BRUCE GREENWALD 00:00
When you look back over your own career. Are there things that, whether at Columbia Business School or in your career since then, you would have done differently that would have helped you get to where you are today sort of more quickly and more easily?
LI LU 00:16
Yeah, well – (Laughter) – looking back I feel I’m extraordinarily lucky and I feel nothing but gratitude. I feel lucky to accidentally step into Buffett’s lecture at your class, basically. The first time he came I feel extraordinarily lucky that I got into the business and to strike a relationship with Charlie Munger.
I feel extraordinarily fortunate to live in a period of time when both the United States and China are going through a fundamental economic growth and providing enormous amount of opportunity that I happen to really know both markets well. And so I looking back at my career, nothing to regret. I feel nothing but really gratitude.
But in terms on the transition from U.S. to China. I think a lot of people, myself included, went through a period of time to really try to understand the nature of the Chinese economy and the nature of the Chinese market, the nature of the Chinese company – investment in Chinese companies.
So one of the key learnings that I have, and it is not that obvious, is the role that the Chinese government played in that whole equation. If you have been a successful investor in the United States, for example, or in the developed market, you tend to come with a set of assumptions about the role of the government and the role of the market participants. And when you really look into the Chinese market, that assumptions, you will see a lot of challenges.
And so you might really, from time to time, arrive to views that are inconsistent with your own experiences partially because historically the Chinese government and the U.S. government – Western governments – perform a very different rules. And that’s one of the key aspect of really investing in China that really requires much deeper understanding and also a systematic comparison to get rid of those biases.
And that’s why that you could really get rid of this typical global investor into China revolved by the inferior enthusiasm or basically pessimistic kind of ‘coming collapse of a China’ type of mentality when things are not going too well. And so that is the education of most of the international investors, particularly when it comes to China that they have to really go through and that is important.
But bear in mind the other aspect to understand to the Chinese economy is that the nature of the modern economy is its ability to generate sustained, compounded economic growth, something that is only recently emerged as the human phenomena.
And this is where we talk about the zero-sum versus win-win type of mentality. Now for the longest period of time that almost all natural or human affairs are characterized by cycles. In the sense that everything goes up cycles, you know, we’re born and then we grow old, and we die, or the trees it goes up and they die. So entropy basically, is always increased. Energy goes from, you know, hot to cold. Things from order to disorder. Great businesses eventually loses its edge. So that is the nature of things. And economy goes from boom and bust.
But something unique happened over several hundred years ago with the beginning of the Industrial Revolution. We began to see this phenomenon of continued, sustained, compounded economic growth. And that is really when value investing become very important. And that’s why you begin to have a phenomenal record such as the one produced by Warren Buffett and now by a few other people as well.
The basic logic behind that, as I said, over the long term, your investment returns are likely to approximate the actual business returns of the company you’ve invested in. And so the fact that you were capable of generating that long term results is a reflection of a changing nature of the economy. What really drives that phenomenon is something that is utterly fascinating.
I literally spent 30, 40 years thinking about that until I think I come to a certain knowledge, I wouldn’t say really know it all, but I think what really produced in that phenomena is, is a combination of free market enterprise, way of organizing social economic affairs. And combine that one with the invention of modern science and technology, a combination of those two produced a modern form of economy. And it’s a paradigm shift.
So what has happened in China is that roughly around 40 years ago, China has really stumbled finally into that magic formula of free market economy. Now, with Chinese characteristic, of course, along with modern science and technology. And any economy that has really strike core and strike that magic formula, begins to produce the phenomenon of compounding economic performance.
Now that has to be combined with the stability of overall political environment to allow the market force that a new economy to really release that power. And that is when a sustained economic – sustaining investment record can be possible in China. It’s not always there, it’s not always possible. And often it was a zero sum. But I think from that period on, that a sustained win-win type of a compounded investment return becomes possible.
And notice that I didn’t really include the political component of it. Most of the Western observers believe that political democracy has to be part of the equation, except they forgot that political democracy wasn’t there when that phenomenon began to take place in the West. In fact, the political democracy happened later, almost as a result, but not because of it.
Anyways, so that is another layer of understanding the phenomena of investment opportunities in China that could be interesting.