Panelists:
Li Lu, CBS '96, Founder and Chairman, Himalaya Capital
Bruce C.N. Greenwald, Founding Director, Heilbrunn Center for Graham and Dodd Investing at Columbia Business School; Professor, Columbia Business Shool

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Live streaming from Columbia Business School in New York City.

Welcome to the final session of the 13th Columbia China Business Conference.

Home to value investing, Columbia Business School is at the forefront of the theoretical development and practices of value investing.

Given the ever-changing global dynamics and market uncertainties, what are the potential advancements on unwavering fundamentals of value investing.

How should practitioners realize value investing in China?

Joining us today are Professor Bruce Greenward and Misi Li Lu.

Professor Bruce Greenward is the founding director of the Helmholtz Center for Graham and Dodd investing at Columbia Business School.

Li Lu is the founder and chairman of Himalaya Capital, a multi-billion dollar investment firm that primarily focused on long-term investment opportunities in Asia and the US.

He's a distinguished alumnus of Columbia, and Mr.

Li Lu currently serves as a member of the Board of Trustees of Columbia University.

Professor Greenward routinely wins prizes for his classes and has trained a generation of value investors, including Mr.

Li Lu has in-depth knowledge about the Chinese market.

His insights are trusted by investment legends like Buffett and Munger.

Now, imagine yourself stepping into the most overcrowded investment classroom at 1 of the best business schools across the globe.

I think this is gonna be a rare privilege for everybody.

I've known Li Liu now for more than 20 years And not only is he a great investor, but he's a great conversationalist.

So why don't we just start out by talking about how your investment philosophy has changed because value investing is after all, always an involving field since you began the field literally, I think I would say 25 years ago,

So how have you been influenced by people like Charlie Munger and so on?

Well, so before I started, I just want to, first of all, thank you for all the organizers of this great conferences.

I look at the speakers are just really unbelievable.

So the quality of the student has dramatically improved since I was a student there.

So thank you for all for that wonderful work of putting together this great conferences.

And it just really gave me such a pleasure to be on the same panel as my professor, Bruce Greenwell.

In fact, I got into this field really because of Professor Greenwell's class.

I think, you know, basically you got Buffet to come to speak to a student really roughly 28 years ago.

And it was really out of that first lecture that I really got into this field.

And of course, I later as a business school student, I took all of the courses that Professor Greenwald offered and learned a great deal and made a lot of money too.

Yeah, so the philosophy is that it is, It is relatively simple.

So I wouldn't say the philosophy really evolved all that much for me.

Before I got really exposed to value investing through Buffett's lecture at Bruce Greenwald's class, I think my whole approach to life was pretty much a set along similar lines.

And so there's not much of a jump for me.

The idea of buying something at a discount or something that really worth more is simply intelligent.

So I would say almost all intelligent investing involves some kind of a value investing.

And now the difference is that your focus on value evolves over time and to different individuals, they tend to focus different areas of that.

For me, when I first started as a value investor, this is now 27, 28 years ago when I bought my first stock.

I didn't really know much about business.

I know I was born and raised in China during the cultural revolution.

There was not much of a private business or market economy back then.

So at the beginning, obviously, look for value primarily on the balance sheet in the in the classic style of Benjamin Graham looking for a cigarette, but looking for the last of puff, basically looking for statistically cheap businesses and ignore what the business really is.

And then over time I evolved into understanding smaller businesses.

And, cause I was just intensively curious about how business run.

So much so actually I evolved into a health funding or co-creating a dozen of those early stage startup companies.

And that experience has taught me a lot about how business have run, what constitute a good or bad of mediocre businesses.

And so over time, I evolved into looking for really good businesses, small maybe, but really good businesses.

And then that leads me to look for good businesses in Asia, eventually for businesses was enduring competitive advantage was a long growth trajectory ahead of it.

And so the places where we're looking for value evolves over time, But the basic philosophy have pretty much remained the same.

It's just our core competence expended over time.

Now I've been very fortunate to be influenced at the very beginning by the investment giant, Buffett and Munger.

And later on, I was really, really lucky.

It was just a stroke of luck that he can't even make it up in fictions.

That I strike a good connection with Charlie Munger and he become a investor

And we've been partners since then basically.

He has been a mentor, a investor, a business partner, and a great friend all these years.

And for many, many years, we have dinner every Tuesday night.

And so this version of Tuesday night was Charlie, every week.

That lasted for years until just right around the pandemic.

So Obviously I had a great deal of influence by him.

But I have to say that the greatest influence from Charlie was really beyond just investment.

