Li Lu, frequently referred to as the “Chinese Warren Buffett”, has achieved significant success as a value investor. Known for his contrarian approach and emphasis on long-term compounders, he exhibits numerous parallels with Buffett’s philosophy.
Himalaya Capital Investors, the value investment firm led by Li Lu, has purportedly achieved a remarkable 30% compound annual return since its inception in 1998. This performance places the relatively lesser-known investor in the same echelons as renowned figures such as Warren Buffett, Charlie Munger, and Peter Cundill.
Li Lu shares numerous similarities with Buffett’s investment philosophy, including
Emphasis on value: Both Li Lu and Buffett adhere to the principle of acquiring stocks well below their intrinsic value, establishing a “margin of safety” to guard against potential losses.
Extended horizon outlook: Both Li Lu and Buffett endorse a long-term approach to investing, prioritizing the fundamental strength of businesses over short-term market fluctuations.
Emphasis on quality: While giving priority to value, both stress the importance of investing in high-quality businesses possessing robust competitive advantages and enduring moats.
Circle of competence: It is crucial to have a comprehensive understanding of businesses, only venturing into areas where one possesses a high level of knowledge and expertise for investment.
Li Lu also brings distinctive insights derived from his experience in emerging markets such as China. Below are some of the key investment principles that have contributed to his remarkable returns:
Precision and comprehensive information: Lu underscores the significance of meticulous research and exhaustive due diligence before making any investment decisions. This encompasses not only financial data but also qualitative factors such as the company’s culture, leadership, and competitive landscape. He is notably known for going to great lengths, such as visiting local places and conversing with neighbours, to gain a profound understanding of a CEO’s character.
Margin of safety: Lu advocates for acquiring stocks well below their intrinsic value, establishing a margin of safety to mitigate potential downside risks. This involves identifying companies with robust fundamentals and competitive advantages that are trading at a discount to their actual worth. By adhering to this principle, the likelihood of attaining substantial returns over the long term is heightened.
Endurance and consistency: Value investing frequently demands a prolonged outlook and the capability to endure market volatility. Lu stresses the significance of maintaining patience and discipline, retaining your investments despite market fluctuations, and resisting the urge to hastily sell during downturns.
Independent thought: Lu urges investors to think independently and not simply follow the crowd. He contends that contrarian thinking and individual research can reveal hidden gems overlooked by the market. By steering clear of the herd mentality and conducting your due diligence, you may uncover opportunities for exceptional returns.
Though not explicitly articulated as a guiding principle, Lu’s investment philosophy heavily leans on the potency of compounding. Through investments in high-quality businesses exhibiting robust growth potential and maintaining a long-term perspective, one can leverage the compounding effect to accumulate substantial wealth over time.
Li Lu is recognized as an exemplary value investor, distinguished by a unique style and focus. Drawing comparisons between your investing approach and his strategies can offer valuable insights into the subtleties of value investing and underscore the significance of tailoring it to diverse contexts.
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Published: 02 Feb 2024, 09:14 AM IST