2006 guest lecture in Bruce Greenwald’s class
Here is the link to the video and the transcript.
It was a good learning session, as Li Lu explained his investing approach using 2 investments (Timberland and Hyundai Department Store) he had made that turned multi-baggers. So, it is not the usual session preaching investing theories.
Instead of parking this under Great Learnings – Investing, it deserves a post of its own.
Below is my extract.
Characteristics of value investors:
- Business owner mentality
- Huge margin of safety and
- Long-term perspective
These all come from the business owner mentality. If you can’t control the business you want a big margin of safety and because you are a business owner, you tend to think long term. The stock market is not for the business owners, but the traders. 95% of the people don’t align themselves with those three points. Suppose 100% of people would be value investors. There wouldn’t be a stock market.
- Only a small number of people are value investors.
You are very comfortable being in the minority – and this is not natural for humans.
You don’t get your ideas because people agree with you, but because of evidence, logic and reason. - You will spend most of your time being an academic researcher instead of being a professional investor.
You have to spend time to be a researcher and investigative journalist with an insatiable curiosity. The more you know, and the deeper your knowledge, the better you will be as an investor.
Being interested in everything will aid you to find those few insights that give you tremendous opportunities. Others might miss them because of psychological factors, limits to their thinking or because of institutional constraints.
When an opportunity presents itself, Li Lu has a checklist to go through:
- Is it cheap?
- Is the business good?
- Is the management trustworthy and good or is there enough external validation?
- What else am I missing?
- Why does this opportunity exist in the market?
If you feel comfortable after going through those points, one only has to go over the last psychological barrier to act.
The first thing I usually do is check the new low lists. “All-time lows”, new lows in P/E, new lows in P/B etc.. They are more attractive than the new high list.
If you are an analyst, you only need two things:
- Accurate and complete information and
- Insights
Sound, complete and accurate information combined with the conscious, subconscious and psychological factors.
As long as humans are irrational, a value investor will find something profitable in the market. The market is designed for people, who are flawed in their thinking and are attracted because they like to trade and make fast money. If you trade, you are bound to make mistakes as emotions will assure that. Fear and Greed open up the opportunities for value investors.
You have to search for that opportunity and nothing is constant. The only constant is change and that is why you need to relearn things. People with active minds and who are prepared will always have the chance to be fabulously rich.
