs? Is there a commonality?

• The future is not easy to predict, and often, you have to choose to believe

Question 6: What is the meaning of investing? While individual investors’ understanding and circle of competence can improve, leading to investment returns, what other value is there?

• Modern capital markets are a necessary prerequisite and cornerstone of modern economics
  • <> virtual-real economy distinction memos
• Moving prices from short-term inefficiency to long-term efficiency is crucially dependent on fundamental investors, value investors. Value investing enables the market’s price discovery function and is the most important node connecting the most valuable companies with non-professional individual savers.
  • But because of fiat money (and “memes”) passive index investment drove out “value” investors <> Gresham’s Law
• Buffett made me realize that the essence of value investing is win-win
• The existence of public companies is crucial for converting savings into effective social resources, which are essential for these companies to grow.
• An increase from 40% to 50% in personal savings rates effectively means a 10% reduction in GDP.
  • <> Voskuilrevisit
    • Is it necessarily the case, even with free market money?
      • I think it is, because nothing gets created if everyone saves their money
• We need to increase real, sustainable demand
• The static view of wealth is rooted from the 2.0 era

---

Audio

• Li Lu (Founders #362)
  • Born 1966
  • Was at 天安門事件 (1989)
  • Was at Columbia Business School
  • He says he started this business late 97
  • Met Charlie Munger 2004
  • ”It’s about accurate and complete information”revisit
  • Gave a lecture at Columbia Business School (2006)
• Li Lu (Founders #363):
  • buffett and munger: “study how to die so you don’t go there”
    • always invert—study weaknesses and mistakesrevisit
  • constantly trading gets you constantly taxed (and more noise from brokers)
    • whatever style you do it has to be authentic otherwise it won’t last a decade (and that’s where the money is)
    • “sit on your arse”
  • timberland example
  • munger: “decision in life is all about opportunity cost”
    • pick the best, and don’t indulge in others
  • bbg example
    • untapped pricing power
  • 2010 talk at columbia (again)
    • he spent 2 years studying buffet
    • “business is change, and change equals opportunity”
    • “capitalism rewards people who are talented at capital allocation—it is a great game”
    • study one company thoroughly, inside out—then you can understand an industryTODO
      • find superior company in superior industry with good management and good price—you can very likely stay for a very long time—superior businesses produce a lot of positive surprises (the opposite is also true)
    • BYD example (2002~) (1:02:52~)
• the 2006 lecture:
  • what defines value investor?
    • those three things are tied together because you don’t really own the business (only a small piece of it) you want margin
      • a. owner of business
      • b. demand safety margin
      • c. don’t really care about what others think—mr. market anology
  • only 5% are value investors
    • other 95% likes trading in and out
      • why value investing is persistently low percent of asset management business?—because assets find these people
        • this is counter-point to make what people wantdevelop
          • see my pieces on Carlo Cipolla
        • common sense is the least common commodity
  • “most of the time you’re going to spend as a value investor is really to be an academic, to be a researcher, to be a journalist actually, to basically be have insatiable curiosity to really, and try to figure out how just about everything works”
  • “the more you know the better off you are as an investor”
  • ask these things
    • is that cheap?
    • is the business good?
    • is the management somebody i can trust either because they’re good or because the external checks are sufficient
  • examples (13:13~)