Li Lu’s lecture at Columbia university was recently posted on the site by Ravi of rationalwalk and myself. It turns out Li Lu recently gave another lecture at Columbia in April 2010. Thanks to my friend David Hui Lau of http://dahhuilaudavid.blogspot.com// for this find.
Transcript via [streetcapitalist.com]. The link to the actual video is posted at the end of the article. By now many of you know that Li Lu is likely to be one of the CIO candidates for Berkshire Hathaway. Based on Berkshire’s investment in BYD, the fact that Lu manages Charlie Munger’s money, and that even Buffett would give money to Lu if he ever retired (according to Greenwald) makes me think this is pretty likely.
With that in mind, I believe it is insightful to study whatever you can find about him and his approach. I think this lecture from 2010 is great. The recording has some audio issues making it difficult to hear and I thought that some of you might enjoy reading notes from the talk. This is not a true transcript, but an approximation of what was said. I think it comes pretty close, having listened to the lecture a few times. I think you will find it helpful and Lu’s talk rewarding.
Bruce Greenwald: Warren Buffett says that when he retires, there are three people he would like to manage his money. First is Seth Klarman of the Baupost Group, who you will hear from later in the course. Next is Greg Alexander. Third is Li Lu. He happens to manage all of Charlie Munger’s money. I have a small investment with him and in four years it is up 400%.
(My comments: Seth Klarman is well known, Li Lu has become well known lately in the value investing world lately, Greg Alexander is less known.
Greg Alexander is impossible to find information about. When I asked Roger Lowenstein, a director of SeqouiaFund about Greg in a recent interview, he stated: "I know Greg. I think Warren is right. He’s a great investor, but as Sequoia director I am not going to comment on Greg personally."
I don’t know anything about Greg Alexander, except that he works for Ruanne, Cunniff and the Sequoia fund. When Buffett shuttered his original partnerships – this is where he suggested that investors put their money. Bill Ruane was till alive then, though, and was widely considered to be leading the charge over there. Alexander has been with the firm since 1985. If Buffett is that impressed with him, I assume he’s a rare talent. This is from a 1996 letter to shareholders, written by Bill Ruane:
“Twelve years ago, Greg Alexander joined us out of Yale where, despite his economics degree, it appears that he spent most of his time reading annual reports. He is highly creative and still spends at least eight hours a day consuming annual reports. I don’t know anyone who processes more ideas with greater analytical depth and he is excellent at cutting through to the heart of an issue. He is a master of chewing through immense detail to reach original insights and judgments about our portfolio companies.”)
Li Lu: Columbia is where my whole life in America started. I could barely speak the language. In Columbia it was where I had a new life. It was really in the Value Investing class where I got my career start. I was really worried about my student loan debt at the time and a friend told me about this class and said I need to see a lecture from Warren Buffett.
What I heard that night changed my life. He said three things:
1. A stock is not a piece of paper, it is a piece of ownership in a company.
2. You need a margin of safety so if you are wrong you don’t lose much.
3. In the market, most people are in it for the short term. It allows you a framework for dealing with the day to day volatility.
Those were three powerful concepts. I had never viewed the stock market like that. I viewed it negatively as a place made up of manipulators who were lining their own pockets. I embarked on an intensive two year study learning everything about Buffett.
Two years after that I bought my first stock. After I graduated I worked at an investment bank for a year and realized it was a mistake. I tried to start a fund but I didn’t have a track record. The first year I managed money I lost 19%.
Being a value investor means you look at the downside before looking at the upside. Before becoming an investor you need to look at how you can fail at this game. There are all sorts of ways you can fail. You need to examine who you are and see if you could be good at it. If you could ever find something you can do well that you really like — that will be your best investment. You will do better than competitors. If you can do it with intrinsic passion, that really over time will add enormous value to you.
Back to the game of investing. This concept of margin of safety is an essential concept to be a good investor. The future is unpredictable, you will always be dealt surprises, some positive most negative. You need to build in a level of safety so that whatever happens, you will not get crushed. If you can really successfully know what you are getting into, you can pretty much navigate. Most people are troubled by what they don’t know. The world is divided by those who know and those who don’t know. If you really know — you will not pull triggers like Wall St. traders. If you are truly intellectually honest, you would not do anything.
This class teaches you to know what you are getting into, especially accepting what things you don’t know. The game of investment is really continuous learning. Everything affects an investment, it constantly changes. You are not investing in the past but the accumulative cash flow of the future. You have to want to find a certain set up where you can know something that most people don’t know. There are plenty of things I don’t know but they don’t factor into the purchase because I am using a huge margin of safety. Buying a dollar at 50 cents. So if things turn against you, you will be okay. That is not easy. This business is brutally competitive. It is so impossible to know everything and know exactly what is going to happen to a business from now till the end that you really have to accept that what you don’t know.
Finding an edge really only comes from a right frame of mind and years of continuous study. But when you find those insights along the road of study, you need to have the guts and courage to back up the truck and ignore the opinions of everyone else. To be a better investor, you have to stand on your own. You just can’t copy other people’s insights. Sooner or later, the position turns against you. If you don’t have any insights into the business,