Chit Chat Stocks - Li Lu - The Chinese Warren Buffett (How He Finds 100 Baggers)

Episode Date: April 16, 2025

Li Lu is the only investment manager Charlie Munger gave outside capital to. He has invested in multiple 100 baggers in China and introduced BYD to Warren Buffett. On this episode, we discuss: (00:00) Introduction to Li Lu: The Mysterious Investor (04:45) Li Lu's Fascinating Background and Early Life (09:35) The Formation of Himalaya Capital and Investment Philosophy (14:26) Investment Strategies: Balancing Patience and Activity (16:59) Key Investment Principles from Li Lu (22:50) Case Study: Timberland Investment (29:52) Case Study: BYD - A Defining Investment (33:40) Investing Insights: BYD vs Timberland (35:41) The Rise of Mu Tai: A Cultural Staple (42:39) Macro Perspectives: Li Lu on China (48:39) Lessons from Li Lu: Value Investing Principles ***************************************************** JOIN OUR NEWSLETTER AND FREE CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* FinChat.io is the complete stock research platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan: ⁠finchat.io/chitchat  ********************************************************************* Bluechippers Club is a tight-knit community of stock focused investors. Members share ideas, participate in weekly calls, and compete in portfolio competitions. To join, go to ⁠Blue Chippers and apply! Link: ⁠https://bluechippersclub.com/ ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. Before we get to this episode, we want to talk about our friends at Interactive Brokers. Interactive Brokers is the professional's gateway to the world's markets. Interactive Brokers offers commissions starting at $0 on U.S. listed stocks and ETFs with low commissions on other products, and there are no added spreads, ticket charges, or account minimums. Clients in over 200 countries and territories trade stocks, options, futures, currencies, bonds, funds, and more on 160 global markets from a single unified platform. Clients earn interest rates of up to 3.83%

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episode. Welcome into the Chitchat Stocks podcast. My name is Brett Schaefer, and as always, joined by Ryan Henderson. Today, if you saw the title, we have a fun investor overview. One of the most mysterious investors out there. One of the only investors, perhaps the single only investor that Charlie Munger ever gave outside money to. The Warren Buffett of China. It is Li Liu himself, Seattle's finest, I should say, and we're going to get into his background, into his investing philosophy, some of his famous investments, what he thinks about US-China relationships, macroeconomics, and what we learned by studying the few things that he's done publicly as quite the mysterious investor.

But before we do that, I want to have some housekeeping items. first the power hours for anyone that listens to those the ones that usually come out on sunday morning and go live on wednesdays or recorded live on wednesdays we are changing it up we're going to be recording those thursday at 5 p.m eastern time on the youtube page to get as much of the news of the week out of the way that we can talk about ourselves we don't miss anything and then we're going to be releasing them friday morning just so we don't get stale same format nothing else changes but friday morning look for those in your inbox as of when this comes out on wednesday we're not going to be recording that today look for that day after and find them in

your podcast feeds feeds on friday mornings so just to reiterate that we will have a podcast out every wednesday morning and every friday morning in your podcast players now if you have loved listening to us on sunday mornings first of all you're probably one of the few but thank you unfortunately yeah you can still do the same format might be slightly still we're just we wanted to have stop having this long delay between recording and publishing the power hours so we're condensing it friday mornings wednesday mornings expect the podcasts in your podcast players yep especially with the trump administration and how crazy it gets all right other things give us a of you on Spotify or Apple Podcasts, we are one away from a nice round number of 350 on Spotify,

and that's the best way to support the show. If you would like written stuff, we'll have show notes released with this podcast on our Substack. The link is in the show notes there. And if you want to discuss anything about the show, our investments, any of our write-ups, or anything, ask us any questions, you can do that on the chat community function on Substack. all right ryan now let's roll through into the episode who is li lu what is his background and take us through his fascinating story as is almost movie-like or a novel uh it's it's an amazing journey he's been on yeah li lu has probably the most fascinating background of any investor we've ever studied and i'll get into it i'll also say there's so much made

And I guess so much talk about Li Lu and discussion about how great of an investor he is and how Charlie was the only – he was the only investor Charlie Munger ever gave money to other than Warren Buffett and what makes him special. And I kind of thought going into this like, hmm, I'm going to be looking to poke holes. I was very impressed with Li Lu, his background, his story, his investments, his career. unfortunately you don't get that much public data with himalaya capital but we've got some tidbits that i think will be useful but i didn't even know that he lived in our hometown until this episode so if i ever see him i'm gonna i don't know i'd love to i'd love to meet him lee if you're listening i live probably 20 minutes away from you and if you like to go for coffee i'm just putting that out into the world but ryan continue with this story lee lu was born in tangshan china

in 1966 during Mao Zedong's Cultural Revolution. As a part of the Cultural Revolution, Li Lu's parents were sent to labor camps when Lu was a child. So he was forced to transition through various orphanages and caretakers. And at the age of 10, he survived the Tangshan earthquake, which apparently killed 240,000 people, including all of Li Lu's adoptive family, and is considered one of the deadliest earthquakes of all time, if that was not already an insane enough childhood, his life gets even crazier into his 20s. In 1989, Liu, who was attending Nanjing University, I believe I'm saying that right, and he had already majored in physics, snuck onto a train heading to Beijing in order to participate in pro-democracy protests.

