THE NEW YORK OBSERVER
Tiananmen Square to Wall Street:
Li Lu Hits the New York Jackpot
By Carrie Cunningham
May 17, 1998
L i Lu, a student leader in the Tiananmen
Square uprising, has jumped headlong
into the bull market. In January, he rented
two rooms of office space on the 15th floor of
660 Madison Avenue, and, equipped with a
phone, a computer and a Bloomberg machine,
he got to work investing other people’s money,
running a high-risk hedge fund called Himalaya
Capital Partners L.P. The minimum investment
is $1 million.
In setting up the fund, Mr. Li said he’s expe-
riencing firsthand the capitalism and democracy
he was fighting for in his homeland. “Free man,
free market,” is a phrase he invokes often.
Mr. Li is 32 years old. He wears Armani suits
that he buys at a factory outlet; he lives in one of
those bland modern towers on the East Side.
While other Wall Street hotshots his age may
have endured the trauma of not getting into the
business schools or investment banks of their
choice, Mr. Li has survived poverty, separation
from his family (his parents were forced into la-
bor camps) and a devastating earthquake. When
he escaped to America after hundreds of his fel-
low protestors were killed in Beijing, he was one
of the most wanted dissidents in China.
His clients hope they’ll see big profits, but
they also seem to be investing in the future of
Mr. Li himself. Jerome Kohlberg Jr., a founder of
the leverage buyout monolith Kohlberg, Kravis,
Roberts & Company, said his decision to invest
with Mr. Li “wasn’t my usual cautionary thing,
but my admiration prevailed … I don’t know
about others, but I would like to see him succeed
and eventually help bring China into the 21st
century and be a democracy, and I think he, by
then, will be uniquely qualified.”
Others who have invested in Mr. Li’s new
hedge fund include: Stanley Shuman, executive
vice president at Rupert Murdoch’s deal maker,
Allen & Company; Jack Nash, co-founder of
Odyssey Partners L.P.; Robert Shaye, chief ex-
ecutive of New Line Cinema Corporation; Ro-
bert Bernstein, former chief executive of Ran-
dom House Inc. and a founding chairman of
Human Rights Watch; and his son, Tom
Bernstein, president of Chelsea Piers Manage-
ment Inc. And proving that it’s a chic invest-
ment, there is also Sting, the sensitive rock star
and rain forest activist, who has kicked in with at
least a million of his own.
The glittering client roster seems not to
intimidate Mr. Li. “You prove to them you’re
good, people trust you,” he said over iced tea at
Sofia’s Fabulous Grill on the Upper East Side.
“They don’t ask how many years I’ve managed a
fund. The question is, Can you make me money?
Show me the money! This is one area where, if
you really believe you’re smart and you’re unique
and you’re different, this can be challenging-this
is it. Because if you’re right, you make a lot. If
you’re wrong, you lose a bundle.”
With the Dow Jones average rising above
9,000, the latest financial district jokes and clichés
liken good investing to good sex. Mr. Li consi-
dered the comparison. “This market is not a
man’s sex drive,” he said. “If you had to compare
it, this market is a woman’s sex drive. It is really
experiencing a multiple climax, but even the
woman has downtime. The traditional Chinese
sentiment is that the woman has the capacity to
climax 15 times. The market is turning into the
traditional description of the woman’s sex drive.
My girlfriend is around that number.”
So how long can it last? “Nothing goes forev-
er,” Mr. Li said. “As I say, even if you compare it
with the woman’s sexual capability, it has an end.
This market is capable of multiple climaxes, but
there is a recession.”
Born in 1966, the year Mao Zedong initiated
the Cultural Revolution, Mr. Li was separated
from his parents when he was less than a year
old. He passed through half a dozen adoptive
families during the first decade of his life. Mao’s
regime condemned his mother, a botanist and
the daughter of a wealthy landowner, and his fa-
ther, an engineer, as bourgeois intellectuals-and
therefore enemies of the state. They were sent
to separate labor re-engineering camps. Facing a
life of hard labor, Mr. Li’s mother was forced in-
to having to choose one of her children to keep
with her. She kept Mr. Li’s older brother.