Now, I think for every profession, for everybody, it is wonderful to have role models in life.

And often we find role models among the eminent dead, because it's safer.

So it's pretty risky to take a role model that's still alive.

And I always have a risk of disappointing.

But in my case, I got really, really lucky in the sense that my role model never failed and instead continued to inspire me right into his 97th year basically.

And so mostly it's really basic, his attitude towards life and his ability to keep equanimity in a sense in the phase of up and downs, success or setbacks.

And I witnessed quite a bit of them over the 70 years or so, we've been working closely.

Retain that rational composure, common sensical approach to all problems, investment or life, that is extraordinary hard.

And it is a bit of, against our natural tendencies.

And I've really washed up close and personal how Charlie have conducted himself.

And it is in that regard that he is probably the most influential person in my life.

And I have been very, very lucky in that regard.

Okay, So in this concentration and sort of now investing in great businesses, can you be specific about what kind of business you look for?

What are the characteristics of a great business in particular?

What detail characteristics you look for and how you put a value on those businesses?

Well, great businesses are the ones who really have above average returns to the best of capital.

But that kind of businesses socially attract imitators, competitors.

Everybody wants to have above average returns when we invest the capital.

And so truly good business is the 1 who can fend off competitors, who can really have enduring competitive advantage and cap that higher than average return on invested capital.

And hopefully also have a long runway of continuous growth.

Those are the businesses we're looking for.

And they could really come in all industries, in all shapes and forms, but they're rare.

To have a business that generate above average returns over a long time on a compounded fashion is again, is really against the natural orders of things.

It really, only a small slice of all businesses belong to that category.

So if you're really lucky enough to really find 1 of those long-term compounders, all you have to do is really to own them for the longest period of time.

Now, it helps when you really buy them at the time when they happen to be treated as a discount to their intrinsic value.

So that if you were wrong about them, you won't lose money.

And if you're right, you have more returns over time.

But over the longest period of time, if you do own them through the ups and downs, your return roughly approximates basically the actual business return to actual capital invested in the business itself over the long term.

The 2 tend to really converge pretty closely.

And so understanding the study, the nature of that business, the dynamic of competition is of really the most important thing as the investor and as a student of the business.

And as I said, there isn't really a set of things that really made them that way.

Every business really built their fortress slightly differently.

And you just have to really, truly be honest with yourself and study from every possible angles until you're really convinced that the edge of their journey enjoying truly enduring, and they truly have a long runway ahead of them.

And if they prove to be exactly as you predicted over the years, we really want to really stay on them, that's really the up and down thing and not to be really dissuaded easily.

Okay, can I actually talk a little bit about those businesses?

I mean, in limiting competition, and I think Charlie Munger is the master at this, you're really interested in moats.

That is the barriers to entry into the business because it's keeping people out that's gonna limit competition.

If you think about a moat, there are probably 2 elements to that moat.

So think of it from the point of view of a company trying to get into the business.

How big a market share do you have to capture in order to be viable as a competitor?

So in automobiles, in the global automobile market, it's really large.

And if you get 1 to 2% share, you're going to be fine.

In other markets, like, for example, local distribution of caffeinated soft drinks, you gotta get to 20 to 25% of the market to support the infrastructure that you need and to compete.

So the first thing is economies of scale.

And the second thing I think, and again, I'm sort of thinking about Charlie Munger here, is how hard is it to get that market share, which is all about customer captivity in a contested environment where unique technology will help you with that and so on.

So suppose you got to get to 25% share, we know for caffeinated soft drinks that 2 tenths of a percent share changes hands every year in a contested market.

Do you do a calculation like that for the companies you're looking at?

Actually, there is a scale economy in those businesses.

Not everything actually have a scale economy.

And so sometimes that the scale becomes a counterpoint make it actually more difficult to really manage.

But in a scale economy, that the scale does really become competitive advantage.

And then, but the dynamic would have changed after a certain scale.

You mentioned automobile, this interesting example, you know what happens in different phases of the industry.

The consumer side is also important in a sense that if you have quite a bit of consumer addiction to certain products and brand loyalty.

And they're good for a long time until they're not good.

New product categories would have come along and brand get tired and old, not refreshed.

New generations really don't like to have the same taste as their parents and grandparents.

So that's really the most interesting aspect of businesses is, what is only constant is the constant change.

And I actually really know business who can really remain that competitive edge for forever.

But some of the business really can keep it for a very, very, very long time.

And of course, when it changes, it's really upon the management team to be able to really reallocate capital towards those businesses, actually now enjoying a robust competitive advantage.

