Li Lu on the Holy Grail, Intellectual Honesty, and the Mutated Genes of Value Investors || San Francisco State University (2012)
“You don’t have to swing a lot [as an investor],” said Li Lu. “You study all the time, but you don’t have to do anything.”
Back in 2012, value investor extraordinaire Li Lu delivered a memorable talk at San Francisco State University’s student investment conference.
Few figures in investing are as compelling as Li Lu. A former student leader in the Tiananmen Square protests against the Chinese Communist Party, he escaped the ensuing crackdown and resettled in the United States. He later became a close confidante of Charlie Munger, who honored him with one of my favorite descriptors of all time: “You can’t find a more capitalistic capitalist than Li Lu.”
If anyone ever said that about me, I would put it as the epitaph on my gravestone.
Note: For clarity and readability, I made minor grammatical and tense adjustments to Li Lu’s comments below, as English is not his native language. These edits are very light — only smoothing phrasing where absolutely needed — and never alter the substance, meaning, or intent of what he said. Also, this particular transcript required relatively few footnotes (just five in total). Just wanted to give everyone fair warning of that up front.
Li Lu: I was a student at Columbia when I was accidentally brought into a lecture by somebody whose name sounded very strange to me. In my first couple years [after] I arrived in America, my English wasn’t quite there and the name sounded like a free lunch — Buffet.1 (Laughs)
In that lecture, [Warren] Buffett fundamentally changed the trajectory of my life in America and really gave [me] the career that I enjoy immensely today. So it gives me great pleasure to be back in this type of setting to communicate directly with students.
Today, I want to talk a little bit about value investing. The basic concept of value investing, obviously, is many, many decades old. But today I think it is as relevant as when it was first laid out by Benjamin Graham at Columbia six or seven decades ago.2
There are essentially just three basic ideas.
The first one is that the stock is not a piece of paper that you trade, but represents fractional ownership of a company. And, therefore, valuing the stock ought to really have a basic variance of valuing the company as a whole.
Secondly, in valuing any financial asset, you have to predict the future — the discounted cash flow of future cash earnings. And the future is inherently difficult to predict. Therefore, you really want to leave yourself a margin of safety so that you could be wrong — or you could be right — because the future is a distribution of statistical possibilities.
Say you bet on something [with a] 90% chance [of being] right, but then the 10% chance occurs — so all of a sudden it becomes 100%. So you want to leave enough of a margin of safety. In other words, you want to buy at a low enough of a price [so that] even if all of the adverse events occur against you in the future, you will still be in the game. It doesn’t mean you won’t lose money. It just means that you will not lose so much that you’ll be out of the game.
Investing is really a long game. It can be played over the life of anybody’s career, so you want to [stay] in the game somehow over the long haul.
And the third concept is Mr. Market, to figure out a frame of mind [so that you] think that when the market is against you, you’re looking at it as a neurotic Mr. Market who is prone to emotional and irrational behaviors.3
Those are the three basic concepts. At the heart of it, obviously, is this “bargain” idea that you want to get [more] than what you paid for. Now, obviously, that is what everybody wants — and if everybody wants the same thing, you would think that all of the professional investors would be value investors.
And that’s just the furthest thing from the truth. (Laughs)