Li Lu on Charlie Munger and the Ability to Remain Rational

Notes on Li Lu's recent Fireside Chat with Bruce Greenwald

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Rupert Hargreaves
Apr 14, 2021
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Recently, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, conducted a virtual Fireside Chat with

Li Lu (Trades, Portfolio), the founder and chairman of Himalaya Capital. The conversation is onlined, and I highly recommended viewing it for any readers interested in value investing and Li's approach to the market.

The discussion covered many topics, but in this article, I will discuss a couple of points really stood out to me.

Li Lu's value investing advice

First of all, in the initial part of the interview, Li heaped praise on

Charlie Munger (Trades, Portfolio), who he said had really helped him over the years to develop his understanding of business and the world. The two have been friends since 2003, and before the pandemic, they used to dine together once a week.

The founder of Himalaya Capital claimed that Munger's influence on his way of thinking and approach to life had been far more important than his investment advice. He said that one of the most essential lessons Munger had taught him, and one of the billionaire's best qualities, was the ability to maintain a "rational composure and commonsensical approach to all problems in investment and in life."

The inability to maintain composure and a commonsensical approach to all problems is one of the main reasons why many investors struggle in the long term, Li opined. This means developing a strategy and being aware of these issues is one of the most critical things individual investors can do if they want to improve their processes and outcomes.

Always be prepared

The other insight I took away from the chat was the principle that investors should always be prepared for the next market crisis. Li noted that over the past few decades, the financial world had seen many major crises. These once-in-a-generation crises tend to happen every five to 10 years, he noted.

The trick is always to be prepared and anticipate what's around the corner. Investing in companies that can thrive in any business environment, and potentially prosper in a downturn, will help investors navigate all investment environments. Specifically, he said:

"One way to deal with it is to anticipate that it is always around the corner. That's basically our attitude, that financial crisis will happen from time to time. People will always be driven by greed and fear and the extreme up and downs. We're looking for businesses that are capable of moving through that. Even businesses that can really thrive in that environment. As a result, that up and down becomes friendly for us in some sense."

The value investor went on to add that all value investors must possess two essential qualities: the ability to not be overwhelmed or pushed around by market movements in the downside, as well as the ability to ignore periods of market excess.

The ability to sit down through a 50% portfolio drawdown and not be affected is vital. Similarly, to be successful in the long-term, investors need to be equally unaffected when everyone in the market is making fast money and stocks are rising quickly. Avoiding the temptation to buy into high-growth fast buck making enterprises is just as important as avoiding selling at the bottom.

I think this is an often understated part of investing. Selling a stock just because it has fallen by 50% is not a sensible strategy.

Equally important, selling an investment just because it has increased in value by 50% may be just as damaging to one's financial health in the long term. We often only need one or two good investments in our lives to be successful, if we play our cards right. So, selling every stock after it goes up 50% will remove the potential of finding these game-changing investments.

At the same time, selling after a 50% profit means one has to find another opportunity. The more investments one needs to find, the higher the chances are of coming across a bad investment due to stretching the imagination to find new ideas.

Put simply, Li and Munger's advice is that remaining rational in all market environments is the most vital thing for long-term success.

Disclosure: The author owns no share mentioned.

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Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.