Li Lu and Charlie Munger and Warren Buffett

0:00 20 years ago as a young student coming to the United States, I couldn't have imagined having a career in investing. I would have never thought that I'd be fortunate enough to meet Charlie Munger. In 2004, Munger became my investment partner and has since become my lifelong mentor and friend, an opportunity I would have never dared to dream about. Charlie and I first met at a mutual friend's house while I was working on investments in LA after graduating from college. The first impression he gave me was distant. He often appeared to be absent-minded to the presence of his conversation partners and was instead very focused on his own topics. But this old man spoke succinctly, his words full of wisdom for you to mull over. 7 years later at a Thanksgiving gathering in 2003, we had a long heart-to-heart conversation. I introduced every single company I've invested in or researched or I'm interested in to Charlie and he commented on each of them. I also asked for his advice on the problems that I was encountering.

1:02 He told me that the problems I've encountered were practically all the problems of Wall Street. The problem is with the way that Wall Street thinks. Even though Berkshire Hathaway has been such a success, there isn't any company on Wall Street that truly imitates it. If I continue on this path, my worries will never be eliminated. But if I was willing to give up this path right then, to take a path different from Wall Street, he was willing to invest. 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. Investors who stayed made long-term investment guarantees and we no longer accepted new investors.

1:44 I then entered another golden period in my investment career. In the next 12 years, the capital grew more than 20 times. Buffett said despite the countless people he has met in his life, he has never encountered anyone else like Charlie. And in the years that I've known Charlie and was fortunate to be able to intimately understand him, I am also deeply convinced of that. Even from all the biographies of people from all the ages, I have yet to see anyone similar to him. Charlie is such a unique man. His uniqueness is in his thinking and also in his personality.

2:17 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. To examine how a business becomes big and strong, Charlie first studies how businesses decline and die. Most people care more about how to succeed in the stock market. Charlie is most concerned about why most have failed in the stock market. His way of thinking is I want to know where I'm going to die, so I will never go there. That is actually uh my favorite book out of, you know, I've probably, I don't know, right, 10, 15 books on Warren Buffett and Charlie Munger. My favorite one is on episode 286. It's called All I Want to Know Is Where I'm Going to Die, So I'll Never Go There. Buffett and Munger: A Study in Simplicity and Uncommon Common Sense.

2:59 So, let's go back to this. His way of thinking is uh I want to know where I'm going to die, so I will never go there. That's episode 286. Charlie constantly collects and researches the notable failures in each and every type of people, business, government, and academia and arranges the causes of failure into a decision-making checklist for making the right decisions. Because of this, he has avoided major mistakes in his decision-making in his life and in his career. The importance of this on the performance of Buffett and Berkshire Hathaway over the past 50 years cannot be emphasized enough.

3:32 Charlie's mind is original and creative, never subject to any restrictions, shackles, or dogmas. He has the curiosity of children and possesses the qualities of top-notch scientist and their scientific research methods. He has a strong thirst for knowledge. And now rereading this again, these are all traits that Li Lu has imitated and adopted. So, let's read that again. Charlie's mind is original and creative, never subject to any restrictions, shackles, or dogmas. He has the curiosity of children and possesses the qualities of top-notch scientists and their scientific research methods. He has a strong thirst for knowledge.

4:09 To him, with the right approach, any problem can be understood through self-study, building innovations on the foundations led by those who came earlier. Charlie advocates studying all the truly important theories in all disciplines and building on the foundations of the so-called worldly wisdom as a tool for studying the important issues in business. Charlie's way of thinking is based on being honest about knowledge. He believes that in this complex and changing world, there will always be limitations to human cognition and understanding.

4:39 You must have the correct understanding of knowing what you know and what you don't know. The true insights a person can get in life is very limited. Correct decision-making must necessarily be confined to your circle of competence. A beautiful lady once insisted that Charlie use one word to sum up the source of his success. Charlie said it was being rational. Charlie can see through to the essence of things. Buffett calls this characteristic of Charlie the two-minute effect. He said Charlie can, in the shortest time possible, unravel the nature of a complex business and understand it better than anyone else can. The process of Berkshire's investment in BYD is an example. I remember in 2003 when I first discussed BYD with Charlie, despite having never met the founder, uh never visiting BYD's factory, and being relatively unfamiliar with the Chinese market and culture, his questions and comments about BYD remains to this day the most pertinent questions a BYD investor needs to ask. Everyone has blind spots, and even the brightest people are no exceptions. Buffett said, "Benjamin Graham taught me only to buy cheap stocks. Charlie allowed me to change my thinking. That's the real impact Charlie's had on me. I needed a powerful force to walk out of the limitations imposed by Graham's theories. Charlie's ideas were the source of that power. He expanded my horizons.

5:57 That is the end of Buffett's quote. This is Li Lu talking about this. I've also had this profound experience. Charlie pointed out the blind spots in my thinking. He is not just a partner. He's a role model in my life. Not only did I learn from him the principles of value investing, but I also learned from him how to live life. He made me understand that a person's success is not accidental. Timing and opportunities are of course important, but the inherent qualities of people are even more important.

6:25 Charlie likes to meet people for breakfast, usually starting at 7:30 a.m. I remember the first time I had breakfast with Charlie. I arrived on time only to find Charlie sitting there finished with the day's newspapers. While it was only a few short minutes away from 7:30, I felt bad letting an elderly man I respected wait for me. For our second date, I arrived about 15 minutes early and still found Charlie sitting there reading the newspaper. For our third meeting, this is one of my favorite stories. It's hilarious. For our third meeting, I arrived an a half an hour earlier and Charlie was still reading the newspaper as if he had been waiting there all year round and had never left the seat. For our fourth meeting, I arrived an hour early and began to sit there waiting at 6:30 a.m.

7:10 And at 6:45 a.m., Charlie leisurely walked in with a pile of newspapers and sat down not even looking up, completely unaware of my existence. Afterward, I came to understand that Charlie will always be early for meetings, but he doesn't waste time either. He will take out the newspaper and read. One year, Charlie and I were attending an out-of-state meeting. After the event, I unexpectedly met Charlie at the airport terminal. His plane had already departed, but Charlie was not in a hurry. He took out a book and sat down to read while he waited for the next plane.

7:47 "As long as I have a book in my hand, I don't feel like I'm wasting time," Charlie said. He always carries a book on him. As long as he has that book, he'll have no complaint. Charlie spent his lifetime studying the causes of human failures, so he has a profound understanding of the weaknesses of human nature. Because of this, he believes people must be strict and demanding on themselves, continuously improving their discipline in life in order to overcome the innate weaknesses of human nature.

8:16 This way of life to Charlie is a moral requirement. He is such a unique person, but if you think about it, if Munger and Buffett weren't so unique, how could they have built Berkshire's performance over 50 years into one that is unprecedented in the history of investing and one that has yet to be replicated? Over the years that I've known Charlie, I often forget that he's an American. He is closer to being the traditional literati, which is the scholar officials of Imperial China.

8:45 Charlie is the best example of a businessman with a literati soul. He's extremely successful in business. However, in the deep intimate interactions I've had with Charlie, I found Charlie to be essentially a moral philosopher and a scholar. He reads widely, is knowledgeable over a broad range of topics, is truly concerned about his own moral cultivation, and is ultimately concerned about society. Charlie's value system from the inside out promotes self-cultivation and self-development to become the saints who help other people.

9:18 Charlie very much appreciates Confucius. I sometimes think that if Confucius was reborn in America today, Charlie would probably be the best incarnation. If Confucius returned 2,000 years later to the commercialized China, his teaching would probably be, "Have your heart in the right place, cultivate your moral character, fortify your family, acquire wealth, and help the world. That was an excerpt from the forward that Li Lu wrote for the Chinese version of Poor Charlie's Almanack, The Wit and Wisdom of Charlie Munger, and it is an excerpt from the book that I made myself. As you and I covered last week, there's only one book on Li Lu. It was written by Li Lu, and it only covers his early life and his escape from China.

10:06 What that version of Li Lu that was writing the book could never have predicted was what the next few decades of his life was going to turn out, the fact that he uh like 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. So, what I wanted to do for this episode was, okay, we we already covered his early life, his his surviving one of the most horrific childhoods you could possibly imagine. Now, I want to learn how he thinks about business building and investing. And so, to do so, I had to make my own book. So, what I did is I I found all the lectures I could find and all the interviews I could find of Li Lu in his own words. Most of them are on video. I would take the video, I then transcribe the video, I then print it out the transcription, then I organized them in chronological order by the year that he gave the talk, and then I treated that giant stack of paper just like a book. And so, the result is I kind of have like a homemade or handmade almost like biography of Li Lu where he's discussing his investment career.

