Recently Li Lu gave a talk at Colombia Business School hosted by Professor Bruce Greenwald.
Classic value investing and fascinating that he hasn’t changed his general focus, mindset and philosophy when compared ti his talk to students in 2006. The only thing is probably different is that he sounds less antsy.
There are so many nuggets of real investing mindset, but here’s a few I’ve picked up (in no particular order):
- When asked about the best businesses in the world to invest in: that it’s the companies with “above average returns on invested capital”. (12:50).
- When asked about how to find great investments: value investing is easy to learn but hard in practice. Then he says that value investing might be different for different people but it’s the same set of core principles. You learn over time and your focus changes over time what types of businesses are considered of value. (6:03)
- Again on returns compounded: “To have a business that generate above average returns over a long time on a compounded fashion, is again, really against the natural order of things. Only a small slice of all businesses belong to that category. If you’re really lucky enough to find those compounders, own them for the longest period of time. It helps to buy them at the time when they are trading at a big discount to intrinsic value.” (13:31)
- On consumer moats: “If you have a certain consumer addition and brand loyalty. … They are good until they aren’t good … new generations might not have the same tastes as their parents. … All great business change over time. … But some of the great businesses really can keep it for a very very long time. … When it changes, it’s really up to the management to reallocate capital.” (18:18)
- On culture: “The culture of a company, in an industry that is rapidly changing, so that you always a few steps ahead of the competitors which allows you always serving that edge. That also is an enduring competitive advantage, if that culture endures.” (20:23)
I think when I think of value investing, I’ve heard people talk about their definition of it. I think the mindset that is just look at the word itself. ‘Value Investing’ can be a noun or a verb. I think those that practice the best “value investing” are the ones that understanding it is a verb more than a noun.
When we treat ‘value investing’ as a noun, we would tend to think of it as having a set definition what it is, something set in stone, immutable and not changeable. But like everything else in business, things change and cycle on and off.
When we treat ‘value investing’ as a verb (which is what I think Li Lu and others are saying) we would think of it as a practice of allow ourselves to uncover value that is out there, not trying to apply the strict definitions in our heads into the world out there. Instead we would try to seek to find the enduring companies we so want to find and “fish where the fish are” as Charlie Munger would say.
Just as he said in 2006, investigating the business, knowing the business really well and then knowing that business is good, if that business has a enduring and have a real moat, plus excellent management that knows how to (re)allocate capital with a long long runway, then you just own them and stay with them in the “up and down, thick and thin and not to be dissuaded easily.”