Li Lu, Chairman of Himalaya Capital, IV Annual Student Investment Conference, San Francisco State University, 2012.
Himalaya Capital’s Li Lu: Value Investing In A Period Of Time
Maverick Capital's flagship hedge fund lost -22.9% in the first quarter of 2022 according to a copy of the firm's quarterly update, which ValueWalk has been able to review. The firm's flagship fund, Maverick Fundamental Hedge, accounts for $3.7 billion of the group's $8.1 billion of assets under management. Even after losses in the first Read More
Accidentally brought in to a lecture by somebody whose name sounds very Swedish. To me the first couple of years since I arrived in America, English wasn't right there. And a name that sounds like a free lunch, "Buffett" for that lecture. Buffett really fundamentally cherishable trajectory of my life in America. I read it if the career that I enjoyed it immensely today so keep your great pleasure to be back into this type of a setting to communicate directly as a student. Today I want to talk a little bit about some of the bad investing. The basic concept of about investing obviously is. Many many say so but today I think it is as relevant as when it was first laid out by Benjamin Bratt at a club 6 7 is essentially just a three basic ideas. First the money to this stock is not a piece of paper tree that is represented fractional ownership of a company. And therefore adding that stock ought to be basic barriers that the company as a whole. Secondly it means that it means any financial asset. That.
You have to protect in the future. The discounted cash flow future cash earnings. And the future is inherently. Difficult.
To predict and therefore you really want to keep yourself a margin of safety so that you could be wrong or you could be right because future years distribution. To me that statistic possibilities say you bet on something that is 90 percent of the chances you could be right within that 2 percent. Has. Occurred. So all of a sudden become 100 percent. So you want to leave enough a margin of safety in other words you want to buy at a low enough of a price. Even if all the adverse events occurred against you in the future you will still be in the game. It doesn't mean you lose but.
It just means that you'll often lose so much that you'll be all of the game. Investing is really a long game it place over. The. Life. Of. His career. And so you want to be really in the game over the long haul.
A third concept is just a market to figure out the preamble of mind. The. Market is that kids to you look at it as a. New product. That's the market approach and irrational behavior. So the three basic concepts at the heart of it is obvious. It is this part of the game you want to really get what you pay. Now obviously that's what everybody involved. And everybody want the same thing you would think that. All of the professional investors would be battling. This just to pay for them to. Go back value investing as is properly practiced. Hospitality a small part of all the investment. The question a jury with people holding different views. Let me just articulate for the whole country. That's. Number one. Yes. Thought legally represent a fractional claim oppression of ownership that is first and foremost a piece of paper and truth all the time and therefore it follows that that is successful use vesting. Lines in the successful GasNet of the stock based on what ever informed theories or practices. That you can find. And thirdly the market is to be respected indeed to be fair because really the market can actually find its value through the market you can actually buy and sell. So this very different than it sounds even more persuasive than the first reviews I laid out. As a matter of fact I'll see what you did with people who followed the latter without the former. So as a young student trying to get into the business which we follow. Fall. Out of suggestible for you to do that goes to some fundamental studies as to the results. If there is a different approach and philosophies. Of either has spent years of studies have gone because we kept a pretty good track record of the last 100 years. And then all the studies have given the a mistaken conclusion the truth that every investor says it properly the practice of consistently awful the market is all just about all other strategies either national market or severely underperforming the market over a long period of time. Now you can dispute that result. I think the evidence is pretty persuasive. And so the question because if that were the case of course of a study also concluded that the true value of investors is a property of practice. Here's a tiny small percentage. Of investing professionals and it's also a very interesting study. But when you do form. Data with the observation that being in this profession close to 20 years. So why is the case. Why is that case. If the empirical studies conclude that overwhelmingly it goes up the value system. Is. The way to build. Up the philosophies of practice articulator for seven decades. And lo practices and publicize the.
Of successful examples such as this to me. Why not more people for what they did. Turnout has a lot to do with it. Even matter. You have to. Have this. Criminal mindset that if you did your work correctly a market against it. You should be comfortable staying home. And this is the concept behind. The market. But that's will be very difficult. It is a very unnatural thing to do. When the whole market is that kids deal with everybody else is really stupid and neurotic and wrong. And you know tend to make everybody off the stock market crash of Rodeck. It is very very natural things to do was waterlines of a Selke in the past probably most people. But at the time. It looks quite ridiculous. I was there at the house.
In fact it requires a certain deal of conformity. Think of all the ladies over the millions of years of evolutionary past. Ancestors of animal predecessors basic hunting groups anyone who was left out and disagree with everybody else to it very easily that way it's not the want to survive. So all the genes that have survived in the past. The one degree of conformity and conformity it also works very well. For him in this society because we are at a hard social edibles. We need to that with and the sympathy.
