Li Lu is considered the Asian Warren Buffett. His investment company, Himalaya Capital Investors, returned a 30% average compounded yearly return from 1998.
So, how has Li Lu made incredible returns so consistently? To help find out, we’ll first cover his early life and then learn about his value investing journey through his relationships with Warren Buffett and Charlie Munger.
Although Li Lu’s accomplishments are awe-inspiring, he keeps quite a low profile in the investment world. Legendary investors such as Charlie Munger and Warren Buffett describe him as one of the top investors in the world, with an average compounded return of 30% over decades. It’s no wonder that even the great investor Charlie Munger invested his money with Li Lu!
A fascinating early life
Born in China, and his life was tough growing up through the Chinese Cultural Revolution. His parents had to go to labor camps, and he’d be moving to stay with various families. Despite this, he studied economics at Nanjing University and then moved to Columbia University in the United States.
He found the language and culture challenging when he first arrived in the U.S. However, Li Lu was determined and earned three degrees simultaneously in economics, business, and law, which is incredible.
As a poor student, he asked his friends how he could make money, and they sent him a flier for an event. He assumed that because the event specified a buffet, he’d receive a free buffet meal at worst. However, when he arrived, he realized there was no buffet; instead, it was a man named Buffett.
It’s fair to say he got very lucky by accidentally attending an event by Warren Buffett! Even more so as Warren Buffett opened his mind, and he would try to read everything he wrote. He bought his first stock a year later and invested through his student years. Inspired by Buffett’s speech, Li Lu followed value investing principles, which put him on a journey of continuous learning and great wealth.
His remarkable value investing journey
He also learned investing principles from Benjamin Graham, Warren Buffett’s teacher. Li Lu founded Himalaya Capital Management in 1998 with the knowledge and wealth he’d gained.
His early years as an investor were tough, mainly because of the Asian financial crisis, as he lost 19% in his first year. Despite this, Li Lu’s belief in his ability to find undervalued stocks and his skill with risk management meant that he would soon overcome this setback.
Following the setback, he said, “In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not risk, but it is an opportunity. Where else do you look for cheap stocks?”
One of Li Lu’s best investments was in Russian oil stocks during the 1990s. The fall of the Soviet Union meant that stocks were made to trade at huge discounts to their actual value. Li Lu quickly recognized these opportunities as the major assets on the Russian company’s balance sheet were significantly undervalued.
For example, his investment in Lukoil, a Russian government entity, resulted in massive returns as the stock price increased tenfold by 1998. This example shows Li Lu’s ability to find value opportunities during periods of crisis when many others are fearful.
Early on, Li Lu’s investment philosophy focused on buying low-cost value stocks, like what Warren Buffet did early in his career. He believes investors can profit, particularly during periods of high uncertainty.
The approach is often called “cigar butt investing,” which is when you buy a low-priced weak company, and as soon as it increases a little in price, you quickly sell it for a profit. Essentially, the company will have one last slight price increase before going back down again. Cigar butt investing is different from value investing for long-term gains.
A popular formula many investors use to help identify cigar butt stocks is the net current asset value formula shown here.
Benjamin Graham developed the formula because he thought comparing its outcome with a stock price could help investors find undervalued companies.
“OK, enough of the long formulas; I’m off to smoke cigar butts on Miami Beach to relax my brain,” says Newbie Nick. OK Nick, but if you’re confused about the formula, I don’t think smoking cigar butts will help.
Another excellent Li Lu investment was in Timberland, a shoe-manufacturing and apparel company. At the time, the company was in trouble due to lawsuits; however, Li Lu saw the value in the brand and strong underlying fundamentals. The company traded at what Li Lu called clean book value with many tangible assets and healthy working capital.
He quickly seized this opportunity, seeing the stock price at a considerable discount. Within only two years, the stock price increased by over 700%, boosted by massive annual earnings growth of 30%. Li Lu had around 20% of his portfolio invested in the stock, and he achieved an incredible return with relatively low risk.
“Damn, these Cuban cigar butts in Miami are so good, you guys should join me,” says Newbie Nick. We’re not interested in your cigar butts Nick.
Li Lu and Munger share great mutual respect and have worked together on many investments. Munger has even invested some of his money in Li Lu’s fund, highlighting his trust in his unique ability. Munger once said about Li Lu, “He’s partly a Chinese Warren Buffett. That really helps, partly because he’s fishing in China. Not in this over-searched, over-populated, highly competitive American market.”
Li Lu emphasizes the need to go deeper than most other analysts when understanding a company’s fundamentals.
He’s committed to comprehensive research into financial statements, competitive advantages, and analyzing management quality.
As Li Lu advanced in his career, his investment capital began to increase, and he started to transition his approach to longer-term value investing. He retains investments over extended periods to allow the true worth of a firm to be realised over time.
A patient long-term approach aligns with Warren Buffet’s famous quote, “Our favorite holding period is forever.” Li Lu aims to receive the full value potential of his investments by staying disciplined and avoiding the temptation of short-term trades.
He also places high importance on risk management because he believes in protecting wealth by thoroughly examining the downside risk of each investment. Similarly to Buffett, Li Lu had to adapt from buying cheap cigar butt stocks to larger and larger companies as his capital grew.
I’ve learned a lot from Li Lu, and I hope you have too. If you enjoyed reading this or just want to hear more about Newbie Nick’s Miami vacation adventures check out more content from the blog.
