今年44歲的李路成為運營伯克希爾哈撒韋1000億美元中多數投資組合的主要候選人﹐這源於他與該公司86歲的副董事長芒格（Charlie Munger）的摯友關係。在採訪中﹐芒格透露李路可能成為伯克希爾哈撒韋負責投資的高管之一。芒格說﹐在我看來﹐這是預料中的事情。
相關報導：索科爾──巴菲特的接班人？
繼承巴菲特的事業是現代企業史上最惹人關注的繼任故事之一。一個月後將過80歲生日的巴菲特表示﹐目前沒有退休計劃﹐在他離開公司後﹐可能將把工作一分為二 ﹐分為首席執行長和投資職能。李路成為監管伯克希爾哈撒韋投資業務的競爭者﹐也是第一個被點名可能將接替巴菲特執掌投資部門角色的人。
這一進展說明伯克希爾哈撒韋正在推進繼任計劃的某些方面﹐此舉可能早於投資者們的預期。
由左至右﹕中美能源控股董事長索科爾﹐巴菲特﹐比亞迪的王傳福和李路
已經加入美國籍的李路已為伯克希爾哈撒韋賺了大錢：他把芒格介紹給中國電池和汽車生產企業比亞迪﹐伯克希爾哈撒韋隨後就投資了。巴菲特說﹐2008年以來﹐ 伯克希爾哈撒韋持有的比亞迪股份已增加逾五倍﹐獲利約12億美元。1998年以來李路的對沖基金復合收益年率為26.4%﹐而同期內標準普爾500指數為 2.25%。
李路在華爾街的晉升非常富有戲劇性：文化大革命期間他父母被送去勞改後﹐他的童年時代是在寄養家庭中輾轉度過的。天安門事件後﹐他逃到法國﹐然後去了美國。他對沖基金里的投資者包括美國企業一些資深高管及音樂人Sting﹐後者認為李路“工作勤奮又聰明。”
李路的投資策略與巴菲特明顯不同：李路主要投資亞洲高科技企業﹐但巴菲特通常對他不瞭解的行業不投資。
巴菲特表示﹐伯克希爾哈撒韋的核心投資工作可以由兩個或兩個以上經理管理﹐他們地位一樣﹐為伯克希爾哈撒韋1000億美元的投資組合負擔不同的職責。索科爾（David Sokol）是公司旗下中美能源控股公司（MidAmerican Energy Holdings）的董事長﹐人們認為他是首席執行長的頭號競爭者。今年53歲的索科爾於1991加入中美能源控股﹐以工作不知疲倦聞名。
在採訪中﹐巴菲特拒絕直接評論繼任計劃。但他並不排除在他仍在為伯克希爾哈撒韋掌舵期間﹐引入李路這樣的投資經理。
巴菲特說﹐我喜歡在我仍在這個崗位的時候引入其他投資經理的這個想法。他說不會排除今年作出這樣的舉動﹐但他補充說﹐也沒有為很快補充投資經理設定“目標”。巴菲特說﹐他想象這是一個團隊﹐伯克希爾哈撒韋的投資高管作為一個團隊接受報酬﹐他說﹐我不希望他們競爭。
巴菲特說﹐李路在許多重要方面適合這一職位。他說﹐你希望有人能夠在新問題還沒有發生前就未雨綢繆。李路是一個逆向投資者﹐在比亞迪股票遭打壓下跌的時候﹐ 他買入了該股。另外他還是伯克希爾哈撒韋的忠實粉絲﹐這或許也可以幫助他的事業。巴菲特說﹐除非他們對伯克希爾哈撒韋有特殊的感情﹐否則我們不會僱傭他們。
但聘用李路可能有風險﹐他對比亞迪的大量押注是他唯一一次大規模投資的全勝記錄﹐如果沒有比亞迪的獲利﹐他作為對沖基金經理的表現則乏善可陳。
如果讓他管理伯克希爾哈撒韋的一個大規模投資組合﹐他是否能獲得這樣的利潤﹐這仍是個未知數。
更重要的是﹐他的戰略是進行大筆投資﹐在市場下滑時也毫不動搖﹐這種戰略可能會在漫長的熊市中產生事與願違的效果。儘管2009年獲得了200%的回報﹐截至今年6月底前﹐他管理的投資組合已經縮水13%﹐是同期標準普爾500指數6.6%跌幅的近兩倍。
李路拒絕討論在伯克希爾哈撒韋的可能任職﹐只是說能成為伯克希爾哈撒韋內部圈子的一份子﹐他感到很幸運。他說﹐這是你做夢也想像不到的。
