Here is a brief summary of a Li Lu Talk at Bruce Greenwald’s value investing class. Li Lu is a hedge fund manager at Himalaya Capital.
While introducing Li Lu, Greenwald says that there are only three people that he would like to have manage his money when he retires: Seth Klarman, Greg Alexander and Li Lu who already manages all of Charlie Munger’s fortune.
The three most important things Li Lu learned was from Warren Buffett:
- A stock is a piece of a business, not a piece of paper
- Always seek a margin of safety
- Ignore short term volatility
To learn how to invest, he spent two years studying everything ever written by Buffett.
Look at what you can lose before you look at what you can make. There are many ways to fail and few ways to succeed. Find something you are good at, that you enjoy, analyze all the ways you can fail and make sure that you don’t do them. If you have an intrinsic passion you will be light years ahead of your competition.
Investing is not about the past, but all of the cash that will be generated in the future.
You must know more about the business that you are buying than other investors. But there will always be things that you do not know, so buy the business with a sufficient margin of safety to make up for the uncertainty.
You must not rely on the ideas of others. If you do you won’t know what to do when the stock you are holding declines. Do you hold or do you sell? Without your own original analysis, you won’t know what to do.
To gain the kind of insight required to invest in this manner you need to understand the underlying business extremely well. Imagine that you inherited the business and needed to learn all about it, as it is the sole source of your wealth. Study it and think about how you would run it, and think about how you would improve it to maximize its value. Then you will get a feel for what it is worth.
All you need are 10 great ideas over the course of 40 years to become wealthy beyond your wildest dreams.
Be prepared to experience a “once in a century” disaster every few years. Berkshire declined 50% on three separate occasions, so you should not expect any gentler treatment than the world’s best investor. A keen understanding of the underlying businesses you own will enable you to hold on during these inevitable draw downs.
Learn continuously because if you are holding the wrong companies, these 50% draw downs can turn into 100% wipe outs.
Look at the trend in the return on capital in the business and in the industry. Watch out when it starts declining across the board.
You can get a full transcript of this Li Lu talk at http://streetcapitalist.com/2010/06/24/li-lus-2010-lecture-at-columbia/.