Video Link: https://youtu.be/dPan16hN3x0
In this episode, Li Lu was asked in his 23 years of running Himalaya Capital, what has he learnt during the financial crises?
In this episode, you’ll learn:
How to invest during a financial crisis?
Ben Graham's concept of Mr.Market.
Why crisis is a test of knowledge in investing?
How to succeed at investing?
To check out all Collection: Li Lu <click here>
BRUCE GREENWALD 00:00
So you’ve lived through in your 23 years running Himalaya, a number of major financial crises, the Asia crisis in ’97, the tech bust in 2000, the financial crisis in 2008 and actually last year, the COVID-19 situation. Are there specific things you learn about managements or companies that you look for in those crises?
LI LU 00:26
Yeah, well, so as you said, in my 24 years of managing Himalaya Capital, we have gone through several of those big crises. Each time when that happens, it was billed as once in a century crisis. It probably was, except it happens on the time frame of every 5 to 10 years. (Laughter)
So a financial market boom and bust has been a constant phenomenon since the beginning of the financial market several hundred years ago. And it was driven by human nature, as long human nature remains that way, it will never change. It will always be with us.
As a product of evolution, we humans are basically run not necessarily in a very rational way. Now we’re very good at rationalization, but we’re really not very good at being rational. (Laughter) In a sense, we’re governed by some set of hard wired, hard coded instincts. And looking for a zero sum and we’re looking for fast money, and they’re really totally scared when things goes against you.
So that’s basic sense of greed and fear, it will always drive the financial market up and down. Particularly when it comes to money, humans are very funny. (Laughter) They tend to evoke a primal part of human nature.
And so particularly relates to financial markets, a security market, money, that that human tendency of the extreme instincts become more amplified and more extreme. And that’s why the financial market from the very beginning has always been characterized by boom and bust and will remain so.
Now how do you deal with such an environment that will be constant?
One way to deal with that is to anticipate that it’s always on the corner at all times. And that’s basically our attitude, that financial crisis will happen all the time. People will always be driven by fear, by euphoria, by this extreme kind of ups and downs.
And so we’re looking for businesses that are capable of living through that and even businesses that could really thrive in that environment. In a sense, have a certain characteristic of antifragile and so that up and down becomes somewhat friendly for us.
In the sense that when our favorite company is on sale, you know, discounted by 50, 60, 70 percent, if we have money, will buy more of it. If we don’t have the money, it is the hallmark of a good investor, you can sit through watching your portfolio down by 50% and not being affected at all.
On the other hand, the other side of the coin is that you’re equally unaffected when everybody around you are making fast money, fast and furious, a lot of them. Now you’re really seemingly totally left behind. And so that’s really part of the temperament that most people don’t have. And that’s why not everybody can succeed in this game of investment. And so to succeed in this game requires a certain temperament and a certain understanding of human nature.
Also a certain commonsensical approach. Knowing that your investment return eventually will mirror the actual business return by actual business. You know, in real life, real businesses don’t really change by day, by hour, by week, by months. It took years for them to really either go up or down.
And so you should expect your investment result that come in over, slowly, gradually over a long period of time. So the short-term phenomena should not really impact you as much, either on the up or on the down.
So if you have that basic temperament and basic approaches, what you’re going to find is that those euphoria, as well as the crash, actually can serve you well. And this is really going back to Ben Graham’s basic concept of Mr. Market that is there to serve you, not to instruct you. Except in the real game of investment, those phenomena, those on the up and down tend to be quite extreme and testing.
And so the other thing that will be very testing is that we really do need to understand the business itself. And if you really try to pretend you understand and you are really driven by something else other than deep understanding, you’ll be tested. And so that’s the salient nature of the financial market.
And sometimes I almost feel that they exist to really catch human weaknesses. That if you really don’t understand something that you pretend to, you will be busted at some point. But if you truly understand, you will be able to add when the security really down 50, 60, 70%.