李录讲价值投资(2006年)

李录哥大商学院讲课(2006年)
– 15年前,由于偶然机会李录参加了一场沃伦•巴菲特的讲座。经过一些领悟,李录觉得自己似乎也可以在投资领域做点什么。
– 当时李录刚刚逃离中国。不认识很多人。没钱、欠了不少债。正在忧虑如何在美国谋生。 
– 在巴菲特讲座中,使他对股票市场有了不同认识。
– 李录越思考越觉得,他也可以在投资领域做点什么。
– 价值投资者把自己当作所投资公司的所有者。因而,财富会随着公司经营状况增加和减少。
– 你需要安全程度(Margin of Safety)。
价值投资者的三个特征
1. 根本上,你不把自己当作只是不停买卖证券的「发牌员」,你把自己当作公司的真正所有者。
2. 因为你只拥有该公司很小的一部分,所以你需要安全程度。
3. 把自己当作公司所有者,你不会频繁交易;你认为其他人和你不一样,那些人好像本杰明•葛拉汉(Benjamin Graham)所说的「市场先生」(Mr. Market)。
关于价值投资
– 价值投资者只管理全部资本的5%以下。他们是投资世界中的「少数民族」。
– 股票市场是为其他95%的人所创建的。这就是价值投资者的机会和挑战所在。
– 在听巴菲特讲课时,有一个问号一直萦绕在李录脑海中。
– 最大的挑战:了解自己是属于5%的,还是属于95%的。
– 像95%那部分人去做,是很有诱惑力的。像5%那部分人去做,在感情上是很困难的,尽管价值投资者通常是有较好回报的。钱是赋予那些想积累更多资产的交易者的。
– 5%部分是有惊人回报的;95%那部分的钱可能总是呆在什么地方。
– 了解自己。你会被考验。你必须要问自己,你是不是一个价值投资者。
– 如果你是一个价值投资者,你可能需要有安于「少数民族」一员的基因。对于每个人来说,这并不是自然的。你需要安于做你自己。你需要接受和坚持那些基于自己理由和证据的主意,而不是因为有其他人同意你。
你可能需要花大量时间,去做一个学术研究者。你是一个研究者或记者,渴望了解更多。你要尽力搞清楚有关的一切。
– 你了解得越多,你投资就会做得越好。
– 政治、科学、技术、文学、诗歌等,任何东西都可能对你产生影响和帮助。
– 有时候,你会发现某些东西激发你极大的洞察力,是其他人所没有的。
– 你会明白:一家公司是不是便宜?管理层怎么样?还有什么你还没有想到?为什么机会还留在这儿?
– 李录的基金始于1997年末。经历了重大事件:亚洲金融危机、技术泡沫。
– 1998年秋,李录的研究十分广泛。沉溺于价值线(value line)。喜欢把东西从头到读到尾。这是些很好的学习。如果你想彻头彻尾了解公司属性,你需要这么做。每一页都要翻到,这会大有帮助。
– 李录会首先查阅新低清单,新低的市盈率(P/Es)、市净率(P/Bs)等。
– 不太关心以前买卖过的东西。
– 首先看价值。如果价值不合适,就打住。
– 如果看到一个低的市净率,会问一下:账面里怎么说?账面是多少?
– 具有广泛知识。对关注不同产业时,会有帮助。
– 看看税前、利息前收入。看看杠杆前基准(un-leveraged basis)。搞清楚公司已投入多少资金,看看资本投入回报率(ROIC)。
案例:天伯伦(Timberland)
– 先用5秒钟看一下这家公司:天伯伦。这家公司交易账面干净,大部分是有形流动资产,营运资本,再加上1亿不动产。投入资本2亿,收益1亿。
– 然后来看,为什么这家公司下滑、股价变得便宜?把自己当作这家公司的全资所有者。
– 当时正值亚洲金融危机峰尖,在亚洲的销售额急剧下滑。和亚洲相关的一切,都在下滑。想查查别人怎么看待这件公司。你不一定要听从别人意见,但你可能想知道别人在怎么看。
– 没有任何分析师谈到天伯伦。
– 为什么没人谈天伯伦呢?
