#363 Li Lu and Charlie Munger and Warren Buffett

Li Lu's investment philosophy is profoundly influenced by Warren Buffett and Charlie Munger, emphasizing the importance of deep, continuous study and understanding of businesses. Lu advocates for focusing on a few exceptional opportunities and betting heavily on them, rather than diversifying broadly. He highlights the necessity of aligning one's investment approach with their temperament and interests, underscoring that success comes from relentless curiosity and rigorous analysis. Lu's journey, marked by studying great investors and meticulously researching potential investments, exemplifies his belief that enduring success in investing requires patience, discipline, and an unwavering commitment to learning.

• Li Lu’s investing career is heavily influenced by studying Warren Buffett and Charlie Munger.
  • Li Lu constantly references lessons learned from Buffett and Munger in his talks and interviews.
  • He shares their obsession with finding great companies.

"Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs, and improving our products and services, we gain strength."

• This quote highlights the importance of consistently improving business operations to maintain a competitive edge.

"Widen the moat, build enduring competitive advantage, delight your customers, and relentlessly fight costs."

• Buffett emphasizes the need for businesses to focus on customer satisfaction and cost control to sustain long-term success.

"Successful places tend to get bloated, fat, complacent. It's the nature of human life. Most places, when they get rich, they get sloppy."

• Munger warns against complacency and inefficiency that often follow success.

• Li Lu’s relationship with Charlie Munger profoundly shaped his career and investment philosophy.
  • Munger became Li Lu’s investment partner and mentor in 2004.
  • Munger’s advice led Li Lu to reorganize his company, leading to significant growth.

"Charlie and I first met at a mutual friend's house while I was working on investments in LA after graduating from college."

• This quote marks the beginning of Li Lu’s partnership with Munger.

"With Charlie's help, I completely reorganized the company I founded. The structure was changed into that of the early investment partnerships of Buffett and Munger."

• Munger's influence helped Li Lu restructure his company for long-term success.

"Charlie is such a unique man. His uniqueness is in his thinking and also in his personality."

• Li Lu admires Munger’s distinctive approach to thinking and problem-solving.

• Munger’s way of thinking involves inverting problems and learning from failures.
  • He studies how to avoid failure to ensure success.
  • Munger’s approach is based on rationality and understanding one's limitations.

"When Charlie thinks about things, he starts by inverting to understand how to be happy in life. Charlie will study how to make life miserable."

• Munger uses inversion to understand and avoid negative outcomes.

"The true insights a person can get in life is very limited. Correct decision making must necessarily be confined to your circle of competence."

• Munger stresses the importance of knowing one’s limitations and focusing on areas of competence.

"Charlie can, in the shortest time possible, unravel the nature of a complex business and understand it better than anyone else can."

• Buffett praises Munger’s ability to quickly grasp the essence of complex businesses.

• Li Lu’s investment approach is deeply influenced by Buffett and Munger’s principles.
  • He focuses on long-term investments and avoids constant trading.
  • Li Lu emphasizes understanding oneself and aligning investment strategies with personal temperament.

"Your biggest challenge is really to understand whether you're that 5% of people or you're like, the 95% of the majority."

• Li Lu advises investors to determine if they belong to the minority of long-term value investors.

"If you're an owner of the business, you don't trade all the time."

• This quote underscores the importance of treating investments as ownership in businesses rather than short-term trades.

"You will be tested. You are going to really have to ask yourself, you're going to have to face yourself whether you're a value investor or you're not."

• Li Lu highlights the need for self-awareness and authenticity in investment strategies.

• Li Lu shares personal stories that illustrate his learning journey and the importance of discipline.
  • He recounts his initial struggles and the transformative impact of attending a Buffett lecture.
  • Li Lu’s experiences with Munger reveal the importance of punctuality, continuous learning, and self-discipline.

"Listening to Warren, a light bulb kind of just went off. And I figured that I can do something in this business."

• A lecture by Buffett inspired Li Lu to pursue a career in investing.

"Charlie will always be early for meetings, but he doesn't waste time either. He will take out the newspaper and read."

• This quote reflects Munger’s disciplined use of time and continuous pursuit of knowledge.

"Charlie spent his lifetime studying the causes of human failures, so he has a profound understanding of the weaknesses of human nature."

• Munger’s deep understanding of human nature and failure informs his disciplined approach to life and investing.

• Li Lu’s journey from a challenging childhood to a successful investment career is marked by his adherence to the principles of Buffett and Munger.
  • His success is attributed to a disciplined, long-term investment approach and continuous self-improvement.
  • Li Lu’s story emphasizes the importance of understanding oneself and remaining true to one’s investment philosophy.