Compassion for the society in peace and live together. So it's certainly mutated genes in a sense to be pretty comfortable to say that everyone else is screwed. Now that is the reason. At least that's one of the ways the financial market itself is not very efficient. Free markets ever since it was practised bottled time up to 300 years ago has worked remarkably well. But it has worked remarkably well. Mary thank you. The goods and services physical goods and definable services. We have several hundred years of long evidence to support that. Every country has the practice that we all try not to be prosperous. Now we also have several hundred years of the history. Of Free as a practice of financial markets. Followed. Disasters. Up and. Down.
Trivial. It doesn't really work nearly as well when it comes to financial assets. Why is it. A financial asset. The essence.
Is a discounting mechanism to predict the future that discounted estimated cash Verde's into the Senate. And of course we all know we cannot predict infinity. We can't even predict. Leaders like we can see which is very short. And so there's a necessary element of speculation. Guess. Estimation. Into the valuation of financial asset that is exaggerated. There is an element of stock market and financial market in general the element of a gambling element to the gas element of speculation. And as we all know as a pure casino pure gambling there is a huge adventitious stock against players. And really for the benefit of casino owners fine. This is why gambling is such a profitable. Business that has never really just waited the people away from gambling. There is one element. That really fit nation lucky and. Even if everybody knows the odds are stacked against it as an element for tact preventing gambling from big business especially when is allowed sanctioned by the government.
Says a practice of accounts from different geographies around the world. So there is some aspect of that within the financial market as well. This is the reason why that it doesn't often work perfectly well as recently illustrated by the year 2000 the 2000.
Financial crisis which is only the stream of a long history major crisis. But it doesn't really mean that we have a better way of doing that just as Churchill said about democracy because it perhaps the worst when compared with all the others. And so is the market. So is the free market when it comes to financial assets. It doesn't work very well party it doesn't work here as well as goods and services. But is still one of the better ways that we have come up with terms of facilitating flows to finance because of like the workings of modern economy. So it does so it works. So if that really is give us the challenge is that it too bad. You just have to really reframe yourself back into office knowing that the financial market doesn't really work too well. But a lot of the time the work reasonably well.
So you want to really wait for the true situation before you can make a bet that you have enough of a margin of safety b you can actually stand because the whole market that you have that require treaty discipline off of the very large margin of safety. Virtually all of us except for. That the best practitioners who have all that. Element. Not bad often when they're really bad Congress a large large market so that they will be comfortable with the market. Against them. So they are seizing the opportunities that is no brainer. And that really is the most difficult challenge. Most people are really has to not only have the necessary discipline then to discipline to do that. So you would have saved the bond market everybody a practice were getting used to what they call themselves that if they buy something they think there is a 20 percent discount to what they think its intrinsic value. And when it goes off really trump themselves successfully Telegin and invited the best for them. But apart from that gives them which is very easy but they present it discovers OVAs. Within the error margin of error. Mark if we get you to say that will be the first with respect to market. Difficulty of the case when you see a situation like that it is because it's. Not. That. This. Is common. Practice. So as a young student and young analyst or somebody that was interested in finance I want to strongly encourage the best way to study. Successful practices. Real life examples is. A. Study farewell. All of the examples are great that that person is talking to as away from the airport picking me. Talk about his favorite stock in Russian oil which reminds me of one of those great examples. Of Biskind that can create as some of you might believe the early 90s Russian. As a. Free market almost overnight a short period of time that privatized some of the most supplies that state assets including Volkova adds. It was so short that most people didn't really understand what it's all about how other people work for the companies and those are older citizens. Given certificates of help for they can be converted to stock ownership. Most people don't know what it is. So anybody with common law over them or real cash can. Give it away. So as a result of those certificate at one point of the treaty as an export. Prices. Lower. Prices.
Forget about it earnings. Just a sort of asset on the balance sheet. At the time oil prices think it for five year average from 20 dollars. And their reserve represented by the balance sheet should face that will be hurt that the oil reserve of oil prices. Did you remember what was the price. Anybody remember it was twenty two dollars per barrel traded on the open market anybody can imagine how that will go. Once cents on the Dow sometimes. It is about 2 cents to 20 cents. Per proven barrels of oil on about. If that's not even counting the earnings. From the company this is how it. It was a resistless. No I thought at that point that some kind of barge. Margin.
Consider the political situation here ought to be treated longest period of time as a 2013. 50. It's all pretty crazy. Two dollars and then a few years later after the Asian financial crisis occurred. Russian combative Kurds all of a sudden a dollar could fall into the Hunger very protected because the Kurds are returning at one point wouldn't doubt 90 percent of the time 0. But if you really wanted in the sense which is a Hoss's 1/2 percent. Over Baghdad. Less than 10 percent of Adye currency down 90 percent you're still quite overweight.
