Table of Contents
Twenty years ago, as a young student coming to the United States, Li Lu couldn't have imagined having a career in investing. He had recently escaped from China, didn't know anybody, had no connections whatsoever, and didn't have any money. He was "horribly worried about how to ever make a living in this country." Then he accidentally stepped into a Warren Buffett lecture at Columbia, and everything changed. His remarkable investing career can be summarized simply: 1. Studied Buffett and Munger. 2. Did that.
Key Takeaways
- Li Lu's entire investing philosophy stems from one accidental lecture by Warren Buffett that "changed his entire life"—proving the transformative power of finding the right mentor at the right moment
- Only 5% of people have the temperament for value investing—you must be "genetically mutated" to be comfortable being in the minority and trusting your own reasoning over consensus
- Great opportunities are extraordinarily rare—you might only get 5-10 tremendous insights in your entire lifetime, but each one can return 5,000-10,000 times your money
- His research process involves extreme effort that eliminates 99% of competitors: reading every legal document, visiting communities and churches, joining boards alongside management
- The key to long-term success is finding something you have "intrinsic passion" for—if you don't genuinely love the work, you won't sustain the decades of effort required for exceptional returns
- Charlie Munger's influence on Li Lu mirrors his impact on Buffett: shifting from buying "fair businesses at wonderful prices" to "wonderful businesses at fair prices"
- All decisions should be viewed through opportunity costs—this naturally leads to concentrated investing rather than diversification
The Accidental Beginning
Li Lu's story begins with one of the most serendipitous moments in investing history. As a Columbia student who wasn't even enrolled in the business school, he was accidentally brought into a Warren Buffett lecture. "In the middle of that speech, listening to Warren, a light bulb kind of just went on and I figured that I can do something in this business."
At the time, Li Lu was desperate. He had recently escaped from China with nothing—no money, no connections, no understanding of capitalist culture. What Buffett said about investing was "so different from my perception of the stock market." The key insight that stuck: you should see yourself as an owner of a business, not a trader of paper. "If you're an owner of the business, you don't trade all the time."
This simple concept became the foundation of everything Li Lu would do in investing. He immediately embarked on a two-year intensive study, reading every single thing he could about Buffett—all shareholder letters, every book, every talk. Like Churchill "devouring entire shelves," Li Lu consumed everything he could find about the greatest investor who ever lived.
The 5% Problem
One of Li Lu's most important insights is that value investing isn't for everyone. In fact, it's only for about 5% of people. "If you're thinking like us, you are really not the majority. You are actually a very, very, very small minority, and the stock market is not created for you."
The 95% of people love trading, love gambling, even when they know the odds are stacked against them. But if you want to be like Li Lu, Buffett, and Munger, "that means that somehow you're probably genetically mutated. You are very comfortable being in a minority, which is not natural to human beings."
Most humans survive by sticking with the group. Value investors naturally adopt the attitude that "you're right not because other people agree with you, but because your reasoning and your evidence showed you that you're right." As Buffett said: "We don't read other people's opinions. We want to think. We want to get the facts and then think."
Li Lu learned this lesson early when Julian Robertson invited him to share office space with other fund managers at Tiger Management. "Most of them were trading all the time, they were shorting stocks," and Li Lu realized this wasn't for him. He preferred to sit in a room, read, and think—more like an investigative journalist than a typical Wall Street trader.
The Research Process: Extreme Effort
What separates Li Lu from other investors isn't just philosophy—it's the extraordinary effort he puts into research. His analysis of Timberland, which returned over 700%, illustrates this perfectly.
When Li Lu found Timberland trading cheaply during the Asian financial crisis, he didn't just look at the financials. He discovered there were lawsuits against the company, so he "downloaded every single piece of the document for every single one of the court cases and read them from page one."
But that was just the beginning. He went to their community, their church, spent weeks there talking to everyone. The founder had a son who went to business school and sat on various boards. Li Lu found out which boards the son was on, discovered one was run by a friend of his, "so I get myself invited onto the board. I join the board along with the son and we become very close friends."
Think about the effort involved: out of 100 people who might know about this investment opportunity, how many would read every legal document? Maybe two or three. How many would visit the community and church? Maybe one. How many would join a board to get close to management? Only Li Lu.
"This is why multitasking is so dangerous," Li Lu explains. "You don't have time to go to the extremes, and the value is found in the extremes."
The Timberland Case Study
Li Lu's Timberland investment perfectly illustrates his approach. He started by reading Value Line cover to cover—a massive book analyzing 1,700 publicly traded stocks. Most people won't do this basic work, which eliminates 95% of competition right there.
When he spotted Timberland, he noticed several things:
- Good brand name but stock getting killed due to Asian financial crisis
- No analyst coverage despite $1 billion in annual sales
- Family-owned with 40% ownership and 98% voting control
- Multiple ongoing lawsuits
Each of these factors scared away superficial investors. But Li Lu saw them as opportunities. The lawsuits revealed that the owner was frustrated with Wall Street and declared he wouldn't talk to analysts anymore: "I don't need a damn dollar from anybody else, this business is wonderful."