Now take example with Berkshire, it started out as a lousy businesses, losing businesses of textile in New England.

And Warren and Charlie skillfully really took the last bit of the cash flow and skillfully invested in some other businesses, really on the right side of the trajectory.

But over time, some of those businesses began to lose its competitive advantage and then they took that capital and allocated to the ones that...

So obviously the management and capability of allocating capital also plays a very important role.

And of course, that the culture of a company in the industry that's rapidly changing, so that you're always a few step ahead of your competitors, which allows you to always a serving on the edge, that also becomes enduring competitive advantage if that culture endures.

So in every specific businesses, what really make them successful are very, very different.

And so that is the most fascinating aspect of the competitive dynamics.

And also the most fascinating aspect of being an investor.

Well, how do you today, as of today, how do you do this differently?

Are there things that you look at specifically?

Are there ways that you approach companies?

Now, I'll tell you the thing that when I started investing with you and I'm honored to say that I made a lot of money doing it, that appealed to me was what you mentioned in your introduction, which is small.

But small businesses are, or small markets are necessarily markets where you have to get a big share because 1 firm can dominate.

And that's not something that most investors look at.

So in what other ways do you do things differently from most other value investors and investors?

When you invested with me or you began to invest with me, Thank God you're still with me.

So thank you for your continued trust and confidence.

No, back then we were looking for smaller business because those are the business, I feel I can understand them.

And as we evolve, we began to look for bigger businesses that we can also understand.

The bigger business does come with a whole set of advantages that if they are right in a sense, they also come in with a whole bunch of problems.

And so we're not really looking just big or medium or small.

Size is 1 consideration, but it's not in the most important.

Certainly not a determining factor is when we're looking for businesses.

There are big businesses because of a certain dynamics are still growing at a robust pace that are becoming even more entrenched as they become bigger and they still have long runs of growth.

So that just exists, you know, the most recent phenomenal of the technology platform because of the network effect.

Some of the business are fitting that characteristics.

Now they don't necessarily always grow forever, but they have been growing for a long, long time and likely to continue for some time.

And so just the size itself is certainly not the most determining factor by, yeah.

But then what other dimensions do you do things differently today than other investors who are less successful?

I don't spend my time studying how other people are doing that, We spend most of our time studying industries, studying specific companies.

We're looking for the ones who are already successful, try to answer what really make them successful.

And some of the time we have answers and some of the time we don't.

We just continue to really study them, continue at it until we have an answer.

I think 1 thing that really is always important for us is this intellectual honesty.

Basically knowing that we really don't know what we do know and what we don't.

In other words, If you claim a circle of competence, you have to understand the ash of the competence.

You have to know what is false in, what is false out.

You have to be very honest with yourself.

So we really insist on knowing inside and out a particular businesses and to the point you're able to predict its outcome, for example, in the next 10 years.

At least I want to know at the worst case scenario, what the business would look like 10 years from now.

And so we do have a long-term horizon in terms, we can't really predict it forever, but I want to see whether I can predict with a very high degree of confidence, say 90% of confidence, that at a minimum, what the business would look like in 10 years, given all different contingencies.

Most of the time, by the way, we don't have an answer.

Sometimes we study for years and years before we see, okay, we really get it.

Then we wait for price to come to our striking zone.

That make our selection very, very difficult.

When we do select them, we tend to really own them for a very, very long time because the businesses, they're really good.

And we really fully understand are very rare.

And how do you mean we really do understand that?

So anything that we would own, we would buy a lot more as they go down.

So that really gives you a measure of our definition of whether we understand that.

I mean, if you look at fixed income, it seems unprecedented.

That said, does the market today remind you of any historical periods you've lived through in good ways or bad?

And would you have advice for anybody on how to navigate?

Well, we usually don't study too much about the market except when they're really extreme.

And this is what happens if you're 1 of those more extreme period of time.

It is truly in many ways similar in uncharted territories.

The amount of liquidity that's been printed, the level of interest rate, and also the slow pace of growth.

All of those are quite really remarkable in this period of time.

We don't necessarily think that history would repeat.

Instead of guessing the patterns of history and whether they repeat, we focus on selecting companies that can really live through the thick and thin.

Whatever the environment, business will continue, somebody would do well.

We just want really investing in those companies who's capable of dealing with those extraordinary set of uncertainties and we didn't find.

And how much has management departed that?

And how do you look for managements that have that capability?

Well, in a lot of the companies, the management will make big differences.

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13th Columbia China Business Conference | Fireside Chat: Value Investing in China