Li Lu, Munger’s disciple, and his Himalaya Capital

Introduction to Li Lu

Born in China

Li Lu was born in Tangshan City, Hebei Province in 1966. In 1985, he was admitted to Nanjing University, where he initially studied physics and switched to economics a year later.

Studied at Columbia University

In 1993, he attended a lecture by Warren Buffett, chairman of Berkshire Hathaway Company, at Columbia University, which enabled him to overcome his previous doubts about whether stock market investment could become his lifelong career (according to Li Lu’s preface to “Munger’s most important work “Poor Charlie’s Almanack”“), which also became a stepping stone for him to engage in the financial industry in the future.

In 1996, he completed a degree in economics, law, and business administration at Columbia University. He was the first student in the history of Columbia University to obtain three degrees at the same time; in 1996, he simultaneously obtained a bachelor’s degree in economics, an MBA, and a PhD degree of law school.

Get to know Munger

He met Munger on Thanksgiving Day 2003, and they became lifelong friends. Meeting Munger was one of the most important events that changed his life. Munger said Li Lu was the only outside manager he had invested in and called him “China’s Warren Buffett.”

Knowing Munger, Li Lu strengthened his belief. Munger told him: “The problem you have is the whole problem of Wall Street. Although Berkshire has achieved so much success, there is no company on Wall Street that can really imitate it. If you want to eliminate your troubles, We need to take a different path from Wall Street.” During that conversation, the pragmatic Li Lu left a good impression on Munger. “Both of them were skeptical about the earnings reported by financial companies, and neither of them liked to hear them.

Later, Li Lu gained Munger’s trust and became the trustee of the Munger family’s assets. Munger gave Li Lu $88 million in investment, and Li Lu more than quadrupled the amount to $400 million.

In 2008, he recommended Chinese battery and car manufacturer BYD to Munger, which earned Berkshire a return of up to $1.2 billion. In 2010, Li Lu also visited China with Buffett. During this period, he also visited investment opportunities in China on behalf of Berkshire Hathaway.

For Charlie Munger in detail, please see my post of “Charlie Munger, a great investor worth remembering“

Investment career

Buffett’s shock

In 1993, he listened to Buffett’s lecture at Columbia University. The biggest shock to Li Lu was: It turns out that a person can gain in the stock market just by studying the value of a company without relying on connections or resources. Wealth, in turn, changes destiny.

He immediately found all the books about Buffett and immersed himself in studying him and Munger, especially how they researched companies, how to buy companies, and how to prevent losing money. After studying for two years, Li Ren used his frugal money to buy his first stock in his life carefully and carefully. He started investing in stocks while studying at Columbia University. By the time he graduated, he had already earned his first pot of gold.

Join Wall Street

After graduating in 1996, he worked as a corporate financial assistant at the investment bank Donaldson, Lufkin & Jenrette and began his investment banking career. However, he resigned after one year because the salary and bonus were not as good as those in There is a lot of money to be made in the stock market. It was also at this time that he firmly determined his ideal of becoming a professional investor.

In 1997, he founded Himalaya Partners on his own to manage venture capital funds and hedge funds. Please note that his funds during this period were typical hedge funds, not value investment funds.

Become a value investor

Later, influenced by the value investing of Munger and Buffett, my future investment style was completely changed. Munger personally helped Li Lu completely reorganize the company into the early partnership structure of he and Buffett, which did not charge an annual fixed management fee.

Most importantly, Munger also used US$50 million from family savings to jointly establish a new fund with Li Lu’s own funds. Investors in this fund have committed to investing only for the long term, and it is not open to new investors.Ultimately, the fund was a huge success, with a compound annual growth rate of more than 36% over five years.

The company was restructured into the current Himalaya Capital & LL Investment.

Investment style

Value investing

His early investment style was not much different from that of most Wall Street fund managers. He mainly relied on long-short operations such as risk aversion to earn short-term price differences, all for the purpose of profit.

After getting to know Munger, I was influenced by the value investing of Munger and Buffett, and completely changed my future investment style. Instead, I focused on the fundamentals of the company, focusing on exploring the deep value of the company, and only being a long-term value investor.