"We have no excuses. Li Lu went from one of the most horrific childhoods you could possibly experience to a billionaire."

• This quote serves as a powerful reminder of resilience and the potential for success regardless of starting circumstances.

"The fact that he attends a lecture from Buffett that changes his life, becomes partners with Charlie Munger, founds a wildly successful investment company that produces billions and billions of dollars in returns."

• Li Lu’s transformative journey underscores the impact of mentorship and the importance of seizing opportunities.

• Successful investors like Warren Buffett and Charlie Munger thrive on independent thinking.
• They rely on their reasoning and evidence, not on others' opinions.
• Being comfortable with being in the minority is crucial for successful investing.

"We don't read other people's opinions. We want to think. We want to get the facts and then think."

• Buffett emphasizes the importance of independent thinking and not being influenced by others' opinions.

"I would say that if Charlie and I have any advantages, it's not because we're so smart. It is because we're rational. And we very seldom let extraneous factors interfere with our own thoughts. We don't let other people's opinions interfere."

• Rationality and avoiding external influences are key advantages for Buffett and Munger.

• Li Lu stresses the importance of having a natural, intense curiosity.
• He advocates for reading extensively to gain a comprehensive understanding.
• This approach can lead to a few significant insights and tremendous opportunities.

"You have to have insatiable curiosity to really try to figure out about how everything works. The more you know, the better off you are."

• Insatiable curiosity is essential for understanding complex systems and gaining knowledge.

"Churchill devoured entire shelves. That's how I think about Li Lu devouring the entire shelf."

• Li Lu's extensive reading habit is compared to Churchill's voracious reading.

• Extensive reading and research may only yield a few actionable insights.
• When these opportunities arise, it's essential to invest heavily.

"Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."

• Buffett's quote emphasizes the importance of seizing rare opportunities with significant investment.

"Reading Barron's magazine for 50 years made him like $400 million. He found one actionable insight that gave him 80 million, and then he took that 80 million, gave it to Li Lu, and Li Lu turned that into 400 or 500 million."

• Charlie Munger's investment strategy highlights the value of rare, actionable insights.

• Li Lu's investment strategy involves meticulous research and analysis.
• He uses investigative journalism techniques to understand businesses deeply.
• This includes reading extensive documents, understanding management, and visiting communities.

"You have to find out the opportunities you're given. Is the business a good business? Is there a margin of safety? Is the management somebody that I can trust? And why is this opportunity presented to me?"

• Key questions Li Lu asks to evaluate investment opportunities.

"He says you'll download every single piece of the document for every single one of the court cases. Every single case. And you read them from page one."

• Li Lu's thorough research approach involves reading every document related to a potential investment.

• Effort and hard work over a sustained period are crucial for success.
• Li Lu emphasizes the importance of going the extra mile in research and analysis.

"Effort and hard work over a sustained period of time. Most of humanity is incapable of doing so."

• Sustained effort and hard work are rare but essential for success.

"I want to be the best in the world at what I'm doing. I want to give full effort always, everywhere."

• Li Lu's dedication to giving full effort in everything he does.

• Li Lu stresses the importance of applying knowledge practically.
• He criticizes students for not putting in the necessary effort and emphasizes the value of hands-on experience.

"I made hundreds of thousands of dollars just taking this class, just listening to the 14 or 15 people. But I did a lot of work. I'm telling you, you can make a lot of money if you're really into this."

• Practical application of knowledge and hard work can lead to significant financial gains.

"You've got to do it. You've got to use it. You've got to do it. I mean, you're young, you have energy. There's nothing to lose."

• Encouragement to take action and utilize the opportunity provided by education and youth.

• Providing accurate and complete information is crucial in the investment business.
• Li Lu's mantra emphasizes the importance of thorough and precise information.

"You want to provide accurate and complete information. Accurate and complete. That is his mantra. Most people will fail on both of those scores big time."

• Accurate and complete information is essential for success in investing.

"If you can't succeed on that, you cannot succeed in this business, because most of the time you're going to stand alone."

• The necessity of accurate and complete information for standing out in the investment business.

• Tremendous insights are rare and valuable, often coming only a few times in a lifetime.
• Continuous curiosity and lifelong study are essential to developing these insights.
• Founders who deeply understand their businesses have a massive advantage.

"Great ideas are rare. There's going to be no more than the number on two hands your entire life."