11:09 And when I'm done, I'm going to put this in a binder, a three-ring binder, and put it up on my bookshelf. This is something when I went to Charlie Munger's house and actually got to see his library. This is something where I realized is like, oh, I'm still a biography amateur because Charlie would make his own biographies. There's this very hard to find interview that John D. Rockefeller gave towards the end of his life. It's like, I think 1,700 pages. I think the transcript is 1,700 pages long. It's the William O.

11:34 English interviews that he did with Rockefeller. And on Charlie's bookshelf, you see that he had printed out the transcript and then put it into multiple three-ring binders. So, I'm going to put my own version of Li Lu's autobiography when I'm done in a three-ring binder on my bookshelf. And so, the first part of this homemade book is going to be obviously the forward that Li Lu wrote for the Chinese version of Poor Charlie's Almanack. The next thing is Li Lu's Columbia Business School lecture in 2006.

12:02 I briefly mentioned this last week because the the lecture's like an hour and 45 minutes long or something like that. There is like a 17-minute section that is just Li Lu completely like lighting up and being very disappointed in the lack of effort that the students in the class and the lack of, you know, just rigor that the students of in the class were exhibiting. But, that I'll touch on later cuz he actually goes through and describes his process of how he selects and the the research that he does.

12:27 He uses Timberline as an example, which is a very successful investment of his. But, that comes later. I want to start He he starts out like, "Why is he doing this? Why is he even bothering to to come to Columbia Business School and to give this lecture?" And his whole point was that the fact that he attended a lecture by Warren Buffett when he was a student at Columbia, when Li Lu was a student, changed his entire life. He says, "This class, in many ways, is really what made my career. At the time, I wasn't even a student at the business school.

12:52 And I was accidentally brought into a lecture. And in the middle of that speech, listening to Warren, a light bulb kind of just went off. And I figured that I can do something in this business. At the time, I was pretty desperate. I had recently escaped from China. I didn't know anybody. I had no connections whatsoever, and I didn't have any money. I was horribly worried about how do I ever make a living in this country? And I really didn't grow up with a capitalist culture, either. I think this is why last week's episode is so important, why it's one that I'm going to re-listen to anytime that I feel like any like self-pity kind of creeping in. We have no excuses. Li Lu went from one of the most horrific childhood you could possibly experience to a billionaire. He moves to America, no money, doesn't know the language, no connections. And so right away you also see the similarities in the thinking between Li Lu and Charlie Munger. You know, he says bad thing 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. And so we go back to this young Li Lu sitting in this lecture from Warren Buffett trying to figure out what the hell am I going to do with my life? I was horribly worried about how do I ever make a living in this country and I really didn't grow up with the capitalist culture either. What Buffett said about investing really was just so different from my perception of the stock market.

14:08 The more I thought about it, the more I thought, well, gee, this may be something that I can do. And so one of the first things that he learned from Buffett was that you should really see yourself as more of an owner of a business and therefore tie your fortune to the outcome of that business. Your your fortune will rise up and down with the nature of the business. And if you're an owner of the business, you don't trade all the time. And so that line, if you're owner of the business, you don't trade all time, this is something that Li Lu's going to repeat throughout the lectures that it's it's really Munger's idea of sit on your ass investing, which Munger says, sit on your ass investing, you're paying less to brokers, you're listening to less nonsense and if it works, the tax system gives you an extra one, two, or three percentage points per year. This important investment philosophy assumes that one is better off buying a business with exceptional business economics working in its favor and holding it for many years than engaging in a lot of buying and selling trying to anticipate market trends. Constantly buying and selling means constantly being taxed. So that's something that Munger will repeat, that is something that Li Lu will repeat as well.

15:08 And so Li Lu is telling the students, hey, uh turns out this Buffett guy's, you know what, let me I'm going to read this to you real quick. Uh I was texting a friend of mine as I was doing research uh for this podcast and I said, uh I'm working on another Li Lu episode, but this one is about his remarkable investing career. It can be summarized by number one, studied Buffett and Munger. Number two, did that.

15:30 So he tells the students like, I'm listening to Buffett. Turns out this Buffett guy is pretty smart. Kind of knows what he did he's doing. I should just do that. And so then he hits on the advice that he has, which I think is the most important I think is the main one of the main things that you and I talk about and why we read biographies and not business books. It's because general business advice is useless. It has to be tailored to who you are. It has to be authentic to you. And so he's saying, you're interested in investing. Well, guess what? 95% of the stock market is made for traders. 5% is going to think maybe 5% or even less are going to think like like Li Lu, like Buffett, like Munger. So you have to figure out does this make sense to you? Cuz if you're not if it doesn't fit, if you're not authentic to you, if it doesn't fit your temperament, you're going to fail. And so he says, if you're thinking like us, you are really not the majority. You are actually a very very very small minority.

16:13 And the stock market is not created for you. And that's really where your opportunities is. And that is where the challenge is. And that is what I first learned when I listened to Buffett. That is one of the things that stuck in my mind. Because I really know I really knew by then what kind of person I was. Your biggest challenge is really to understand whether you're that 5% of people or you're like the 95% of the majority.

16:37 And I think this is overlooked and really excellent advice because this is key to enjoying the game. His whole point is like all the value is in the long term. If you're building a business that's not authentic to you, if you don't enjoy it, you're not going to last decades and that's where all the money is. And in many cases and in Li Lu's case, it takes an experiment. You have to know what you don't like to do. So he's like, "Listen, I always knew I was going to run my own fund."

16:57 That he knew. But he didn't know how he was going to run the fund. And so one of his early backers was Julian Robertson, who was the founder of Tiger Management. And so he tells Li Lu, he's like, "Hey, come into the office. Come like work out of here with all these other trainers." He Li Lu's going to talk about this uh in more detail in in another interview later. But this is where he realizes like, "I'm not part of this 95% and so it says Julian invited me to share office with him and invited a whole bunch of other fund managers that he also invested in to share ideas and that's when I sort of got a much better understanding of how the 95% of other people operated. And so most of them were trading all the time, they were shorting stocks and Li Lu was like I don't like this isn't I don't like this. Li Lu is much more like Munger and Buffett where he wants to sit in a room, read, think. He compares his job to an to an investigative journalist. He's like this doesn't match me. And so after describing this period of time where he's like I don't like this this this kind this version of the business, he gives excellent advice again that I think too many people miss especially people who don't read biographies miss.

17:53 So my first point I want to leave you with is really to understand who you are because 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. And he says if you want to be like, you know, if you want to be in a value value investor, you want to be like Li Lu, if you want to be like Charlie Munger, if you want to be like Warren Buffett, that means that somehow you're probably genetically genetically mutated. You are very comfortable being in a minority which is not natural to human beings.

18:22 Most of us survive because we stick with the group. And if you're like Li Lu and Buffett and Munger, you would naturally adopt the attitude that you're right not because other people agree with you but because your your reasoning and your evidence showed you that you're right. When I got to this part, I searched this cuz I was like I know Buffett said something about other people's opinions over and over again and that's what I was thinking about when I got to this paragraph. So in that book that I mentioned earlier which I feel is the best book that I've ever read on Buffett and Munger which is all I want to know is where I'm going to die so I'll never go there written by Peter Bevelin, Buffett says two things about this.

18:55 First quote from Buffett, we don't read other people's opinions. We want to think. We want to get the facts and then think. And then later on the second thing he says uh Buffett says 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. And so we go back to Li Lu.

19:19 He says, "This is common sense, but of course common sense is the least common commodity." That is a great line. Common sense is the least common commodity. Most people don't think that way. And so he's like, "You have to ask yourself, how do you want to spend your time?" And for Li Lu, he's like, "I want to spend most of your my time or your time uh truly being an academic researcher instead of being a so-called professional investor. Most of the time the job really is to be a researcher, to be a journalist. And then he describes the traits that you have to have if you want to go down this path. He's really describing himself here.

19:52 Uh you have to have insatiable curiosity. You have to have an insatiable curiosity to really try to figure out about how everything works. The more you know, the better off you are. And so you have to be naturally interested and curious. He matches that intense curiosity with the fact that he reads everything. There's a line in a young Churchill's um biography that I read that talked about the difference between I think he was like 26 when he was in Parliament. He said the difference between Churchill at that time and his competitors or I guess his fellow lawmakers was they would contend to read like the day's newspapers where it said uh there's a line in in the book where it says Churchill devoured entire shelves.

