Li Lu says the core of value investing is understanding value. What you pay is price. What you buy is value. That is the entire discipline in one sentence.
The six principles are the foundation. Stocks are not pieces of paper. They are legal ownership of a business. The market is not a guide. It is a servant that offers prices, sometimes far below value, sometimes far above. The margin of safety is an act of humility. It admits the future is unknown and protects against being wrong. Long-term returns come from excellent companies compounding their intrinsic value over decades. Fish where the fish are. Go where the opportunities exist. Wealth is purchasing power. Cash is not wealth. It is a claim on wealth that inflation erodes.
These principles are not complicated. They are difficult. The difficulty is not intellectual. It is temperamental. Holding a stock that drops 50 percent requires deep understanding of what you own. Li Lu held BYD through an 80 percent drawdown. That is not conviction. That is competence. The market tests the boundary of your circle. If you really understand the business, the price decline is an opportunity. If you do not, it is a crisis.
Good summary. The principles are timeless. The execution is the hard part.
"Here at Kingswell, I prefer the more expansive (and Munger-approved) view that all intelligent investing is value investing. That it really boils down to getting back more in value than you pay out in capital — and should not be limited to the working capital calculations that once dominated the discipline."
Value investors have too often limited themselves to ratios like P/E, which often don't measure the most important generators of value in a tech-driven world, e.g.
- mindshare/time spent: before YouTube was acquired by Google, board member Roelof Botha (now partner at Sequoia) said he knew YouTube would be valuable because at all his other portfolio companies, the employees were watching YouTube.
- productivity: Nvidia GPUs were widely known to significantly boost productivity in sciences and of course with ChatGPT
Neither of these companies had a reasonable P/E, but they were (and still are) tremendously valuable.
I'm still working my way through a lot of Li Lu's interviews and speeches, but I don't recall off the top of my head him commenting on ETFs and indexes. If anyone else does, please chime in here. I do think several of these principles -- especially remaining calm during market fluctuations -- apply equally well to all investing strategies.
Li Lu says the core of value investing is understanding value. What you pay is price. What you buy is value. That is the entire discipline in one sentence.
The six principles are the foundation. Stocks are not pieces of paper. They are legal ownership of a business. The market is not a guide. It is a servant that offers prices, sometimes far below value, sometimes far above. The margin of safety is an act of humility. It admits the future is unknown and protects against being wrong. Long-term returns come from excellent companies compounding their intrinsic value over decades. Fish where the fish are. Go where the opportunities exist. Wealth is purchasing power. Cash is not wealth. It is a claim on wealth that inflation erodes.
These principles are not complicated. They are difficult. The difficulty is not intellectual. It is temperamental. Holding a stock that drops 50 percent requires deep understanding of what you own. Li Lu held BYD through an 80 percent drawdown. That is not conviction. That is competence. The market tests the boundary of your circle. If you really understand the business, the price decline is an opportunity. If you do not, it is a crisis.
Good summary. The principles are timeless. The execution is the hard part.
Mr Li is a giant in Chinese Investing circle. Great insights, and well condensed, amazing read, subscribed for more.
Thanks Bing! There is so much to learn from Li Lu.
"Here at Kingswell, I prefer the more expansive (and Munger-approved) view that all intelligent investing is value investing. That it really boils down to getting back more in value than you pay out in capital — and should not be limited to the working capital calculations that once dominated the discipline."
Value investors have too often limited themselves to ratios like P/E, which often don't measure the most important generators of value in a tech-driven world, e.g.
- mindshare/time spent: before YouTube was acquired by Google, board member Roelof Botha (now partner at Sequoia) said he knew YouTube would be valuable because at all his other portfolio companies, the employees were watching YouTube.
- productivity: Nvidia GPUs were widely known to significantly boost productivity in sciences and of course with ChatGPT
Neither of these companies had a reasonable P/E, but they were (and still are) tremendously valuable.
The driver of Growth is a value.
ROA and the real reinvestment rate (not the one in hypothesis expected growth formula) are the drivers.
I'm still working my way through a lot of Li Lu's interviews and speeches, but I don't recall off the top of my head him commenting on ETFs and indexes. If anyone else does, please chime in here. I do think several of these principles -- especially remaining calm during market fluctuations -- apply equally well to all investing strategies.