In fact you still have about a minute to give money. That's how the situation can become a good example just stop. So the really was sent to a situation external shock. Really shock of a measure of value in this case. Currently 5 percent this fuel came off. I'll talk that is often treated as the cost of our safety. We do practice.
Take another example a few years back in 97 98. The only open market worldwide it treated the full ten dollars. For occurred of several boxes. At the time. The five year average is probably 20 as I said before. But also the majority actually if not all of the production of the Southwest is often no cost. Exxon Mobil BP you name it everything all sides of Saudi Arabia a couple of Gulf state countries look part overwash part of those a small. Portion small that small that is still a fraction of the overall production. Everybody become profitable with a ten dollars. Another time we have we didn't figure out how to use Facebook. So they were plenty plenty companies at the time. Not losing money even at that time. And speaking of greed that was a huge follow about and you can calculate as to what it is about per share. So there's a read in examples of examples of examples. So every period of time. I wasn't just. From. The mid 90s.
For nearly 20 years.
I've never really gone through a period of time that I couldn't find something just interest. So if you especially offer a smaller pool of the body. At any time. Because you're from the Constitution from the fountain. Different securer most stocks all over the world. There are always opportunities like that to give plenty of parking seats.
But of course the most interesting thing you want to do is not only talk about the actual talk about doory earn generating projects count. If you could combine the cheap prices on the. Quality of. The. Building to consistently generate cash earnings on a compound growing base. That is the holy grail. You can really hold the longest occurred of time but it is market to really form is really facing does situation like that exist. I would argue it does. Maybe not. I think a larger part of the cap would have a smaller cap a cap I through that today. And it has a few thousands. Of dollars. I'll be really very happy with the it is today. If I have a larger market we have political challenges. Although the word marriage we cannot really go into today but have a smaller pool of money. There are tremendous opportunities like all small profit I give you one example that you can really work to see whether. It's interested.
In career is a form of a securities per person. Essentially it is not voting. Common stock that pays slightly more for film and not much. What they cannot. Afford. Interesting same. There. Two they are tricky some time up to 70 80 percent discount. To a common and group of securities and there are several companies that have during that growing earnings and a revenue. Compound basis over 3 for a decade because the French has nearly 4 purpose. Like. Great for any politician to have an opportunity to. Expand and treat it at prices that is essentially just a tiny fraction of what the fourth private transaction could buy the company. In fact it happened really a comparison of common stock of the day when we can call the stock a situation just like that we really this even today. There is absolutely no reason especially all those companies that I talked about it the family really confused the folding of the corporate end. So there is virtually no differences between the company voting and non-voting. There was virtually no difference. And yet the trading was up 80 percent just talk about 20 percent or 80 percent trading in the 20s. All or if you will have that come back for like the trip to that opportunity that my point is really existed at all the different players. So if you're starting your career. Yeah. If I were to start again first of study I don't think maybe in the past. We've got to be extremely small. So it gives you a tremendous tremendous marginal seat. To all sorts of things happen and you still come out OK. Even if you lose money in the game. Study about what this study and what is available today. At any given time there are always those opportunities like that. And really it has something to do with their fundamental human psychology. As long as human remains the same I suspect you will believe there is that opportunity to exist which is quite encouraging signs for young people. So if I were you I would be very excited today as I was when I was in the audience. You're shooting. About 20 years ago. So. Like. Open question.
Yeah. Question What do you say when you sell the stock. Well that's very interesting. Question now. What's. Your source. That. Is sort of an example that I stated sort of the value it really is to. Use. The assets. And in that case we really want to really re-evaluate your scenarios. Aside. A downside. Every once in a while because the situation changes for example a favorite stock in the rational Cohoes I guess I sold it two years first followed. The gist of what at the time and are still kind of a treaty. Probably 90 percent 80 to 90 percent discount. But I think about 80 90 percent discount is worth today just due to trading that I don't know what it is you probably didn't like it but relative to all the other countries I would feel less comfortable. With that discount. I. More. And I just happened to be given a 90 percent discount. Ninety nine point. Five. Percent discount that was that was. Now if you're really talking about earnings I tend to be less in a hurry because if you even better write that anyone can teach well. And every time you sell a stock you basically take essentially a 30 to 40 percent. Of. Interest free you borrow buy not really done in the stock. You avoid paying capital gains taxes the state and federal.
Together some 20 30 40 percent I think it's going up. And as long as you give them that sends you Farnam from the government the interest free that risk free basis. And give them that asset under the line as it continue to grow. Count on that basis. I wouldn't say that is what Jesus took less in a. So if it reflects the fact that it would. Keep it from shame or a bad situation. And if the business environment changes of course. To change course of action. And that's a good thing about your past and everything related and affected business. With. All the insurance changes all the time. That's why the king is so fucking wondering what is the margin of safety to look for before you start buying yet again that has something to do with the quality of the asset. If the quality of the asset is high demand asset base is low because you are at a margin of safety with upside generating power. Whatever it is you have to have it has to live to those assets to generate for you. And somehow this is somewhat of a different league inside whether you know the business of politically particularly better than anybody else's. If you really buy into their future earnings for that asset whatever you can withstand the balance sheet better than the other people. You have to have a better insight as to what is the property bad. And therefore it may not appear to other people is it a large enough margin for your mind. You have a very very large margin. In my case I just think that you can get the better. You want to have a very very large. Right right. So how about assuming that you don't get sites whatsoever as to what the future. You always just that it's just.
