The Chinese Warren Buffet? Li Lu Investment Checklist
Investing is about predicting the future, and the future is inherently unpredictable. Therefore, the only way you can do better is to assess all the facts and truly know what you know - Li Lu
Hello, Value Vultures!
In this issue, we're diving into the world of Li Lu, a name that might not ring as many bells as Warren Buffett, but believe me, in the hallowed halls of value investing, he's a rock star in his own right.
Who is Li Lu? A Brief Snapshot
Imagine a chess master, meticulously planning moves, foreseeing potential pitfalls, and striking with precision. That's Li Lu in the investing realm. Famous for being the only fund manager Charlie Munger had personally invested with, Li Lu's story is not just about numbers and charts; it's a saga of resilience, intelligence, and exceptional investing acumen.
Li Lu's Investing Philosophy: Simplified
Li Lu's approach to investing can be compared to a chef seeking the finest ingredients for a gourmet dish. He looks for stocks the way a connoisseur selects vintage wines - with patience, knowledge, and a keen eye for quality.
1. Is it Cheap?
Just like how Buffett learned from Benjamin Graham, the father of value investing, Li Lu starts with a simple question: "Is it cheap?" This doesn't just mean low in price; it's about finding quality stocks that are undervalued - a diamond in the rough, if you will.
2. Is it a Good Business?
Next, Li Lu probes deeper, much like how a mechanic looks under a car's hood. He examines the fundamentals: profitability, business model, competitive advantage - the works. It's not about flashy trends but about solid, enduring qualities.
3. Who's Running the Show?
The captain of a ship can make or break a voyage. Similarly, Li Lu assesses the management team's quality. He dives into their history, their decisions, their ethos. It's about trusting the team steering the company's ship.
4. What Did I Miss?
Lastly, he's cautious, always asking, "What did I miss?" This humility and vigilance are similar to a seasoned sailor constantly checking his compass and maps.
Li Lu in Action: Practical Examples
Let's take a real-life example from Li Lu's playbook. Consider Timberland, the shoe company. When Li Lu invested, the company was trading at about five times earnings and about one times book value. To the untrained eye, it might seem ordinary, but Li Lu decided to look deeper.
Li Lu's genius lay in his ability to dissect the financials and see beyond the apparent numbers. One of the key insights he uncovered was in Timberland's real estate holdings. About $100 million of the company's book value was tied up in real estate. This is a crucial piece of the puzzle.
Now, why does this matter? In the world of balance sheets and income statements, real estate can be a tricky beast. It's a tangible asset, yes, but its presence can sometimes obscure the true operational efficiency of a business. For Timberland, this real estate investment made their return on capital appear lower on paper than it actually was in the context of their core business - making quality shoes.
By doing this, he realized that the company's return on invested capital (ROIC) was significantly higher than what a surface-level analysis would suggest. We're talking about a staggering 50% ROIC - a hallmark of a truly efficient and profitable business.
He recognized that the company was significantly undervalued.
And the market eventually caught up with Li Lu's assessment. Over the next two years, Timberland's stock value soared by an astonishing 700%. This wasn't just a win; it was a validation of the principles of value investing and a testament to Li Lu's meticulous approach.
The Core Principles of Value Investing
So, dear readers, what can we learn from Li Lu?
Look Beyond the Surface: Like a treasure hunter, look for value where others see the ordinary.
Fundamentals are Key: A strong foundation outlasts flashy trends.
Management Matters: The right team can navigate through stormy markets.
Stay Humble and Vigilant: Always question and reevaluate your choices.
Conclusion: Embracing the Li Lu Way
In a world brimming with complex financial jargon and fleeting trends, Li Lu's approach stands out for its simplicity and effectiveness. His strategy, deeply rooted in the principles taught by Graham and practiced by Buffett, shows that value investing is not just a technique; it's an art.
Remember, being a 'Value Vulture' is about patience, discipline, and a keen eye for quality. It's about seeing the potential where others see risk.