Buffett has said that only 5% of the funds in the market are value investments, which is different from the other 95% of investment methods. Li Lu believes that he belongs to the 5%. He believes that he has the potential characteristics of a value investor.

Concentrated investing

As I posted in the article of “Charlie Munger, a great investor worth remembering” and in my book “The Rules of Super Growth Stocks Investing“: Munger has only three stocks in his personal portfolio. As a disciple of Munger, Li Lu only has 5 concentrated holdings.

Discover BYD

Li Lu’s most successful investment so far is in BYD. He is an informal adviser to BYD (ticker: BYDDF). His investment fund owns about 2.5% of BYD. During the more than 20 years of holding, the income was close to HK$20 billion, with the maximum return exceeding 38 times.

As early as 2002, Li Lu bought BYD through his own fund and became a cornerstone investor. His first investment accounted for 1.67% of the total equity. The most rare thing is that he discovered BYD when the car company was still “obscure”.

Later, he successfully persuaded Munger to “clearly see” the deep value of this stock. By 2008, Berkshire began to invest heavily in BYD, buying 225 million H shares of the company at one time. It invested US$230 million to acquire a 10% stake in BYD, which is now worth US$1.86 billion, bringing a return of at least eight times to Berkshire Hathaway. I have held it to this day, achieving a long-term holding period of fifteen years.

At the 2024 Berkshire Shareholders Meeting, Buffett recalled that Munger always followed his wishes in the past, but he only slapped the table with him twice and told him to buy. One of them was when Munger suggested that Buffett buy shares. BYD. But the reason why Munger knew about the existence of BYD was actually from Li Lu’s recommendation to Munger. This shows Li Lu’s influence on Buffett’s investment portfolio.

Long-term investing

As an in-depth value investor, he has successfully identified and invested in many well-known stocks before others who later became bullish on the market. If you carefully study his shareholding history, Himalaya has a good sense of long-term holding of equity assets.

As mentioned before, his most typical case is that he went from being a cornerstone investor in BYD to a long-term holder. During the more than 20 years of holding, his income was close to 20 billion Hong Kong dollars, and the maximum return was more than 38 times.

Buy on dips

Another example is that Himalaya’s optimism about banking stocks has allowed it to make a fortune in the Hong Kong stock market. The Postal Savings Bank of China started buying Hong Kong stocks aggressively in December 2020. In less than two years, its shareholding ratio in the Postal Savings Bank exceeded 6% of the total share capital, and its net profit once exceeded 2.6 billion Hong Kong dollars.

In fact, many investors at the same time as this investment were not optimistic about bank stocks and believed that their fundamentals had many flaws. However, it turned out that he had demonstrated to the market that value investors should buy undervalued stocks at low prices.

At the end of 2014, BYD unexpectedly suffered a bloodbath in the Hong Kong stock market, and its stock price plummeted nearly 47% to 18.7 yuan, a two-year low. At that time, Bank of East Asia massively reduced its holdings by 650,000 shares, causing panic selling in the market. Li Lu took the opportunity to enter the scene, he increased his holdings of 3.29 million BYD shares at an average price of HK$23.544, involving more than 77.53 million shares. After the increase, the shareholding reached 6.27%.

At the end of August 2015, he spent HK$198 million to buy more H-shares in China Midea at low prices. After Himalaya Capital increased its investment in China Midea on August 24, its shareholding increased from the original 4.83% to 5.36%. . In just about two weeks, the account has earned approximately HK$27.64 million.

Buffett himself has publicly praised Li Lu: “You hope someone can prepare for new problems before they happen. Li Lu is a contrarian investor. He bought BYD’s stock when it was suppressed and fell. In addition, he He’s also a big fan of Berkshire Hathaway, which might help his career.”

Portfolio Analysis

Assets under management

Since Himalaya’s U.S. shareholding was first exposed in 2016, it was initially only US$100 million in size.

As of June 2021, Himalaya currently has nearly $18.5 billion in assets under management. Invests primarily in securities from around the world. Among them, the largest investment in the United States is Micron Technology (ticker: MU), worth US$1 billion.

According to the U.S. Securities and Exchange Commission (SEC): As of the end of March 2024, Himalaya Capital’s declared trustee fund assets were US$2.26 billion.