– 看一下该公司过去几年的表现。天伯伦一直在成长、营利状况良好、不需要投资市场。家族生意。家族拥有40%股份,控制98%表决权。
– 马上意识到,大多数人都选择避开它了。迅速做数据查询。
– 你要有一颗细致的、主动的心态,去问问题、找答案。
– 天伯伦家族有主要表决权、分析师不关注、有一些股权人诉讼。如果你是投资市场中95%一员,你可能认为,天伯伦管理层在榨取该公司。
– 下载每一个诉讼的法庭文件。读它们。你需要有一个非常细致的心态,去搞清楚究竟发生了什么。每一次都去挖掘。通读所有文件。
– 第一次,花几分钟大致看一看与财务有关的。收集问题,做深入研究。
– 大多数诉讼是关于天伯伦不发布指导信息,这惹恼了投资人、也就是惹恼了那些公司所有者们。管理层决定不再与华尔街沟通了。诉讼不是关于榨干公司或者欺诈。管理层不是恶棍。
–  怎么确定管理层是好的管理者、是些正派的人呢?
像一个记者那样去调查。大多数公司管理(所有)者都会留下一些痕迹,让你可以去了解,他们如何处理与公司管理无关的状况。大多数专业投资经理们,不会去做这类工作。而你是属于5%的一员。
– 走进管理层的社区,去接触那些认识他们的人,去他们的教会或会堂,去认识他们的朋友和邻居。花尽量多时间,这是值得的。发现他们过去做过哪些事,听听邻居怎么说他们。这样,你就可以准确地了解他们的人格。
– 父亲看起来是个简单、体面的人,高中毕业。儿子读过商学院,尽管年龄和李录相仿,但已是公司首席运营官(COO)了。李录查阅儿子在哪些董事会任职,注意到他们有一个共同的朋友。设法去加入儿子所在的一个董事会,很快和儿子成为朋友。慢慢认识到,该董事会成员是一些有品味、正派的生意人。
– 其后,发现这只股票还是很低。决定再也没有什么遗漏了。95%那部分人是不会做这些研究的,或者某种程式化思维阻止了他们去做这一类股票。
如果你不是一个好的分析者,你永远也不会成为一个好的投资者。
– 我们决定要买入。买多少呢?假设总计900块钱。95%那部分人会买一点点,50块。你是专注的,会投200块。想一想做过了多少工作。李录跑了所有商店,看到赢利在提高,公司在推出孩子们都想要的一系列风潮鞋子。其亚洲市场规模很小,收入只是降低了5%。
– 李录在天伯伦上下了大注。随后两年发生了什么呢?股票升值700%。收入一直在增长。没有任何真正风险—5倍于收入的股值被拉到15倍于收入的股值,收入每年增加30%。都上来了。
成为一个学习机器
– 当一个投资机会来临,要抓住它。要日日夜夜投入,这样你才可以行动迅速。工作要完整、更要快。你要训练自己抓住机会。
– 机会浮现时,你是可以闻到味道的。做到这一点,只有通过训练自己,阅读一页又一页财务报告。
– 用标准普尔(S&P)手册查阅外国股票。
– 作为一个公司所有者,你是不会思考每股状况的。
– 用大脑,看股票手册时,每一页只需要花5分钟。不要用计算器。用脑袋算。
案例:一家韩国公司
– 市值6千万,税前收入3千1百万。市值大约是税前收入2倍。
– 账面价值2亿3千万。账面价值由什么构成?如果你是所有者,会看固定资产、流动资金,不要算入商誉(goodwill)。
– 大致上,你看到市值6千万、税前3千万、账面价值2亿4千万(其中固定资产1亿8千万)。
– 可能便宜。
– 确定收入来源。账面。营运资本。
用常识、常规逻辑来思考这家公司。
– 大部分员工没有上过商学院,李录发现他们会很容易被培训。
– 目前资产7千万,全是现金。
– 1亿8千万固定资产中,全资拥有一家酒店,账面计3千万。拥有一家百货商店13%股份,账面计3千万。
– 看一下那家百货商店,市值大约6亿。13%大约是8千万。这样账面少计了5千万。
– 他们拥有3家有线电视公司15%股份,还有一些不动产。
– 那家百货商店情况大致相同,主要是现金交易和投资、收入良好,还拥有不少资产。他们还是第二大的有线电视运营商。
– 那家百货商店的运营,好像那家酒店,没有存货,更像一家购物中心。
– 他们对所有商品销售,额外收取一定百分比费用。