The protests and demonstrations, which included a hunger strike that I think lasted six days, so the protesters starved themselves for six days, the protests lasted for months, and they eventually elected Li Lu as one of the leaders of the protests. And according to one of the protest organizers, this is kind of, I guess, maybe gives you a sense of his personality, says Li Lu mostly remained silent during meetings, absorbing differing views. Li also made sure to get close to the right people. Now, keep in mind, Li Lu was an outsider in these protests. He wasn't from one of the prestigious Beijing universities, and he didn't have any ties to the organization before joining these protests. So there were actually a lot of people at the protest that, because he had no previous ties, were worried that he was actually a spy. He wasn't. He was there for the protests, it seems. And then after a couple of months, the protest had gathered more than a million people that joined them in Tiananmen Square. And for anyone familiar with the story, you likely already know what came next. Here's a quote from a Good Financial Times article on his life. It says, in the early hours of June 4th, troops marched in, opening fire on activists. Tanks crushed tents with sleeping protesters inside and blocked exit routes while soldiers arrested those who tried to flee. Officials claimed 200 civilians were killed. Student leaders estimated the figure at up to 3,400. After that moment, the Chinese government named 21 people for leading the uprising and Li Lu was one of them. So he was forced to go into hiding. He escaped through a smuggling route and in 1989, he was granted asylum in the US. In a memoir, he wrote, I tried to identify with any family that took me in and learned to fit into whatever environment I found myself in.

He learned English within a single summer and enrolled at Columbia University where he earned a degree in economics while simultaneously earning graduate degrees in business and law. Very impressive. While at Columbia, he attended a lecture – this is where it gets kind of funny. While at Columbia, he attended a lecture given by Warren Buffett, which he says changed his life. The side note here is that apparently, Brett, you told me this, he only attended the lecture because he misheard his friend and thought there was a free buffet, which is actually quite hilarious considering how many people misspell Buffett's last name, Buffett. No one's immune to the warm buffet. I'm sure we're going to do it once. Everyone can make fun of us, but I guess it worked out in this case.

And another note, I don't know if you mentioned it in here, when he moved to the United States, this kind of shows probably his intellect, he learned English in one summer, which it's not like learning Spanish. Think about that. If you're someone that speaks English learning Chinese in one summer, that'd be quite difficult. Yeah. Yeah. After attending that lecture, he began investing his own money and generating apparently quite good returns while doing so. So much so that in 1997, after graduating from business school, he decided to start his own fund. I'll let you take it from here, Brett, and talk through the formation of Himalaya Capital and any sort of guesses slash public information that we can

piece together to try to get a sense of his returns. Yeah, we don't have official numbers. So again, this is all hearsay reporting sources from newspapers, just things you read online. Some of this stuff might be more reputable than others, but we're just going to go with it and give some stuff that makes sense. What I also think is fascinating learning about Lou and also knowing Warren Buffett's history is that similar to Buffett, he started out as more of an active trader in deep value stocks, but as we'll get into, matured into more of the high quality compounder bro, as someone might call him. Maybe, you know, we'll get into BYD and what makes that such a good never sell investment. But let's talk about Himalaya Capital founded in 1997 by

Lee Liu after he finished business school. It is technically run out of Seattle, but Liu invest in Asia and North America with a focus on China. And I believe he was also given his attachment to Munger was in Santa Barbara and Southern California with Munger a lot. So again, it's a global investment firm. They have a big focus on China, his home country. Now, when you look up his 13F, you will see American holdings. Sometimes there might be some US listed Chinese stocks, but you'll see mainly American holdings, but not anything listed in China or Hong Kong, such as BYD. So it's going to be misleading. You think, oh, he's got a huge position in Bank of America and Google and that's it? No, it's a very different investment fund

that's only going to be misleading along the way. Now, from what I researched, some stats on the fund are that in late 2023, it had about $14 billion in assets under management. So I'm guessing today, given how BYD has been performing, maybe we're pushing closer to $20 billion, but who knows? Let's just say $10 to $20 billion in assets under management. The rumor has that they've put up 30% annual returns since inception, although I cannot confirm that. I would also say I'm guessing they're at about 20% or higher, maybe lower, but either way, very, very good returns over the long haul. And then in 2004, so from 1997 to 2004, Lou was kind of, I wouldn't say struggling, although he did start out during the Asian

financial crisis, which was a very tumultuous period. But he was still, you know, an emerging manager. He was trying to do a lot of things himself. He was an immigrant in another country. But after that, he met Munger. Munger was so impressed that in 2004, Lou received an $88 million investment from Munger, who taught him the methods of, you know, quote unquote, value investing, similar to what he taught to Buffett. Now, we look at Himalaya's website, some of their writings. They say they use the value investing approaches of both Ben Graham, Charlie Munger, and Warren Buffett. Now, Ben Graham is more of the classical deep value. So they're not opposed to investing in deep value stocks, but they're also looking for

the Munger style approaches as well. It's a combination of deep value and quality buy and hold investing. And he talks about, you know, it's a cliche, but he's using the stuff that Buffett talks about waiting for the fat pitch, the Ted Williams analogy, and he recommends investors focusing on not being too patient and not swinging at all, but also waiting for the fat pitch. So he says, again, you want to make sure you are not being too active, you're not over trading, but also that you're not too patient and under trading and are afraid to take the chance when you see a promising opportunity I guess I won't read the full analogy I'll probably include it in the newsletter but again it just talks about how Ted Williams had these squares