20:31 That's how I think about Li Lu, devouring entire shelves. So he's like, "Of course you have to have this natural intense curiosity." He says, "This will help you if you're obviously reading everything." He says, "It will help you because then occasionally you will find a few insights. All of your studies would really just give you a handful of tremendous opportunities." And so when he talks about all this reading, all this thinking, all this research, will only produce a handful of opportunities.

20:53 And obviously when you when you find these opportunities, you want to bet really heavily. In fact, I have a uh I have a a coffee mug of Warren Buffett's wisdom and it has like quotes and I just pour espresso into this thing all day long. And there's a line uh that I was thinking of because on the on the coffee mug it's a quote from Warren that says opportunities come infrequently. When it rains gold, put out the bucket not the thimble. And the reason I thought about this is because multiple times people will ask Li Lu because he takes questions in almost all these talks.

21:26 It's like, well, well, how much money do you put into this investment? And like, what large percent of your what percent of your portfolio and everything else? And my funny his funniest answer to this was like, "How much money did you put into this?" He goes, "A shitload." And so, I was thinking about that because my first introduction to Li Lu came when I heard Charlie Munger describe the fact that he said reading Barron's magazine for 50 years made him like $400 million and and he described why cuz he's like, "I read Barron's magazine for 50 years. The entire 50 years that I read Barron's magazine, I found one actionable insight that I could actually I could I could make an investment in.

22:01 That insight 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." And so, I think that's a great illustration for what Li Lu the point that Li Lu's trying to make here. It's like you're going to do all this reading, all this learning, all this research and over your lifetime you're going to have a handful of insights and you know, if you act on those insights, you're going to be fabulously fabulously wealthy. And so, he's going to start walking the students through how he found and how he thought about this investment in Timberland which I think went I think he returned like 600, 700% maybe even more. And so, he he's doing this research. He's like, okay, you have to find out the opportunities you're given. Is the business a good business?

22:41 Is there a margin of safety? Is the management somebody that I can trust? And why is this opportunity presented to me? And so, the first thing that he tells the students is like, "Listen, I no longer talk about what we own." In other words, bad boys move in silence. But I can pick a couple examples of something that I owned in the past and he's using this as an illustration or I guess an example of how he thought about how he thinks about investing. And so, during this, he's holding this giant book. So, it's the Value Line Investment Survey, which is a stock analysis, tracks approximately, you know, 1,700 something like publicly traded stocks. It's a giant book, and he's trying to walk the students through on how to analyze businesses that are in this book. And so, again, Li Lu, just like Churchill, just like most of the people you and I study, they devour entire shelves. So, he's like, "I got hooked on Value Line, and I would read the entire thing from beginning to end."

23:34 He says, "That's really the best kind of education. If you want to have an encyclopedic knowledge base, you have to go through page after page after page. Doing so is just enormously helpful." And if you really think about the idea behind the idea, like, what is he trying to tell the students? He's that is like, "How bad do you want it?" That right there, the amount of people are going to read cover to cover this giant book that it's in the video. You know, it it looks like you can work out with the thing.

24:02 How many people are willing to do that? Right there, it's going to eliminate like 95% probably greater than 95% of people. It's going to eliminate most of the people are sitting in this Columbia These are MBA students, and they're not even doing it. And this is why studying the early lives of these entrepreneurs and investors that you and I study is so important because this guy had I don't know if I mentioned it on the the podcast that's in the book last week. He had 500 books in his dorm room. This guy grows up in unbelievable poverty in the communist country, no uh no opportunity at all. What do you think that kind of person is going to do when they get to America? They go to Columbia. He hears Buffett speak, and then he realizes, "Wait, there's a book that does this in-depth analysis on all the stocks.

24:44 Okay, yeah, I'm going to read every single page multiple times." Wait till we see the analysis that he does for Timberland. This guy is going to devour entire shelves. So, he pulls this up, he shows the the the Value Line sheet on Timberland, and he's like, "Listen, you don't really care where it traded before. The first thing I look it at is valuation, and if the valuation doesn't fit, I don't even really want to go beyond that."

25:09 So, he is walking through the class on how he starts understanding a business. And he makes the point, "If you've done this work, if you have this encyclopedic base of knowledge, if you read every single page, then what happens is it speeds up your learning process later on, so you can pull up a page." He says, "Listen, if you're skilled, it shouldn't really take you more than a second to find it." And then the next thing you want to do is you says he or next thing he does, he says, "I always think of myself as a business owner."

25:32 And he thinks, "If I could buy the entire business at this price, then I probably want to own it." Meaning buy the stock. And so, he senses there might be an opportunity with Timberland. Timberland's got a brand name a good brand name, but the stock is just getting completely killed. At the time, there was the the Asian financial crisis, and all the the shoemakers that were like they were depressed. The prices were depressed because they thought their sales in Asia are just going to fall off a cliff. And he mentions this is also happening to Nike and Reebok at the time. And so, he goes and tries to find analyst report on Timberland, what's going on with Timberland? He says it turned out there's no analyst report. Nobody was even covering this. And that didn't make sense to him cuz he said the company's doing about a billion dollars a year in sales. It's a big brand. Why is nobody covering this?

26:16 And so, he walks people through this. He's like, "Well, it's always been really profitable, and therefore they didn't have need their need for the financial market is very limited. Any other reason?" He's constantly Wait. Like you'll answer one thing, and he'll go, "Okay, more. More. More. Any other reason?" "Well, the ownership structure." "What's the ownership structure?" "Well, it's family owned. They own about 40% of it, and they control 98% of the vote." And so, Li Lu says, "Immediately that turns a bunch of people off." And he brings up the point. He's like, "You really you should think of yourself as an investigative journalist." And he says, "You've got to have a very active, very a mind. A mind that wouldn't be satisfied with any bogus answers.

26:55 Otherwise, you can't be in this business. So, he's like, okay, we have the Asian financial crisis. We have the fact that there's no analysts covering Timberland. What else could be the reason why he failed feels there's an opportunity here? Why are they keep Why is their stock getting absolutely battered? Turns out there's a whole bunch of lawsuits. So, what do you do next? You already know. We're going to pause right here. You already What do you think Li Lu is going to do next? 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.

27:32 If you do not have a curious mind, you're not going to do this. I am just so curious. I want to know what's happening. This doesn't add up. And so, you have to dig into every single thing, and you have to read everything as I did. He's talking about effort. There is so many times So, obviously, as you know, like I underline things as I'm reading them, I jot down to myself like what comes to mind. Sometimes they're past ideas, sometimes there's stuff I have to search on.

27:57 Sometimes it's like, oh, this is an idea related to something else he said. Multiple times, if you were to see this little handmade book that I made, you're going to see the word effort in cap lock cap in all capitals in a big giant ass circle. Cuz that's what he's talking about. He's talking about effort. Just like Munger and Buffett talk a lot about human nature and human psychology, so does Li Lu. Remember what he said? You know, common sense is the least common commodity. You know what else is a a least common commodity? Effort and hard work over a sustained period of time.

28:27 Most of humanity is incapable of doing so. So, this continues, and like I have a big smile on my face as this continues to go on cuz it's just the effort that this guy is going to do. Remember, he's When he pulls the trigger, it's he's not like dabbling around. You know, there's a great line where it says, Walt Disney seldom dabbled. Everyone who knew Disney remarked on his intensity when something intrigued him. He focused himself entirely on it as if it was the only thing that mattered.

28:51 That's the same description for Li Lu, too. Okay, so at this point, he's like, all right, I found Oh, there's all these lawsuits. Cool. I'm going to print out every single case and read it front to back. And what he realizes like, oh, this is fantastic. You see the owner of the business, right? He's kind of like getting pissed off. There's like this fight between him and some like some other investors. And Li Lu says you get a sense of his personality by reading those documents because you can vividly see his defense. And so it was the owner who was like, I'm not going to talk to the street anymore. I'm not going to give you any guidance.

29:19 I don't need a damn dollar from anybody else. This business is wonderful. And so the people that didn't do the work, right? How many people Let's say there's 100 people that knew about the lawsuits. That's going to scare a bunch of people away. How many of those 100 people actually read the every single word and every single document like Li Lu? I don't know. One, two, maybe? And so this is beneficial for people like Li Lu because these lawsuits served a purpose. They scared They scared the superficial people away. And so now Li is starting to get a little bit more comfortable with them. He's like, okay, well, that's nice. Like we still have to find out are they actually good managers? How do we know that they're decent people? And this is where he goes back to. He's like, I view this job as an investigative journalist. Most people who have built businesses have also have a big personality. Yes, they do. And they have a history they can go and audit. They've left a trail of evidence of what kind of person they are and what they've done, how they deal with different situations. And so this is I mentioned this last week. He goes to their community. He goes to their church.