李路出生於1966年文革開始的那一年。他說﹐他九個月大時﹐他當工程師的父親被送到了一個煤礦接受“再教育”。他的母親被送到了一個勞改所。李路的父母向很多家付錢﹐希望他們照顧他。有好幾年﹐他都在好幾個家庭之間輾轉﹐直到到了家鄉唐山一個文盲礦工的家裡。他和這個礦工建立了深厚的感情。李路說﹐小小年紀就與家人分離﹐這教會了他生存的技能。
十歲後﹐他與父母和兩個兄弟重新團聚。當時他的家鄉唐山發生了一場大地震﹐造成約24.2萬人遇難﹐其中包括照顧他的礦工一家。他說﹐他們家在地震中倖免﹐不過他認識的大部分人都死了。
李路說﹐當時他沒有方向﹐在街上打架鬥毆。他說﹐他的祖母激勵他開始讀書學習。他的祖母是她們市里第一批女大學生之一。李路後來上了南京大學﹐專業是物理。
1989年4月﹐他到北京天安門廣場遇到了在那裡集會悼念胡耀邦的學生。胡耀邦被視為是一個民主與改革的支持者。
學生們抗議腐敗等問題﹐李路參與了學生的組織工作﹐並參加了絕食。
他和其他學生後來逃往法國。1989年晚些時候﹐他到了美國﹐在哥倫比亞大學發表演講。那裡的人權活動人士像迎接英雄一樣地迎接了他。他不太會說英語﹐不過卻收到了一筆寫書的預付款﹐書的內容是關於他自己經歷的。
在哥倫比亞大學獎學金的幫助下﹐李路迅速學會了英語。據哥倫比亞大學說﹐他成了該校第一批同時獲得三個學位的學生之一：經濟學、法學和商業碩士學位。
在李路的學生貸款不斷增加之際﹐1993年他聽了巴菲特在哥倫比亞大學的一次講座。當時﹐90年代的牛市正如火如荼﹐對沖基金在上升階段。李路說﹐在中國﹐他不相信金融市場﹐不過聽過巴菲特的講座之後﹐幫助他克服了對股市投資的質疑。
他開始用寫書的預付款投資股市。1996年畢業前﹐他已經有了相當規模的儲蓄﹐他說他覺得自己可以退休了。然而﹐他接受了證券公司帝傑(Donaldson Lufkin & Jenrette)的一份工作﹐之後離職創建了自己的對沖基金。1997年﹐他創建了對沖基金Himalaya Partners。之後﹐他建立了一只風險投資基金﹐以便投資美國的科技公司。
當時正值華爾街令人迷醉的時候。互聯網熱剛剛開始。投資者們吵著找熱門股。
通過他的人權人士的關係﹐李路迅速吸引了包括伯恩斯坦(Bob Bernstein)和音樂家斯汀(Sting)在內的富有客戶。伯恩斯坦是蘭登書屋(Random House)前董事長﹐也是“人權觀察”前主席。李路說﹐其他投資者還包括金融家科爾博格(Jerome Kohlberg)﹐新聞集團(News Corp.)董事、Allen & Co.高管舒曼(Stanley Shuman)﹐以及對沖基金經理納什(Jack Nash)。
新聞集團擁有道瓊斯公司(Dow Jones & Co.)和《華爾街日報》。道瓊斯公司為道瓊斯通訊社的出版商。
不過﹐1998年李路擔任對沖基金經理的第一年就損失慘重。他的以投資亞洲股市為主的基金受到了亞洲債務危機的嚴重打擊﹐損失了19%。
他說﹐我感覺很糟﹐因為人們信任我﹐他們知道的只是我是一個學生活動分子﹐他們看到的只是損失。
隨著亞洲危機迅速消退﹐他的財富反彈。1998年伊始﹐一場新的大牛市也隨之到來。當時對沖基金行業急速發展﹐到1999年末﹐李路的基金已經補回了損失。
2002年﹐對沖基金巨頭朱利安•羅伯森(Julian Robertson)斥資投資李路的基金﹐條件是基金在做多的同時也要做空。
這樣的條件並不合適。李路說他痛恨做空股票﹐抱怨說他不得不一直進行交易﹐調整自己的投資組合。（該基金剩餘的部分目前正在清理。）羅伯森拒絕就這一商業關係發表評論。
簡 •奧爾森(Jane Olson)是李路在人權方面的一位聯絡人﹐她的丈夫羅納德•奧爾森(Ronald Olson)是伯克希爾的董事﹐還曾是芒格幫助創建的一家洛杉磯法律事務所的早期合伙人。李路會去奧爾森夫婦位於加州聖巴巴拉的週末度假房﹐2003年的感恩節﹐他遇到了家在附近的芒格。