on the strike zone uh during you know playing baseball and there were some where he would do extremely well the ball showed up there but some places where he wouldn't so you wait for the one where you can hit the fat pitch and that's what Leloo at Himalaya Capital is waiting for if we look at his 13f he made no trades in what would have been q4 of 2024 now that was only his american holdings but still no trades not going to buy or a sell and then i guess this leads to my discussion question ryan more personally what downfall do you believe and i'll answer it too you fall for the most too much trading or too little trading what's something that you feel like you need to work on oh um maybe too little uh i definitely don't do too much trading i'm really not that

active other than adding to existing positions so definitely not too much trading although i'd say the places where i've been hurt the most is selling things too early or at the wrong time so if you consider that maybe it is too much trading the limited trading that i have done is too much i think yeah i think i think i have problems with both and everyone has the instinct to have that problem where you're afraid to take the chance when a stock is down 80 or if you see some opportunities that seem good but then you buy it and then you sell later you know again you're not waiting for the fat pitch you're swinging at something outside of your strike zone i think Again, maybe I have the same problem as you of selling too early in some promising stuff, but there's some balance there.

But waiting for the right pitch or not or being too patient on something can be a good thing or a bad thing. But if we look back at Himalaya Capital today, it is, again, much more of a buy and hold patient investor than turning over deep value rocks. and besides any of the public like stuff they have on their website we don't have much in letters from lilu he has some chats that we've talked about um we know now that they have invested in byd as well as i'm not going to pronounce the name that alcohol stock that ryan will get into and i would guess that the 30 return is not too far off i mean byd's performance has been a little bit less than that. So maybe it's under 30% per year,

but still, even if it was 20%, that's a fantastic long-term track record. And if we look at, again, a Columbia Business School talk that wasn't too long ago, these are probably the best ways for any listener to get more of the direct stuff that Lelu does. He's always done some talks with Columbia Business School from time to time

or talks with, I think, Peking University over in China. And there's some transcripts out there. there's some recordings out there that you can watch. And he's discussed more in depth of what he's actually looking for, as opposed to kind of these vague platitudes, for lack of a better word on the website. And after listening to this talk, I found four, I think, big things that he seemed to focus on. So one, a great business is one that consistently earns high returns on invested capital. Two, and this is maybe a small one, but I thought it was a good one. Addiction to a brand can be quite valuable. That seems pretty obvious, but I think people forget it. And that can be both

literal or figurative. So, you know, addictive sugary products or figuratively, you know, the brand is so strong among in consumer mindshare. Third, Himalaya Capital studies industries and is looking for companies that are already strong, not ones they hope can eventually be strong in the future. So he doesn't want turnaround stories. He wants stuff that's already going to be good. And yeah, when you look at it at first, it might be a 30, 40 times earnings, but that's what waiting for the fat pitch is. You keep it on the watch list. Maybe at some point over the next 10 years, hey, you can get it for 10 to 15 times earnings and it's a fantastic investment. And then lastly, like Buffett, he focuses on capital allocation from management.

And he says that durability of an investment can come from intelligent capital allocation from management. We have some other quotes from here that I'll get into after this, but Ryan, I'll let you go here. What did you think about some of his tenants and what he cares about from these Columbia Business School talks? I like that second one. Addiction to a brand can be quite valuable. And you actually saw that in probably one of his best investments ever, which we're going to talk about here in a sec, which is the alcohol company in China has great brand affinity. So that was kind of one of those prime examples of it. And you actually even saw that we're going to talk about, I will talk about here one in a second, which was more

of a deep value investment, which does kind of show the flexibility he had as an investor, but there was some brand affinity there as well. Now, I do think brands can kind of be a trap, like brand relevance, brand power can kind of be slightly misleading, but there are clear instances where it drives a ton of value. I think in consumer goods, you see that especially as opposed to retail, say. Yep, and I like the reminder that turnaround stories are tough.

I think that's something that I lean into or I'm like, oh, this new pitch is gonna work. And sometimes it doesn't. If it does work, it can be a home run investment. But a lot of the times turnaround stories are very, very hard. All right, I have some other quotes here. They're pretty short,

I think I'll just read them. And if you have any reaction or anything, just let me know first. And these are all from the talk. Quote, watch your portfolio go down 50% and not be affected. Watch everyone else make more money than you and not get affected. I think that second part is what people forget about. I think it's honestly more easy in a vacuum. If you're confident in the businesses you hold to watch your portfolio go down 50%, especially if you're someone that has regular income coming in because you can go, I'll just buy. I have a long-term time horizon. But in those moments, maybe late 2024, maybe late 2020, early 2021, when people are calling you up and saying, oh, you're not in this crypto stuff. Oh, it's up a thousand percent.