30:13 And he says, you go visit everyone. You spend a few weeks there. So let's use that example again. There's 100 people maybe interested in this potential investment in Timberland. How many people out of the 100 are doing what Li Lu did? Now it's not even two or three. It is one. And Li Lu doesn't stop there. He says the fellow actually I think this is the founder of Timberland. Uh he says this fellow actually only graduated high school. He's a relatively simple guy, but he's a nice decent guy. It turns out he has a son who actually went to business school. Now, I'm going to have a hard time not laughing at this. It's ex- inspiring to me. He says like, "I want to be the best in the world at what I'm doing. I want to give full effort always everywhere." And he's like, "What I Like, I wouldn't even think to do this." Listen what he does. So, turns out the Timberland founder, right? He has a son. His son actually went to business school. His son was actually my age at the time.

31:07 So, I go and find out all the boards that the father and the sons sit on. And I find one of these boards that the son is on is run by a friend of mine. So, I get myself invited onto the board. I join the board along with the son, and we become very close friends. And then I really know what's going on in that family. It turns out to be one of the most admiring families I've ever met. They are wonderful. And they also happen to be brilliant businessmen.

31:35 This is incredible. This is also related when I got to this part, like think about Charlie Munger would talk about the dangers of multitasking for for decades. And this is a perfect example of this cuz this is why multitasking is so dangerous. You don't have time to go to the extremes. And the value is found in the extremes. So, in addition to this, he goes to all the different stores. He talks to all the store managers. And he He does the work for us. He summarizes this for us. Think about how much effort you put in to get the damn thing right.

32:07 And so, now he realizes he has a margin of safety. He understands he has a very in-depth, thorough understanding of the business from A to Z, and he makes his investment. And they ask him, "Well, how much did you put in?" He goes, "I put a shitload on them." And over the next 2 years, the damn thing went up seven times. That's Charlie Munger. Charlie Munger said, "You should remember that good ideas are rare. When the odds are greatly in your favor, bet heavily."

32:32 That is the same idea that Buffett has on my coffee mug. "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble. Go back to the text message I sent my friend. I'm working on another Li Lu episode, but this one is about his remarkable investing career. Can be summarized. Number one, study Buffett and Munger. Number two, did that. Munger and Buffett said, "Good opportunities are rare. When I find one, go all in." Li Lu's version of this is is I found a great opportunity, I put a shitload on them, and then over the next 2 years this damn thing went up seven times. He talks about talks about the beginning, makes the investment, okay?

33:04 This is before this giant increase in value. He goes, the CEO goes and and starts doing analyst meetings, okay? So, Li Lu's going to You already know Li Lu's going to show up at the analyst meetings, okay? You know how many people are at the first analyst meeting? It's the CEO, Li Lu, and one other guy. Three people. And then after the increase in value, which is I think the end of I think this is happening in the year 2000, he says, "The room was just absolutely filled."

33:33 And then he says, "So, that's when I knew I had to sell, so I sold everything." Think about that. The stock goes up 700% or whatever it is, and then the meetings are packed. And then he's summarizing exactly his thinking. And this thinking, it's coming out of Li Lu's mouth, but this these are, you know, Buffett and Munger's ideas. You don't You just have to sit on your ass. You don't have to do a a damn thing. That's the good thing about buying a really good business. The business will take care of itself. The opportu- Opportunities like that don't come very often, so when it comes, you have to seize it. When opportunity comes, you have to jump on it, and that's what I did. When I He continues a few paragraphs later.

34:08 When opportunity comes, you can tell. You can smell it. He's assuming you did the work necessary, right? You can smell it. How can you really develop that smell? The only way to do that is just reading page after page after page. And then he's asked again. He was asked what percent of your fund did you put in Timberland? He said, "A shitload of money." So, then we get to the part This is when they start analyzing. So keep in mind, he just went through how he analyzed Tamerlane, right? So he's like, "Okay, we're going to pull out Value Line, we're going to analyze some of these businesses together." This is when they start analyzing together, and this is when he absolutely lights them up.

34:44 And so he starts, "Think of yourself as an owner." This is something he tells over and over again. And he asks like very simple questions, right? Like what is the market cap? And he goes, "Come on, it's simple. Come on, I thought you guys did all your homework. Did anybody do homework? Not one hand? Raise your hand if you did homework." One person in the class. One hand goes up, and I think that guy even gets the next question wrong. So we have to question if he even did his goddamn homework. And he says, "How the hell are you going to make it in this business?"

35:13 And I wrote in the column in the margin, they would not be one of three at the analyst meeting. So it continues. I'm I'm going to just talk I'm just going to talk about his reaction to them, right? Cuz this is effort. How bad do you want it? Come on, guys, you're the Columbia Business School. What do we pay you for? Come on, guys, you have work to do. This is not good. Bruce, the teacher, he goes, "I don't know what the hell you're teaching them. Come on." This goes on for pages and pages, so I'm going to skip over this. It's so bad. This is his response.

35:40 This is why all my employees I had never went to business school. They never worked at an established management firm, and some of them never even had accounting because I find it's easier to train them than somebody who did. This is something that pops up in the biographies a lot that it in many times, especially if you're running your business differently, and these are, you know, from very I hate saying this, but like very much like first principles thinking. It's better no experience than bad experience, better no habits than bad habits.

36:06 And so they're going back through uh this stock. There's just one thing I want to pull out that I think is a really important um point that you shouldn't be fooled by what things are called or what things how things are described, but you should be asking how do they actually function? And so there's uh this business that they're analyzing that has a bunch of other businesses, and one of the businesses that they own is like this department store. It's called a department store, but it's not like you and I would think of a department store. It has It's holding all this inventory. So therefore, the book value of this department store, it's worth more than the book value uh in his opinion. He says, "It's not a department store that would like we understand here. They don't take any inventory. It's more like a shopping mall that would take a percentage off the top line of all the merchandise and all the stuff that they sell there." And so it's clear from his description when he when he's talking about this section, he's like, "Oh, I don't care what you you're calling it. I don't care what you're describing it like what you describe it as. Like what does it actually do? How does it actually function?"

37:05 And so after like struggling through this and kind of, you know, cre- criticizing them or just, you know, chastising I guess for lack of effort is the way I would put this. He He makes a point again, "This type of approach is not natural. However, if you come to the conclusion that your personality somehow will fit this mutated gene pool, this is something you might really be looking to do. The only thing I can add to this is that there's a lot of money in it as has been repeatedly proved by people from Ben Graham to Buffett and everybody else. I took this class and it really changed me fundamentally. But one thing you have to do is you've got to do it.

37:38 That's why I was somewhat disappointed with the amount of work that you have put into this. 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. Not only just listen, but do it. I benefited hugely, hugely just by listening and actually doing it. That is the difference. There is no [ __ ] theory.

38:05 All everybody's telling you is what works. It's what works. You guys have a terrific opportunity and if you don't really use this, then shame on you. 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. And he starts talking about what becomes his his mantra, that other people describe as his mantra in in his investment company. You want to provide accurate and complete information.

38:29 Accurate and complete, that is his mantra. Most people will fail on both of those scores, big time. And you have to go that extra length in order to get it done, though. The extra length he described in the Timberland, right? If you can't succeed on that, you cannot succeed in this business. Because 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. If you want to do the Buffett and Munger type, which is more of the kind that I want to do, he's describing this, this is Li, and you want to be that way, your return is going to come from a handful.

39:05 Great ideas are rare. There's going to be no more than the number on two hands your entire life. He says over a course of 50 years, you might get tremendous insight, you know, on on no more than 10 insights, essentially. Tremendous insight. And what he means by tremendous insight is what we're just going to bet the bet the entire house. How do you really build that insight? There's no other way than other than basically continuous curiosity, intense curiosity, and continuous study, your entire life.

39:35 I would also say this is why founders that still run and control their company do so over a long period of time have such a massive massive advantage. Because think about it, it's like Sam Walton talks about, you know, I never really had to invest in much. I never really invested in much outside of Walmart. And how many people understood Walmart the way Sam Walton did? Probably nobody on the entire planet. And so therefore, he can direct not only all of his money, but all his time and energy into this thing, cuz he knows it better than anybody else. And by just by getting that one insight, getting that one that one fundamental understanding of his company, he didn't need anything else. Even if he never invested anything, never bought a stock, never made an investment in another company, he's still fabulously rich. That idea, that fundamental truth, is gets me fired up.

