- By Grahamites
In my previous two articles, I wrote about two of Li Lu's early investments, which he detailed in his book "Civilization, Modernization, Value Investment and China."
Both cases remind me of early Warren Buffett (Trades, Portfolio). No wonder Charlie Munger (Trades, Portfolio) calls Li Lu "The Warren Buffett (Trades, Portfolio) of China." Below are a few things Li and Buffett share in common, based on the case studies of their early investments.
VFC 15-Year Financial Data
The intrinsic value of VFC
Peter Lynch Chart of VFC
We know Buffett used to go through Moody's Manuals page by page in his early investment career. He came across a good amount of investment ideas by poring over the stock manuals. Even in his late career he bought a basket of Korean stocks after reading the Korean stock manuals.
Li Lu did the exact same thing. In the U.S., Li Lu read Value Line page by page. Outside of the U.S., he read stock manuals published by brokerage firms. Not only are stock manuals helpful in terms of screening for new ideas, they are also the best type of education if you want to build encyclopedic knowledge of businesses.
Although Buffett often talked about the four filters they use at Berskhire, Buffett in his early days used a different set of filters. So did Li Lu in his early career. From the case studies, in his early days, Li asked the five following questions before making investment decisions:
Is it cheap?
What's in the book?
Is it a good business?
Is the guy running the business decent?
What could I miss?
The first thing Li checked in stock manuals was the "new low" list, i.e. new low price-earnings ratios, price-book ratios, etc. If the valuation didn't fit, then he didn't go beyond it. If the valuation was attractive based on book values, he asked what's in the book and how much is the book value actually worth. If the valuation was attractive on a price-earnings basis, both Li and Buffett looked at the pre-tax earnings on an un-leveraged basis. They also both calculated how much capital was deployed in the business and what the return on invested capital looked like.
Deep investigative work
Both Li and Buffett acted like investigative journalists when they did their due diligence on management. Buffett has always done investigative work on the managers he invested in even though sometimes he suggested otherwise. Just because Buffett hasn't met the owners before doesn't mean that he hasn't spoken to people who know them well. Similarly, it seems that Li always try to go through a thorough investigative analysis of the managers he invested in.
Most investors would not do this kind of investigative work as part of their job. Li and Buffett would go to their community, visit their friends and neighbors and even their churches. Some may find this type of work extremely challenging. What's encouraging is Li's point that most entrepreneurs leave a trail for you to follow so you can see how they deal with different situations. To this day, Buffett and Li still conduct intensive investigative work.
When Li was researching Timberland (which is now part of VF Corp. (VFC)) and Hyundai Department Store H&S (now (XKRX:069960)), two case studies that he has shared on extensively with investors, he was extremely focused for a few weeks, working day and night trying to piece all the information together. He tried his best to get complete and accurate information.
So was Buffett in his early days. In fact, Li's research on Timberland and Hyundai Department Store H&S remind me of Buffett's research on GEICO and Sanborn Maps. They both focused on every aspect of the business wholeheartedly for an extended period of time.
Again, here Li is very similar to Buffett. Li bet big on ideas he had high confidence on, such as Timberland and Hyundai Department Store, because they were such great opportunities. He had high conviction of the ideas because he put so much work in.
Both Li and Buffett agree that when opportunity comes, you have to bet big on it. But to do that, you have to prepare yourself to act quickly. You have to train yourself to jump on opportunity, especially the ability to do quick and extensive research and mental math.
Read more here:
Case Study: Li Lu's Investment in a South Korean Company
Case Study: Li Lu's Investment in Timberland
Hillhouse's Zhang Lei - Be a Friend of Time Part 5
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This article first appeared on GuruFocus.