In a Fireside Chat with Bruce Greenwald earlier this month, Li Lu (Trades, Portfolio) provided viewers with some fascinating insights into his investment strategy.
The investor, who founded his firm Himalaya Capital in 1998 after graduating from Columbia University, told Greenwald that there was one thing that set him out from his peers at the time, and that was a deep understanding of Warren Buffett (Trades, Portfolio)'s approach to life and investing.
After hearing Buffett, a Columbia alumnus, give a lecture at the university in 1993, Li decided he wanted to become an investor, and he attributed a huge amount of his success to the lessons he'd learned from Buffett and his right-hand man, Charlie Munger (Trades, Portfolio), over the years.
While Li is a highly accomplished investor himself, he said that these two investors had taught him much of what he knows today.
If the lessons from these two legendary investors formed the foundations of Li's education, then his experiences as a fund manager in the later 1990s and early 2000s helped build the walls.
Li's venture capital experience
Soon after setting up Himalaya, Li also became involved in venture capital. He told Greenwald that by heading down this path, he built a deep understanding of how businesses worked and, most importantly, began to experience the qualities that indicated a good company.
Some studies have shown that the best investors are or have been business owners. The experience of managing a business can be invaluable as an investor as one knows what risks and challenges to look out for. One may also be more aware of the opportunities and threats to a companies success. Above all, it helps develop a mindset. Businesses take time and effort to develop. That's something all business owners will understand. There will be mistakes, setbacks, opportunities and missed opportunities. Investors who have no first-hand experience running a business may struggle to understand this.
Li admitted in his discussion with Greenwald that value investing has changed to some extent over the past few decades. The net net, deep value style pioneered by Benjamin Graham, for example, may no longer work. However, while the style might have changed, the philosophy remains the same. The philosophy of buying something for less than it's worth hasn't changed over the past three decades, the value investor stated. "The philosophy is relatively simple," Li explained, but the "practice is relatively hard."
Finding good companies
Li explained that when he started as a value investor, he was looking for deep value. That has changed over the past few decades. Today, he explained that he's looking for high-quality companies trading at attractive valuations that have the potential to achieve impressive growth rates over the next decade. Specifically, Himalaya's founder said:
"Truly good businesses are those that can fend off competitors. The ones that can have an enduring competitive advantage. And hopefully also have a long runway for continuous growth. Those of the businesses we are looking for. They come really in all different industries and all different shapes and forms. But they are really, really rare. If you're really lucky enough to find one of these long-term compounders, all you really need to do is hold them for the longest amount of time."
Finding these businesses is not easy. Li explained that to uncover these companies, investors need to be always searching for the next opportunity and constantly learning about sectors and industries. There's no shortcut to this approach. Li said that he and his team want to know the company and its sector better than its own management before they buy a position. That takes time and dedication. Most investors may not be suited to this approach.
Disclosure: The author owns no share mentioned.
Read more here:
- Li Lu Explains Why Chinese Equities Are So Attractive
- Charlie Munger: How to Remain Rational
- Charlie Munger's Thoughts on Mistakes and What We Can Learn From Them
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