Li Lu on How to Invest with Margin of Safety? | FAME 2012 【C:L.L Ep.40】

[Transcript]

AUDIENCE MEMBER: I was wondering what is the margin of safety that you look for before you decided to buy?

LI LU: Yeah, again that has something to do with the quality of the assets you're buying. If the quality of the asset is very high, your demand on asset basis is low because you are demanding that margin of safety on the upside in terms of the earning generating power.

Whatever it is, you have to have an insight as to what those asset can generate for you. And somehow it is somewhat of a different insight — the unique insight — whether you'll know the business of particularly better than anybody else's if you really buy into their future earnings. Or the asset for whatever reason, you can withstand the balance sheet better than the other people.

You have to have a better insight as to what is the appropriate value. And therefore, it may not really appear to other people as large enough of margin, but your mind you have a very, very large margin of safety. In my own case, I just think that the larger you can get it the better. You want to have a very, very large margin of safety.

AUDIENCE MEMBER: So how about assuming that you have no insight whatsoever as to what the future earnings power is, and you just assume that it's a no growth business, what would you pay for that business?

LI LU: Well, in the case of that Russian since I know very little about Russia, and I've every reason to be suspicious. So that goes to 99% (margin of safety) and I get extremely uncomfortable when it goes to 80%, for example.

And in the end and actually that 90% evaporated because of the currency changes — although it came back. So in each situation is different. But in the environment, I understand external forces, I understand the management, I understand the general business practice in that particular culture. You would have probably, you know, 70-80% is actually pretty good. It's all situation-specific.

AUDIENCE MEMBER: Okay, I just have to say that, that's a pretty high hurdle rate.

LI LU: Well, that's why you don't have to — My whole point is you don't have to swing a lot.

One of the key of success for being a long-term successful investor is you have to endure a long period of time in which you do nothing. You don't have to do a lot in order to be fabulously rich and prosperous. That's the good thing about this game.

You study all the time but you don't have to do anything. And every time you do — when you don't have enough of a margin of safety — you can come out really losing and that's the really much worse than nothing. But every time you do (do something), if you have large enough of a margin of safety, your upside is also become huge.

And there are many, many examples — I wouldn't have time to go into it — in which when you turn out to be right, the upside is just enormous, you could really surprised your wildest dreams. And you want to wait for those fat pitches, most of the time.

(Source: https://youtu.be/P4jZFgWNY2E)

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