#363 Li Lu and Charlie Munger and Warren Buffett

**David Senra** (0:00)
I sent a friend this text this week. I said, I'm working on another Li Lu episode, but this one is about his remarkable investing career. Can be summarized by number one, studied Buffett and Munger. Number two, did that. In all the talks and interviews that Li Lu gave over the last two decades, he's constantly referencing the lessons that he learned from studying Warren Buffett and Charlie Munger, and he shares their obsession with finding great companies. So many times when I was reading the words and listening to the words of Li Lu and I was researching the podcast, I thought of this book, which I mentioned multiple times in this episode. I think it's the best book on Buffett and Munger I've ever read. It's called All I Want to Know is Where I'm Going to Die So I'll Never Go There, Buffett and Munger, A Study in Simplicity and Uncommon Common Sense. And there's a few sections from this book that I want to read to you because it's really Buffett describing what makes a great business. And he says, Every day in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, which means don't watch our costs, our businesses will wither. On a daily basis, the effect of our actions are imperceptible. Cumulatively, though, their consequences are enormous. Later on in the book, Buffett is asked, How should you be running your business? He says, Just do what you always do. Widen the moat, build enduring competitive advantage, delight your customers and relentlessly fight costs. On the same page, Munger talks about that most people don't do this, especially companies after they get successful. So Munger is now describing the other side of this. What happens when you don't do this? Successful places tend to get bloated, fat, complacent. It's the nature of human life. Most places when they get rich, they get sloppy. And there's another great line from Buffett. He says, A great manager must be a demon on cost. This is something I've been talking about with my friend Eric, who's the co-founder and CEO of Ramp. Ramp is now a partner of this podcast. I've gotten to know all the co-founders of Ramp and have spent a bunch of time with them over the last year or two. They all listened to the podcast and they all picked up on the fact that the main theme from the podcast is on the importance of watching your costs and controlling your spend. That is the reason that Ramp exists. Ramp gives you everything you need to control your spend. Ramp gives you everything you need to be a demon on cost. Sam Walton in his autobiography summarized it perfectly. He says, our money was made by controlling expenses. You can make a lot of different mistakes and still recover if you run an efficient operation or you can be brilliant and still go out of business if you're too inefficient. Ramp helps you run an efficient organization. Ramp is everything that you need to control your spend and optimize your financial operations all on a single platform. So as your company gets more successful, you can avoid the fate that Munger said that successful places tend to get bloated, fat and complacent. Not if they use ramp. Ramp's website is incredible. Make history's greatest entrepreneurs proud by going to ramp.com to learn how they can help your business control costs. That is ramp.com.
20 years ago, as a young student coming to the United States, I couldn't have imagined having a career in investing. I would have never thought that I'd be fortunate enough to meet Charlie Munger. In 2004, Munger became my investment partner and has since become my lifelong mentor and friend, an opportunity I would have never dared to dream about. Charlie and I first met at a mutual friend's house while I was working on investments in LA after graduating from college. The first impression he gave me was distant. He often appeared to be absent minded to the presence of his conversation partners and was instead very focused on his own topics. But this old man spoke succinctly, his words full of wisdom for you to mull over. Seven years later, at a Thanksgiving gathering in 2003, we had a long heart to heart conversation. I introduced every single company I've invested in or researched or I'm interested in to Charlie and he commented on each of them. I also asked for his advice on the problems that I was encountering. He told me that the problems I've encountered were practically all the problems of Wall Street. The problem is with the way that Wall Street thinks. Even though Berkshire Hathaway has been such a success, there isn't any company on Wall Street that truly imitates it. If I continue on this path, my worries will never be eliminated. But if I was willing to give up this path right then, to take a path different from Wall Street, he was willing to invest. With Charlie's help, I completely reorganized the company I founded. The structure was changed into that of the early investment partnerships of Buffett and Munger. Investors who stayed made long-term investment guarantees, and we no longer accepted new investors. I then entered another golden period in my investment career. In the next 12 years, the capital grew more than 20 times. Buffett said despite the countless people he has met in his life, he has never encountered anyone else like Charlie. And in the years that I've known Charlie and was fortunate to be able to intimately understand him, I am also deeply convinced of that. Even from all the biographies