Why aren't you doing this? We're all making so much money. That to me is much more difficult when it seems like everyone else is getting rich and you're not. Yeah, that pushes me out the risk spectrum more so than big drawdowns especially if every if the drawdown is like across the board it feels like the buying decisions are a little easier but yeah when when when it starts to become relative and you start to say it's the neighbor effect i think warren buffett's talked about this where it's like uh you know your wife comes to you and says well how's the neighbor making so much money he's he's an idiot and you're not and it's like you're a professional that's when it's like well now i really got to push myself out on the risk spectrum um yeah i think that second part

is really tough but that's really i think when the value approach matters the most exactly exactly that's when you need to have the most discipline when those instincts the emotions are trying to get you here's the second quote and it kind of this one i think encapsulates his personality the most because he's pretty sharp and aggressive and he's not afraid to just be super direct with people. So here it is. Quote, financial markets are there to expose your weaknesses. If you don't actually understand an investment, it will eventually expose you. That's another one. You can't borrow conviction. I think it's a good example there. All right. Third one. And I like this one because it's stuck in my own book. You are more likely to find promising investments

in a rapidly growing economy. And this comes to the fact that he's talked about where macroeconomics matters for your fundamental investments, where I've heard people talk about, for example, the promising growth of Poland and why they are excited about making investments over there. Or as I've talked about it, people probably heard the promising growth of Mexico, or I'm very bullish on that. So if you see fast growth, that can be a fantastic place to find stocks that could be 10, 20 hunter beggars over the long term. And that's what Li Lu saw in the 2000s and 2010s in China. Now we'll talk about later how this tune has changed a bit, but I did like that quote where broadly, not just China, not just the United States, durable economic growth from a country

level perspective or even a region, it can be a rising tide that lifts all boats and really helps returns. Yeah. Let's dig into some company specific examples now. The first one we're going to start with is more of a deep value play that he started buying in 1998. So this was actually before Munger wrote him his check. And then we'll talk about some of the compounders that have been huge winners for him. So when you look at Himalaya Capital and you're trying to do a web search for Lulu, the companies that come across the most that talk about his success and how he generated such outstanding returns was probably the compounders that we're going to discuss in a bit. This is not one of those, but it's a phenomenal example of how A, illustrates

how deep his process and research system was. And it shows his flexibility as an investor, because this certainly was not a compounder, but let me go through it. So in 1998, he came across an interesting idea through ValueLine, which by the way, apparently he used to read the ValueLine reports and he'd go page by page. And the first thing he would look at is valuation for all these companies and company he came across was Timberland. No, it has nothing to do with lumber as some people are probably guessing. Timberland was a clothing and shoes retailer that traded at a remarkably cheap multiple and had a phenomenal following with its core customers. That's that brand affinity that we talked about. When Li Lu found the company, Timberland was trading between

$28 to $30 per share and was estimated to be earning about $5 per share. He also did some digging into the book value and assets of the company. He found that they had $300 million in operating assets, $100 million in cash, and $100 million in a commercial real estate building. And he was also looking at this company during the third quarter. He knew that the fourth quarter was seasonally strong for cash flow, so there would be more cash at the company come the next report. Additionally, he found it was a good enough business. He estimated that it was 50% ROIC at the time. Keep in mind, this is retail, so ROIC can change pretty rapidly.

But he tried to figure out why is it so cheap. And here's what he discovered. The company was primarily owned by a family. 40% of the outstanding shares were owned by the family, 98% of the voting power, and they never raised any additional capital outside of its IPO. That means banks really don't have that much incentive to cover you. If you're not going to do any financing rounds, there's less reason to throw a sell-side analyst on your company because you're not going to, I don't know, give them additional business as well. the other part that was weighing down the stock is the company had a ton of outstanding lawsuits so he downloaded all the court documents and he started going through each lawsuit and he found that most of them were just upset or dissatisfied shareholders that sued because the management team was missing guidance apparently those lawsuits yeah those are all fake just money grabs yeah if you see those you can go ahead and toss them out if you're a shareholder

anyway apparently those lawsuits were pissing off management enough that they stopped talking to wall street altogether so there was very little communication between them and wall street which is part of why the company had zero sell-side coverage and then the last sort of step of the process for lilu is getting a read on management this is apparently where he goes to great lengths and lu has recommended to students in the past that they should operate like investigative journalists when assessing management so lilu apparently started digging into the background of the ceo found he was a high school graduate found he went to a certain church found that his son was in business school and he literally visited the church and this is apparently how he

got connected he found that the son of the ceo who's apparently going to be the successor had he was on a board of some non-profit and that non-profit the founder was a friend of lilu i don't know if his past friend or lilu became friends with him to get connected with the son but he joined the board as well lilu did and got connected with the son of the ceo the son introduced him to the actual ceo and all of a sudden uh he was able to get quite a good read on who the people were and he was basically able to say um that they were honest and competent people so he took a stake over the next two years timberland jumped 700 percent so and this is not this was not some big long-term compounder i think it's now since been acquired i think it

was acquired in 2011 at not that much of a premium there may have been some share changes. Not a phenomenal long-term investment, but at the time, he knew earnings were going to grow 30% a year for the next couple of years. And it was trading at five times earnings with tons of cash. So that was one example of the value investments he was seeking out early on and the process and the lengths he was willing to go to, to get a read on management and who he's pairing his capital with. But this one, I think this example you're going to go through and Brett, feel free to add anything to the Timberland investment one. The next example I think is the perfect illustration of how much he cares about management. All right, folks, if you are a regular