“Mao Zedong’s way was to make people
crazy,” Mr. Li said. “It was like a religious cult.
You cut all the culture, you kill or jail all the
people with learned minds who think indepen-
dently. Anything that remotely reminded you of
humanity was destroyed.”
On the eve of Mao Zedong’s death in 1976,
Mr. Li survived an earthquake in Tangshan, Chi-
na, that killed the adoptive family whom he had
grown to love. In the earthquake’s rubble, the
10-year-old boy ran through the city; the dead
bodies overwhelmed him and he blacked out.
When he came to, he saw a woman giving birth
and heard her cries.
Days after the earthquake, radio propaganda
claimed that Mao Zedong’s administration was
helping his ravaged town-something that ran
counter to what he saw. “The soldiers and party
officials are grabbing all the things available for
relief for themselves or their family,” he recalled.
“Older people just don’t get anything. So I de-
veloped a tremendous aversion, you know, ha-
tred toward those people.”
He was living with his blood family again
and came under the guidance of his grandmoth-
er, a founder of elementary schools in the 1930’s.
She told him the only way he could beat the
government and help people was, first of all, to
educate himself. Mr. Li immersed himself in
books, which gave him the idea that “other
people have lived a different life, a better life, so
should I-so should everybody.”
His convictions led him to Nanjing Universi-
ty and Tiananmen Square. He was deputy com-
mander of the student movement, second to
Chai Ling, who is now at Harvard Business
School. He saw many of his fellow student
protesters shattered by the massacres. “They
couldn’t get over this sense of loss and failure
and guilt,” he said. “It was terrible and I had
some of it.”
He arrived in Manhattan in December 1989.
By 1996, he had earned a B.A., M.B.A. and J.D.
from Columbia University, and written a me-
moir of his experiences in China (Moving the
Mountain, Macmillan London). With royalties
from the book, as well as fees earned from giv-
ing lectures, he made investments and rode the
bull market to the $125,000 he needed to pay his
living costs and the tuition not covered by his
scholarship.
“Early on,” he said, “I know I gotta make
money work. The whole thing is, really, money
makes money. That’s the whole thing about ca-
pitalism. Without the capital, there is no -ism.”
His early success in investing, linked with his
abysmal experience with communism, made
him a true believer in the free market. “But the
precondition of capitalism is a free man,” he
said. “With free market and free man, if you re-
move one of them, it is not called capitalism in
my dictionary. Without a free man, there is no
free market. That’s called exploitation. In China,
there’s not capitalism. It’s official corruption,
that’s what it is.”
Before striking out on his own, Mr. Li
worked for a summer at the white-shoe law firm
Simpson, Thacher & Bartlett, put in four months
at the media investment-banking firm Allen &
Company and spent two years as a corporate
finance associate at another investment banking
firm, Donaldson, Luf kin & Jenrette. The chores
that go with pleasing clients didn’t sit well with
him. “It’s very hard for me in the service busi-
ness,” he said. “I want to make up a decision and
do it. I’m a doer rather than just giving ideas.”
Mr. Li’s liberation from corporate hell came
on the red-eye from San Francisco to New York
last year. On the flight, he saw Rena Shulsky, a
Manhattan real estate magnate whom he had
met while giving a lecture. She encouraged him
to start a fund. “I thought he could do better
than working at D.L.J.,” she said. She also, ac-
cording to Mr. Li, gave him something better
than advice-namely, $2 million in seed money.
(Ms. Shulsky would not comment on how much
she invested with him.)
Tom Bernstein, who helped Mr. Li gain asy-
lum in the United States in his role as board pres-
ident of the Lawyers Committee for Human
Rights, was another early investor. “We kid
about Li Lu,” Mr. Bernstein said. “If you said
that someone was going to make a billion dollars
and be the head of the largest country in the
world, all in one lifetime, he could be the guy.”