of people from all the ages, I have yet to see anyone similar to him. Charlie is such a unique man. His uniqueness is in his thinking and also in his personality. When Charlie thinks about things, he starts by inverting. To understand how to be happy in life, Charlie will study how to make life miserable. To examine how a business becomes big and strong, Charlie first studies how businesses decline and die. Most people care more about how to succeed in the stock market. Charlie is most concerned about why most have failed in the stock market. His way of thinking is, I want to know where I'm going to die, so I will never go there. That is actually my favorite book. I don't know, I read 10, 15 books on Warren Buffett and Charlie Munger. My favorite one is on episode 286 It's called All I Want to Know is Where I'm Going to Die, So I'll Never Go There. Buffett and Munger, A Study in Simplicity and Uncommon Common Sense. Let's go back to this. His way of thinking is, I want to know where I'm going to die, so I will never go there. That's episode 286 Charlie constantly collects and researches the notable failures in each and every type of people, business, government, and academia, and arranges the causes of failure into a decision-making checklist for making the right decisions. Because of this, he has avoided major mistakes in his decision-making in his life and in his career. The importance of this on the performance of Buffett and Berkshire Hathaway over the past 50 years cannot be emphasized enough. Charlie's mind is original and creative, never subject to any restrictions, shackles or dogmas. He has the curiosity of children and possesses the qualities of top-notch scientists and their scientific research methods. He has a strong thirst for knowledge. And now re-reading this again, these are all traits that Li Lu has imitated and adopted. So let's read that again. Charlie's mind is original and creative, never subject to any restrictions, shackles or dogmas. He has the curiosity of children and possesses the qualities of top-notch scientists and their scientific research methods. He has a strong thirst for knowledge. To him, with the right approach, any problem can be understood through self study, building innovations on the foundations led by those who came earlier. Charlie advocates studying all the truly important theories in all disciplines and building on the foundations of the so-called worldly wisdom as a tool for studying the important issues in business. Charlie's way of thinking is based on being honest about knowledge. He believes that in this complex and changing world, there will always be limitations to human cognition and understanding. You must have the correct understanding of knowing what you know and what you don't know. The true insights a person can get in life is very limited. Correct decision making must necessarily be confined to your circle of competence. A beautiful lady once insisted that Charlie use one word to sum up the source of his success. Charlie said, it was being rational. Charlie can see through to the essence of things. Buffett calls this characteristic of Charlie the two-minute effect. He said, Charlie can in the shortest time possible, unravel the nature of a complex business and understand it better than anyone else can. The process of Burschauer's investment in BYD is an example. I remember in 2003 when I first discussed BYD with Charlie, despite having never met the founder, never visiting BYD's factory and being relatively unfamiliar with the Chinese marketing culture, his questions and comments about BYD remains to this day, the most pertinent questions a BYD investor needs to ask. Everyone has blind spots and even the brightest people are no exceptions. Buffett said, Benjamin Graham taught me only to buy cheap stocks. Charlie allowed me to change my thinking. That's the real impact Charlie's had on me. I needed a powerful force to walk out of the limitations imposed by Graham's theories. Charlie's ideas were the source of that power. He expanded my horizons. That is the end of Buffett's quote. This is Li Lu talking about this. I've also had this profound experience. Charlie pointed out the blind spots in my thinking. He is not just a partner. He's a role model in my life. Not only did I learn from him the principles of value investing, but also learn from him how to live life. He made me understand that a person's success is not accidental. Timing and opportunities are, of course, important, but the inherent qualities of people are even more important. Charlie likes to meet people for breakfast, usually starting at 7:30 a.m. I remember the first time I had breakfast with Charlie. I arrived on time only to find Charlie sitting there, finished with the day's newspapers. While it was only a few short minutes away from 7.30, I felt bad letting an elderly man I respected wait for me. For our second date, I arrived about 15 minutes early and still found Charlie sitting there reading the newspaper. For our third meeting, this is one of my favorite stories, it's hilarious. For our third meeting, I arrived a half an hour earlier and Charlie was still reading the newspaper, as if he had been waiting there all year round and had never left the seat. For our fourth meeting, I arrived an hour early and began to sit there waiting at 6:30 a.m. And at 6:45 a.m., Charlie leisurely walked in with a pile of newspapers and sat down, not even looking up, completely unaware of my existence. Afterward, I