– 综合起来:付6千万,7千万净现金,1亿的股票,3千万的酒店(其估价已10年未变了,而房地产市场已涨了很多)。去韩国,实地考察酒店和百货商店。
– 查阅邻近地产交易资料,市值大约是账面的2至3倍。在账面基础上,再加1亿5千万。和其余的再相加,资产计3亿2千万。付6千万,每年运营收入3千万。
– 很多因素对你有利,你还要看当地投资者怎么看。股价上升时,他们要愿意跟进买入。
– 百货商店股价由22升至100。
– 那家公司股价由12升至大约70。
– 两只股票都升了5至6倍。
不要只是听、要做。
– 要做到这一点,对于投资者来说并不是天生的。
– 如果你确定自己性格属于有异常基因那一类的,你可以尝试去做。股票市场确实是可以挣大钱的,这已经被本杰明¨葛拉汉(Benjamin Graham)和巴菲特所证明过了。
– 你要做大量分析工作。
– 如果你真有兴趣,你可以挣大钱,去听、更要做。
– 李录从价值投资讲座中受益,然后走出去、去做。
价值投资其实不是理论、是实践。
– 年轻分析者有精力、没什么可输的,所以他们更要去做。
– 在成为一个好的投资者以前,你需要成为一个好的分析者。
李录说成为一个好的分析者,需要做两件事。
1. 提供准确、完整的信息。你需要做得深入。大多时候,你是孤立的。如果你了解得不够充分,当事态失控、每个人都嘲笑你时,你可能站不稳脚跟。
2. 在股票中挣到的大部分钱,不是从榜样那里学来的。榜样不会提供超常收益。你可以学习托迪布朗、葛拉汉(Tweedy Browne、Graham)或者巴菲特、芒格(Buffett、Munger)。你的收益来自股票。你需要有惊人的洞察力,这需要通过持续的、紧张的、细致的研究才可获得。
投资错误
大部分错误是由于不准确、不完整的信息造成的。
– 最大错误:大部分人期望以双周或月计来获得回报,他们想在市场下滑中寻求突破。
– 李录犯的最大错误是迷失方向,当时他在和朱利安·罗伯逊(Julian Robertson)一起做空头(Shorting)。可以想像,你在做空头,而其下降空间却没有限度。这正如查理·芒格所说,在战斗时,你的双手被紧紧绑在身后。
– 还有,曾错过购买股票价值低于现金值(Below Cash)公司的机会。李录当时了解其管理团队,并有个人见解。那家公司随后连涨50至100倍。李录当时没有买入,只是在一念之间。
– 人犯错误,有时是因为你太喜欢那家公司了,但你并没有完成你的研究。你开始赌其可能性,而没有进行实质性分析。
不断寻找主意
一生之中,你可能只有5至10次极具洞察力的时刻。这只有通过不断的学习,才能获得。
找一家美国公司,然后再找一家类似亚洲公司比较。有些公司已被研究15年了。你需要明白那家公司是做什么的、它的日常运转,在风浪中你才有确据。如果你做不到这点,你就很难有超常收益。
– 如果你像葛拉汉、托迪布朗那样做,你会有15-20%的回报,但不会有巴菲特那样的巨大回报。
最好的主意会产生上万倍回报。
– 发现机会并不容易。那需要很多因素加在一起—-芒格的「合奏效应」(Lollapalooza Effect)。从你洞察力那一点开始、所有东西一起发酵,而你愿意去投注。
– 这些是李录投资的动力。
李录从物理、数学、法律、经济开始,进而对其它学科产生兴趣。太太有生物学博士学位,他从太太那里学到很多东西。
– 在一切中学习,充满强烈的好奇心。
– 最终你会撞到一个大机会。
– 同时,如果你撞到天伯伦(Timberland)那样的投资机会,也不错。
– 可能很多年不会有机会,也可能接下来几年间有很多机会。
– 这要看哪些会临到你头上了。主意不是有规则的,不会有每周一个主意这样的模式。
– 6年中,李录可能有过3至4个非常好的主意。你会变得越来越好,机会数量增加,因为你的分析速度在加快。
– 每天学点儿什么。一年你就会学到不少东西。
李录读生物、物理、历史时,都在寻找主意;有时某个主意,会突然跳出来。
– 空闲时间和太太孩子在一起,李录同样可以从他们身上学习。开发人的认知力太重要了。
李录投资清单
1. 它真的便宜吗?
2. 这是一家好公司吗?
3. 谁在管理该公司?
4. 我还有哪些遗漏?