芒格說﹐李路馬上就給他留下了印象。他說﹐兩人都對金融公司報告的收益抱有懷疑﹐也都不喜歡聽那些廢話。
芒格給了李路一部分家庭儲蓄用於投資﹐創立了一個押注嚴重受挫股票的“價值”基金。
李路說﹐兩週後他與芒格再度會面﹐以確保後者的聽證權。2004年初﹐李路創立了一個基金﹐自己投資400萬美元﹐又從其他投資者那裡籌集5,000萬美元。芒格的家族投資5,000萬﹐後來又投資3,800萬。李路與芒格達成的協議中有基金將不再向新投資者開放的內容。
李路獲得成功始於2002年首次投資比亞迪﹐當時比亞迪只是一家羽翼未豐的中國電池公司。比亞迪創始人出身貧寒﹐1995年用借來的30萬美元開創了這家公司。
比亞迪在香港證交所進行首次公開募股(IPO)後不久﹐李路就投資了這家公司。（比亞迪在美國“粉單”(Pink Sheets)市場交易﹐最近報每股6.90美元。）
李路創立自己的基金後﹐再次買進比亞迪股票﹐最終將與芒格共同經營的1.5億美元基金中很大一部分都投向了比亞迪﹐後者當時迅速發展﹐已經收購了一家破產的中國汽車製造商。芒格說﹐李路一開始只買了一點兒﹐後來比亞迪股票下跌時又買入更多﹐這是他的特點。
2008年﹐芒格還說服索科爾為伯克希爾調查比亞迪。索科爾去了中國﹐回到美國後﹐他與芒格一同勸說巴菲特加大對比亞迪的投資。9月﹐伯克希爾向比亞迪投資2.3億美元﹐收購了該公司10%的股份。
比亞迪的業務一直火爆。現在它已佔了全球用於手機的鋰電池市場近三分之一的份額。比亞迪更宏大的計劃包括電動汽車和混合動力車方面的業務。
作為中國最大的汽車廠商之一﹐比亞迪面臨的考驗在於能否實現其開發市場上能效最高的鋰電池的計劃﹐這種電池未來可能成為更強勁的動力來源。更有前景的是﹐鋰電池有可能用於存儲太陽能和風能等其他能源產生的電力。
芒格說﹐大型鋰電池將改變整個行業的狀況。
比亞迪是李路重點押注的對象。他是該公司的非正式顧問﹐並擁有約2.5%的股權。
李路的基金向比亞迪投資的4,000萬美元現在價值約4億美元。伯克希爾2008年投資的2.3億美元現在價值約15億美元。巴菲特、芒格、索科爾和李路﹐還有微軟創始人兼伯克希爾董事比爾•蓋茨(Bill Gates)計劃今年9月訪問中國並參觀比亞迪。
現在李路可以在有限制的條件下在中國旅行。但中國政府對他有何看法還不清楚。
李路拒絕透露基金的其他資產。雖然今年出現虧損﹐但這個規模6億美元的基金自2004年底創立以來已經增長了338%﹐年化回報率約30%﹐而標普500指數年化回報率不足1%。
李路對投資者說﹐他從世界杯觀賽經歷中汲取了一項教訓﹐他將自己的投資風格比作足球。他說﹐你有可能踢得非常賣力﹐但就是進不了球﹐但偶然之間──非常偶然──你得到一兩個好機會﹐從而踢進決定性的進球。
Susan Pulliam
Li Lu’s 2010 Lecture at Columbia
Bruce Greenwald: Warren Buffett says that when he retires, there are three people he would like to manage his money. First is Seth Klarman of the Baupost Group, who you will hear from later in the course. Next is Greg Alexander of the Sequoia Fund. Third is Li Lu. He happens to manage all of Charlie Munger’s money. I have a small investment with him and in four years it is up 400%.
