How Li Lu, the Chinese Warren Buffett, spots market gold

Li Lu, the Founder and Chairman of Himalaya Capital, is not called 'The Chinese Warren Buffett' for nothing. A devout value investor, he has built his fortune using the same principles that made Buffett a legend: deep research, disciplined investing, and the courage to go against the crowd. Lu has managed Himalaya's principal fund since 1997, delivering extraordinary annual returns of 30 per cent! His most legendary bet was an early investment in BYD, which has skyrocketed over 5,600 per cent since 2002.

At a lecture at Columbia Business School, the Chinese-born American investing genius broke down his investing playbook—how to spot undervalued businesses, when to go all in, and why the biggest mistake is missing out on great opportunities. We lay out some of the key takeaways:

Value investing: Swimming against the tide

"Value investors are a rare breed," Lu says to the audience. "Fewer than 5 per cent of investors follow this approach."

The investing world is driven by emotions like fear and greed, and the endless chase for short-term gains. But value investing demands a different mindset, one that thrives on patience and conviction rather than reacting to daily price swings. To succeed, Lu explains, an investor must embrace being in the minority. It requires the discipline to trust research over hype, and the willingness to be wrong in the short term while being right in the long run.

His investment process

Lu's approach to investing is rigorous, methodical, and brutally selective. He believes in starting with broad scans—looking at stocks hitting fresh market lows—and then filtering through a company's financials, book value, earnings, and cash flows. But he makes one thing clear: "If the valuation doesn't fit, I don't bother going any further."

Numbers, however, only tell part of the story. True value investors dig deeper, looking beyond financial statements to understand the company, its management, and the external factors shaping its future. Lu shares how his investment in Timberland in 1998 was a direct result of this approach.

At the time, Timberland's stock was suffering, largely due to fears surrounding the Asian financial crisis. The market had written it off. But Lu saw something different. The company had a strong balance sheet and steady profitability—two markers of resilience. Still, he didn't stop there. He went beyond the spreadsheets—studying shareholder lawsuits, speaking with the community, and even joining the board to assess management firsthand. His patience paid off when the market eventually realised Timberland's value.

His takeaway is clear: "The best investment opportunities come from deep insights built through years of study".

Two paths in value investing

Lu outlines two dominant styles of value investing:

• The Ben Graham approach. The classic deep-value method, where investors buy companies trading far below their intrinsic worth, relying on a margin of safety.
  
• The Warren Buffett and Charlie Munger approach. A refined approach, where investors seek high-quality businesses with strong competitive advantages that can compound wealth over decades.

While both strategies have their merits, Lu favors the latter. Instead of just looking for cheap stocks, he looks for exceptional businesses that can reinvest profits at high returns—the kind of businesses that don't just survive but thrive.

He points to Marlboro Cigarettes, Cellphone towers, and Bloomberg Terminals as prime examples of businesses with high switching costs and near-monopoly control in their industries. Using Bloomberg as a case study, he explains how its ecosystem locks users in, making it incredibly difficult for customers to switch—a classic example of a moat that protects long-term profitability.

Bet big or regret it

One of Lu's most powerful lessons is the importance of conviction. Finding a great investment isn't enough—you have to act decisively. "Your biggest mistakes will be the opportunities you didn't take," he says.

Most investors hesitate. They second-guess, they wait for confirmation, they let doubt creep in. But Lu believes that when you find an extraordinary opportunity, you must be willing to bet big. The greatest fortunes aren't built on hundreds of small trades but on a few well-placed, high-conviction bets that pay off massively.

Closing wisdom

Lu ends his lecture with a simple but profound takeaway: "Commit yourself to learning and exploring, and you'll find your way to extraordinary wealth."

His success is a testament to the power of independent thinking, rigorous research, and patience. For those looking to follow his path, the message is simple: Think like a business owner. Stay focused. Ignore the noise. The biggest rewards often come from the least crowded places.

Before you leave: Don't let this market crash go to waste

Smart investors don't fear market dips—they see them as stepping stones to wealth. Right now, the market turbulence has unlocked incredible opportunities, and our updated Aggressive Growth Portfolio is here to guide you.

What's new?

An updated selection of 10 high-growth stocks designed to maximize returns in today's market conditions.
Unbeatable valuations after recent corrections.
A proven strategy leveraging positive momentum for explosive growth.

Why act now?

Market dips don't last forever. This is your chance to invest in high-quality stocks while they're undervalued.

Get started today with a 47% discount on Value Research Stock Advisor. For just Rs 36,000 Rs 18,990.

Subscribe now

Also read: Mastering market cycles with Howard Marks

This article was originally published on January 30, 2025.