Recently, Bruce Greenwald carried out a virtual Fireside Chat with Li Lu (Trades, Portfolio), the founder and chairman of Himalaya Capital. The conversation is online and is highly recommended viewing for any readers interested in value investing and Lu's approach to the market.
Greenwald and Li covered multiple topics during the discussion, addressing everything from the value investor's approach to valuing businesses and what he had learned from his great friend Charlie Munger (Trades, Portfolio).
In the discussion, the duo also talked about China and why this market is so important for value investors.
Li and Chinese equities
Li's Himalaya focuses most of its efforts on the Chinese market. While the fund has recently been acquiring U.S. securities, Li and his team have traditionally targeted Asian businesses.
Li and Munger believe some of the best investment opportunities available today are to be found in China.
At the 2019 annual meeting of the Daily Journal Corp. (DJCO, Financial), Munger remarked that "the strongest companies in the world are not in America." He went on to add that "I think Chinese companies are stronger than ours and are growing faster."
Munger has previously advised investors to fish where the fish are or look for investments in the world's fastest-growing economies, to put it another way. That's China in this situation.
Munger has put his money where his mouth is.
We know he has an investment in Himalaya, which is his only hedge fund investment, and one of the few investments he holds personally alongside Costco (COST, Financial) and Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial).
In his talk with Greenwald, Li discussed why he believes China is such an attractive market for value investors:
"I think China is one of the best markets in the world if you are a value investor. In a sense, the market is still underdeveloped. It is not representative of the real economy in the same way as it is in the United States...the trading and investors are not as mature. There's still this mentality of faster trading and high turnover, which drives companies through this faster pace of boom and bust. This usually provides opportunities for patient investors who truly know the value of businesses."
This mentality is going to change over the next decade, the value investor went on to add. In some respects, he said, the stock market does still not reflect China's real economy. Initial public offerings have to be vetted and approved, and banks account for the majority of lending to businesses. This model is entirely different to the market-driven model that is present in many developed markets.
However, Li explained that he believes this will change as policymakers in China are already looking to move away from the IPO approval process. On top of this, the direct investment economy is growing, and banks' share of funding is shrinking.
As well as this tailwind, the Chinese economy should also benefit as it moves away from the export-driven economy toward services. Li said he believes this will be part of the development of financial markets as the middle class has more discretionary income and money available to spend on financial services.
According to the value investor, these twin tailwinds of the growing middle class and developing financial sector are the reasons why he's so optimistic about the future for Chinese equities and the Chinese economy.
Li didn't reveal any of the companies he owns in the discussion, so it may be difficult for investors to follow his advice. However, I think he makes a compelling argument as to why Chinese equities are an attractive investment today as the country's economy reaches maturity and moves on to the next stage of growth.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Charlie Munger: How to Remain Rational
- Charlie Munger's Thoughts on Mistakes and What We Can Learn From Them
- Li Lu on Charlie Munger and the Ability to Remain Rational
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