Li Lu: How I Found $1 for $0.01 (99% Margin of Safety) | FAME 2012【C:L.L Ep.36】

[Transcript]

LI LU: I was talking to Esnier on the way from the airport to pick me up, so we talked about his favorite stock in Russian oil, which reminds me one of those great examples of value investing back in the early 90s.

As some of you might know in the early 90s, Russian went through a shock therapy and went into free market almost overnight. In short period of time, they privatized some of the most prized state assets, including Lukoil and Gazprom we talk about.

And it was so short that most people don't really understand what it's all about. A lot of the people work in the companies and also ordinary citizens were given certificate that can really converted it into stock ownership, but most people really don't know what it is. So anybody could come along offer them in real cash which they recognized, they were just afraid and give it away.

So as a result of those certificate, at one point, it was a trading at extraordinarily low prices. How low is the prices?

Forget about the earnings, just a sort of the asset on the balance sheet. At the time, the oil prices I think in the 4-5 years average around $20 and the reserve represented by the balance sheet on a per share basis value the per value of the oil per barrel of the proven reserves at really a low prices.

Esnier, do you remember what was the price? Anybody remember? It was $20 per barrel trading on the open market. Anybody could imagine how low did it go?

$0.01 on the dollar, sometimes $0.005 on the dollar. In other words, about $0.10 to $0.20 per proven barrels of oil on the balance sheet. And that's not even counting the earnings from the company. This is how low it went. It was ridiculous.

Now, I thought at that point and that's some kind of a margin of safety – (Laughter) – even consider the political situation in Russia. And it ultimately traded up you know, for the longest period of time it was $0.20 or $0.30, $0.50 and gradually moved to $1 and briefly traded to $3.

And then a few years later, the Asian financial crisis occurred and the Russian devalues the currencies. So all of a sudden, the $2 would no longer looks very protected because the currency literally at one point, it went down 90%. I mean 90.

But if you really bought it in the $0.10 which is 0.5% of the value, less than, you know, now at 10% – the value of the currency down 90% – you still came out quite alright. In fact, you still probably made 10 times your money.

That's how an extreme situation can become, that will be a good example to study. So that you can really withstand a situation – external shock – and really shocked at one of the measure of value. In this case, currency by 90%. You still came out on top. That is how extreme it is, that concept of margin of safety when you do practice.

(Source: https://youtu.be/OkwXPnnbUXE)

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