• Tremendous insights can lead to significant financial returns.
• Lifelong study and curiosity are necessary to build these insights.

"How do you really build that insight? There's no other way than basically continuous curiosity, intense curiosity, and continuous study your entire life."

• Founders who deeply understand their businesses can direct all their resources effectively.

"How many people understood Walmart the way Sam Walton did? Probably nobody on the entire planet."

• The biggest mistake is not making a big bet when a tremendous opportunity arises.
• Missing out on significant opportunities can be more costly than losing money.

"The biggest mistake is not how much money I lost. It was how much money I forgone. That is the biggest mistake."

• Tremendous opportunities are rare and require conviction to act upon.

"You go through your life, you might not have more than five or ten insights. You develop that over many, many, many years of study."

• Buffett's approach to investing involves making only a few significant decisions in a lifetime.
• This approach forces investors to weigh each decision carefully against alternatives.

"You get very rich, he said, if you thought of yourself as having a card with only 20 punches in a lifetime and every financial decision used up one punch."

• This method emphasizes the importance of opportunity costs in decision-making.

"Decisions in your life are all about opportunity costs. And wise people think in terms of personal opportunity costs."

• Li Lu emphasizes the importance of opportunity costs in making investment decisions.
• He highlights the need for deep preparation and psychological readiness to make significant investments.

"If you didn't do the work, if you're not psychologically prepared, you're never going to make any real amount of money."

• The biggest ideas can yield enormous returns, but they are rare and require careful consideration.

"Their biggest ideas, meaning Munger and Buffett's, really gave them 10,000 times their money."

• Continuous learning and curiosity are crucial for success in investing and business.
• Li Lu treats the world as a classroom, constantly seeking knowledge from various fields.

"You have to be intensely curious about everything, and occasionally you're going to stumble into a big opportunity."

• This approach leads to a deep understanding of different industries and businesses.

"When I read biology, when I read physics, when I read history, it's all searching for ideas."

• Successful investors like Buffett and Munger are more like business builders than stock market traders.
• They focus on deeply understanding and building businesses rather than frequent trading.

"People describe them as investors, but they really are, they're business builders."

• Li Lu evolved his philosophy on selling investments, recognizing the value of holding great businesses.
• He emphasizes the importance of identifying businesses with defensible moats and high switching costs.

"If you're in a really great business, that leader is going to take a disproportionate amount of the capital, even more so in the future than you could possibly."

• High switching costs and widespread usage contribute to the stickiness of a business like Bloomberg.

"Anything that is hard to learn and that is highly, highly, highly relied upon to do your daily work, once you learn that damn thing, you do not want to learn that again."

• Businesses with untapped pricing power can significantly increase returns by raising prices.
• Examples include Disney parks and Seas Candy, which raised prices without losing customers.

"There are actually businesses you'll find a few times in a lifetime where any manager of the business could raise the return enormously just by raising prices and yet haven't done it."

• Li Lu emphasizes the importance of identifying businesses with strong pricing power and monopolistic characteristics.

"That is why it's a fabulous business. A fabulous business. That's what I mean by insight."

• Continuous study and understanding of businesses are crucial for finding valuable insights.
• Li Lu advises deeply understanding one business as a starting point for gaining a competitive edge.

"Pick one business, any business, and truly understand it. That is better than any training possible."

• This approach helps in understanding the value and operations of a business, leading to better investment decisions.

"If you can do that, you will have a tremendous leg up against the competition."

• Financial panics and crises are common, and resilience is crucial for long-term success.
• Understanding that change equals opportunity helps in adapting to new circumstances.

"Businesses change, and change equals opportunity. Nothing is constant. That's the interesting thing about business."

• Successful investors and business leaders are those who continuously learn and adapt to changes.

"People who have an active mind and are actively prepared and have the psychological temperament to be able to act when they see an opportunity will always, always have a chance to be fabulously rich."

• Intrinsic passion for a subject is essential for excelling in it.
• Continuous learning and curiosity are key components of entrepreneurial success.

"If you could ever find something you can do well that you really like, this will be your best investment. You will do better than competitors."

• Finding an edge in business and investing requires years of continuous study and the right mindset.

"The game of investing is really continuous learning and excessively profitable because finding an edge really only comes from a right frame of mind and years of continuous study."

• Li Lu advises understanding a single business deeply to gain valuable insights.
• This approach helps in making informed investment decisions and identifying valuable opportunities.

"How do you understand and gain that great insight? Pick one business, any business, and truly understand it."

• Continuous study and understanding of businesses and industries lead to better investment decisions.