李录检阅这份清单时,「我还有哪些遗漏」会在很大程度上被心理因素影响。后来李录在和女儿玩耍过程中,找到了解决办法。
价值投资者的三个特点
1. 公司所有者心态
2. 情况随时间在改变
3. 需要大的安全程度(Margin of Safety)
像公司所有者那样思想
– 关键的是,你是这家公司的所有者。你无法强迫公司管理层改变,你需要安全程度。你有长远眼光,你在像公司所有者那样思想。
– 你为什么涉猎股票市场?股票市场是给那些做梦的人创造的。这就是为什么95%那部分人从来没有做过价值投资。这是人性的局限。
– 你不属于95%的股票市场,你要清楚这一点、把自己准确定位。如果你真地像公司所有者那样思想,你最终会离开资产管理领域、去开一家真正的公司了。这就是为什么巴菲特和芒格去干公司去了。
– 或者,你可以成为一个私募基金(Private equity)投资者。
– 基本上,股票市场是给那些有缺陷的人设计的。人们跃跃欲试去交易,由于恐惧和贪心犯着各式各样的错误。但他们总会给价值投资者创造空间。
– 在卖出好公司时,曾经很严格。因着洞察力加深,李录现在更喜欢那些逐年在改进的公司。
– 所有好公司都有一个规律:其公司领袖会异常出色。
– 卖股票时要交很多税,而且你可能再没有合适价格买入了。
– 如果一家公司的投资资本回报率(ROIC)达到50-100%,随后的计算就会变得有趣了。
– 告诫:你需要超常信心。做投资的银行业者们,使用着资产负债表(BS)相关工具,其规划预测甚至达到无穷长时间。你的规划和预测达不到那么长时间。你只有几次机会,你的规划和预测也许会比较长。
– 如果还不错的话,你50年所有职业生涯,可能会有5至10次机会,你可以很有信心地规划预测接下来的10至20年。如果那样,你就不想卖了。握着。你就不用交资本收益(Capital Gain)税,实际上你在调合40%利息,公司可以在合理避税情形下每年利用40-100%资金。这正是你想要做的。
– 你要找出那些每年都在成长的公司。
– 是什么使这家公司比其它的更成功呢?为什么它比对手更挣钱呢?
– 要了解这些,你需要研究那些已经成型的公司。
– 去找那些好公司,而不仅仅局限于巴菲特所持有的那些。
一个绝佳案例:彭博公司(Bloomberg L.P.)
– 产品优于对手。用户转向其对手产品时需要付出较高费用(high switching costs)。
– 彭博公司是一个独一无二的案例。
– 一步步获得市场份额,超过某一个里程碑、变成垄断。
– 收益从依赖每一天运转收入所得开始,然后转移至凭借其高额switching costs。赢家通吃。
– 假设你有机会看到这个产业在初期如何进化。在某一个时刻,他们冲了出来。
– 也许每一个产业都有一个时间点,某家公司冲出来。这家上市公司会疯狂获利、直至垄断。
– 为什么微软会成功击败苹果?他们一点一点蚕食了苹果100%市场份额。
– 办公室使用微软视窗。今天,你还有其它选择、不用彭博吗?
– 彭博几乎每个月都在问你,你在做什么、你使用其系统的感受。彭博终端提供成千上万的功能,他们却不提供手册。
– 他们想把让你的眼球紧紧抓住,让你形成习惯,让你不介意成年累月给他们送钱;当他们提价时,你别无选择。
– 他们不断回访你,因为他们知道你在交易,想给你提供更多服务,紧紧拴牢你。
– 这就是为什么彭博是一家不得了的公司,你被拴牢了。想像一下,如果你换到其对手产品,你还受得了吗?
– 李录不知道那个转折时刻。假设你知道,你想投资它吗?李录当然期望能在彭博那个转折时刻投资。
– 你需要洞察力。研究每家公司。他们都程度不同地存在这样的时间点。
– 你作为一个分析者,需要一直在研究各类公司。观察它们的走向。
– 在一生之中,你可能发现这样的机会。
– 彭博会把他的公司卖了吗?他没有必要。
– 当你有一家这样的公司,你也不会卖掉它。
– 李录做过很多个人投资,比如CaptialIQ,这是一家模仿彭博模式的公司。在工程服务领域,有许多相同模式的投资。
– 李录喜欢尽量多了解各种东西。他喜欢和人交朋友。天伯伦的CEO和儿子后来都成了李录基金的投资人。
你可以在每天的商业决策中学习和观察,学习在动态中行动。
– 没有什么是一成不变的。一切都在改变,这就是你为什么要不断学习。
– 市场在改变,微软现在已有威胁了。
– 你需要一个主动活跃的心态,你要时刻准备着行动,你就会根据你的洞察力抓住机会。
This past weekend was the Berkshire Hathaway (NYSE:BRK.A / BRK.B) annual shareholder meeting. At one point during the Q&A, a questioner asked Warren Buffett about the status of Berkshire’s CIO candidates. Charlie Munger remarked that one candidate who he is particular close with was up 200% in 2009 with 0 leverage. Some people think that the person Munger is referring to is Li Lu, a fund manager who turned Munger and Buffett onto BYD.
