Included in Li Lu (Trades, Portfolio)'s book, "Civilization, Modernization, Value Investment and China," are a few speeches he gave in China and the U.S. One of them was the speech Li made during the Global Investor Conference held in January 2019. It was one of the best speeches on how to think about the Chinese economy and investment opportunities. It was an unusual speech because it was not from a bottom-up perspective, but mostly about the macro picture of China. It is also an extremely important speech because it helps investors who are interested in investing in China to answer an important question – why?
We can compare Li's speech to the speech Warren Buffett (Trades, Portfolio) gave during the 2018 Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual shareholder meeting. Before the question-and-answer session, the Oracle of Omaha uncharacteristically started with a personal investment story to provide perspective on how investors "should think about investments, as opposed to the tendency to focus on what's happening today." He recounted the story of how he missed a multi-bagger to make the point that the grim short-term outlook in March 1942 didn't change the bright future outlook for American businesses because America's system had been working since 1776 and would continue to work. Buffett's point:
"All you had to do was figure that America was going to do well over time, that we would overcome the current difficulties, and that if America did well, American business would do well."
Buffett then reminded all the shareholders that for long-term American investors, the overriding question is: How is American business going to do over your investing lifetime?
It's such a simple and important question that many fail to consider. Perhaps investors often take it for granted that they should invest in the country in which they reside because of familiarity. But the reality is, where you invest matters enormously. In fact, I think we can generalize Buffett's overriding question for investors:
"How is the business in the country you invest in will do over your investing lifetime?"
I hadn't thought seriously about this question before Charlie Munger (Trades, Portfolio) pounded the table at the 2017 Daily Journal (DJCO, Financial) shareholder meeting, during which he said: "The first rule of fishing is to fish where the fish are. A good fisherman can find more fish in China if fish is the stock market. It's a happier hunting ground."
At that time, I had been studying and working in the U.S for almost 12 years. I was working at a fund I had dreamed of joining, for someone who I really admire. I really enjoyed what I was doing. Being a Chinese citizen and growing up in China, I had natural interests in a lot of Chinese companies. But at my previous fund, it was difficult to remove the biases towards China and to convince my colleagues to invest in Chinese companies. Although the fund did invest in some Hong Kong-listed companies, it wasn't investing in the best Chinese companies. I spent most of my time researching U.S companies. I was quite comfortable researching U.S companies, some of which are among the best businesses in the world.
But after attending Charlie Munger (Trades, Portfolio)'s shareholder meetings for a few years, I started to realize that it was time for me to seriously think about focusing solely on the Chinese market. From an opportunity cost perspective, I needed to make a choice. Fortunately, both look good. But Munger and Li seemed to suggest that from the perspectives of competitive and comparative advantages of nations, equity market efficiency or inefficiency level and the compounding rates of great businesses, China's market offers better long-term opportunities. Even though I regard Munger and Li as the smartest investors in the world, I was still a bit confused and hesitated. My hesitation came from a lack of experience in the Chinese stock market. What confused me back then was the macro picture of China's economy. I was also embarrassed at myself for not understanding my own culture.
After many months of researching and thinking, I decided to move back to China in December 2017 and focus solely on the Chinese market. Looking back, it was without a doubt the right decision. But even to this day, I am still trying my best to learn more about China's history, culture, economy and best businesses. There's still a lot to learn. Therefore, I was so delighted to come across Li's speech because he covered many of the questions I've had for a while.
This is the background of why I am writing this series. Perhaps many readers who are interested in investing in China have the same questions. In my next few entries, I'll post my notes from Li's speech.
Read more here:
- The 5 'Rights' for Value Investors: Part 2​
- The 5 'Rights' for Value Investors: Right Values
- Notes From Peking University's Fall 2020 Value Investing Course - Lecture 4 Q&A
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