40:14 And then Li talks about the other side of this. That his mistake cuz he's he hounds on the margin of safety, right? He's like, you know, he's lost some money, but in very rare cases. And he says his biggest mistake is actually not making a big bet when he had that tremendous opportunity. Uh so he says, "The biggest opportunity uh came or the big biggest mistake uh the missed opportunity came from this company that I had an absolute insight on. Uh I had the absolute insight. I knew the management. I knew that they were trading below cash. And subsequently, that went up 50 to 100 times and I missed it. I couldn't bring myself into it. That was the biggest biggest mistake I made. The biggest mistake is not how much money I lost, it was how much money I foregone. That is the biggest mistake. I cannot forgive myself for making that mistake." And so then Li Lu is going to elaborate on why.

41:05 And this is going to sound a lot like Warren Buffett's punch card idea. So Li Lu says, "You go through your life, you might not have more than five or 10 insights. You develop that over many, many, many years of study. Some of the things I'm doing, I really found myself doing first 15 years ago. So what he means, I studied an American company 15 years ago, and now I found the Asian counterpart. But I studied that business for 15 years in between. I know everything about that industry and what really makes that business tick. You need to have that kind of insight in order to really swing with conviction. And if you cannot do that either psychologically or because you're ill-prepared, you would just never really make any real amount of money." So I got to that part and I was like, "Oh, that's another one of, you know, Buffett's ideas and Munger's ideas." Essentially coming out of, you know, Li Lu is just echoing what he learned from them.

41:55 And so Buffett goes and I think he speaks to University of Florida MBA students. But this is from the biography Snowball. And so it says uh to the students, Buffett explained his 20 punches approach to investing. "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, you would resist the temptation to dabble. You make more good decisions, and you'll make more big decisions. I need to actually read something to you.

42:28 I watched this video of Charlie Munger. It's like 90 seconds long, and uh it says it's titled Charlie Munger on what's different about Li Lu. Not only did I watch it 20 times this week, but I sent it to a bunch of friends. And I transcribed it, and I this really is and now it's like making me pause this week and really analyze how I'm spending my time, and really making sure that I'm analyzing everything through opportunity cost, and only taking the best opportunities available, right? So, Charlie Munger says, Li Lu I'm I'm getting off of the the text that we have uh the Li Lu book that I have in my hand. I'm going to this transcript of this Charlie Munger video because I I really do believe in 90 seconds he gives us like a lifetime of of lessons.

43:12 There's a bunch of great ideas in here. And so, he says, Li Lu is not normal. He is the Chinese Warren Buffett. He is very talented. In 95 years, I have given Munger family money to an outsider to run once. Once in 95 years, and that is Li Lu. And he has hit it out of the park. And that's pretty picky. Once I have Li Lu, if I am comparing to him, who else am I going to pick?

43:41 By the way, that is a good way to make decisions, and that is what we do, meaning him and Warren. 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. And so, when I hear that, when I read the transcript, I know Munger's talked about this over and over again. Talks about making all of your decisions to opportunity costs. And if you would do so, you're obviously going to be your your bets and what you invest in your time and energy is going to be heavily concentrated. So, I go and I search and I was like, okay, I know he's talked about this before. I go to Founders Notes and I search opportunity cost.

44:17 First thing I find is a quote from Munger from that book I keep mentioning, All I Want to Know Is Where I'm Going to Die So I Never Go There, episode 286. He says, "Decisions" This is Munger speaking now. "Decisions in your life are all about opportunity costs, and wise people think in terms of personal opportunity costs. In other words, it's your alternatives that matter. That is how we make all of our decisions." The genius in Buffett's advice to the students, if you really think about it, he's just like, well, what's a good way to make sure that you're thinking through opportunity costs is saying, "Hey, I'm going to limit your entire life. You have 20 opportunities and no more."

44:50 That forces you to weigh them against the alternatives, does it not? So, now we go back to Li Lu and he's talking about the fact that, hey, if you don't if you didn't do the work, if you're not psychologically you don't you don't have the temperament to it, you're not ill-prepared, you're never going to make any real amount of money. You're not going to make the outside returns that Buffett has been able to achieve. Why should it be easy? Opportunity that gives you 10,000 times your money. And he says, "Their biggest ideas" meaning Munger and Buffett's, "Their biggest ideas really gave them 10,000 times their money. An opportunity like that, if done once in your life, and you're set. Why should it be easy?"

45:24 And then he ties that back to how he started this. He's like, you got to build something that is authentic to you. Cuz if you're not deeply interested, if you're not obsessed, you're not going to do what what he did. They just go back to the Timberlane example. It's like he downloads everything, goes to their church, gets finds out what boards they are, and then gets elected to the board. Like you're just not going to do that. And he says, "This is what really drives me in the business. It's exciting. It's utterly exciting." And he extends this to everything. He treats the really the Li Lu treats the world like a classroom.

45:52 He's like, you know, I was interested in physics and mathematics and history and economics and law and politics. I like everything. I'm interested in everything. And that's what you need. 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. You want to go through every day learning something. It's a good mental discipline to have. And as time goes by you have learned a great deal. So when I read biology, when I read physics, when I read history, it's all searching for ideas. He even talks about the development of his kid of his daughters. Like seeing them seeing how human cognition develops. He found enormously important. He says it's important understand psychology. I guess it's all work anyways. Essentially saying the entire world is his classroom.

46:35 And he goes back to the fact that people like him, people like Munger, people like Buffett, they don't belong to the stock market. Meaning that they don't want to trade all the time. People describe them as investors but they really are they're business builders. And so then he's asked the question like what drives your decision to sell. And so I need to be clear when he the terminal investment he made a lot of money on, you know, these like seven six seven eight X investments. He's like you'll find a bunch of those maybe.

47:00 But what he's really going for is like these things that you know, return 5,000, 10,000. Like the ones that one of those can make you, you know, unbelievably wealthy. So when you find one of those you don't sell. So he's going to talk about his evolution of thinking on this. So he's asked question like what drives your decision to sell. I used to have a philosophy if I don't want to buy at the price I'm offered then I sell. And so he talks about how he evolved away from this and the fact that if you're in a really great business like first of all there's just not many truly phenomenal businesses out there.

47:26 And if it is a phenomenal business that leader is going to take a disproportionate amount of the capital even more so in the future than you could possibly guess. And so there's like an indirect way he kind of continues to answer this question and he does that while he leads the students on a way to analyze the business of Bloomberg. Even though Bloomberg is a private company you can invest in but he's going to talk about the his he has a lot of respect. In fact he mentions the business of Bloomberg multiple times throughout the years. And later on when he tries to compete with them he even realizes they're even better than he expected. But he's really trying to to to educate the students on like, well, you know, how do you know you have a business that you shouldn't sell? And part of this exercise is like some series of questions you want to ask yourself like, is there an actual moat here that is defensible for many decades to come? So they go through a bunch of questions. Why is it so sticky? And a lot of the students answers he doesn't like, but one of them he loved. And they said, well, they have high switching costs. And so they talk about people that use the machine have a high opportunity cost for their time.

48:24 And it takes a long, long time to learn all the functionalities of 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. And besides, then they add another advantage they have. And besides, everybody else uses the same thing. You have to be able to communicate with your partners, with your colleagues. Anybody you collaborate is using it.

48:48 This business is winner take all. And he talks about one of the genius marketing ideas that Bloomberg had is that they would introduce them, I think either free or unbelievably cheap to every business school student. So then you're in college and you're learning how to use the machine. And Li Lu talks about what you can expect to happen after. He goes, okay, I have this thing available cheaply to me. I'll learn this thing. But once I graduate and I go out into the world, I don't want to learn that again. And besides, everybody else is using it. And so he makes the point that at some point Bloomberg had stacked up all these advantages and at one point he crossed the line.

49:23 And then once you cross that line where everybody's using it, they have high opportunity costs on their time, high switching costs, takes forever to work to to to learn. Everybody else is using it, too. It's just like he's stuck in there. And so Li says, suppose that was a public company and suppose you would have to develop that insight, that insight is worth a shitload of money. That's the kind of insight I was talking about. That is a virtual monopoly business. He's telling them, look for this kind of insight. Do you even have a choice today of not using Bloomberg?

