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Grahamites
Grahamites
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Notes From Li Lu's Recent Roundtable Session - Part II

Li Lu discusses various investment related topics

September 15, 2020 | About:

In a previous article, I shared some of my notes from the first part of Li Lu's recent roundtable discussion session with Peking University's Guanghua School of Management and Citic Publishing. Continuing from that article, below are my notes from the second part of the Q&A session.

6. You've read so many books. But for someone who doesn't read as much as you do, is it possible to practice value investing?

There's not a strong correlation between the number of books you read and the investment results. In my book I discussed many topics unrelated to investing so I included a list of books for those readers who are interested in those different topics. I read books on a variety of topics because of my personal interests.

But the implied question might be what books investors should read to improve investment results. There's indeed a strong correlation between the amount of annual reports read and the investment results. The more businesses you understand, the more you understand histories of different companies, the deeper your analysis. When you analyze a company in the right way, with an owner's mindset, you'll be more acute in your judgment. But if you choose a different approach such as technical analysis, it won't do you any good.

Generally speaking, if you use the scientific method, you'll continuously accumulate knowledge in a compounding way. Once you've mastered the method, you'll be more proficient in recognizing opportunities. Then after a while, you'll find out that some seemingly unrelated knowledge may help your decision making. My best insights for some of the best investment decisions I made in the past did not come from annual reports, but from other sources.

You don't know how knowledge links apriori. You should be honest with yourself and follow your interests. Everyone has different interests and therefore, different circle of competency. What matters is you honestly follow your interests.

In the beginning (of the investment journey), many things matter. But in the end, it's passion and interest that matters the most because if you are passionate and interested in something, you'll still be strongly motivated to pursue it, even after financial success. So if you can approach investing with a scientific mindset and with intellectual honest, you should be fine. If you like reading annual reports, that's sufficient.

Remember you'll build your own circle of competency, which is different from even your best friend. The more unique your circle of competency is, the more opportunities you can recognize. You will form your unique contrarian opinions when everyone agrees with the consensus. That's where the big money is.

7. We all are very optimistic about China's future. What do you think are the best three industries to invest in in China for the next decade?

This is a great question. It's also not an easy question. What you want to look for is an industry that has a long run way and the potential for snowballing effect. Some industries have long run ways but the barrier to enter is low. Some industries may not grow very fast but they are going through consolidation. In these industries the top players may do very well for a long time. As an investor, you invest in a business. Therefore, whatever industry you research, you have to narrow it down to a specific business. How will the business perform in the next 10 years? Of course it has something to do with the competitive profiles of the industry but it also depends on how it competes against its competitors. You have to think about both of them.

For instance, China's economy is going through a massive transition with domestic consumption replacing exporting as the main driver. Both export and domestic consumption will be important but domestic consumption will be the most important driver. Human nature is similar. What people need in more developed countries will be needed by Chinese people. So one of the most predictable growth area is the currently under-consumed products and services.

Also, after the invention of the internet, a new competitive advantage emerged – the network effect. The network effect gives the first movers huge advantage and often forms monopoly power. These days whether and how government should break those modern monopolies has been a hot topic around the world. But before the monopolies are broken up, they are monopolies, especially the consumer internet companies.

Of course there are exceptions. Not all first movers survived. Therefore, even a business with a tremendous network effect and a long run way may not last. So again, you have to boil down to the business and its competitive advantages. The most important thing is to predict the trend of future competitive advantages. Once you can understand this, you can understand everything else.

Value investing is not about investing in any specific industries such as consumer stables, financial services or technology. It's a thinking model and a behavioral standard. It's also a methodology of making predictions. It's applicable across all fields, not just in investing.

Because everyone's ability to predict the future of a different industry is different, everyone's focal point is also different. For instance, Warren Buffett (Trades, Portfolio) rarely invests in technology stocks. Technology plays different roles during different periods of time among different industries. All modern industries are results of modern technologies. When we talk about the technology industry, we are talking about the latest technologies. When we talk about traditional industries, we are actually talking about old technologies in the past. They were once the newest technology.

For instance, textile stocks were the earliest tech stocks but today there are traditional stocks. Two hundred years ago, textile was the breakthrough technology which ignited the first industrial revolution. The computer industry was also a high tech industry in the past. But very few computing companies were truly first class enterprises. It's actually the software providers such as Microsoft (NASDAQ:MSFT) and computer parts companies such as Intel (NASDAQ:INTC) who became the biggest winners.

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About the author:

Grahamites
A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

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