[Applause]
Li Lu: Columbia is where my whole life in America started. I could barely speak the language. In Columbia it was where I had a new life. It was really in the Value Investing class where I got my career start. I was really worried about my student loan debt at the time and a friend told me about this class and said I need to see a lecture from Warren Buffett.
What I heard that night changed my life. He said three things:
1. A stock is not a piece of paper, it is a piece of ownership in a company.
2. You need a margin of safety so if you are wrong you don’t lose much.
3. In the market, most people are in it for the short term. It allows you a framework for dealing with the day to day volatility.
Those were three powerful concepts. I had never viewed the stock market like that. I viewed it negatively as a place made up of manipulators who were lining their own pockets. I embarked on an intensive two year study learning everything about Buffett.
Two years after that I bought my first stock. After I graduated I worked at an investment bank for a year and realized it was a mistake. I tried to start a fund but I didn’t have a track record. The first year I managed money I lost 19%.
Being a value investor means you look at the downside before looking at the upside. Before becoming an investor you need to look at how you can fail at this game. There are all sorts of ways you can fail. You need to examine who you are and see if you could be good at it. If you could ever find something you can do well that you really like — that will be your best investment. You will do better than competitors. If you can do it with intrinsic passion, that really over time will add enormous value to you.
Back to the game of investing. This concept of margin of safety is an essential concept to be a good investor. The future is unpredictable, you will always be dealt surprises, some positive most negative. You need to build in a level of safety so that whatever happens, you will not get crushed. If you can really successfully know what you are getting into, you can pretty much navigate. Most people are troubled by what they don’t know. The world is divided by those who know and those who don’t know. If you really know — you will not pull triggers like Wall St. traders. If you are truly intellectually honest, you would not do anything.
This class teaches you to know what you are getting into, especially accepting what things you don’t know. The game of investment is really continuous learning. Everything affects an investment, it constantly changes. You are not investing in the past but the accumulative cash flow of the future. You have to want to find a certain set up where you can know something that most people don’t know. There are plenty of things I don’t know but they don’t factor into the purchase because I am using a huge margin of safety. Buying a dollar at 50 cents. So if things turn against you, you will be okay. That is not easy. This business is brutally competitive. It is so impossible to know everything and know exactly what is going to happen to a business from now till the end that you really have to accept that what you don’t know.
Finding an edge really only comes from a right frame of mind and years of continuous study. But when you find those insights along the road of study, you need to have the guts and courage to back up the truck and ignore the opinions of everyone else. To be a better investor, you have to stand on your own. You just can’t copy other people’s insights. Sooner or later, the position turns against you. If you don’t have any insights into the business, when it goes from $100 to $50 you aren’t going to know if it will back to $100 or $200.
So this is really difficult, but on the other hand, the rewards are huge. Warren says that if you only come up with 10 good investments in your 40 year career, you will be extraordinarily rich. That’s really what it is. This shows how different value investing is than any other subject.
So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it. I tell my interns to work through this exercise – imagine a distant relative passes away and you find out that you have inherited 100% of a business they owned. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand 1 business, inside out. That is better than any training possible. It does not have to be a great business, it could be any business. You need to be able to get a feel for how you would do as a 100% owner. If you can do that, you will have a tremendous leg up against the competition. Most people don’t take that first concept correctly and it is quite sad. People view it as a piece of paper and just trade because it is easy to trade. But if it was a business you inherited, you would not be trading. You would really seek out knowledge on how it should be run, how it works. If you start with that, you will eventually know how much that business is worth.
