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Grahamites
Grahamites
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Key Takeways From Li Lu's Recent Roundtable

Investors should focus on long term competitive advantages

September 16, 2020 | About:

In previous articles, I shared my notes from Li Lu's recent roundtable discussion session with Peking University's Guanghua School of Management and Citic Publishing. You can find Part I here and Part II here. In this article, I will go over some of my key takeaways from the interview.

Li only answered seven questions, but he answered each one of them in great detail. If we pay attention to his answers, we'll notice the one thing he stressed over and over – competitive advantages. Below are a compilation of the parts of his answers in which he discussed competitive advantages:

"It depends on whether and to what extent will the scandal impact the long term competitive advantages of the business...

It doesn't matter whether it's bottom up or top down. What matters is how you measure a business. You are investing in a business. This business competes in an industry with its competitors. Ultimately your understanding and analysis should focus on the future competitiveness of the business...

The long term prospect of business depends mostly on its competitive positions. So if you are interested in a business, you'll find out that you should focus on the long term competitive advantages of this business...

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."

Obviously how to think about competitive advantage is an extremely important aspect of Himalaya's research system. Himalaya has a systematic methodology in assessing the competitive advantages of a business. It's a very rigorous and dynamic system which involves multiple dimensions across different level of thinking.

There are a few key points I want to stress. First, in the long term, industry characteristics and competitive dynamics can be the most important source of the sustainable competitive advantages of the business. For instance, many businesses in the healthcare and consumer sectors such as Coca Cola (NYSE:KO) and Johnson and Johnson (NYSE:JNJ) have sustained competitive advantages for many decades. Secondly, it's the trend of the competitive advantages that matter. You need to understand why the business had some competitive advantages in the past, but it's the future trend that will drive the fundamental growth of the business. Last but not least, the ability to assess competitive advantages is dependent upon whether an investor can build a circle of competency.

Perhaps part of Li Lu's framework of assessing competitive advantages is based on two important books, which Li recommended at the end of his book "Civilization, Modernization, Value Investment and China." The two books I'd like to highlight are "Competition Demystified" by Bruce Greenwald and Judd Kahn and "Competitive Advantage" by Michael Porter.

Another important point I took from this session is that value investing is a personal journey. Everyone has to make their own judgment regarding the competitive positions and the future growth prospect of a business. Every investor's level of understanding of the same business is different. Each investor will also has his or her own circle of competency based on personal interests. Opportunity cost and discount rates should also be different for different investors. It's wrong to think that you can generalize the important ideas.

Some of the questions were asked in an instrumentalist way, which means that the questions were directed to solicit answers for solving practical problems, i.e., improving investment results right away. Li has politely pointed out that this is not the right way to approach value investing. Although he didn't say it directly, his messages implied that investors should stop looking for formulas and rules of thums. Value investing is not easy. It's a very rigorous system of thinking models with a very high moral and behavioral standard. There are no shortcuts if you want to practice value investing in the most righteous way.

In the end, I want to thank Mr. Li for share his wisdom and insights so generously. In the future, I'll continue to follow his speeches and interviews and share my notes.

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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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