49:53 He's asking the question. What is the cost of Bloomberg? What is the cost? Nothing. You can almost call that zero. Now, obviously he knows it's, you know, 30,000 a year or whatever the number is. It's a very ex- expensive, but his point is every trade to these kind of people that use it can mean millions of dollars gain or loss. So, they don't care if you call if you charge them $30,000 a year. And if And they they don't really care or they don't really have a choice if you decide that next year the price is going to be 10% or a year 10% a year more. They don't have a choice. That is why it's a fabulous business. business.

50:30 He repeats that over and over again. And I'm going to pause here. I'm going to come back to what he's saying here cuz I think it's really important, but like the point of his his hounding on this that you need an encyclopedic, you know, basis of knowledge, you should study all businesses, all industries, you should read all the time is cuz you realize this is not it has nothing to do with financial services, technology, it's a type of business that has pricing power because there is no other alternative. And again, this sounds a hell of a lot like Charlie Munger. I when when I just did it was episode 355. It's on this very rare Bernard Arnault interview, right?

51:06 It's exact He has the same exact characteristics and they talk about the fact that Bernard Arnault bought Tiffany. Starts raising prices. I think the average customer used to spend $500 per like visit to the store and now it's like four times that. You know, they they raised they they immediately start raising prices. And when I got to that, right? I thought of that when I got to this in Li Lu, but when I got to that, I thought of what Charlie Munger said. So, I'm going to pull this this quote from Charlie Munger that I think Li Lu obviously understood when he's analyzing Bloomberg. Says there's 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. So, they have huge untapped pricing power that they're not using. That is the ultimate no-brainer.

51:46 Disney found that it could raise prices a lot for the Disney parks and attendance stayed right up. So a lot of the great record of Eisner and Wells came just from raising prices at Disneyland and Disney World. And so Munger continues, at Berkshire Hathaway Warren and I raised the prices of See's Candy and of course we invested in Coca-Cola which had untapped pricing power. And so back to Li Lu, that is why it's a fabulous business. A fabulous business. That's what I mean by insight.

52:09 You study every business. When you have things like that, you do not sell. And then finally he ends this lecture. Where the vast majority of my highlights in this little handmade book is going to come from this because he's remarkably consistent in how he looks at things and what he talks about. So obviously he'll repeat some of the stuff in in future conversations and and future transcripts I have in front of me. But I'm obviously not going to go over it over and over again. So he says nothing is he's really just talks about businesses change and you need to welcome that because change is equals opportunity. So businesses change and change equals opportunity.

52:40 Nothing is constant. That's the interesting thing about business. Nothing is constant and that's why you have to keep relearning things. And that's a good thing. That's a good thing. That's why people who are 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. And that is a good note to end on. Okay, so the second talk is a lecture at Columbia again, but this one happens four years later. And I'm not going to repeat the ones we just went over, but he does tell slightly different stories in this where uh after discovering uh watching that lecture from Warren Buffett, it's not going to surprise you.

53:17 He read every single thing he could about Buffett. All of it. Shareholder letters, every single book, every single talk. He says he embarked on a two-year intensive study learning everything about Buffett. And so he says after I graduated Columbia I worked in an investment bank for a year and realized that was a mistake. I tried to start a fund. The first year I managed money I lost 19%. That's when he goes into building the business or uh life that's authentic to you. If you could ever find something you can do well that you really like, this will be your best investment.

53:46 You will do better than competitors if you can do it with intrinsic passion. That really over time will add enormous value to you. And again, I need to point out I I may I don't even know what I'm going to name this episode. Maybe it should be just like Li Lu and Charlie Munger and Warren Buffett cuz it's like they all have the same ideas. Li Lu saying, "Hey, find something you have an interest intrinsic passion." Charlie Munger in Poor Charlie's Almanack says, "Another thing that I found is that an intense interest in any subject is indispensable if you're really going to excel in it. I could force myself to be fairly good at a lot of things, but I couldn't excel in anything which I didn't have an intense interest."

54:19 Going back to Li Lu, "The game of investing is really continuous learning." I crossed that out. I really think the better way to say that is the game of entrepreneurship 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. This is really difficult, but on the other hand, the rewards are huge. Warren says if you only come up with 10 good investments in your 40-year career, you will be extraordinarily rich. That's really what it is. With this idea of finding an edge comes from years of continuous study, okay? So, one of the craziest things that that kind of smacked me in the face is when I read that other biography Sam Walton. So, I think I've read Sam Walton's autobiography twice and then I read this biography by Vance Trimble on him twice. So, I think my fourth reading really smacked me in the face of the importance of like fast and then uh slow and then really fast. So, he's talking about, you know, studying companies, reading about them, figuring out the management, figuring out the opportunity. You know, this is like you need years of continuous study. For a founder, that can use of continuous study is obviously going to happen inside and outside of your business. So, like Sam Walton had seen more retail stores than anybody else on the planet.

55:25 And and the edge came from he was relatively slow, right? He like Think about this. Sam Walton, greatest retailer ever live, he had one store, a single store for 5 years. And then you look at how fast he learned. So that was his you know this is pre this is prehistory of Walmart. It wasn't even called Walmart. It was like a five and dime which we would think of as like a dollar store today, okay? And then you have you know success of Walmart and then he sees the success of what he wants to do like like a Costco like a Sam's when he starts Sam's Club.

55:56 And so his at the beginning of his career before he had this years of continuous study, one store for 5 years. This is fascinating cuz it's like they the faster you learn the faster you compound your knowledge the faster you can actually move in real life. So then four decades later he starts Sam's Club. He goes from zero stores to 105 in 7 years and 5 billion a year in sales. And the edge came from this like slow continuous study because Sam Walton said the key was that they started out under financed under capitalized in these remote communities and it turned out by running these experience or experiments in these small remote communities that there was much much more business out in these little communities of like 6,000 you know people 10,000 people than they could have ever possibly imagined.

56:42 That one insight is the foundation of the Walmart financial empire. That is Walton's version of Li Lu's idea of finding an edge only comes from the right frame of mind and years of continuous study. And so Li has some advice for us. How do you understand and gain that great insight? Pick one business, any business and truly understand it. I tell my interns to work through this exercise. Imagine a distant relative passes away and you find out that you have inherited 100% of a business they own. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand one business inside and out just like obviously Sam Walton understood Walmart. That is better than any training possible. It does not have to be a great business. It could be any business.

57:24 But you'll need to be able to get a feel of how you would do or what you would do as a 100% owner. If you can do that you will have a tremendous leg up against the competition. Most people don't take that first concept correctly, and it is quite sad. If you did, you would really seek out knowledge and how it should be run, how it works. If you start with that, you will eventually know how much that business is worth.

57:46 And then he talks about the temperament you need to have. He go He's like, you know, I started my first business in '97. That was in the middle of the Asian financial crisis. Then we had the internet bubble. And then a few years after that, it was the great financial crash of 2007-2008. He says, "These are build These financial panics are build as once-in-a-century disasters, but they happen every few years. This is really where the insight and temperament come in. You have to have a certain confidence in your own judgment and not be swayed by other people's views. It is not easy, but that is life." That sounds just like Charlie Munger. "It is a given. It happens to everyone. Berkshire has had at least three times when the stock went down 50%. It happened to Andrew Carnegie. It happened to John D.

58:28 Rockefeller. It happens to everyone." "This happens to even mighty companies. Look at the top 50 companies in America every 10 years. By the time 20 or 40 years go by, 2/3 of them are gone. By the time it goes to 100 years, there might be only a couple left. That's just the way it is." This is why he kept saying, "Business is change. Change equals opportunity." He says, "Capitalism rewards people who are talented at capital allocation. It is a great game." He loves it. You know, like he refers to it as a game, as a passion, as an obsession over and over again. He just absolutely loves what he does.

59:01 And so then he continues, "Once you understand a single business inside and out, then you start examining the entire industry. If you can understand a business inside and out, then eventually you can extend that knowledge to understanding an industry. If you can get that insight, it's enormously beneficial. If you can then concentrate that on a business with superior economics in an industry with superior economics, with good management, and you get it at the right price, the chances are you can stay for a very long time."

59:27 And then he said something in passing that I hope I never forget in that superior businesses produce a lot of positive surprises. You know, bad businesses are going to throw up one headache after another. And so he talks about he says analyzing BYD and the crazy thing I think BYD is now like I don't know 80 billion market cap or something like that, maybe more. But he started his position in BYD in 2002. He's going to mention the founder of BYD and BYD a lot throughout the talks. But this is Li Lu on BYD in 2010.

60:01 And so he says when you get into situations like BYD, you see a lot of good surprises. And so he says the founder and his team have this fabulous culture. This is nuts. I didn't know this. That the founder only raised 300,000 in venture capital before the IPO. Uh he raised money in an IPO and then Buffett gave him $200 million. And so at this point they had 160,000 employees, 6 to 7 billion in revenue and 500 million in net profit. It is amazing.