When I started in the business in 1997, it was in the middle of the Asian Financial Crisis. A few years later there was the Internet bubble. A couple years ago was the Great Crash of 2007 – 2008. They are billed as once in a century disasters but happen every few years. Every time it goes against you, your net worth or value of your investments might go down 50%. This is really where that insight and temperament comes in. In a sense, you have to have a certain confidence in your own judgement and not be swayed by other people’s views. It is not easy. But that is life. It is just a given. It happens to everyone. Berkshire had at least three times when the stock went down 50%. It happened to Carnegie too. It happened to Rockefeller. It happens to everyone. If you really made a mistake, it would not stop at 50% but go to 0.
This happens to even mighty companies. Look at the top 50 companies in America every 10 years. By the time 20-40 years go by, 2/3rds of them will be gone. By the time it goes to 100 years, there might be only a couple left. It’s just the way it is. Look at what happened to the once mighty General Motors. So thats why I’m saying is, investing is a continuous learning process because your investments are constantly changing
So for those of you that have curiosity and the temperament, this game couldn’t be better. Capitalism rewards people who are talented at capital allocator. So if you have the aptitude and temperament, it is the great game. If you don’t have that then I urge you not to go and become a nuisance. That is really what Wall Street did, they don’t really create anything they just move money around. Letting the financial industry get too big is bad for the economy, it is just as bad as getting addicted to casinos, drugs, and alcohol. None of them are really useful, they just transfer wealth. That is what I think happened on Wall Street over the last several decades. So avoid being harmful.
With that I am open to questions.
Q: Mohnish Pabrai recently spoke about his reluctance about investing in China due to the multiple accounting books / the possibility of fraud. How do you deal with this given your own investments in China?
Li Lu: Well, you know I think he is right. Every thing has an exception though. Just because a next door neighbor is a fraud doesn’t mean you are. That is one question to ask — whether you can trust the accounting and people running the business. That can have a huge impact on the business. I suggest you spend a lot of time looking at these factors, especially if you are investing for the long haul.
Q: Why did you decide to go into venture capital? How is that different than your other investing?
Li Lu: I always had this bent that I want to build a real business. I started a venture and it was really a lot of fun. Overall, it is a tougher game than simply investing in securities because you have to evolve to the day to day changes in operations and it is just not as easy to build great businesses. Every generation has a handful of great businesses that come from no where and come to dominate their fields. It is much more rewarding as an investor to pick those. Also, you are more likely to find managers much more capable than yourself. Overall, I learned a lot. I learned a lot in how businesses succeed and how businesses fail. It really was a lot of fun. I probably carried it too far — I eventually ran one of the businesses and it was of course a mistake.
Q: I read that when you look at an industry, you look at the most miserable failures of that industry to see whether you will invest in it. Can you talk a bit about that?
Li Lu: It goes back to understanding the business. Once you have that understanding you can extend it to understanding an industry. A certain industry might have characteristics that make it different than others. In certain industries you might have better prospects than others. Find the best of the players in the industry and the worst players. And see how they perform over time. And if the worst players perform reasonably well relative to the great players — that tells you something about the characteristics about the industry. That is not always the case but it is often the case. Certain industries are better than others.
So if you can understand a business inside out you can then eventually extend that to understanding an industry. If you can get that insight, it is enormously beneficial. If you can then concentrate that on a business with superior economics in an industry with superior economics with good management and you get them at the right price — the chances are that you can stay for a very long time.
Q: Did you have any specific example?
Li Lu: I have studied many over the years. As I have said, don’t copy other people’s insights because it doesn’t work. Automobiles are amazing. If you look at the early days it started with several players and concentrated with just a few players that became enormously profitable. Then they became miserable. You then see how the life cycle turns with new automakers in China and India. Everything has a reason. If you want a good idea — look at General Motors from the early days, look every 5 years and see how the performance metrics change. The Graham and Dodd Center should collect all the data and perform some kind of commentary on it.
