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Collection: Li Lu - #31 'How Do You Decide When To Sell'



[Transcript]

AUDIENCE MEMBER 00:00

What drives your decision to sell?


LI LU 00:02

That's a very interesting question. I evolved over that question, I used to have a philosophy, if I don't want to buy at that price, I sell. That was used to be my philosophy.


And I find myself evolving a little bit from that one because occasionally I find a business – I find an insight – but I just like the business so much and all of a sudden, I find myself being a real owner. I basically saying somebody tried to tempt it to really get me to sell because the price is very good. You know, the sort of is not something I'm willing to buy – put it that way – at that price, but my hunch is the probability is with me that over the next 10 years, [the business gets] better and better and better.


And that's really the law of distribution of a good businesses, the leaders take a disproportionate amount of capital and in certain industries, that advantage, that huge advantage [it gets better and better and better].


And that's when I really begin to think, okay so now you got to a different calculation. Okay, you sell;

(A) You may not be able to find another opportunity to buy it back.

(B) You have to pay huge amount of tax because at that point, assuming you are right, you already accumulated a giant amount of tax which you have been borrowing from the government, interest free.


Essentially if you don't sell, you're basically borrow – you’re leveraging your position by a margin of a 30% or something. I mean in my case it will be 50%, by the time you add 12% in this – you know, all of the other stuff – it's like you know 40-50%. So you’re leveraging a position 40-50% interest free and is not called upon and is indefinite loan from the government to you.


And so if you can think and the business will be able to deploy that capital at a return that roughly – you know, it’s not even 15% – a superb business I usually find is a 50-100 percent return of deployed capital and they were able to deploy that. Boy, that mathematics get very very interesting very quickly.


Now the caveat for that one is that you have to be confident, reasonably confident to be able to project that long. And I would say that there’s only a handful of opportunities in your entire lifetime, you’ll be able to project that far off.


If you’re an investment banker, all you do is really project into infinity and that's bullshit. You know it's bullshit, everybody else know it’s a bullshit. You don't know. You can't really project for the next day. How do you know you can really go to, you know, some shit for the next five years and after another five years then infinity, terminal value all of that shit. It means nothing, it means absolutely nothing.


However, I predict if you are good, if you spend an entire lifetime studying, you might be able to come across over a course of a 50 years career, maybe 5-10 opportunities in which you can confidently project with overwhelming odds in the next 10-20 years. At that point, you don't sell. Why do you wanna sell?


You got a government really lending you money, 40% compounded interest free and it would have never really kind of asked the money back. And you can really project and the business is deploying the capital in the order of 40 to 100% a year. And also very tax efficient. And that’s what you do, that's what you do.


AUDIENCE MEMBER 03:49

What made you decide to sell Timberland and H&S?


LI LU 03:53

Because they don't have that. None of the business really fit in that category. They're not that kind of business. I do have some business in my portfolio that really kind of belong to that category that I was just talking about. That's why I’m not talking about it. (Laughs)


 

[YAPSS Takeaway]

Do not sell businesses that gets better and better and better over time, sell those that are not when the price is ridiculously high.

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