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Li Lu’s Big Non Short

Li Lu is one of the world’s most significant value investors. He managed money for Charlie Munger and has been tipped as a possible candidate to take over from Warren Buffett when he leaves Berkshire Hathaway.

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Li Lu is not as well-known as Warren Buffett, but his investment record stands in the same category as the "Oracle of Omaha." In fact, Lu’s record is so impressive Charlie Munger considers him to be one of his favorite investment managers.

Li Lu's Big Short

Lu’s investing strategy is based on value, and he has built his reputation on the strategy designed by Graham and Dodd. Also, when it comes to the topic of value, he is just as knowledgeable as his two better-known peers.

Indeed, in a rare lecture to students at the Colombia Business School in 2010 he made the following statement:

"So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it. I tell my interns to work through this exercise – imagine a distant relative passes away and you find out that you have inherited 100% of a business they owned. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand the business, inside out."

As it turns out, Li Lu's knowledge of investing goes far beyond value investing.

Li Lu's Big Non Short

Dr. Michael Burry shot to fame after the financial crisis because he was one of the few investors to spot the disaster before it happened. As profiled in the film, The Big Short, Burry discovered the opportunity shorting sub-prime mortgage securities offered after turning his eye for detail to understanding these products.

And as it turns out, Lu had the same idea, but he abandoned it after running the idea by Charlie Munger:

At the beginning of the new year of 2016, the movie "The Big Short" is watched. The film, adapted from Michael Lewis' eponymous novel, tells the story of several investors who first discovered loopholes in the 2007-08 subprime mortgage crisis and the entire U.S. financial system and set out to make money short. I have experienced many of the events involved in the film. I have more or less had inter-relationships among the various characters in the film, so it looks more realistic and gives rise to a sense of reality Some thoughts.

"Starting from 2005 and 2006, I personally discovered the product of CDS for some accidental reasons and did some research. I planned to enter on a large scale and short the CDS. Later, after several conversations with Munger, he gradually dispelled this idea. The reason for Charlie's objection was simple: if my analysis was correct, it meant eventually either taking over the counterparties to these products, the big financial companies failing to cash in on bankruptcy. Or the big financial institutions being passed to the government and being saved with taxpayer money. In this scenario, then you actually make taxpayers money, the government's money. The result really confirmed Charlie's judgment. Those who made the biggest short in this history of money actually ended up directly or indirectly getting paid by global taxpayers. So I never regretted it because I did not earn taxpayer money." -- Source, translated.