Bruce Greenwald: Do you want me to give you the answer to that? In the 1960s, their return on capital was 46%. In the 1970s their return on capital was 28%. In the 1980s it was 9% in the 1990s it was 6%. You want to guess how negative it is now?
Li Lu: So that is really fascinating. If you have that data, the amount of insight that would yield would be astonishing. So instead of just accepting the conventional wisdom that the auto business is bad — that is just not true. Or if you say well those guys just unbelievable money machines — that is not true either. So if you can really examine those statistics and understand it that will give you an advantage for analyzing new situations like in China and India. That is really what turns me on. Understanding this gives you a tremendous leg up.
Q: I wanted to ask you about BYD. I heard that you thought it was important for them to introduce a model to the US and wanted to know why you thought that.
Li Lu: That might be a better question to ask the BYD chairman than myself. Well, If you are just talking about electric vehicles, you know the key — the heart and soul of the electric vehicle age the heart is the battery. There is the battery, electric motor, and the electric control control panel. The electric motor has been there for 100 years, control system is software that can be improved over time.
The battery is really where you get the biggest appreciation and is what determines the value of the electric vehicle. 100 years before the Model-T was introduced, the competition between electric vehicles and gasoline was not nearly as optimistic. Up and till then, 1/3rd of cars being produced were electric. It wasn’t until Rockefeller got oil extracted easily enough that it worked. Henry Ford was able to make the internal combustion work even though it wasted 85% of the energy. He was able to build the engine and produce automobiles that were cheap enough for people to buy and it took off. That is where you find the real winners.
Now, years later, we know that the way that oil is burned contributes to global warming. If it continues, the planet might still be here but all the human beings might not. Human beings have only been on the planet for a tiny bit of the earth’s history. So there are all sorts of good reasons for electric cars. Battery development has advanced so much that it is now comparable to the price and performance of traditional cars. So now with the help of companies like BYD, the balance is about to tilt towards where performance and price are getting to the level that makes them a desirable alternative. It will be desirable everywhere. Eventually, if you have a car that does all that, it will be sold everywhere.
Q: What about BYD versus others in the industry?
Li Lu: The market will determine that.
Q: Yeah – but why BYD versus others?
Li Lu: Well because we also studied all those other guys. We will see when the winner emerges whether we are right or wrong.
Q: Right – but what did you look at to reach that view?
Li Lu: There are a lot of people who have worked over 100 years making great cars. The technology for building a traditional car has been refined enough to where it can be learned in a short period. The place we are still seeing a curve of continuous rapid improvement is with the batteries for cars. Whoever is leading the charge will have a major advantage. There is really only one company that is a leader in battery manufacturing and automobile manufacturing. There is only one company. To put this together you need a Ford to put that together. So far those two elements need to be put together. It is not an easy process.
Q: So you went to BYD in 2005 and then you brought Berkshire as well. I saw that you sold a small amount of your BYD position at the end of last year. Was it just rebalancing? Can I just wanted to get your thoughts on that.
Li Lu: Actually I started my BYD position in 2002. I sold a small amount of shares because an investor of mine had an emergency redemption.
Q: We read your profile online. I had a question – do you have any problems when trying to invest in China?
Li Lu: Yeah I do have some difficulty. I did not really see a factory plant at BYD until the end of 2008. I really did not have a better understanding till then. That really causes you to question what it is before you make an investment. With investing, you have to work with imperfect information because you are buying a piece of the future. I did not really get a chance to get more information because the problem in Asia till much later but it did not stop me from making my investment decision. So there is a point, where if you have enough margin of safety– that is why I kept coming back to the elementary concept of margin of safety– you can allow much more uncertainty and unknowns. So the answer of the question is does that stop you from making the investment? No.
Q: So I did some research on lithium ion batteries, and I saw that BYD has a manufacturing advantage with consumer batteries. But I saw that automobile batteries are much more complex. I did not think that the idea of a good consumer battery manufacturer + an automobile maker made much sense. So when Buffett looked at the stock maybe it was a better deal but today it is this dream of vehicles that is really priced in. It does not feel like a good value investor stock. So why would you own it today?