Two investors said John Kluge, chairman of
Metromedia Company, had invested in Mr. Li’s
fund this past January. Which seemed odd, given
Mr. Kluge’s recent meeting with Chinese Pres-
ident Jiang Zemin concerning the possibility of
expanding his company into China. (Mr. Li at
first would not comment on Mr. Kluge; in a later
interview, he said Mr. Kluge was not one of his
clients. Mr. Kluge did not return calls seeking
comment on the matter.)
Mr. Li said he likes to buy stocks that are un-
dervalued, in his estimation. That goes against
the currently fashionable “momentum” theory
used by investors who believe they can ride an
overvalued stock that is still soaring in price, and
then jump out before the stock comes crashing
back down.
“If you’re right, ultimately it will prove
you’re right, but you look stupid for a long
time,” he said of his own gambits. “It is what I’m
all about. It’s revolutionary. It is about trusting
yourself. It’s about challenging the conventional
wisdom. That’s what we did in Tiananmen.”
 Li Lu’s 2010 Lecture at
Columbia Business School
Rough transcript/summary by Tariq Ali
Spring 2010
BRUCE GREENWALD:
Warren Buffett says that when he retires, there
are three people he would like to manage his
money. First is Seth Klarman of the Baupost
Group, who you will hear from later in the
course. Next is Greg Alexander. Third is Li Lu.
He happens to manage all of Charlie Munger’s
money. I have a small investment with him and
in four years it is up 400%. [Applause]
LI LU:
Columbia is where my whole life in America
started. I could barely speak the language. In Co-
lumbia it was where I had a new life. It was really
in the Value Investing class where I got my ca-
reer start. I was really worried about my student
loan debt at the time and a friend told me about
this class and said I need to see a lecture from
Warren Buffett.
What I heard that night changed my life. He
said three things:
1. A stock is not a piece of paper, it is a
piece of ownership in a company.
2. You need a margin of safety so if you are
wrong you don’t lose much.
3. In the market, most people are in it for
the short term. It allows you a frame-
work for dealing with the day to day vola-
tility.
Those were three powerful concepts. I had
never viewed the stock market like that. I viewed
it negatively as a place made up of manipulators
who were lining their own pockets. I embarked
on an intensive two year study learning every-
thing about Buffett.
Two years after that I bought my first stock.
After I graduated I worked at an investment bank
for a year and realized it was a mistake. I tried to
start a fund but I didn’t have a track record. The
first year I managed money I lost 19%.
Being a value investor means you look at the
downside before looking at the upside. Before
becoming an investor you need to look at how
you can fail at this game. There are all sorts of
ways you can fail. You need to examine who you
are and see if you could be good at it. If you
could ever find something you can do well that
you really like—that will be your best investment.
You will do better than competitors. If you can do
it with intrinsic passion, that really over time will
add enormous value to you.
Back to the game of investing. This concept
of margin of safety is an essential concept to be
a good investor. The future is unpredictable, you
will always be dealt surprises, some positive most
negative. You need to build in a level of safety so
that whatever happens, you will not get crushed.
If you can really successfully know what you are
getting into, you can pretty much navigate. Most
people are troubled by what they don’t know.
The world is divided by those who know and
those who don’t know. If you really know—you
will not pull triggers like Wall St. traders. If you
are truly intellectually honest, you would not do
anything.
This class teaches you to know what you are
getting into, especially accepting what things you
don’t know. The game of investment is really
continuous learning. Everything affects an in-
vestment, it constantly changes. You are not in-
vesting in the past but the accumulative cash
flow of the future. You have to want to find a
certain set up where you can know something
that most people don’t know. There are plenty
of things I don’t know but they don’t factor into
the purchase because I am using a huge margin
of safety. Buying a dollar at 50 cents. So if things
turn against you, you will be okay. That is not
easy. This business is brutally competitive. It is so
impossible to know everything and know exactly
what is going to happen to a business from now
till the end that you really have to accept that
what you don’t know.