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you 15% off. That is finchat.io slash chitchat. Link will be in the show notes. Yeah. The last thing I'll say about Timberland is that, and I see this mistake going on a lot and I try to avoid it, is the margin of safety on the balance sheet for a deep value investment where he had the net cash position. There were the, I think, real estate assets. The details don't really matter. But a lot of times I see something that is pitched value investors club, wherever it's like, oh, it's four times earnings, five times earnings. The earnings should grow, but the balance sheet is not pretty. It's like, it's got a ton of debt, not that much cash there. Cashflow might be icky. I think that is the key to deep value where you have that margin of safety on the balance sheet.

and then you have a chance to make it a 5, 6, 7x returns if things go right for you. Well, let's talk about BYD. It's been a huge winner for Himalaya Capital. They've owned it, I think, for 22 years, maybe 23 now. It's the largest electric vehicle maker in the world, dethroning Tesla, headquartered in China. And the company is perhaps the closest thing we have to a vertically integrated clean energy company because they make the batteries themselves. They have electric vehicles. They have a lot of electric vehicles besides just passenger cars, but mainly, you know, it's the passenger vehicles they're selling in China and some other markets around the world now. And they've really dominated the market through technological innovations,

economies of scale, and just the hard-nosed efficiency that Chinese manufacturers are famous for. There's some quotes here that I think encapsulate it better than I could say. Here's a quote from a profile in the FT, quote, Himalaya's biggest early success bolstered that notion. In 2002, Lee invested in BYD, then a little known maker of electric batteries, though he was still ostensibly forbidden from visiting the company's factory in Shenzhen. He believed that the future lay in the manufacturing might of China and in the purchasing power of its 1.4 billion consumers. He sold Munger on the vision with Berkshire taking a 10 percent stake in BYD in 2008 and blah, blah, blah, blah, blah. There's some other quotes from Munger there. RIP. I think, again, this is a lesson in buying a quality business with a good manager or a good founder and never selling. And two, he saw at the time in 2002, the great potential of the Chinese market. and that could be a tailwind that would help BYD through thick and thin, through any upsides and

downsides of the global economic cycle. And here are some stats out there that I got to pull from our friends at finchat.io. Use our link finchat.io slash chitchat, get 15% off any paid plan. And yes, there are international stocks on there, including BYD. We can get a lot of this good data. Since 2005, BYD has had a 29% revenue kegger, and they are now doing over $100 billion USD in revenue. Since 2002, it has been 100-bagger stock, producing a 24% total return. And I would say today, and maybe this alcohol one too, BYD has really been Lee Liu's defining bet and made some money for Berkshire Hathaway while he was at it. This is company is a classic never sell investment due to its reinvestment runway. And there's this quote here again, I think it's I

think listeners will enjoy reading it because Lou, he can't say it better than I have. This was at an investor talking late 2024. So quite recent. And he's talking about BID and competence, understanding, business conviction and how to manage drawdowns. So quote, another example is BYD, which we've held for 22 years. During this time, its stock has dropped by more than 50%, at least six times, once even by more than 80%. Each significant price drop tests the boundaries of your circle of confidence. Do you really understand it? Do you truly know its value and how much value it has created? In one year, BYD might have increased its value, yet its stock fell by 70%. Only then is your circle of competence truly tested. Touching its boundaries confirms

its existence. During the time we've held it, BYD sales grew from 1 billion won to nearly 1 trillion won, and it hasn't reached its limit. It continues to grow and create value. This is the intriguing part of investing. Yeah, and BYD, maybe they'll hit $300, $400, $500 billion in USD in revenue someday. I mean, there's a lot of potential still in that electric vehicle market. And that leads to the discussion question. I think a lot of listeners already know the answer, But for people that want to learn more, Ryan, what do you think makes BYD a never-sell investment for Leloo versus something like a Timberland? I imagine for Leloo, it's the same as what Buffett and Munger would say and probably what most investors would say is that is there a sustainable advantage in the business? If there is not a sustainable advantage, like frankly, Timberland Shoes, it's got great brand value.

And when Leeloo bought it, it was trading very cheaply and had plenty of margin of safety on that investment. But it's not a sustainable advantage. I'm reluctant to say anybody in retail – sorry, anyone in apparel specifically has a truly undisruptable advantage. We're seeing that with Nike right now. but byd on the other hand was extremely innovative ahead of the game probably had some other lock-ins as well like the manufacturing complexity that's probably an advantage they probably had distribution agreements um i don't know maybe some ip stuff as well there's just a little more complexity as opposed to creating shoes and another thing i'll add there is

reinvestment runway. Timbaland didn't really have much of a reinvestment runway. Sure, you could do some Silicon Valley tan thing. Well, here's the number of people that wear shoes, everyone in the world. But in reality, the growth one runway was limited, whereas BYD, you can see a huge reinvestment runway and they have attractive return on investment capital and you can invest $100 billion. Well, that's an exciting proposition and it can keep you, I think from understanding or when you understand that it can keep you from selling, even if the valuation gets stretched sometimes, as opposed to other investments where you think that reinvestment runway might be limited versus the size it's trading at. Well, it might not be the best

opportunity. Let's go into a different one, Ryan, maybe one that we can understand a little bit better. And I'm not going to pronounce the name. Maybe you figured out how to pronounce it, but it's the alcohol company. It's the one that dominates that market and was another huge winner for Li Lu in Himalaya Capital. Yeah. The company I believe is pronounced Kwechow Mutai. I'm sorry if I'm pronouncing that wrong. And after Charlie gave Li Lu $88 million, he reportedly began buying up Kwechow Mutai, which I'm just going to call Mutai right away. So Muay Thai, for anyone who's never heard of this company, I believe it's only traded on the Shanghai Index as well or Shanghai Exchange. They have a brand of distilled liquor that is very popular in China and especially became very popular after the communist revolution.