Li Lu: Well that is interesting. One of the most fascinating things about being an investor is that surprises are part of the game. When you get into situations like BYD, you see lots of good surprises. Chuanfu and his team have this fabulous culture, everything people thought they knew turned out to be a few years late. He got into battery manufacturing in that particular way because he really had no other option. He had no money, he only had $300,000 in venture capital funding before IPO and that was it. He raised money in an IPO and Buffett gave him $200M, now they have 160,000 employees. $6-7B in revenues, $500M in net profit. It is amazing. So he has this ability to adapt in a competitive environment. He has demonstrated that ability again again and again. The way he does automation is far cheaper than anyone else and more reliable. He continues to surprise me with his ingenuity, to figure out ways to do something better than everyone else. What he is currently doing is very different than what everyone else has done. At the end of the day, you might look at what he has done.
So how do you look at it as an investor with imperfect information? Well I suggest you look at what he has accomplished. 8 years ago I had no idea they would go into the automobile or laptop or cellphone battery business. So that demonstrates how he is. This investment is not easy to understand because it is changing so fast, at such a large scale. An almost unheard of speed. Their manufacturing capabilities will double soon. This year they will hire 10,000 college graduates, 8 or 9 thousand engineers. The scale is almost unparalleled. So this is why the study of history, of all the great corporations will give you a good insight in seeing what will happen with BYD. I suggested that we start with GM and analyze its performance every 5 years for 100 years to understand at least one aspect of BYD’s business.
Q: One investor came in and said talking to management is a waste of time. They will say what you want them to say. Obviously it sounds like you don’t agree with that. What do you think? Will you pay a premium for a business with a moat?
Li Lu: There is no general rule. The key in investing is to know what you know and know what you don’t know. You can know about management teams without meeting with them. Every situation is slightly different. So I come back to the point that if you know enough on other things that there is enough margin of safety. Even if you meet with management, you may not learn something. Obviously, actions speak louder. You want to see what they have done. Everything being equal, the more you know about management, the more honest and upfront they are, the more motive they have, the better the situation is and the deeper the discount. You have to analyze it all. The key to analyzing it is you have to ask: do I really know what I think I know, do I really know what I don’t know? If you can’t answer that question, chances are you are gambling.
Q: What kind of preparation do you do before meeting a management team?
Li Lu: I don’t really have a set method. Because I usually am just curious about the business and don’t know a lot. So you are prepared and not prepared. If you are really curious, you want to learn more and study it more. When working at a hedge fund or mutual fund, you are expected to learn a business in one week. You can’t truly understand everything about a business in one week. It took me 10 years and I am still learning new things about BYD. It is a continuous learning process. You could spend a lifetime studying a business or industry, but in a few seconds I can tell you whether or not I like it. You want to build knowledge by continually learning. There is not set preparation.
Q: Recently, Jim Chanos gave us his thesis on the China Syndrome with there possibly being a bubble.
Li Lu: Well, it is too big of a question for me. I don’t know
Q: 20 years ago you said you challenged conventional wisdom in China. Out of curiosity, in terms of value investing what do you challenge in the conventional wisdom?
Li Lu: Well, the fundamental philosophy of value investing is very sound. Its basically the three things:
1. A stock is not a piece of paper, it is a piece of ownership in a company.
2. You need a margin of safety so if you are wrong you don’t lose much.
3. In the market, most people are in it for the short term. It allows you a framework for dealing with the day to day volatility.
That is really an intelligent approach. So therefor any intelligent investing is really value investing. There is a certain level of intellectual honesty. If you have all that insight going into analyzing businesses I don’t have any arguments with it.
Q: What is your point of view on long / short positions in value investing?
Li Lu: The most profitable kind of investing is long term investing. You want to allow the time that it might take because you don’t know when the market will catch on. If you can find a business with good management with good industry fundamentals blowing it forward, you have a good opportunity and you can save money on taxes.