After his exhaustive research—reading every legal document, visiting the community, joining a board with the founder's son—Li Lu concluded this was an exceptional business run by decent people trading at a massive discount. When asked how much he invested, his response was characteristic: "I put a shitload on them."
The result? "Over the next two years, the damn thing went up seven times."
When to Sell vs. Hold Forever
Early in his career, Li Lu had a philosophy: "If I don't want to buy at the price I'm offered, then I sell." But he evolved away from this thinking, influenced by Munger and Buffett's preference for holding exceptional businesses indefinitely.
The key insight: truly phenomenal businesses are extraordinarily rare, and they tend to take a "disproportionate amount of the capital even more so in the future than you could possibly guess." Superior businesses "produce a lot of positive surprises," while bad businesses "just throw up one headache after another."
This led Li Lu to study Bloomberg as an example of a business you never sell. Bloomberg has high switching costs, network effects, and pricing power. Once you learn the Bloomberg terminal, "you do not want to learn that again." Everyone else uses it, so you have to be able to communicate with colleagues. The cost is irrelevant when each trade can mean millions in gains or losses.
"That is why it's a fabulous business," Li Lu emphasizes. "When you have things like that, you do not sell."
The BYD Investment
Li Lu's investment in BYD exemplifies his approach to finding exceptional businesses. He started researching the company in 2002, but it took him 10 years to fully understand it. "You cannot truly understand everything about a business in one week... it is a continuous learning process."
What attracted him to BYD was the founder's track record:
- Started with only $300,000 in venture capital
- Raised no additional money until the IPO
- Built a company with 160,000 employees, $6-7 billion in revenue, and $500 million in net profit
- Demonstrated ability to adapt in competitive environments repeatedly
- Created cheaper and more reliable automation than anyone else
"He continues to surprise me with his ingenuity to figure out ways to do something better than anyone else," Li Lu said. The founder had created what Li Lu calls "a learning machine"—exactly the kind of business that compounds value over decades.
Charlie Munger's Influence
In 2004, Charlie Munger became Li Lu's investment partner, fundamentally changing his approach. Munger told him the problems he was encountering "were practically all the problems of Wall Street." If Li Lu continued on the conventional path, his worries would never be eliminated. But if he was willing to take "a path different from Wall Street," Munger was willing to invest.
With Munger's help, Li Lu completely reorganized his company. The structure changed to that of early Buffett and Munger investment partnerships—investors made long-term commitments, and they no longer accepted new investors. In the next 12 years, the capital grew more than 20 times.
Munger's influence on Li Lu mirrors his impact on Buffett. As Buffett wrote after Munger's death: "Charlie in 1965 promptly advised me: 'Forget ever buying another company like Berkshire... add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices.'"
Li Lu experienced the same evolution: "I started out looking for cheap securities, but over time I really fell in love with strong businesses."
The Opportunity Cost Framework
One of the most important concepts Li Lu learned from Munger is viewing all decisions through opportunity costs. As Munger said: "If we've got one great thing to do more of, we are not interested in anything that is not better than that. That simplifies life a great deal."
This thinking naturally leads to concentration rather than diversification. "All decisions ought to be looked at through the concept of opportunity cost," Li Lu explains. "When you make that comparison, you tend not to really diversify too much."
The logic is simple: if you have a great opportunity that you understand deeply, why would you invest in inferior opportunities just for the sake of diversification? As Li Lu puts it: "You certainly do not want to diversify away from the opportunity that you have been waiting patiently for a long time to discover for some really inferior other opportunities."
The Rarity of Great Opportunities
Li Lu consistently emphasizes that great investment opportunities are extremely rare. "Over the course of 50 years, you might get tremendous insight on no more than 10 insights essentially." But each of these insights can be transformative: "Their biggest ideas really gave them 10,000 times their money."
This rarity explains why you must bet heavily when you find exceptional opportunities. As Buffett says: "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."
Charlie Munger made this point through his own experience: "Reading Barron's magazine for 50 years made me $400 million." How? In 50 years of reading, he found one actionable insight that generated $80 million. He gave that $80 million to Li Lu, who turned it into $400-500 million.
Li Lu's biggest mistake wasn't losing money—it was missing an opportunity. "I had the absolute insight, I knew the management, I knew they were trading below cash, and subsequently that went up 50 to 100 times, and I missed it... The biggest mistake is not how much money I lost, it was how much money I forgone."
Building Authentic Success
Throughout his lectures, Li Lu emphasizes that success must be authentic to your personality and interests. "Part of the game is to come into your own. You must find some way that perfectly fits your personality."
The key is finding something you love so much that you naturally think about it all the time. "Do what you love to do so you naturally do it or think about it all the time, even if you are relaxing. Over time, you can accumulate a huge advantage if it comes naturally to you."
Li Lu discovered this when he realized investing was perfect for his temperament: "I was extremely lucky to be introduced into the field by the greatest investor who ever lived... now that I've compiled a record of my own for over 20 years, I still enjoy the game even better than when I started."
