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Collection: Li Lu - #27 'The Biggest Investment Mistake I Have Ever Made'



In your career doing this kind of analysis, what particular mistakes did you make?

LI LU 00:06

Well, every time I failed on those three scores I made a mistake. Every time I don't get accurate information, I made a mistake. I don't get complete information, I made a mistake. I thought I have an insight and it wasn't insight, I made a mistake. Every time I failed all three scores, I made a mistake. And there are plenty.


Can you give specific example?

LI LU 00:29

Well, on the big bet I've ever made, I don't recall we have ever made a mistake actually on the big bet.

Now, my biggest mistake actually is not making a couple bet – (BROKEN AUDIO) – Biggest mistake I made is that during the course of my – (BROKEN AUDIO) – that you know, I had a spectacular returns but I couldn't raise any money.

Because every time I go out to talk to people, people basically said, "what the hell are you talking about, I want a monthly, I want a two weekly, I want a weekly return. I want you to go up in the down market, and that's what I wanted. I want you to be a bank except you yield better. Well, you're a hedge fund aren't you?"

Anyway so, but that's you know, I couldn't really – (BROKEN AUDIO) – In the end, I sort of there was a couple, you know, couple years not long – (BROKEN AUDIO) – Okay, I will do some of those conventional stuff.

I moved into Julian Robertson – (BROKEN AUDIO) – learn from the best practice of other hedge fund managers and – (BROKEN AUDIO) – somebody else kind of work on the shorting, all of that. You know, essentially is sort of useless things, it turned out to be.

And I sort of busy myself with all sorts of different trades because if you're in shorting, you just have to trade, there's no other choices. Because you know, your upside is 100%, your downside is unlimited. You have to trade.

And so you really – and your mentality changes somewhat, you can't no longer really – you basically kind of put yourself into the – (BROKEN AUDIO) – What Charlie says about kind of, if you’re doing things like that, as if you know just bound your hands behind you in an ass kicking game or something like that, it's true. It really is true.

And that was the period of time that I probably had the biggest opportunity of company that I have absolutely insight, management that I know, that are trading below cash and subsequently went up 50 to 100 times. And I missed it. I couldn't really bring myself into it. It doesn't really fit into this, all this shit. That was the biggest biggest mistake I made. It was not how much money I lost, it was how much money I foregone.

I lose money, of course I do. I do make mistakes from time to time and usually you make a mistake when you haven't really quite finish all your work but you like it. You know enough, so this is Timberland you know at 28 or Boston, but I haven't finished all the work and I said on itself, the probability is with me, but I added a lot lot more after I finish the whole project.

Well, sometimes you know, as you sort of finding more and more, you prove your thesis wrong by then you lost 20-30%, you sold it. Okay so you’re wrong, take the mistake, run, you know move on.

But odds is with you if you buying stock with a sufficient margin of safety, the probability is with you, so if you do that long enough and with, you know, relatively smaller amount of debt – of course, you haven't know everything – then you're okay. You're not gonna likely to lose a lot of money.

But if you cannot really bet on the things you know and you know you have insight no other people have it. And that's the biggest mistake. I cannot forgive myself for making that mistake.


Are you going to tell what that company is?

LI LU 04:12

No. (Laughter)

Because I still might have a chance to do that. (Laughter)

No seriously, you go through your life and you may not have no more than 5-10 insights and you developed that one over many many years of study. Some of the things I’m doing, really I find myself doing that 15 years ago. I study American companies and now, I find Asian counterparts. And I find valuations that I like. I find that I can really bet, but I study their business for 15 years in between, I know everything about that industry and what really makes that business takes.

You need to have that kind of insight in order to really – (BROKEN AUDIO) – you can really swing with conviction. And if you cannot do that either psychologically or because you're ill prepared, you just would never really make any real amount of money.

I mean if you go through, you know, you do what Ben Graham does and what Tweedy Brown does, you're gonna have your 10-15% a year and you will likely do much much better than most of the professional managers – the 95% of other people – but you're not going to make the outsized return that Buffett has been able to achieve.

And you may not have that opportunity throughout your life. Why should it be easy?

Opportunity of that kind that gives you a 100, 1,000, 10,000 times. Their biggest idea really give them 10,000 times. Opportunity if done once in your life, you are set. Why that could be – Why should that be easy?

By definition, they're not. And you require a bunch of different factors to come together. You know, what really Charlie would have called it – What is the term?



LI LU 06:00


You got all sorts of different kind of things working on the conscious level, the subconscious level, the psychological level, political, whatever. You got a whole bunch of forces working together, you got a huge wave behind you, and you are the one, the only one who have the insight and is willing to bet, backed by sound, complete, accurate information and a huge insight.

And that's what sort of really drives me in this business. It’s exciting, It is utterly exciting. And you got to learn everything. You know my interest is just, you know, I started with physics, mathematics, and got into economics, history, law, politics. I like everything, I'm interested in everything and that's what you needed.

You might need mottos from biology. My wife has a PHD in biology and actually you know I learned a lot from her over the years and actually some of them helped my investment except she didn't know. That's maybe why she's here to check. (Laughter)

But anyways so you have to learn from everything, you have to be intensely curious about everything. And occasionally you’re going to stumble into one big opportunity. Meanwhile you still have plenty of things like you know the Timberland, the Hyundai Department Stores H&S. You're going to find those opportunities from time to time, give you few times return. That's not bad.



[YAPSS Takeaway]

  • The biggest mistake that investors can make and will make is the amount of money they have foregone.

  • If you are not done with your research, it's much better to invest with margin of safety.

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