60:27 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. He continues to surprise me with his ingenuity to figure out ways to do something better than anyone else. But you cannot truly understand everything about a business in one week. It took me 10 years. He's talking about BYD still. It took me 10 years and I'm still learning new things about BYD. It is a continuous learning process. You build this knowledge base by continually learning.

60:58 And it's during this section he's he's asked a lot of questions from the students in the audience and he talks about the importance of staying within your circle of competence of not being intellectually arrogant. And so there's a bunch of times where they're giving him like "Hey, are we in a bubble?" or like some kind of macro economic call. And so I just want to pull out a couple things. He's asked the question. The question's irrelevant. It's outside of his circle of competence. He competence.

61:20 He says, "That's too big of a question for me. I don't know." Few questions later, asked another thing like this. "That's just not my game. I don't know." And then he ties it back to just not taking shortcuts and just realizing you have to build this base of knowledge. The process and progression is like compounding money. In fact, you can compound knowledge faster than money. If you truly love this game, I would suggest that you don't take shortcuts.

61:44 It might take longer, but it's more rewarding." And then he ends this with saying, "You know, the truly great businesses in many times will grow even bigger than you could possibly expect." And he gives the example of Microsoft. "With truly great companies, it only looks logical in retrospect. Think about Bill Gates how Bill Gates started Microsoft. I don't think he knew up front that he would take the entire market because at the time the market didn't even exist."

62:10 Okay, so the next talk he gives in 2012. He gives it at San Francisco State University. And I found this and I thought the the quality was terrible. So, I went looking for uh like another recording of it. It turns out somebody had like remastered it and made it sound better. It still doesn't sound fantastic, but enough that I could transcribe it. And on that the the remastered version, there was a fantastic comment that I think tells you a lot about Li Lu. But this is the comment on the YouTube video. "Thanks for creating a higher quality version.

62:37 My team and I actually hosted this event in 2012. Not only is Li Lu a fantastic investor, he's also a great and humble person. We had reached out to him over a cold email asking him to speak at a student conference in San Francisco. Although he didn't know who we were, nor he had nor did he have any connection to the school, he flew to San Francisco, gave this speech, and then went right back after LA after his speech. He's a remarkable person." And so, I just want to pull out a few of the ideas he had.

63:05 He spoke for like 30 minutes, took questions. And you know, it starts with really this is just about the fact that general business advice is useless. It depends on who you are. Depends on the personality, depends on It's like hugely important to build a business that's authentic to you. And usually that requires experimenting with things and realizing what you don't like first. Which is obviously true in Li Lu's and Charlie Munger and Warren Buffett's case. And so he says, "Why is the practice that is being publicized by tremendous successful examples such as Mr. Buffett, why do more people not follow what they do?"

63:37 It turns out it has a lot to do with human psychology. And he says, "It is human nature to love gambling. Even if everybody knows the odds are stacked against them, that has never prevented gambling from becoming a very big business. It's also endured throughout the centuries." But he says, "This goes against the track record that Li Lu and Charlie Munger and Warren Buffett have, but virtually all the successful investor practitioners do not bet often." I need to pause. I found another quote from him.

64:04 W- I think that relates to what he's saying here. So, Li Lu says, "In the short term, there will be winners and losers, but in the long term, there are very few winners. If someone can produce outstanding results over 15 years or more, we can probably say that they're they're they're something exceptional." So, his whole point is just like, you should just study the greats and then do what they do. So, back to this. Many of the very successful investor investor practitioners do not bet often. Most people really do not have the necessary discipline, mental discipline to do that.

64:36 I would strongly encourage you to study successful practices in real life and in examples of history. What you are looking for, what he is looking for, is you're talking about an enduring earning generating franchise, a compounding machine, in other words. To know what to look for, he says, "I would have first studied all the great examples in the past." And so he just pounds over and over again the same idea. Like, "Hey, only go for the best. You might only have five to 10 shots in your entire life. Make sure you do all the work. Make sure you you have the temperament." And one of the students, God bless him, just God bless him, but he goes, "I have to say that's a pretty high hurdle rate." Come on, man. You just got done explaining why there's this flaw in human nature, why so few people are able to do so, and you just proved his point. And I wrote in the column, "Yeah, no shit."

65:28 Yeah, no [ __ ] it's a high hurdle rate. That's his entire point. And he's trying to explain why this is so important because if you actually have a great opportunity, you only need one. When you turn out to be right, the upside is just enormous. It could really surprise your wildest dreams. He repeats, "It is extremely rare to find no-brainer great opportunities. You certainly do not want to diversify away from the opportunity that you've been waiting patiently for a long time to discover for some really inferior other opportunities." Investing is essentially opportunity cost. Does not not sound like that 90-second video from Charlie Munger, right? So, any other alternative, you really have to justify itself by comparing with the one that you already have. Charlie Munger is not going and looking to to run Munger family money with other people that are inferior to Li Lu.

66:20 And when you make that comparison, you tend not to really diversify too much. All decisions ought to be looked at through the concept of opportunity cost. So, I'm going to go and summarize these are This is a note I left on this page, right? Cuz you know, I may never read this entire page again, but I'll go back and look through them. And they're my notes and highlights. And I want a summary, like a quick way to understand what did I learn from this page? Number one, all decisions should be looked at through the concept of opportunity cost.

66:48 Number two, if you do that, you will not diversify too much. Number three is how you should make all of your decisions. Okay, so the next year he gives an interview with Graham and Dodds Phil. And this one's written out. And so, in order not to repeat what we already covered in the other talks, I'm going to skip to the second page of the interview. Part of the game is to come into your own. You must find some way that perfectly fits your personality. It is a competitive game, so you're going to run into a lot of very intelligent, hard-working fellows. The only way to gain an edge is through long and hard work. 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 like this. The ones who really figure out their own style and stick to it and let their natural temperament take over will have a big advantage.

67:42 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. One of my favorite sentences out of every single thing that we've talked about so far. And even though that's one of my favorite sentences, I feel he does it even a great job of summarizing the idea behind that with another sentence that's one of my favorite. I let my own personal interests define my circle of competence.

68:17 So then Lee talks about the influence, the same influence that Munger had on Buffett, Munger had on Lee. When Charlie died, Buffett was writing about the fact that Charlie's the architect of the of Berkshire. So Lee talks about it. He's like, "Listen, I started out looking for cheap securities, but over time I really fell in love with strong businesses." And I think that's super important. He mentioned earlier, strong businesses, wonderful businesses, great businesses. They produce positive surprises.

68:42 You want that than a, you know, a shitty business that you get for a good price. And so I want to read from kind of like the eulogy that's posted on Berkshire's website that Warren wrote after Charlie died. And so he says, "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. In other words, abandon everything you learned from your hero Ben Graham. And Charlie said because Ben's ideas only work when practiced at a small scale. With much backsliding, I subsequently followed his instructions. Many years later, Charlie became my partner in running Berkshire and repeatedly jerked me back to sanity when my old habits surfaced. Until his death, he continued in this role and together we, along with those who early on invested with us, ended up far better than Charlie and I ever dreamed possible. In reality, Charlie was the architect of the present Berkshire and I acted as the general contractor to carry out the day-to-day construction of his vision.

69:45 Charlie should forever and they this is bold. They bolded this on the website. Charlie should forever be credited with being the architect. So, Li Lu continues. I become more attracted to looking for great businesses that are inherently superior. And actually, he mentions this cuz he's going to talk about Bloomberg again, which again he we already know he thinks is an inherently superior business. So, he was a the first investor in this company called Capital IQ. But, what was fascinating is the insight that he learned about Bloomberg through Capital IQ because they started Capital IQ to compete with Bloomberg. We wanted to create something just like Bloomberg.

70:20 And in the process, we grew to appreciate Bloomberg much more because it was so hard to compete with them. We learned quickly that we couldn't really compete with Bloomberg. I think one of the best ideas for figuring out who is a really great inside of an industry. You identify who is really great by asking who I do not want to compete with. And I think it was Marc Andreessen, somebody said one time that you could survey the industry and it's uh the one bullet theory, I think is what it's called, is you sell all of like the CEOs in an industry. If you have a gun with one bullet, who you which one of your competitors are you shooting? And that's a good indicator that, you know, I don't want to compete with that guy. That And And if everybody's saying they don't want to compete with that person, that's an idea that that that's who's truly great inside the industry. So, what we learned quickly is that we really couldn't complete compete with Bloomberg. And maybe that insight is transferable to his BYD investment. So, talks about, you know, how were you able to get He just asked the question, like, how were you able to get Charlie Munger interested in company like BYD? Because Berkshire Hathaway shies away from technology-oriented companies. Keep in mind, this is 2013 this interview's happening. And Li's insight on that is different. He says, "I don't think Warren and Charlie are ideological. They are not ideological, neither am I. It's really how much you know. The story of BYD is relatively simple. The guy is a really terrific engineer, started the business with $300,000, takes no additional money until the IPO.