Lu personally owns at least 2% of BYD, which rose 400% in 2009. I don’t know anything about his investments beyond that one position, but I know he is a huge believer in taking concentrated, high conviction positions. If that is the case here, BYD’s spectacular results must have contributed a lot to his returns for 2009 which may make a 200% for the year possible.
Here is a brief bio on Lu:
Li Lu was born in China in 1966. He attended Nanjing University in China and later came to the U.S., and earned three degrees (BA, JD, MBA) simultaneously from Columbia University. After graduation, he worked in an investment bank until 1997, when he founded Himalaya Capital Management, which today manages both LL Investment Partners and Himalaya Capital Ventures, funds focused on publicly traded securities and venture capital. Li Lu was named a global leader for tomorrow by the World Economic Forum in 2001, and a Henry Crown fellow by the Aspen Institute in 1998. He is a member of Council on Foreign Relations and Young Presidents’ Organization.
Fortune: Barnstorm Green
There isn’t a whole lot of information about Lu’s investing style out there. But I thought I would share some notes from a lecture he gave to Columbia Business School back in 2006. All of this is paraphrased, so don’t take anything as a direct quote and there may even be some inaccuracies. Still, I believe you will find these notes insightful, especially with respect to improving your own abilities as an analyst and investor. Even if Lu is not a Berkshire Hathaway CIO candidate, he is an investor with a tremendous work ethic that we could all learn from.
Below are my notes from Lu’s lecture:
Li Lu at Columbia Business School – 2006
-15 years ago, Lu was accidentally brought in to a lecture by Warren Buffett. Had epiphany moment, Lu thought he could do something in the investment business.
-At the time, Lu had just escaped China. Did not know very many people. No money, deep in debt. Worried about making a living in the US.
-In the middle of Buffett speech, made him think differently about the stock market.
-The more Lu thought about it, the more he thought it was something he could do.
-Value investors see themselves as owners of a business. Therefore, fortunes are up and down with the nature of the business.
-You demand a margin of safety.
3 Traits of a Value Investor:
1. Basically, you don’t think of yourself as a paper shuffler who constantly buys and sells securities. You think of yourself as a real owner of the business.
2. You only own a small piece of the business, so you demand a huge margin of safety.
3. Because you think of yourself as an owner, not trading all the time, you think everyone else is different — like Ben Graham’s Mr. Market
On Value Investing
-Under 5% of all assets are run under value investors, a real minority in the investment world.
-The stock market is created for the other 95% of people, that is where your opportunity and challenge is.
-That was one lesson that stuck in Lu’s mind when listening to Buffett’s lecture.
-Biggest challenge: understand whether you are the 5% or the 95%
-It is tempting to do what the other 95% of people do. Emotionally very difficult to be in the 5%, but value investors typically have better returns. The money is really for traders and they tend to amass more assets.
-5% have a spectacular return, but 95% of money probably always resides to somewhere else.
-Understand who you are. You will be tested. You will have to ask yourself whether you are or aren’t a value investor.
-If you are a value investor, you are probably genetically mutated and comfortable being in the minority. This is unnatural to human beings. You have to be comfortable being by yourself. You have to adopt the idea that you are right because your reason and evidence, not because others agree with you.
-You will probably spend most of your time being an academic researcher rather than a professional. You are a researcher or journalist, with insatiable curiosity. You are trying to figure out how everything works.
-The more you know, the better you are as an investor.
-Politics, science, technology, literature, poetry, everything can affect businesses and help you.
-Occasionally you can find insights that will give you tremendous insights that other people don’t have.
-Then you find if the business is cheap. Is the management good? What else? Why is the opportunity there?
-Started fund in late 1997. Been through really traumatic events: Asian Financial Crisis, Tech Bubble.
-Fall of 1998: Lu’s search process is very general. Got hooked on value line, loved to read the whole thing from beginning to end. The best kind of education, you should do this if you want encyclopedic knowledge of companies. Go through it page after page, it is enormously helpful.
