Li Lu is not as well-known as Warren Buffett (Trades, Portfolio), but his investment record stands in the same category as the "Oracle of Omaha." In fact, Lu’s record is so impressive, Charlie Munger (Trades, Portfolio) considers him to be one of his favorite investment managers.
Lu’s investing strategy is based on value, and he has built his reputation on the strategy designed by Graham and Dodd. In addition, when it comes to the topic of value, he is just as knowledgeable as his two better-known peers.
The Spring 2013 Graham & Doddsville Newsletter contained an interview with Lu, and it was full of insightful information. Even though it is dated, there are still some highly valuable takeaways from the text.
Lu's best investing advice
On playing to your own strengths:
“Part of the game of investing is to come into your own. You must find some way that perfectly fits your personality because there is some element of a zero sum game in investing. If you buy, somebody else has to sell. And when you sell, somebody has to buy. You can’t both be right. You really want to be sure that you are better informed and better reasoned than the person on the other side of the trade.”
On the three downsides of shorting:
“Three things about shorting make it a miserable business. On the long side, you have 100% downside but unlimited upside. On the short side, you have 100% upside and unlimited downside. I do not like that math.
Second, the best short has some element of fraud. However, a fraud can be perpetrated for a long time. Of course you borrow to short, so they could really just wear you down. That’s why I could be 100% right and bankrupt at the same time. But, you know what, you go bankrupt first!
Lastly, it screws up your mind. Shorts just grab your mind and take away from the concentrated effort that is required to do proper long investing. So, those are the three reasons why I just stay away from shorting. It was a mistake on my part. I shorted for a couple of years. I don’t discard people who are really doing well at shorting – it’s just not me.”
It is important to understand the businesses you are buying:
“You should understand every aspect of one business as if you own 100% but you don’t actually run it. This causes you to be desperate to understand every aspect to protect your investment. That will give you a sense of a disciplined approach. That’s how you truly understand business and investing.”
On finding an edge:
“Investing is about predicting the future, and the future is inherently unpredictable. Therefore the only way you can do it better is to assess all the facts and truly know what you know and know what you don’t know. That’s your probability edge. Nothing is 100%, but if you always swing when you have an overwhelmingly better edge, then over time, you will do very well.”
How to find the best ideas:
“You can recognize good ideas by reading a great deal and also by studying a lot of companies and constantly learning from intelligent people – hopefully more intelligent than you are, especially in their field. I try to read as much as I can. I study all of the interesting and great companies, and I talk to a lot of intelligent people. You know what? In some of those readings or conversations, ideas just click. Then you do more research and then you get comfortable or you don’t get comfortable.”
The main reason to sell an investment:
“Number one, if you make a mistake, sell as fast as you can, even if it’s a correct mistake. What do I mean by a correct mistake? Investing is a probability game. Let’s say you go into a situation with 90% confidence that things will work out one way and a 10% chance they work out another way, and that 10% event happens. You sell it. Then there’s a mistake that your analysis is completely wrong. You thought it was 99% one way but it was actually 99% the other way. When you realize that, sell as fast as you can. Hopefully at not too much of a loss, but even if it is a loss it doesn’t matter – you have to sell it.”
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