BRUCE GREENWALD 00:00
Okay, so, in this concentration, in sort of now investing in great businesses, can you be specific about what kind of business you look for? What are the characteristics of a great business in particular, what detailed characteristics you look for and how you put a value on those businesses?
LI LU 00:24
Yeah, well, great businesses are the ones who really have above average returns on invested capital. But that kind of a business traditionally attract imitators, competitors, everybody wants to have above average returns to the invested capital.
And so truly good businesses are the ones who can fend off competitors, who can really have an enduring competitive advantage and have that higher than average return on invested capital and hopefully also have a long runway of continuous growth. Those are the businesses we’re looking for. And they could really come in all industries, in all shapes and forms. But they’re rare.
They’re really, really rare to have a business that generates above average returns over a long time on a compounded fashion is again is really against the natural order of things. It’s really only a small slice of all businesses belong to that category. So if you’re really lucky enough to really find one of those long-term compounders, all you have to do is really to own them for the longest period of time.
Now, it helps when you really buy them at the time when they happen to be traded at a discount to their intrinsic value so that if you were wrong about them, you won’t lose money, and if you’re right, you have more returns over time.
But over the longest period of time, if you do own them through the ups and downs, your return roughly approximates basically the actual business return to actual capital invested in the business itself over the long term. The two tend to really converge pretty closely.
And so understanding and studying the nature of that business, the dynamic of the competition is of really the most important thing as the investor, and as a student of the business. And as I said, there isn’t really a set of things that really made them that way.
Every business really build their fortress slightly differently, and you just have to really actually be honest with yourself and study them from every possible angle until you’re really convinced that they are actually currently enjoying truly enduring (competitive advantages), and they truly have a long runway ahead of them.
And if they prove to be exactly as you predicted over the years, we really want to stay on them through the up and down, thick and thin, not to be really dissuaded easily.