-First thing Lu checks is new low list. New low P/Es, P/Bs, etc.
-Does not care where something traded before.
-First looks at valuation. If the valuation doesn’t fit, doesn’t go beyond it.
-If you see a low P/B ratio, ask – What is in the book? How much is the book?
-Encyclopedic knowledge is helpful when looking across different industries.
-Look at pre-tax and pre-interest earnings. Look from an un-leveraged basis. Figure out how much capital is deployed in the business. Look at ROIC.
Example: Timberland
-Start by giving a 5 second look at the business. Timberland. The business is trading around clean book value, consisting mostly of tangible liquid assets, working capital, plus 100M in real estate. Deployed capital is 200M with 100M return.
-Then check why the business fell apart and became cheap. Think if you had owned the entire business at that price.
-At the time, was the height of the Asian Financial Crisis, saw their sales falling off the cliff in Asia. Any thing with exposure to Asia was falling apart. Try to check what other people are thinking about this. You may not listen to their advice but you may want to know what other people are looking at.
-Timberland had no other analysts covering it.
-Why no coverage?
-Look at business across years. Timberland has been growing, pretty profitable, did not need financial markets. Family owned. Owns 40% controlling 98% vote.
-Immediately, that is a turnoff to most people. You can do a quick data search.
-You need to have a curious, active mind to ask questions and find answers.
-Timberland had most of the vote, no analyst coverage, a bunch of shareholder lawsuits. If you were a member of the other 95% of the investment business you might say maybe management is milking the business.
-Download every court document lawsuit. Read it. You NEED a very curious mind to figure out WHAT is happening. Dig every single time. READ EVERYTHING.
-The first time, it takes a couple minutes to look over financials. Then gather questions and do deep research.
-Most lawsuits came from Timberland missing guidance, annoying investors, which annoyed the owner of the business. They decided to stop talking to Wall Street. So it was not about milking the business or fraud. They were not crooks.
-How do you determine if they are good managers? Decent people?
-Act like an investigative journalist. Most business owners leave a trail for you to follow and see how they deal with different situations. Most professional managers would not see this as part of their job, but YOU are part of their 5%.
-Go to their community, visit people they know, their Church, their Synagogue, introduce yourself to their friends and neighbors. It is worth it to spend as much time as possible, to find what these business people have done and what their neighbors say about them to accurately get an idea of their personality.
-The father seemed like a simple, decent guy, just a high school graduate. the son went to business school, was already COO of the company even though he was Lu’s age. Lu saw what boards the son sat on, and noticed that they had a mutual friend. Managed to get himself on the board with the son and became friends quickly. Came to realize these where high quality, very ethical businessmen.
-After all that, saw the stock was still trading low. Decided he did not miss anything. The other 95% may not have done enough research to see this or have some kind of institutional imperative that prevents them from owning.
-If you are not a good analyst, you will never be a good investor.
-But we decide to buy. How much do we buy? Imagine having $900. The other 95% will take tiny positions, 50 basis points. You need to use concentration, a $200 position. Think of how much work you did. Lu visited all the stores to see how margins improved – they had a fad going on where kids wanted the shoes. Their asian business is tiny, reduced earnings by less than 5%.
-Lu put a ton into Timberland. What happened after next 2 years? Stock went up 700%. Propelled by earnings. No real risk – went from trading at 5x earnings to 15x with earnings growing 30% a year. It adds up.
Be a Learning Machine
-When an investment opportunity comes, you have to seize it. Devote day and night so you can act quickly. Do everything complete but do it fast. You have to train yourself to jump on opportunity.
-When opportunity presents itself you can smell it. The only way to do that is by training yourself and reading page after page of financial report.
-Uses S&P manuals for viewing foreign stocks.
-As an owner, don’t think about per share information.
-Use your brain, when looking at stock manuals, each page should really only take 5 minutes. Don’t use calculators. Use mental math.
Example: Korean Company
-60M market cap, pre-tax earnings of 31M, roughly 2x pre-tax earnings.
-Book value of 230M, what constitutes book value? If you are an owner, look at: fixed assets, working capital, don’t count on goodwill.
-Basically you see with 60M in market cap, 30M in pre-tax, $240M in book value ($180M in fixed assets)
-It might be cheap.
-Determine what the earnings is. The book. The working capital.
-Use common sense, common logic and think about the business.
-Most employees never went to business school, Lu finds they are easier to train.