According to that article from Financial Times, which we've referenced a couple of times, they say, as China boomed, Muay Thai became the drink of choice for toasting foreign dignitaries and the bribe of choice for high-ranking bureaucrats. Here are some notes I found through a Value Investors Club write-up about the company. It says, Muay Thai's main product is the Muay Thai alcoholic beverage. Muay Thai is the number one-ranked premium baiju, which is traditional Chinese liquor, in China. Muay Thai traces its roots back 2,000 years ago to the Han Dynasty. From inception, it has gone through thousands of years of perfection and improvements during the Qing Dynasty. Muay Thai became the first Chinese liquor to be produced on a large scale with an annual output of 170 tons. And today, Muay Thai is one of the most recognized premium brands in China. So it really is a cultural staple in China. And really, Baijiu overall is kind of the preferred liquor of choice in China as well.

So they're the dominant player in this market that's very, very important to the country in total. And it's seen remarkable growth over the last 20 years specifically. They've gone from 4 billion – I think this is in Chinese yen. Is that the correct currency or is it – Yuan. Yuan. Chinese Yuan. we could be pronouncing a lot of this stuff wrong so spelled y u a n for us english speakers

and don't fault us you can laugh at us if we pronounce it wrong but the investment case it still stands whether we're saying this whether we're sounding like idiots here yeah this all this this makes it all the more impressive that lulu learned english in a summer because we can't even pronounce these names. Anyways, they went from 4 billion, let's call it one, revenue in 2005 to 171 billion in revenue last year. That was a roughly 23% revenue CAGR. So 48-fold increase in revenue, but the business model is really impressive as well. So Premium Baiju is a really high margin business. Kwechow Mutai has 92% gross margins and 68% EBITDA margins as the input costs are typically very low and they have a bit of a geographical moat as well since the grains

required to make it are only grown in certain geographies and they've got certain agreements with those certain suppliers. In total, they've grown earnings per share at a 26% annual rate over the last 20 years and the stock is more than a 300 bagger since 2004 there isn't a ton of color on his purchases or whether or not he even still owns it today um since himalaya is so discreet but munger commented it commented on it a bit in an interview he said it was real cheap four to five times earnings and li lu just backed up the truck bought all he could and made a killing I think there's two takeaways for me here between looking at Muay Thai and BYD. A, he got the economy right.

So he was right on China. He was right on the growth of China and Muay Thai was already a very established business, but he benefited because of the growth of China overall and because this was an advantaged business. BYD, not only did he get the economy right, but he got the company right where he picked the innovator in the space. So he got industry tailwinds, pure revenue growth, economy tailwinds, kind of this perfect combination of events for him. Yeah. What's funny though, Motai is a better performing stock, 300 bagger versus 100 bagger. And I think it's an example

of why capital intensive is worse than non-capital intensive, as long as that moat remains solid. And hey, who knows? Maybe that 30% annual return is legit if he's held this the whole time. And let me just add that the 68% operating margins, 68% EBITDA margins that I mentioned, for context, Diageo, Pernod Ricard, Brown Foreman, those are kind of the three other big liquor giants internationally. They have about 30% operating margins. So this is double, at least double the margin profile, very insulated, and margins have

continuously gone up over time. Before we move on, we want to talk about Blue Chippers Club. Blue Chippers Club was started by two friends of ours with the goal of building a tight-knit community of stock-focused investors. Inside this community, everyone gets to share a breakdown their portfolios, pitch stocks, receive feedback, and participate in weekly calls. I truly love this idea and it's why we're promoting it here on the show. In fact, we are in this community ourselves and enjoy just how much value we get by collaborating with other investors. When I first got into investing, a role model of mine recommended that I build a network or community of friends to bounce investing ideas off of and Blue Chippers does just that. If you're

interested in joining, head on over to bluechippersclub.com and hit apply. The link will be in the show notes. Yeah. And that's the point where the, maybe the Chinese government can help you because they're not going to let some of these foreign brands take hold. Although I know that the brand has had, you know, it's been so long lasting, uh, regardless. Yeah. Maybe those companies are pretty bloated too with some McKinsey style stuff. That's what I remember thinking of when I took a look at Diageo, but let's talk about his macro stuff. People I think had this misconception about Buffett-style investing, about value investing, where they go, well, I can just ignore everything that's happening in the broader economy. And Liu would say that's a bit of a

mistake. And he has a great viewpoint because he's someone that grew up in China, saw the country turn from communist to more capitalist, I would say, and then also moved to America. So he has great perspective on both countries. And given his roller coaster historical relationship with the Chinese government, remember after the Tiananmen Square massacre, he's banned from the country, even though he was investing in the market. I think given that he has a rational approach to China, he understands the market better than most in North America, including ourselves, probably tenfold, not even close. But he's not going to cheerleading on his Chinese or US investments just because that is where he's from. He seems like a very rational guy.

