Li Lu: Virtual Orphan to Investing Prodigy

Li Lu is considered by many to be one of Warren Buffet’s top picks to be his successor at Berkshire Hathaway. After generating compound annual returns in excess of 36% from the fourth quarter of 2004 to 2009 and 29% from 1998 to 2009 it is not hard to see why people think this and why Charlie Munger and many other high profile people have given Li Lu their money to manage.

Li Lu’s Life Story

Not only has Li Lu generated impressive returns, but his life reads like a Horatio Algers story. He was born in 1966 in Tangshan, China. When he was a year old, he was separated from his parents and went through six adoptive families before he was ten. His mother and his father were condemned by Mao’s government and sent to labor camps. She was allowed to keep only one child, so she kept Li’s older brother. After surviving the 1976 Tangshan earthquake, which killed the adoptive parents that he had grown to love, he went on to become one of the student leaders of the Tiananmen Square protests. As Chinese government started cracking down on the protesters, he managed a well-timed escaped from China and ended up studying at Columbia University, where he became on of the first students to receive three degrees simultaneously.

In 1997, he started Himalaya Capital, where he managed a hedge fund and a venture capital fund at the same time. In 2004, after meeting Charlie Munger and being inspired by Munger’s ideas he transformed Himalaya into a long only investment vehicle modeled on Warren Buffet’s early investment partnership.

Meeting Charlie Munger

Seven years after meeting Charlie Munger at a mutual friend’s house, Li Lu had a extended heartfelt talk with Munger in 2003. They talked about Li’s past and current investments and the day-to-day problems Li faced when running his funds. Munger mentioned that the problems Li faced were endemic to Wall Street and the only solution was to forge a different path. Munger encouraged Li to diverge from Wall Street and offered to invest if he would have the courage to do this.

With assistance from Munger, Li embarked on a radical transformation of his fund to resemble the incredibly successful early investment partnerships of Buffet and Munger. These partnerships managed to eliminate the myriad of principal agent problems endemic to hedge funds and encouraged partners to commit for the long haul, allowing Li to invest for the long term, without worry of redemptions.

Li says that Munger is the most unique person that he has ever met. Munger approaches every problem by inverting. Instead of looking at the successes, he starts by looking at the failures and strives to avoid doing what the failures do. For example, when investing, Munger looks at all the ways that investors fail, like: overtrading, excessive diversification, buying momentum rather than value, and so on. And then he strives to do the opposite.