came to understand that Charlie will always be early for meetings. But he doesn't waste time either. He will take out the newspaper and read. One year, Charlie and I were attending an out-of-state meeting. After the event, I unexpectedly met Charlie at the airport terminal. His plane had already departed, but Charlie was not in a hurry. He took out a book and sat down to read while he waited for the next plane. As long as I have a book in my hand, I don't feel like I'm wasting time, Charlie said. He always carries a book on him. As long as he has that book, he'll have no complaint. Charlie spent his lifetime studying the causes of human failures. So he has a profound understanding of the weaknesses of human nature. Because of this, he believes people must be strict and demanding on themselves, continuously improving their discipline in life in order to overcome the innate weaknesses of human nature. This way of life to Charlie is a moral requirement. He is such a unique person. But if you think about it, if Munger and Buffett weren't so unique, how could they have built Berkshire's performance over 50 years into one that is unprecedented in the history of investing and one that has yet to be replicated? Over the years that I've known Charlie, I often forget that he's an American. He is closer to being the traditional literati, which is the scholar officials of Imperial China. Charlie is the best example of a businessman with a literati soul. He is extremely successful in business. However, in the deep, intimate interactions I've had with Charlie, I found Charlie to be essentially a moral philosopher and a scholar. He reads widely, is knowledgeable over a broad range of topics, is truly concerned about his own moral cultivation, and is ultimately concerned about society. Charlie's value system from the inside out promotes self-cultivation and self-development to become the saints who help other people. Charlie very much appreciates Confucius. I sometimes think that if Confucius was reborn in America today, Charlie would probably be the best incarnation. If Confucius returned 2,000 years later to the commercialized China, his teaching will probably be, have your heart in the right place, cultivate your moral character, fortify your family, acquire wealth, and help the world. That was an excerpt from the foreword that Li Lu wrote for the Chinese version of Poor Charlie's Ominac, The Wit and Wisdom of Charlie Munger. And it is an excerpt from the book that I made myself. As you and I covered last week, there's only one book on Li Lu. It was written by Li Lu, and it only covers his early life and his escape from China. What that version of Li Lu that was writing that book could never have predicted was what the next few decades of his life was going to turn out. The fact that he attends a lecture from Buffett that changes his life, becomes partners with Charlie Munger, founds a wildly successful investment company that produces billions and billions of dollars in returns. So what I wanted to do for this episode was, okay, we already covered his early life, his surviving one of the most horrific childhoods you could possibly imagine. Now I want to learn how he thinks about business building, and investing, and so to do so, I had to make my own book. So what I did is I found all the lectures I could find, and all the interviews I could find of Li Lu in his own words. Most of them are on video. I would take the video, that would then transcribe the video, I then printed out the transcription, then I organized them in chronological order by the year that he gave the talk, and then I treated that giant stack of paper just like a book. And so the result is I kind of have like a homemade or a handmade, almost like autobiography of Li Lu, where he's discussing his investment career. And when I'm done, I'm going to put this in a binder, a three-ring binder and put it up on my bookshelf. This is something when I went to Charlie Munger's house and actually got to see his library, this is something when I realized it's like, oh, I'm still a biography amateur because Charlie would make his own biographies. There's this very hard to find interview that John D. Rockefeller gave towards the end of his life. It's like, I think 1,700 pages. I think the transcript is 1,700 pages long. It's the William O. Englis interviews that he did with Rockefeller. And on Charlie's bookshelf, you see that he had printed out the transcript and then put it into multiple three-ring binders. So I'm going to put my own version of Li Lu's autobiography when I'm done in a three-ring binder on my bookshelf. And so the first part of this homemade book is going to be obviously the forward that Li Lu wrote for the Chinese version of Poor Charlie's Dominec. The next thing is Li Lu's Columbia Business School lecture in 2006 I briefly mentioned this last week because the lecture is like an hour and 45 minutes long, something like that. There is like a 17-minute section that is just Li Lu completely like lighting up and being very disappointed in the lack of effort that the students in the class and the lack of, you know, just rigor that the students in the class were exhibiting. But that I'll touch on later because he actually goes through and describes his process of how he selects and the research that he does. He uses Timberland as an example, which is a very successful investment of his, but that comes later. I want to start. He starts out like, why is he