And in his early days running the fund from the stuff I could find, his talks and whatever, I found that he was extremely optimistic about China. He saw the growth and prosperity coming from the cultural revolution days compared to the cultural revolution days and the potential for more free markets to be a catalyst for a wealth boom for 1.5 billion people. However, what I thought was, again, a huge shift was in his last talk where his tone seemed to change. He doesn't directly criticize the government. I mean, come on, you're not going to do that with what Xi Jinping does sometimes to entrepreneurs. But I believe he is against the tighter capital controls, the top-down commands from government telling the entrepreneurs what to

do. He seems this is going to prevent, or excuse me, he seems to think this may prevent China from escaping the middle-income trap. If you're interested, the middle-income trap is basically just a trap a country gets in when they start industrializing, when a bunch of workers get higher incomes because of manufacturing jobs. But if you don't allow innovation in the economy, if you're holding that stuff back, it can keep you trapped just at this lower level and you don't expand to bigger services, starting businesses, stuff like that. And they don't grow much beyond this. This keeps wages stuck. And you've seen this in places like Mexico and China in the last two decades where there's been some solid growth or maybe the last decade or so,

But they just haven't been able to hit that escape velocity and become as rich on a per capita basis as Europe, United States and other places. It's more complicated than that, but we don't have time. We'll take that. That's essentially the gist from what I understand. And this is what Li Lu says about escaping the trap in that recent December 2024 talk. Quote, first, the perpetuating compound growth of a 3.0 economy, which is the United States, is powered by the free exchange and circulation of all economic elements within it. Every instance of free trade and exchange generates a synergistic effect. 1 plus 1 is greater than 2, while knowledge

exchange can even achieve a multiplier effect where 1 plus 1 is greater than 4. Thus, the more frequent and unrestricted the exchanges of goods, services, and ideas, the greater the incremental benefits. A truly modernized and sustainable 3.0 economy possesses this crucial trait, the complete and uninstructed circulation of all elements without any bottlenecks well what do you think his opinion is on terrorists right but i thought that quote was fascinating i thought it was fantastic and it's really better than i could say it why he believes in that and it is just his perspective coming from you know the cultural revolution you can see why he cares so much about it yeah i mean you see you read some of these recent talks and it's just a very rational and

thoughtful view it's somber i would say yeah given the consumer depression in china yeah and he's changed like you said he's changed his tune a bit because when you look at he had a talk i believe in 2015 where he talked about the prospects of investing in china um and sort of the possibilities for the economy i think it changed a bit relative to his latest publication where i think it was a talk um and he seemed a little less uh encouraged is maybe the word i'd use he was almost batting down the hatches like this could get shaky not like a macro doomer guy but i would say and i'll read a quote here from it he seems more pragmatic now about the situation but especially between the United States and China and the consumer depression in China. In the talk, he talks about

stimulating consumer spending, which has been a big factor holding back the economy, but says that as an investor, you need to accept macroeconomic reality. You can't invest on hope, especially if it's your home market where people are going to be more optimistic, at least most of the time. Here's the quote again. Now I'm reading a lot of quotes, but he's a sharp guy. He's a fantastic thinker. As global investors, you need to invest in the most dynamic economies you believe in, but also pay attention to your actual needs so you can maintain your purchasing power where you consume. For global investors like Himalaya Capital, our goal is to select the most dynamic, creative, and competitive companies within the world's most

vibrant economies, own their shares, and thus achieve the goal of maintaining increasing wealth globally. However, for individual investors, you need to maintain your purchasing power in the economy where you're willing and need to consume, as that is your real wealth. For example, many Chinese investors' main purchasing needs are in China, and they may not need purchasing power in Europe or South America. I think it's a good point. Where are you spending your money? It's maintaining your purchasing power, not some random person somewhere else. yeah i like it all right i guess as we kind of close out this section do you have any more comments any quotes from lilu on i guess china today well the last part

of that talk that i would take away from it it was very thorough i think it was about 30 pages pretty dense so i can't you know reiterate everything uh in this podcast it would start to get boring. But one thing he mentioned is that he has added a sixth tenet to his pillars of value investing. And I'll go through his pillars, which I think first, they all make sense. And maybe Ryan can have some comments on them after if you want. One, a stock is not just a tradable piece of paper. Okay. Two, Mr. Market is here to serve value investors. Three, investments must have a sufficient margin of safety. Four, investors should have a clear circle of competence. Five, fish where the fish are, which means promising industries, promising economies. And this is

the one he just added, which I think is almost again saying, hey, look, things could get shaky on a global macroeconomic basis. Six, wealth is the proportion of purchasing power in the economy. The goal of value investing is to hold shares of the most dynamic companies in the most vibrant economies to preserve and grow wealth. i i thought that was again like why now add that i don't know i didn't couldn't get a good read on it do you think it had to do with his frustrations around some of the recent developments in china maybe or the united states too right yeah i don't know i like you said i i got a feeling he isn't too excited about these uh the last couple of weeks and everything that's happened yeah all