What would you pay for that.
Well in the case of Russia I feel very little of that reason I suspect. So that goes to 99 percent and I get extremely when close to 80 percent. It's not for anybody as I show you that 90 percent evaporated because of the currency changes although they came back. So the situation is different but in the in any environment trying to send external forces. I understand the management. I understand that general business practices in that particular culture you would have probably 70 80 percent is actually pretty good. Is all the situation specific. I just see that great.
That's why you don't have to. I hope you don't have to swim a lot. One of the key to success for being a long term successfully is. You have to endure long periods of time in which you don't have to do a lot harder to be fabulously rich and prosperous. That's the good thing about this case. You study all the time but you don't have to do. Every time you do when you don't have enough margin of safety. You can come off really lose. And that's really much worse than doing nothing. But every time you do something if you have a large enough margin of safety you're offside.
So there are many many examples and I wouldn't have time to go into it which you. When you turn out to be right. The upside is just enormous. It could be a surprise for your wildest dreams. You want to wait for those fat pitches. Most of the time. And then laugh how much cash holding that is different from the opportunity.
Came from her. So I mean I'd like to think our domestic. Give. Us. Over our.
Head out. Well I think you know as I said that to be a success you really have to know everything. You don't have to be crazy most never ever stop. In fact if you truly know something falling into a small circle like monger like to call the circle of confidence.
You would find in your circles that circle tend to be small. So every time you hear people talk about what you think of that industry is is this. Is undervalued. That is not intellectually honest to begin. Investing. The last thing you want is to have that air of arrogance fighting beautiful words. I think the more honest you are the more prosperous you have never the less arrogant people. Successful practice of getting the investment.
Thank you for coming. Talk about break ups. Which. I'm under 5 percent.
Well I find it in my own career. All the ideas I find tend to come from. All sources. I don't have a particular rule where it comes from. If you have a curious mind. If you study all the time you leave the relationship with others have. A way of looking. To find all of us. First of all. It comes as. Karma. I wouldn't be surprised to find a lot of great ideas. Just autumn reading publicly available information. It is Joshy. It is a good opportunity. It is really difficult.
The interview finally develop fiction and I kind of like an aha moment. You describe how you come to that.
One of my favorite way to describe the conviction think is if you can find the most intelligent person could oppose your idea and you were able to far more successfully than he does right that is when you develop a pilot with some. And even then you find yourself. A small segment. Of things that you think you're right. As you gain Britney Spears tend to expand. But only small and gradually. Over time. So I think to be controlled by actually honest is a huge requirement. Being. Successful endless and successful.
Yes thank you for coming. I wanted to ask your question about portfolio construction. Just treat your comments on diversification in the last session and there was a lot of discussion about diversification and the importance of it. My sense is that you're more of a concentrated investor so if other investors are like where it is and what kind of role this diversification play or how do you think of building portfolio.
Well you always have to have some kind of diversification because you can be all right. You're betting on statistics. In other words the future is essentially a distribution of profitability saying say you have 90 percent conviction. You're right. That event is 90 percent but a 10 percent chance. And so you don't want to 10 percent to cash all over again. So you do need to diversification on the other hand that recognizing.
Is really a rare to find no brainer create opportunities increasingly rare. In fact have to wait for a long time for that fetish to come to you. So when that happens. You certainly do not want to diversify away the opportunity that you have been waiting patiently from all time. Discomfort. Really fear other opportunities. So investment is essentially the opportunity cost. So what other alternatives have been really just myself by comparison to the way you're writing. And so when you make that comparison you tend not to really diversify too much you wouldn't find a.
Very very good. That have very high. Conviction and lighter lives. So yes you do a bit of both.
So Apple is kind of getting hit again at a very high conviction. IBM what do you feel the limits are the firms you know how much should could be invested. What know what the race.
Is it says that all decisions ought to be able to rule with the concept of opportunity cost is what else can I do with the cash I have. And by the way is it really a fundamentally important asset. I don't really find anything else or even find a whole bunch of other opportunities fear to cash that I would if it had cash. And so I would say that I would never abolish cash you can find great opportunities. At the same time when I find one that I guess I'll. Give. You a percentage of the portfolio and then compare it to cash. And so I'm holding cash can be the result of a bottom up research. All of us always believe that's the case.