"Once you understand a single business inside it out, then you start examining the entire industry."

• Continuous curiosity, learning, and understanding of businesses are essential for success in investing and business.
• Deep insights and the right psychological temperament lead to significant financial returns and long-term success.

"Change equals opportunity. Nothing is constant. That's the interesting thing about business."

• Successful investors and business leaders continuously adapt, learn, and seek valuable insights.

"People who have an active mind and are actively prepared and have the psychological temperament to be able to act when they see an opportunity will always, always have a chance to be fabulously rich."

• Superior businesses often produce positive surprises and fewer headaches compared to bad businesses.
• Example: BYD, a company with a strong culture and excellent management, started with minimal venture capital and achieved significant market success.

"Superior businesses produce a lot of positive surprises. You know, bad businesses are going to throw up one headache after another."

• Superior businesses tend to adapt well and continuously innovate, leading to sustained success over time.

"He has this ability to adapt in a competitive environment. He has demonstrated that ability again and again the way he does automation is far cheaper than anyone else and more reliable."

• This quote emphasizes the importance of adaptability and innovation in maintaining a competitive edge.

• Staying within one's circle of competence is crucial for success.
• Intellectual arrogance should be avoided; admitting when something is beyond one's understanding is important.

"That's too big of a question for me. I don't know."

• This quote highlights the importance of acknowledging the limits of one's knowledge to avoid making poor decisions.

• Knowledge can compound faster than money, making continuous learning essential.
• Avoiding shortcuts in the learning process leads to more rewarding outcomes.

"The process and progression is like compounding money. In fact, you can compound knowledge faster than money."

• This quote underscores the idea that investing time in learning and understanding pays off significantly in the long run.

• Investing in great businesses can lead to unexpected and significant growth.
• Example: Bill Gates and Microsoft, where the market potential was initially unknown.

"The truly great businesses and many times will grow even bigger than you could possibly expect."

• This quote illustrates that the potential of great businesses often exceeds initial expectations.

• Successful investors focus on individual opportunities rather than following general business advice.
• The importance of studying successful practices and historical examples is emphasized.

"Many of the very successful investor practitioners do not bet often. Most people really do not have the necessary discipline, mental discipline, to do that."

• This quote emphasizes the need for discipline and selective investment to achieve long-term success.

• The concept of opportunity cost is crucial in making investment decisions.
• Diversification should be minimal when a great opportunity is identified.

"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."

• This quote highlights the importance of focusing on high-potential investments and minimizing distractions from less promising opportunities.

• Developing a personal investment style that aligns with one's temperament and interests is key.
• Long-term success comes from doing what one loves and naturally excels at.

"This game is a process of discovering who you are, what you're interested in, what you're good at, what you love to do, then magnifying that until you gain a sizable edge over all other people."

• This quote emphasizes the importance of aligning one's investment strategy with personal strengths and passions.

• Mentors like Charlie Munger have a profound impact on shaping investment philosophies.
• Transitioning from seeking cheap securities to focusing on strong, wonderful businesses is a significant shift influenced by mentors.

"Charlie, in 1965, promptly advised me, Warren, forget ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices, and give up buying fair businesses at wonderful prices."

• This quote illustrates the shift from focusing on undervalued companies to investing in strong businesses with long-term potential.

• Identifying industry leaders by understanding who competitors fear to compete with is a valuable strategy.
• Example: Capital IQ's attempt to compete with Bloomberg revealed Bloomberg's unmatched industry strength.

"We learned quickly that we couldn't really compete with Bloomberg."

• This quote highlights the importance of recognizing and respecting industry leaders' strengths.

• Maintaining focus on core activities and avoiding distractions is crucial for success.
• Example: Li Lu focuses on studying industries and companies rather than other investors.

"I don't spend my time studying other investors. We spend our time studying industries and studying specific companies."

• This quote underscores the importance of focusing on core competencies and avoiding distractions.

• Successful businesses and individuals continuously adapt to changes and learn from experiences.
• The future is inherently unpredictable, making adaptability a key trait.

"Successful businesses have some combination of things that enable them to adapt to changes better than anyone else."

• This quote emphasizes the need for continuous adaptation and learning to navigate an unpredictable future.

• Success involves continuous self-examination, learning from mistakes, and adapting over time.
• Building strong relationships and seeking mentorship are essential for personal growth.

"Socrates was right. The unexamined life is not worth living. Certainly not living well."

• This quote highlights the importance of self-reflection and continuous improvement for a fulfilling and successful life.