Currently main holdings

Statistics at the end of March 2024 show that the main stocks held by Himalaya are very similar to Berkshire Hathaway.

Alphabet

Including GOOGL, a total of 2.543 million shares, accounting for 16.7%; Class C shares GOOG, a total of 3.044 million shares, accounting for 20.5%. The holdings of Alphabet account for 37% of the total assets of the Himalaya investment portfolio, which is close to 40% of the portfolio.

Bank of America

Bank of America (ticker: BAC) accounts for 30.33% of the total assets of Himalaya’s portfolio. This is similar to Berkshire’s investment portfolio, which is heavily betting on Bank of America.

Berkshire Hathaway

Berkshire Hathaway’s B shares (ticker: BRK.B) account for 16.7% of the total assets of the Himalaya investment portfolio.

East West Bank

Himalaya’s investment portfolio includes a relatively unknown public bank, East West Bank (ticker: EWBC). Himalaya invested nearly 10% of its shares in East West Bank, which is located in Southern California, with the United States and Chinese ethnic groups as its main markets, and its total assets rank among the top 30 banks in the United States. Himalaya’s first investment in this bank may be in the first quarter of 2023.

Apple

Apple (ticker: AAPL) accounts for 5.76.% of the total assets of the Himalaya investment portfolio.

Investment preferences

Bank stocks

Statistics at the end of March 2024 show that bank stocks account for two of the five largest holdings in the Himalayan investment portfolio’s total assets, which is highly similar to Berkshire Hathaway.

Chinese stocks

In addition to the well-known BYD, Li Lu has invested in many Chinese concept stocks, including Dan Bin who revealed after the Berkshire shareholders meeting in 2024 that Li Lu once represented Berkshire to communicate that Buffett wanted to invest in Kweichow Moutai, but later the negotiation between Kweichow Moutai and Berkshire Hathaway failed, so Li Lu himself bought a lot of shares in Kweichow Moutai.

Another example: successively invested in a number of Chinese stocks, including well-known companies such as Sina, Baidu, Weibo, and Pinduoduo. Among them, the period of holding Baidu was from the fourth quarter of 2016 to the third quarter of 2018. The scale of funds used at that time was not high, and even the “small trial” income exceeded 10 million US dollars.

Li Lu’s investment philosophy

Stocks are not just securities that can be bought and sold, but actually represent partial ownership of a company. Investing in stocks is actually investing in a company. As the GDP of good companies grows, the value itself will be continuously created.
Investing in the form of shareholders and sharing the benefits you deserve as the company’s value grows is the right path and is sustainable.
The market is just a service channel that provides services for purchasing company equity. The people participating in market transactions and the rise and fall of market conditions are just to make the market tool better to use. Short-term market fluctuations do not mean much to value investors.
The essence of investment is to predict the future of a company. If you want to reduce the risk of prediction, you must carefully choose stocks of good companies whose prices are far lower than their value. Only in this way can you make yourself invincible.
No matter how sure you are of something, keep in mind the margin of safety. Your buying price must be well below the company’s intrinsic value.
Investors can truly establish their own circle of competence through long-term and unremitting efforts, and can gain a deeper understanding of certain companies and certain industries than almost everyone else, and make more accurate judgments than all others.
The circle of competence must be very narrow, and you must clearly define its boundaries and every boundary.
Sustainable things all have a common characteristic, which is that what you get is what you deserve in the eyes of others and in the eyes of all other people.
The most fundamental requirement for working in this industry is to be a complete and 100% honest person in terms of knowledge. Never lie to yourself, because it is actually best to lie to yourself.
Value investing can not only be applied in China, but even China’s current immature stage gives value investors more advantages in China.

Books related to Li Lu

In May 2010, Li Lu helped translate and publish the Simplified Chinese version of “Poor Charlie’s Almanac” and wrote the preface for the book. For an in-depth introduction to this part, please see my post of “Munger’s most important work “Poor Charlie’s Almanack”“.
In April 2020, Li Lu’s collection of essays “Civilization, Modernization, Value Investing and China” was published by CITIC Publishing House.

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