right well let's do lessons from lilu i didn't write mine down yet i i kind of was going to go off the cuff but we'll include them in the newsletter but ryan i've been talking so why don't you go first yeah when after having this talk a big one for me is the economies focusing on the actual economies where they've got all the tailwinds for businesses to perform well. I think what's the exact language he uses? Goal of value investing is to hold shares of the most dynamic companies in the most vibrant economies. I think that's something I'm going to take away and try to focus on a little more, try to get a sense of how the economy overall is doing, especially when I'm looking at these international businesses. For the US, I think

we kind of get a pretty good grasp on it just by living here closely and it's covered so closely um but countries like mexico um that's probably one i'm more optimistic on we're seeing some strong development in other countries like you said poland as well korea seems to i think they yeah are kind of middle and i guess the population worries there but besides that there's yeah yeah it the other part is even though he kind of comes from the buffet stock the ben graham philosophy i thought he had some similarities to david gardner a bit where and maybe i'm just looking at him letting his winners run and having that drive such strong returns you know looking back when we did our episode on david gardner it seemed like he was

very uh i mean that was what built his returns i'm talking about david gardner here feels like it's been mostly the same although he's had obviously the flexibility to be sort of deep value as well and then the other one that i might try to take away here this is a little tough because it's not look i'm not going to go to the ceo's church i'm not going to get on a plane and maybe someday maybe if our portfolios get big enough someday yeah but i do think trying to spend more time analyzing management and get a sense of really who these who you are partnering with especially when it is a bet on management there are some companies where like okay mutai yeah you want to have a sense of their allocation philosophy but it's so ingrained in the chinese culture that

it's not necessarily a bet on management view id very much a bet on management so if you have companies like that where it's about innovation and serving the customers in new ways and trying to expand your addressable market reinvestment runway right big reinvestment runways that's where you i think you try to hear maybe what friends have said about and read a book on those people. Try to find if any VCs talked about them. We just saw this with Bumsoo Kim of Coupang South Korea. There was a conversation with a VC that got to know him pretty early on who had very high praise for him. Trying to find those kinds of conversations, see what they're like outside of work, people they've connected with in the past. I think that can be really valuable in helping A,

solidify your belief in management, but also give you a sense during downturns of, okay, i know who this person is i trust that they're going to work hard through this and that the company is going to be just fine yeah nothing to add uh i'll say my lesson is again i was going to say fish where the fish are so those vibrant economies thing but understanding your circle of competence not just from a sector perspective but from a country perspective where we've said this time and time again if we look at china we'd have no idea what we were doing he had in one of talks where the guy asked him, I think it was his old professor, Greenwald at Columbia Business School said, hey, look, you know, if someone is going to invest in a financials company in China,

you'd want to understand the ins and outs and the intricacies of the financial regulations in China, right? And Li Liu was like, of course, you can't invest if you don't understand that. And I was thinking, well, it would take me a long time and I would probably still not know what to do given I don't have boots on the ground. I have no experience investing in that market. so understand what economies or what areas you maybe have more of a circle of competence in and that's going to change with everyone just giving your life experience let me ask you this discussion question before you get to your funny anecdote yeah i might save that i might not read the full quote there but i'll tease it for the newsletter for the full story sure are you more or less open

to investing in a chinese company after researching lilu i'd say same which is zero interest because even if i he has swayed me of any concerns about government regulation or stuff like that i still know it's outside of my circle of competence so shouldn't change zero interest what about yeah i think it's encouraging to see someone like him have success with investments and and it's kind of like a vote of confidence that oh you can invest in that market if you find the right managers and all that but at the same time i would have had no way to identify byd early on i would have had no idea how influential mutai was in china i think there are some serious uh i don't know for me there's a serious lack of understanding of what

the chinese consumers like and i don't know i like having boots on the ground research to really feel like something is inside my circle of competence, and I just want to have that. Yeah. All right. I'll close out with a tease on a funny story. Li Lu met the now infamous investor Bill Hwang back in the late 90s during the Asian financial crises. They talked about investing in South Korea, and apparently Bill Hwang, which is this thing at the time when you would just buy a stock with a low PE and then short one with a higher PE. And Lou, again, without naming him, he says, this sounds crazy today, but it vividly reflected the mainstream Wall Street thinking back then and what went on outside of value investing. By the way,

this person later became infamous by almost causing Credit Suisse to go bankrupt due to fraud. And he was recently sentenced to 18 years in prison by a US court. Well, I guess Lou was saying i was right over the long term and it was an example of how markets can be very inefficient and you shouldn't let all the naysayers tell you i just buy index funds you're you have no point in doing this it can be fun and you can make a lot of money so i think that's a good way to end things right ryan yeah all right i think that's gonna do it any other want me to do the disclosure or yeah anything else ryan no i i really liked studying li lu and trying to get some additional information on him and i see why munger was so amazed by the guy

you read his talks and it's he's very thoughtful and very intelligent yeah he's got a reading list on his website which i think has marcus aurelius and random stuff like that so if you're really going to learn more about them. My read is about 100 book reading list. But yeah, I think that's going to do it. If you want us, if you have any recommendations on any investors we should study, hit us up on any Twitter, Substack, wherever you can get in contact with us. But let's hit the disclosure. We are not financial advisors. Anything we say on the show, it's not formal advice or recommendation. Ryan, I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Thank you

everyone once again, and we'll see you next time.