doing this? Why is he even bothering to come to Columbia Business School and to give this lecture? And his whole point was that the fact that he attended a lecture by Warren Buffett when he was a student at Columbia, when Li Lu was a student, changed his entire life. He says, this class in many ways is really what made my career. At the time, I wasn't even a student at the business school, and I was accidentally brought into a lecture. And in the middle of that speech, listening to Warren, a light bulb kind of just went off, and I figured that I can do something in this business. At the time, I was pretty desperate. I had recently escaped from China. I didn't know anybody. I had no connections whatsoever, and I didn't have any money. I was horribly worried about how do I ever make a living in this country, and I really didn't grow up with a capitalist culture either. I think this is why last week's episode is so important, why it's one that I'm going to re-listen to anytime that I feel like, like self-pity kind of creeping in. We have no excuses. Li Lu went from one of the most horrific childhoods you could possibly experience to a billionaire. He moves to America, no money, doesn't know the language, no connections. And so right away, you also see the similarities in the thinking between Li Lu and Charlie Munger. You know, he says, if you live long enough, bad things are sure to happen to you. Self-pity has no utility. Get up, dust yourself off, and keep going. And so we go back to this young Li Lu, sitting in this lecture from Warren Buffett, trying to figure out, what the hell am I going to do with my life? I was horribly worried about how do I ever make a living in this country, and I really didn't grow up with a capitalist culture either. What Buffett said about investing really was just so different from my perception of the stock market. The more I thought about it, the more I thought, well, gee, this may be something that I can do. And so one of the first things that he learned from Buffett was that you should really see yourself as more of an owner of a business, and therefore tie your fortune to the outcome of that business. Your fortune will rise up and down with the nature of the business. And if you're an owner of the business, you don't trade all the time. And so that line, if you're owner of the business, you don't trade all the time, this is something that Li Lu is going to repeat throughout the lectures. It's really Munger's idea of sit on your ass investing, which Munger says, sit on your ass investing. You're paying less to brokers, you're listening to less nonsense, and if it works, the tax system gives you an extra one, two or three percentage points per year. This important investment philosophy assumes that one is better off buying a business with exceptional business economics, working in its favor and holding it for many years, then engaging in a lot of buying and selling, trying to anticipate market trends. Constantly buying and selling means constantly being taxed. So that's something that Munger will repeat, that is something that Li Lu will repeat as well. And so Li Lu is telling the students, hey, turns out this Buffett guy's, you know what, I'm going to read this to you real quick. I was texting a friend of mine as I was doing research for this podcast, and I said, I'm working on another Li Lu episode, but this one is about his remarkable investing career. It can be summarized by, number one, studied Buffett and Munger. Number two, did that. So he tells the students, like, I'm listening to Buffett. Turns out this Buffett guy is pretty smart, kind of knows what he's doing. I should just do that. And so then he hits on the advice that he has, which I think is the most important, I think is one of the main themes that you and I talk about, why we read biographies and not business books, is because general business advice is useless. It has to be tailored to who you are. It has to be authentic to you. And so he's saying, you're interested in investing. Well, guess what? 95% of the stock market is made for traders. 5% is going to think maybe 5% or even less are going to think like Li Lu, like Buffett, like Munger. So you have to figure out, does this make sense to you? Because if you're not, if it doesn't fit, if you're not authentic to, if it doesn't fit your temperament, you're going to fail. And so he says, if you're thinking like us, you are really not the majority. You are actually a very, very, very small minority. And the stock market is not created for you. And that's really where your opportunities is. And that is where the challenge is. And that is what I first learned when I listened to Buffett. That is one of the things that stuck in my mind. Because I really know, I really knew by then what kind of person I was. Your biggest challenge is really to understand whether you're that 5% of people, or you're like the 95% of the majority. And I think this is overlooked and really excellent advice, because this is key to enjoying the game. His whole point is like all the values in the long term. If you're building a business that's not authentic to you, if you don't enjoy it, you're not going to last decades. And that's where all the money is. And in many cases, and in Li Lu's case, it takes an experiment. You have to know what you don't like to do. So he's like, listen, I always knew I was going to run my own fund. That he knew. But he didn't know how he was going to run the fund. And so