In the high flying world of investing, Lei Zhang maintains a relatively low profile. Yet since he was seeded by David Swensen of Yale Endowment with $20 million in 2005, he has achieved a ~40% compounded annual return (28x not adjusting for inflation), making him one of the best performing investment managers. To put it into perspective, Warren Buffett has achieved a compounded annual return of ~22%, albeit for the past 50 years. Today, Lei Zhang’s Hillhouse Capital, named after a street nearby Yale where Lei received his MBA and master’s in public policy, manages ~$18 billion. Though not just focused on tech, Lei is best known for backing several most successful Chinese internet entrepreneurs and startups (e.g. Tencent, JD.com). On April 29, Lei paid a visit to the “Temple of Value Investing” Columbia Business School to share his investing and life lessons. Below are my summaries of his wisdom:
For those who crave brevity, here is the essence of the lessons that Lei Zhang shared:
- Being a long-term investor gives you a big advantage from the starting line.
e. - Do deep fundamental research. Make few bets instead of continuing to chase ideas. This way you simplify your life and your business.
- Hillhouse invests in changes and strives to help create value through entrepreneur-like thinking and problem solving. “We are entrepreneurs who happen to be investors.”
- Spend quality time with quality people doing quality things. Hopefully part of the outcome is making money.
- Stay connected to reality and everyday life. Do not become a victim of your own success.
- Four most important traits in people that Lei looks for: intellectual curiosity, intellectual independence, intellectual honesty and empathy.
For those who want more details and articulations, read on:
- Investment Strategy
- Flexibility – Lei only had one investor in his fund when starting out Hillhouse – David Swensen (Trades, Portfolio) from Yale Endowment seeded Hillhouse with $20 million. He could have raised more money with Swensen’s endorsement but did not. He wanted to start with a solid foundation, a strategy that allows him 100% flexibility to invest in whatever he believes in and is passionate about, be it public equity, venture capital, or private equity. In Lei’s words “it’s not about the format but about the essence.” To him the essence is to invest in companies that he thinks make sense, truly believes in, run by people who he respects and are open-minded, and could compound capital over a long stretch of time no matter what stage the company is in. In terms of his investment team, Lei believes in a generalist model and prides himself on being one of the analysts.
- Long Term Orientation – Hillhouse is a long-term investor. Lei thinks that, when you have a long-term orientation, from day one you have a huge advantage over most people – it’s what he calls free option value of time arbitrage. His view on the Chinese stock market at the time of this speech? “It’s like 1999 all over again, but times three.” The environment is so bubbly that any company that changes its name into something internet related could get an elevated multiple on their valuations. Some say long-term investing does not work in China because everybody trades so much. Speaking at one mutual fund conference, some managers asked Lei, “How do you make so much money despite being a long term investor?” (Everyone in the room laughed really hard on this comment.) Some Chinese mutual fund managers complain to regulators, “I know you want long-term investors, but we need to make money. We have a fiduciary duty.” The understanding of long-term investing in China is so distorted, people think there is a cost to being a long-term investor.
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