The Learning Machine Mindset
Li Lu treats the world as his classroom, constantly learning from every discipline. "I was interested in physics and mathematics and history and economics and law and politics. I like everything. I'm interested in everything." This broad curiosity helps him find insights that others miss.
"When I read biology, when I read physics, when I read history, it's all searching for ideas," he explains. Even studying his daughters' cognitive development helped him understand psychology better for investing.
This approach reflects Munger's concept of "worldly wisdom"—building a latticework of mental models from multiple disciplines. As Li Lu puts it: "You might need models from biology; some of them help my investing. You have to be intensely curious about everything, and occasionally you're going to stumble into a big opportunity."
The Importance of Focus
Li Lu's success comes partly from extreme focus. "I don't spend my time studying other investors. We spend our time studying industries and studying specific companies." He knows that studying great companies will give him the insights he needs to make money, so studying other investors represents a poor use of time from an opportunity cost perspective.
This focus extends to his personal investments: "I don't invest anything outside of the fund. I put all of my investment capital into my funds." Like Sam Walton concentrating everything on Walmart, Li Lu concentrates on where he has the deepest understanding and competitive advantage.
Business Is Change
One of Li Lu's constant themes is that "business is change, and change equals opportunity." Nothing in business is constant, which creates opportunities for those prepared to adapt.
"Successful businesses have some combination of things that enable them to adapt to changes better than anyone else," he observes. The same applies to people: "Successful people have some combination of things that enable them to adapt to changes better than anyone else."
This is why continuous learning is so important. "The game of entrepreneurship is really continuous learning," Li Lu explains. "Finding an edge really only comes from a right frame of mind and years of continuous study."
The Temperament Test
Li Lu warns that value investing requires a specific temperament that most people don't have. You must be able to stand alone against consensus, sometimes for years. "Most of the time you're going to stand alone and you're going to be against just about everybody else, and if you're not really confident about what you know, you can't possibly be putting that kind of money into something."
This is why the work is so important. You can only trust your judgment if you've done extraordinary research. "If you cannot succeed on accurate and complete information, you cannot succeed in this business."
The psychological requirements are demanding: "It is not easy, but that is life." As Li Lu learned from his traumatic childhood: "Bad things, if you live long enough, bad things are sure to happen to you. Self-pity has no utility. Get up, dust yourself off, and keep going."
Practical Implications for Investors
Li Lu's approach offers several practical lessons for serious investors:
- Start with one business: "Pick one business, any business, and truly understand it... imagine a distant relative passes away and you find out you have inherited 100% of a business they own. What are you going to do about it?"
- Read everything: Build an encyclopedic knowledge base by reading cover to cover publications like Value Line. "If you really think about the idea behind the idea—how bad do you want it? The amount of people willing to do that will eliminate 95% of the competition."
- Go to extremes in research: Don't just read about companies—visit their communities, talk to customers, understand management deeply. "You've got to have a very active, very curious mind that wouldn't be satisfied with any bogus answers."
- Think like an owner: "I always think of myself as a business owner. If I could buy the entire business at this price, then I probably want to own it."
- Use opportunity cost thinking: "All decisions ought to be looked at through the concept of opportunity cost. When you make that comparison, you tend not to really diversify too much."
- Be patient: "It takes time to make a good product." Great investments often require years to develop and years more to compound.
- Focus on superior businesses: "Superior businesses produce a lot of positive surprises" while inferior businesses create constant headaches.
The Circle of Competence
Li Lu consistently emphasizes staying within your circle of competence and not making predictions outside your expertise. When asked about macroeconomic questions, he frequently responds: "That's too big of a question for me, I don't know" or "That's just not my game."
He built his circle of competence by letting "my own personal interests define my circle of competence." This authentic approach meant he could sustain the intense effort required for decades.
The process is compounding: "You can compound knowledge faster than money if you truly love this game." But it requires avoiding shortcuts: "I would suggest that you don't take shortcuts. It might take longer, but it's more rewarding."
Looking Back at Fifty
In reflecting on turning fifty, Li Lu wrote about the importance of self-examination and continuous growth: "Socrates was right: the unexamined life is not worth living. Every once in a while I would sit down alone to figure out where I might be wrong."
He credits his success partly to being "careful not to be influenced by emotions that I know are poisonous and counterproductive to the journey—things like envy, resentment, hatred, jealousy, greed, and self-pity."
Most importantly, he found something he loved: "My temperament and experiences prepared me well for a career in investment." The key insight: when you find work that matches your authentic interests and temperament, extraordinary results become possible.
Li Lu's journey from desperate refugee to legendary investor proves that with the right mentors, extreme effort, and authentic passion, even the most challenging circumstances can be transformed into extraordinary success. His approach—studying the best, doing the work, and staying true to your nature—offers a timeless framework for anyone seeking to achieve greatness in their chosen field.
As he puts it simply: "Do what you love to do so you naturally do it or think about it all the time. Over time, you can accumulate a huge advantage if it comes naturally to you."