A short cannot be a fundamentally long term position. In the long game, the upside is unlimited. Your downside is 100%. In shorting it is opposite. Shorting is also essentially borrowing, so you need money and time on your side. If time is not on your side, you can be right but lose all your money. The best kind of short usually has some kind of fraud. In those situations, management is determined to keep the fraud. Look at Bernie Madoff, 20 years time. You cannot afford to borrow money for 20 years. So shorting is a short term game. When those positions go against you, there is huge leverage that can utterly crush you.
In theory, long / short is okay, but if you are trading all the time you need to be in tune with all the things moving the market. None of them might be fundamental to the actual business. So you spend all your time chasing noise than studying a long term situation. If you cannot concentrate on things in the long term, and spend all your time thinking about the short term, you will not be able to develop the kinds of insights necessary to identify great investments.
From time to time, you will lose some money on paper. But it is just part of the game. This is why I closed long / short. You know I went through three bubbles. The Asian Financial Crisis, the Internet Bubble, and this most recent financial crisis. The biggest mistake I made is not being able to pick up undervalued companies where I had a unique insight but was tied up with this whole long / short thing. The money I left on the table is still adding up. I am still paying for those mistakes.
Q: In a bull market environment, how do you re-evaluate your thesis?
Li Lu: I don’t ever want to profit from a bubble. Soros does that, that is just not my game. I don’t profess any ability to understand how long a crowd will buy into a bubble. I invest in things that appear to be compelling values that continues. So that is why this game is a continuous learning process – because everything affecting the investment is constantly changing. Including the price. Including the prospects and elements of business success. You really do want to never stop learning. This game looks to be easy but it is not easy.
Q: Given your focus on international investments, how do you think about diversifying your investments regionally?
Li Lu: First of all, I did not really specialize in international investments. I started off doing most of my investments in the US and Canada. In recent years, I just find better bargains outside of it. One of the great things about being an investor is you can look anywhere and find great pockets of opportunities. You cannot do that as a venture capitalist as I experienced myself. So you can look anywhere for opportunities. I do not take a regional approach to diversification. I have views towards certain countries and currencies, but it is not the driving force for a potential investment. If you have your fundamental things right, if you happen to have macro economic factors behind you, you can run a great wave.
Q: How is your investment style different today than when you started the fund?
Li Lu: A lot of things have changed. One bonus about this profession is you get better over time. Most professions, as you get older, you get out of the game. Take the example of competitive sports. If you are a figure skater or gymnast, after your teenage years you are out of the game. With investing, if you are doing it the right way, you get better over time. Your knowledge accumulates exponentially. When I look back at everything I have done, I would have done it all slightly differently, but that is because I am better at it today. So if you approach it in a fundamentally sound way, as you mature, you become better and better. That process and progression is like compounding money. In fact, you can compound knowledge faster than money. If you truly love this game, I would suggest that you don’t take short cuts. It might take longer but it is more rewarding.
Q: What is the difference between being a top political criminal in China versus a hedge fund manager today (referring to the ire directed at Wall Street)?
Li Lu: I don’t consider myself a criminal. I don’t think China considers me a criminal. What I think we are doing today with our investment in BYD in China is really helping China march towards a modern era of prosperity. BYD is providing a solution to both China and the US, to migrate from the past to a way that gets us out of the unsustainable carbon age that we live in. Global warming is a vital concern to every human being, so China is providing a great contribution to everybody with BYD. America has had a great history of invention and here is a great company in China that is about to make a major contribution to human civilization with cheap electric vehicles and solar power.
Ultimately we will have to get our energy from the sun. Most of the energy, even fossil fuels (plants that die and then go into the ground), all originally come from the sun. So if you can figure out a way to take energy from the sun and power vehicles, while using batteries to store it, inexpensively — will really make renewable energy power everything. The combination of those things holds the key to the future of industrial civilization that we are about to embark on. We didn’t set out with BYD with this in mind, it just happened that way. With great companies, it only looks logical in retrospect. Think about how Bill Gates started Microsoft. I don’t think he knew up front that he would take the entire market — at that time it did not exist. It is the same way with our investment in BYD. Ultimately, I think finding an inexpensive way to store energy that we harness from the sun will be a huge contribution for both China and the US, but more broadly our entire civilization.
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