Li Lu - 30% CAGR by following these 9 Principles
Li Lu is the Chinese Warren Buffett and has helped Charlie Munger to build his fortune. Here are his 9 Investing Principles.
Today, I’ll walk you through the 9 Investing Principles that Li Lu used to return 30% annually for over a decade.
Charlie Munger called him “party the Chinese Warren Buffett” and trusted him with his personal money:
“I took the $80 million and gave it to Li Lu, who turned it into $400 million or $500 million.” - Charlie Munger, 2017, Daily Journal Shareholder Meeting
1. Why Value Investing Works
The market isn’t built for value investors. It is built in a way that increases the urge to speculate.
That’s why businesses are so often misprized in the short term. Value investors can benefit from this circumstance.
2. Understand What Type of Investor You Are
You’ll be more interested in some industries/topics than in others. And in investing, you can choose in what industries you’ll look for opportunities.
Investors should use this advantage and be sure about their circle of competence. You don’t need to participate in every new industry or company. Exceptional returns can be made everywhere.
3. Be a Journalist
Being an investor is a lot like being a research journalist.
You have to dig into the company on a level that journalists do when they research their stories. You also need to clearly articulate your thesis and research and bring it to the paper.
Make sure to continue your research until all the questions that arise in your mind have been answered.
4. Find the Truth
A journalist also has to find the truth before he publishes a story. The same goes for an investor. It could be fatal if he makes a decision before he knows “the truth” about a company.
Thus, he has to avoid all sorts of biases and misleading influences. You don’t want to be a Boulevard Journalist coming up with alternative facts.
You want to be the high-quality research journalist who writes top-notch articles.
5. Commitment Bias
One of these biases is the commitment bias. To avoid this one, Li Lu rarely agrees to public appearances.
The more you talk about investments, the more you talk yourself into them. The perceived knowledge about a company increases for no reason.
Just like Charlie Munger, Li Lu emphasizes the importance of ROIC as a metric for superior performance and competitive advantages.
The longer your holding period, the more your return will equal the ROIC of the underlying company.
As explained before, stock prices are a lot more volatile than the business behind that stock.
Investors, therefore, should pay attention to slow, long-term changes in the business instead of stock prices.
8. Self Defense
To Li Lu, the Margin of Safety is a concept of self-defense. Even if the company is more valuable than the market gives it credit for, the management could destroy this advantage.
This possibility is something investors have to look out for.
Some industries are impossible to value. Li Lu gives the example of restaurants.
Even if the business is great, there are little to no durable advantages. Investors shouldn’t try the impossible. Instead, focus on what can be valued.
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