-Of the 70M in current assets, it is all cash
-Of 180M in fixed assets, they own 100% of a hotel, recorded 30M as book. Own 13% of a department store recorded as 30M.
-Look up the department store, it roughly has a market cap of 600M. 13% gives you roughly 80M. So the book value undervalues it by another 50M.
-They own 15% of 3 cable companies and a whole bunch of real estate.
-The department store has exactly the same profile. Trading roughly around cash and investments, good earnings, and own a whole bunch of assets. Turns out they are the second largest cable operator as well
-The department store operates like a hotel, do not take inventory, more like a shopping mall.
-They charge a percentage on the top line of all merchant sales.
-Put it all together: Paying 60M, 70M in net cash, another 100M in stock, 30M in hotel with a value that has not been changed in last 10 years while real estate market has gone up in 10 years. Went to Korea, looked at hotel and department stores.
-Checked recent transaction of properties in neighborhood, value is likely 2-3x what is on the book. But take what is on the book anyway, add 150M. Add that to rest and you get 320M in assets that you are paying 60M for and earning 30M annually from operations.
-Insiders own 50%
-Many factors going in your favor, but you need to look at how local investors see it. They need to be buying it for the price to go up.
-Department store used to trade at 22 went to 100
-This company was at 12 now trades around 70
-each went up 5-6x
Don’t just listen. Do it.
-This type of an approach is not natural to an investor.
-If you decide your personality fits in with the mutated gene pool, that this is something you might be looking to do, there is a lot of money in it — proven by Ben Graham to Buffett
-You have to put in a lot of work into your analysis.
-You can make a lot of money if you are really interested, listening, and actually DOING IT.
-Lu benefited from listening to his value investing class and then actually going out and doing the work required.
-Value investing is not really about theory, it is about what works.
-Young analysts have energy and nothing to lose, so they should go and do the work.
-Before you become a good investor, you need to be a good analyst.
Lu says you need two things to be a good analyst:
1. Provide accurate and complete information. You have to go to an extra length to get it done. Most of the time you will stand alone against everybody else. If you are not competent about what you know, you cannot possibly take conviction positions when things go into free fall and everybody else is laughing at you.
2. Most money is not made in stocks from the examples. They do not provide out-sized returns. You can do the Tweedy Brown/Graham or the Buffett/Munger school. Your returns will come from a handful of stocks. You need tremendous insight by continuous intense curiosity and study.
Investment Mistakes
-Most mistakes come from inaccurate or incomplete information.
-Biggest mistake: most people wanted 2 week or monthly returns. They wanted to go up in down markets.
-Lu’s biggest mistake was straying, was working with Julian Robertson, started shorting — have to think like a trader when you are shorting because your downside can be unlimited. It’s like Charlie Munger says — having your hands tied behind your back while getting into a fight.
-Missed the opportunity to buy a business below cash, even though Lu knew the management and had great insights. The business subsequently went up 50-100x. Could not bring himself to buy it because of his mindset at the time.
-You make a mistake when you have not finished your work but like it enough. You start betting on probabilities instead of real analysis.
Constantly search for ideas
-In your life, you may only have 5-10 key moments of insight. You only get it from continuous learning. Find an American business and then find the Asian counterpart. Some businesses studied for 15 years. You need to know what that business is, how it ticks, so you can swing with conviction. If you cannot do that you will not make huge out-sized returns.
-If you do what Ben Graham or Tweedy Brown does, you will make 15-20% returns but you wont make the huge returns of Buffett.
-The biggest ideas can give 10,000x returns.
-Opportunities are not easy to find. They require a lot of factors to come together – Charlie Munger’s lollapalooza. You need a whole bunch of things working together where you have the insight and are willing to bet.
-This is what drives Lu in business.
-Lu started in physics, mathematics, law, economics, got interested in other subjects. Wife has a PhD in biology, he has learned a lot from her.
-Learn from everything, be intensely curious
-Eventually you will stumble into one big opportunity.
-In the meantime, you will stumble into Timberland style investments which aren’t bad.
-There might be years without opportunities, then years with a lot of opportunities.
-Depends on what becomes available to you.
-They do not come in a steady pace, not like once a week an idea.
-In 6 years, Lu had maybe 3-4 great ideas. But you get progressively better and better, improving the amount of opportunities for you since you will be quicker at your analysis.
-Go through every day by learning something. In a year you have to learn a great deal.
