Li Lu - The Chinese Warren Buffett?

Li Lu, often referred to as the "Chinese Warren Buffett," has made a significant mark in the investment world, particularly noted for his early investment in BYD, which has yielded a staggering return of over 5600% since 2002. Despite his close friendships with Charlie Munger and Warren Buffett, Li Lu maintains a low profile, rarely making public appearances. His journey from a challenging early life in China to becoming a highly successful investor is a testament to his resilience and understanding.

Early Life and Education

Li Lu's early life in China was fraught with challenges. Born in 1966 during the Cultural Revolution, he experienced significant hardships. Despite these challenges, he pursued education vigorously. Li Lu moved to the United States for higher education, eventually attending Columbia University, where he earned degrees in economics, business, and law. It was during his time at Columbia that he attended a lecture by Warren Buffett, sparking his ambition to excel in the investment business.

The Investment Journey Begins

In 1996, while still a student, Li Lu made his first million dollars using student loans. After graduation, he founded Himalaya Capital, a hedge fund that now manages around $14 billion in assets and has achieved a 30% compound annual return since its inception as of September 2023. However, his journey was not without hurdles.

Early Challenges

Himalaya Capital faced a rocky start. The 1997 financial crisis hit hard, resulting in a 19% loss in its first year and prompting major investor withdrawals. Li Lu experimented with day trading and short selling, facing unlimited downside risk. However, he recovered by investing in undervalued Japanese and Korean stocks, gradually building his portfolio.

Meeting Charlie Munger

In 2003, a chance meeting with Berkshire Hathaway's Vice Chairman, Charlie Munger, at a Thanksgiving dinner marked a turning point in Li Lu's career. This encounter led to a 20-year partnership that profoundly impacted his investment philosophy and strategy. Munger advised Li Lu to shift from high-risk trading to long-term value investing, leading to the restructuring of his fund.

Himalaya Capital's Success

Following Munger's advice, Li Lu launched a new fund in 2004, with Munger investing his family fortune of around $88 million. This investment eventually grew to $400-500 million, achieving an annualised return of 36% per year. Li Lu's success can be attributed to his adherence to four fundamental investment principles.

Four Key Investment Principles

1. Circle of Competence: Li Lu invests within his circle of competence, deeply understanding businesses through extensive reading, experience, and effort. This enables accurate predictions and informed decisions.
2. Exploiting Market Fluctuations: Viewing the stock market as an auction, Li Lu exploits market fluctuations, buying when prices are low and selling when they are high.
3. Margin of Safety: Recognising the uncertainty of forecasts, Li Lu leaves room for error, cushioning against potential losses and ensuring that gains justify the risks.
4. Trust in Company's Moat: By investing in companies with strong moats, Li Lu benefits directly from their success as shareholder wealth increases with the company's value.

Li Lu's Impact and Legacy

Li Lu's journey from adversity to success is inspiring. His ability to adapt and apply value investing principles effectively has earned him a reputation as the "Chinese Warren Buffett." His story offers valuable lessons for aspiring investors: the importance of resilience, the power of education, and the benefits of long-term value investing.

Li Lu's investment journey is a remarkable tale of perseverance, strategic thinking, and unwavering focus on value investing principles. His friendship with legendary investors like Warren Buffett and Charlie Munger further underscores his credibility and influence in the investment world. As Li Lu continues to make waves in the financial markets, his story serves as a beacon for investors seeking to understand the intricacies of successful investing.