71:43 He creates a company that has 8 billion in revenue, thousands of engineers. He solves a whole bunch of different problems. Then the engineering culture there has consistently demonstrates its ability to tackle big, difficult problems. BYD plays in a big field with open-ended possibilities and have a and has a reasonable chance of being successful. Berkshire is not ideological against technology stocks. They're just against anything they don't feel comfortable with. There's a line Buffett has on that. He Buffett says that they're individually individual opportunity-driven.

72:12 Individual opportunity-driven. And I would say Li Lu is too, because multiple times like he's asked questions and they kind of like, "Are you only investing in Asia? Are you only investing in this? Are you only investing in that?" He's just like, "I go where the greatest opportunity is. I'm individual" He doesn't use the word, but that's what I would describe it as. Individual opportunity-driven. Li Lu continues on BYD. "The company is a learning machine. And by this point, I'm so deep" Obviously, I've been deep into Buffett and Munger for years, but so deep into Li Lu that I would realize like this company is a learning machine.

72:38 Okay, that applies to BYD, BYD, but it applies to Berkshire, too. It applies to Munger, applies to Buffett, and applies to Li Lu, too. This guy is a learning machine. He also has a great line hidden in here that I really think speaks to the the importance of focus. I don't invest anything outside of the fund. I put all of my investment capital into my funds. Li Lu, going back to focus, really concentrate on the ideas where you truly have the time and energy to fully understand the situation better than anybody. And I believe the best founders know this know this instinctively. That is why Walton was Sam Walton was not doing a bunch of investing outside of Walmart. Why? Cuz he's concentrating on the ideas where he truly had the time and energy to fully understand the situation better than anybody. Back to the importance of being a learning machine and constantly adapting. There is not a single business that I know of that will never change. Business is change. That's the fascinating thing about business. Successful businesses have some combination of things that enable them to adapt to changes better than anyone else. I think you could switch out That's definitely true for businesses, right? Let's What about successful people? Right? So let's let's let's run that sentence back with people instead of businesses. Successful people have some combination of things that enable them to adapt to changes better than anyone else. I think that statement's still true. He hits this again on the next page. Successful companies are able to deal with change consistently.

74:01 And then remember several times he's he's repeated, you know, the fact that Munger and Buffett are rare, great opportunities are rare, it's not supposed to be easy. In fact, he repeats over and over again that the future is excessively hard to predict. And he he has a bunch of examples in in trying to illustrate that point. And you know, it's obviously important to him cuz he repeats it throughout almost every single one of these talks. But this is the best way that he framed it. I was like, "Wow, this is a great way to summarize that idea about, you know, the future's hard to predict." He says if you went through the American Civil War, the country killed 2% of its population.

74:33 And yet not only was it rebuilt, but it was rebuilt at a furious pace. After that, it went through two great world wars. After World War II, if you thought Japan and Germany were doomed, boy were you wrong. It is hard to predict the future. Okay, the next talk he gave in 2021 and it is the 13th Columbia China Business Conference fireside chat. And he mentioned earlier that the more like foundational like the encyclopedic base of knowledge you have the faster you can identify things. And he was using specifically like the more you read Value Line the the easier it is to spot the opportunities and the faster you can do so. It's also true if you're studying this person. So, by the time I get to this, you know, I think the the transcript here runs out of I don't know 30 pages or something. I had an understanding of Li Lu and how he thinks to the where there's only one insight that I want to share with you from this talk that we haven't already covered.

75:26 And it deals directly with focus, but I think more than that it's like once he obviously Li Lu has this ability to trust his own judgment and he knows his path in life. A lot of what he's telling you is like you have to learn to think for yourself and the only way you can trust your judgment is actually do the work that you should be able to trust your own judgment. And so he's asked the question like what other dimensions do you do things differently than other investors?

75:47 And he says, "I don't spend my time studying other investors. We spend our time studying industries and studying specific companies." In other words, he's keeping the main thing the main thing. He is focused. He knows that if he does if he studies great companies and great industries, he will develop those rare, you know, five, 10, 15 insights in entire lifetime. That's all and if he does that and only does that, he will be successful. And doing things that are not that, spending time that is not that, the op what is he You know this. He's like he makes his decisions through opportunity cost. So, studying other investors instead of the way he makes money and the main his main business, which is studying great companies, identifying insights for great companies and great industries, the opportunity cost to study other investors is too high. So, therefore he doesn't do it.

76:35 Okay, and then the final thing is he turns when he turns 50 years old, he writes this post about reflections on turning 50. And I think this is a perfect place to end. I could never imagine my life would turn out this way. It takes countless bridges, roads, means of transportation, and years of effort to travel this far. The countless people in my life, kind-hearted strangers, well-wishers, mentors, partners, friends, are my bridges, my roads, my transportation for getting here. Without your help, friendship, and constant encouragement, I simply could not travel this far.

77:10 If I have anything to do with that journey, it's simply that I took it. Woody Allen is right, 90% of success is to show up. At various stages of my life, I could have stopped or took the long rest, but for some reason my heart told me otherwise. I just kept going. Half of the time, I wasn't sure where I was heading. The other half, I was probably taking the wrong turns. No matter, but I was on high alert to correct mistakes along the way. I was careful not to be influenced by emotions that I know are poisonous and counterproductive to the journey.

77:45 Things like envy, resentment, hatred, jealousy, greed, and self-pity. Again, that's very much Munger and Buffett-esque. Munger says self-pity has no utility. Buffett says that the world doesn't run on greed, it runs on envy. They both said that you need to cure yourself of envy. My early life experiences may require me to work even harder than others to guard against these human vulnerabilities. And when I did fall to their prey, I was fortunate to be able to correct them quickly. Socrates was right, the unexamined life is not worth living, certainly not living well. Every once in a while, I would sit down alone to figure out where I might be wrong.

78:24 In my experience, every 5 to 10 years or so, I had to change so much about myself that at times it felt like almost a reinvention. And when I fail in self-examination, I'm even more blessed to have some strong friends who can point out my blind spots. I would have been lost in life's various mazes if I had not gotten that help. So, through the tumblings and the zigzags, I kept going while at the time insisting on sitting in the driver's seat.

78:53 It is my life and my journey, after all. According to Confucius, at 50, one should know his purpose in life. What your life was meant to be. I believe in Confucius' dictate. Having done relatively well in additions to my life, I'm slowly learning the art of subtraction and focus. I would have failed in a lot of professions. For example, I wouldn't be good at ballet or basketball. But, my temperament and experiences prepared me well for a career in investment. I have to pause there. I really do think one of the the main themes that reappears in the the teachings of Li Lu is you pick a career that you have an immense passion and that suits your personality and how you want to spend your time.

79:40 I was extremely lucky to be introduced into the field by the greatest investor who ever lived when I accidentally stepped into a lecture by Warren Buffett at Columbia nearly 25 years ago. And it was even more magical 13 years ago when Charlie Munger became my investment partner, mentor, and lifelong friend. To this day, I don't know to what I would attribute this extreme fortune. It is something even the wildest imagination or the best fiction could not conjure.

80:06 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. I have three lovely children. They're beautiful, talented, and kind-hearted. I'm most proud of them. Reaching 50 probably makes me closer to the end than to the beginning. Regarding my age, my favorite quote comes from Norman Lear. At 94 years old, he's still active in so many different things. Collecting fans who are in their 80s, their 60s, and all the way down to their 20s.

80:37 I once asked him, "How old does he think of himself?" Without missing a beat, he said, "I'm always the same age as the people I talk to." Now, that is a cool answer. Now that I've officially crossed the half-time line, I really need to make more young friends as my new teachers so that I can stay fresh. So, my friends, may we all grow wiser with age and younger at heart always. And that is where I'll leave it. For the full story, I will leave links to all of my sources. You can watch the talks, read the interviews. They'll be linked down below in your podcast player and also available at founderspodcast.com.

81:15 That is 363 books down, 1,000 to go, and I'll talk to you again soon.