I previuosly shared the formal session of Li Lu’s speech at Guanghua School of Management of Peking University. Below are my summary notes from the question-and-answer session.
Question 1: For someone who has worked in the sell side for more than a decade, how can one transition from sell side to value investing?
Answer: You have to adjust your mindset, which is very hard. A good way to start the transition is to manage your own money for a while before formally moving to the value investing profession. But the good thing about the sell side is that you have accumulated valuable industry and company knowledges and experiences, which are very useful. And the framework of research analysis is also very useful.
Question 2: Do you know any young value investors who have failed? If so, why have they failed?
Answer: Lack of interests and passion is one key reason why some have failed. Passion is very important. The key to success in value investing is to combine competency with passion.
Question 3: How can you tell whether you really understand a business or not? Are there any standard metrics we can use?
Answer: Asking this simple question when you analyzing a business - can you tell what the worst case scenario is for the business during the next ten years? In other words, if some day during the next 10 years, everything that could go wrong does go wrong, what the economics of the business will look like? If you can answer this question, then you can say you understand the business. Human psychological biases make it really hard to be completely honest with ourselves. Charlie Munger (Trades, Portfolio)’s idea is very useful – always seek counter-argument from someone who’s very knowledgeable about the business but has the opposite view about the future of the business.
Question 4: What is the best way to learn value investing?
Answer: It’s better to let your own personal interests to guide you and just let the knowledge accumulate over a long time. This way you can also learn more efficiently.
Question 5: What are the most important sources of a business’s moat?
Answer: It depends on the time horizon. In general, the longer the time horizon, industry characteristics are the most important source of moat. But in the shorter time horizon, the people factor is more important.
Question 6: What traits do you look for in successful entrepreneurs?
Answer: It depends. Each company and each entrepreneur is different. What works for one may not work for another. The question you should ask is why is this entrepreneur so successful in creating this specific business? How did he build the business? For instance, why was Jack Ma so successful in building Alibaba? He might not be successful in building another business. Ditto to Steve Jobs. There are many examples of entrepreneurs with great qualifications who have failed to succeed.
Question 7: What advice would you give to students? Should we get a job at a large institution first?
Answer: It’s true that you can accelerate your learning if you work for somebody who’s experienced in the field. But the problem is there are very few authentic value investors out there. And the authentic value investors rarely need to hire analysts. It’s unfortunate but that’s the reality. So the best way is to learn by yourself. You can also keep in touch and get together with other value investors. Otherwise, go work for someone who you admire and respect.
Question 8: Can you talk about how Mr. Munger formed his investment framework?
Answer: Munger established his mental model framework very early in his life, before he got into the investment business. He’s always curious about how the world works, what works and what doesn’t work. He’s interested in learning about outstanding businesses from an early age.
Question 9: Can you share your perspective on life, family and health?
Answer: Investing is a long term endeavor. The most important thing is to do what you love, keep a good habit, and a calm mindset. Physical health is obviously very important as without it, you won’t be able to compound for a long time. The other important thing to keep in mind is to minimize the pressure, especially from LPs. This means only partner with people who share the same philosophy. Himalaya only manages money for endowments and charitable foundation because they share the long term view and they create value for the society.
It’s also a good idea to live in a place like Omaha, which is far from Wall Street. You’ll get less noise. Avoid people you don’t want to be associated with. You also want to always try to create win-win situations. Be kind to people around you.
Lastly, don’t be afraid to go slow. In the long term, slow is fast.
Question 10: What’s your view of the impact of indexing investing?
Answer: This is less of a problem in China because China’s main index such as the CSI 300 index doesn’t properly reflect the underlying economy. Chinese government is working hard at making the stock market a better proxy of the economy. In the U.S, the index is a good proxy of the economy. But the problem of passive investing is that it isn’t the best pricing mechanism for different businesses. And the pricing mechanism is very important for capitalistic market. It’s hard to say at what point passive investing will be counter-productive to market-based pricing mechanism.
Question 11: How important is balance sheet based margin of safety analysis?
Answer: It depends on the market. In China, it’s hard to find such opportunities but in other Asian markets there are still such opportunities. It’s true there are fewer net net opportunities now compared to when I started. If I were to start over again, I’ll probably start with this approach because it offers more certainty and it helps protect the downside. But nowadays you’ll have to look harder for net net opportunities.
Read more here:
- Notes From Li Lu's Latest Speech at Peking University
- Case Study: Buffett's 50% Edge Against the Dow in the 1950s
- Disconfirming Evidence and the Feedback Mechanism
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