one of his early backers was Julian Robertson, who was the founder of Tiger Management. And so he tells Li Lu, he's like, hey, come into the office, come like, work out of here with all these other trainers. Li Lu is going to talk about this in more detail in another interview later. But this is where he realizes, like, I'm not part of this 95%. And so says, Julian invited me to share office with him and invited a whole bunch of other fund managers that he also invested in to share ideas. And that's when I sort of got a much better understanding of how the 95% of other people operated. And so most of them were trading all the time, they were shorting stocks. And Li Lu is like, I don't like this. Li Lu is much more like Munger and Buffett, where he wants to sit in a room, read, think. He compares his job to an investigative journalist. But he's like, this doesn't match me. And so after describing this period of time where he's like, I don't like this version of the business, he gives excellent advice again, that I think too many people miss, especially people who don't read biographies miss. So my first point I want to leave you with is really to understand who you are, because you will be tested. You are going to really have to ask yourself, you're going to have to face yourself, whether you're a value investor or you're not. And he says, if you want to be like, if you want to be an value investor, you want to be like Li Lu, if you want to be like Charlie Munger, if you want to be like Warren Buffett, that means that somehow you're probably genetically mutated. You are very comfortable being in a minority, which is not natural to human beings. Most of us survive because we stick with the group. And if you're like Li Lu and Buffett and Munger, you would naturally adopt the attitude that you're right, not because other people agree with you, but because your reasoning and your evidence showed you that you're right. When I got to this part, I searched this because I was like, I know Buffett said something about other people's opinions over and over again. And that's what I was thinking about when I got to this paragraph. So in that book that I mentioned earlier, which I feel is the best book that I've ever read on Buffett and Munger, which is All I Want to Know is Where I'm Going to Die, So I'll Never Go There written by Peter Bevelin, Buffett says two things about this. First quote from Buffett, We don't read other people's opinions. We want to think. We want to get the facts and then think. And then later on, the second thing he says, Buffett says, I would say that if Charlie and I have any advantages, it's not because we're so smart, it is because we're rational, and we very seldom let extraneous factors interfere with our own thoughts. We don't let other people's opinions interfere. And so we go back to Li Lu. He says, this is common sense. But of course, common sense is the least common commodity. That is a great line. Common sense is the least common commodity. Most people don't think that way. And so he's like, you have to ask yourself, how do you want to spend your time? And for Li Lu, he's like, I want to spend most of my time or your time. I truly being an academic researcher instead of being a so-called professional investor. Most of the time, the job really is to be a researcher, to be a journalist. And then he describes the traits that you have to have if you want to go down this path. He's really describing himself here. You have to have insatiable curiosity. You have to have an insatiable curiosity to really try to figure out about how everything works. The more you know, the better off you are. And so you have to be naturally interested and curious. He matches that intense curiosity with the fact that he reads everything. There's a line in a young Churchill's biography that I read. They talked about the difference between, I think he was like 26 when he was in parliament. They said the difference between Churchill at that time and his competitors, or I guess his fellow lawmakers, was they would contend to read like today's newspapers where it said, there's a line in the book where it says, Churchill devoured entire shelves. That's how I think about Li Lu devouring entire shelves. So he's like, of course, you have to have this natural intense curiosity. He says this will help you if you're obviously reading everything. He says it will help you because then occasionally you will find a few insights. All of your studies would really just give you a handful of tremendous opportunities. And so when he talks about all this reading, all this thinking, all this research will only produce a handful of opportunities. And obviously when you find these opportunities, you want to bet really heavily. In fact, I have a coffee mug of Warren Buffett's wisdom, and it has like quotes, and I just pour espresso into this thing all day long. And there's a line that I was thinking of because on the coffee mug, it's a quote from Warren, it says, opportunities come infrequently when it rains gold, put out the bucket, not the thimble. And the reason I thought about this is because multiple times people ask Li Lu because he takes questions in almost all these talks. He's like, well, how much money do you put into this investment? And like, what large percent of your, what percent of your portfolio and everything else? And my funniest, his funniest answer to this is like, how much money did you put into this? And he goes, a shitload.