-When Lu reads biology, physics, history, it is all searching for ideas. If one idea jumps out, it is all Lu does. Rest of the time is spent with wife and kids and Lu learns from them too, especially with seeing how human cognition develops which is enormously important.
Li Lu’s Investing Checklist:
1. Is that cheap?
2. Is it a good business?
2. Who is running it?
3. What did I miss?
-Lu goes through the checklist, ‘what did I miss’ is greatly affected by psychology. This kind of cognition happens early on and Lu learns it from interacting with his girls.
Three characteristics of a value investor:
1. Business owner mentality
2. Difference in time horizon
3. Demand a huge margin of safety
Think like a Business Owner
-It all comes from one thing, that you are a business owner. You cannot force management changes, so you demand a margin of safety. You have a long time horizon because you think like an owner.
-But why dabble with stock market? Stock markets are made for people who can dream. That is why 95% of people never buy into value investing. Human nature prevents it.
-You do not belong to the stock market but you have to understand its perspective to position yourself properly. If you are truly think like a business owner, you will eventually leave the asset management business and run a real company. That is why Buffett and Munger left it.
-Or you become a private equity investor.
-The people who the stock market is designed for are fundamentally flawed people. Traders are bound to make mistakes due to fear or greed. They will always make room for value investors.
-Used to be strict about selling with great business. Now, sometimes Lu feels he has insights about the business that allows him to believe the probabilities are in his favor for the business actually improving year after year.
-That is the law of distribution in good businesses. The leaders perform spectacularly well.
-Selling makes you pay a huge amount of tax and you might not get that good buying price again.
-If a business can generate 50-100% ROIC, the mathematics get interesting very quickly.
-Caveat: you have to be very confident. Investment bankers use BS and project into infinity. You cannot project that long. There are only a few opportunities where you can project that long.
-If you are good, and spend your entire lifetime studying, across 50 year career maybe 5-10 opportunities where you can confidently project the next 10-20 years. At that point, you don’t want to sell. By holding you don’t pay the tax on capital gains, so you are really compounding 40% interest free, the business is deploying the capital at 40-100% a year in a tax efficient manner. That is what you do.
-You have to identify businesses that are getting stronger and stronger every year.
-What makes one business more successful than others? Why are they making more and more money compared to others?
-The only way you can find that is by studying the ones that are established.
-Look for great businesses, not just businesses owned by Warren Buffett
Example of a great business: Bloomberg LP
-Product was superior to others, high switching costs
-Bloomberg is a fabulous case study, it came out of no where.
-Gained market share little by little, crossed a milestone point, became a monopoly
-At a certain point, after being highly relied upon for daily work, the switching costs become to high so winner takes all.
-Suppose you have an opportunity to see how an industry evolves early on. At a certain point they cross the line
-Maybe when introduced to all businesses. There is a time when that line gets crossed and a public company is poised to benefit by becoming a monopoly business.
-Why did Microsoft succeed over Apple? Little by little they eroded Apple’s 100% market share.
-Offices were using Windows. Today – do you have a choice of not using Bloomberg?
-Bloomberg visits almost every month and asks what you do, how you use the system. Bloomberg terminals have tens of thousands of functions, they don’t give you a manual
-They want you visually hooked so it is a behavioral connection and you don’t mind paying tens of thousands of years where you don’t have a choice if they raise prices
-They keep coming back to you because they know you are a trader and want to provide you with more services so you are hooked.
-That is why Bloomberg is a fabulous business because you get hooked. Think about switching from that or a competitor coming up with a rival product. How do you compete with that?
-Lu doesn’t know. Suppose you know the inflexion point. Do you want to invest? Lu would invest in Bloomberg at that point.
-You need insight. Study every business. They all have more or less this type of dynamic.
-Your job as a good financial analyst is to study that business ALL THE TIME. Observe those trends.
-Once in your life, maybe you will find that opportunity.
-Why doesn’t Bloomberg want to sell? He doesn’t need to sell.
-When you have a business like that, you don’t need to sell.
-Lu has made many private investments, ex: CapitalIQ, which copies Bloomberg’s business model. Same method with an investment in an engineering service.
-Lu likes to know as much as he can. He likes to be friends with people, with Timberland, the CEO and his son actually became investors in Lu’s fund.
-You can learn and observe from everyday business decisions and learn dynamics.
-Nothing is constant. Everything is changing that is why you have to keep learning.
-Businesses change, Microsoft has threats now.
-You need an active mind, so you are prepared to act and you can seize opportunity due to your insights.