Finding an edge really only comes from a
right frame of mind and years of continuous
study. But when you find those insights along the
road of study, you need to have the guts and
courage to back up the truck and ignore the opi-
nions of everyone else. To be a better investor,
you have to stand on your own. You just can’t
copy other people’s insights. Sooner or later, the
position turns against you. If you don’t have any
insights into the business, when it goes from
$100 to $50 you aren’t going to know if it will
back to $100 or $200.
So this is really difficult, but on the other
hand, the rewards are huge. Warren says that if
you only come up with 10 good investments in
your 40 year career, you will be extraordinarily
rich. That’s really what it is. This shows how dif-
ferent value investing is than any other subject.
So how do you really understand and gain
that great insight? Pick one business. Any busi-
ness. And truly understand it. I tell my interns to
work through this exercise—imagine a distant
relative passes away and you find out that you
have inherited 100% of a business they owned.
What are you going to do about it? That is the
mentality to take when looking at any business. I
strongly encourage you to start and understand
1 business, inside out. That is better than any
training possible. It does not have to be a great
business, it could be any business. You need to be
able to get a feel for how you would do as a
100% owner. If you can do that, you will have a
tremendous leg up against the competition.
Most people don’t take that first concept correct-
ly and it is quite sad. People view it as a piece of
paper and just trade because it is easy to trade.
But if it was a business you inherited, you would
not be trading. You would really seek out know-
ledge on how it should be run, how it works. If
you start with that, you will eventually know
how much that business is worth.
When I started in the business in 1997, it was
in the middle of the Asian Financial Crisis. A few
years later there was the Internet bubble. A
couple years ago was the Great Crash of 2007 –
2008. They are billed as once in a century disas-
ters but happen every few years. Every time it
goes against you, your net worth or value of
your investments might go down 50%. This is
really where that insight and temperament
comes in. In a sense, you have to have a certain
confidence in your own judgment and not be
swayed by other people’s views. It is not easy.
But that is life. It is just a given. It happens to
everyone. Berkshire had at least three times
when the stock went down 50%. It happened to
Carnegie too. It happened to Rockefeller. It hap-
pens to everyone. If you really made a mistake, it
would not stop at 50% but go to 0.
This happens to even mighty companies.
Look at the top 50 companies in America every
10 years. By the time 20-40 years go by, 2/3rds of
them will be gone. By the time it goes to 100
years, there might be only a couple left. It’s just
the way it is. Look at what happened to the once
mighty General Motors. So thats why I’m saying
is, investing is a continuous learning process be-
cause your investments are constantly changing
So for those of you that have curiosity and
the temperament, this game couldn’t be better.
Capitalism rewards people who are talented at
capital allocator. So if you have the aptitude and
temperament, it is the great game. If you don’t
have that then I urge you not to go and become
a nuisance. That is really what Wall Street did,
they don’t really create anything they just move
money around. Letting the financial industry get
too big is bad for the economy, it is just as bad as
getting addicted to casinos, drugs, and alcohol.
None of them are really useful, they just transfer
wealth. That is what I think happened on Wall
Street over the last several decades. So avoid be-
ing harmful.
With that I am open to questions.
Q. Mohnish Pabrai recently spoke about his
reluctance about investing in China due
to the multiple accounting books / the possi-
bility of fraud. How do you deal with this giv-
en your own investments in China?
Well, you know I think he is right. Everything
has an exception though. Just because a next
door neighbor is a fraud doesn’t mean you are.
That is one question to ask—whether you can
trust the accounting and people running the
business. That can have a huge impact on the
business. I suggest you spend a lot of time look-
ing at these factors, especially if you are investing
for the long haul.
Q. Why did you decide to go into venture
capital? How is that different than your
other investing?
I always had this bent that I want to build a real
business. I started a venture and it was really a
lot of fun. Overall, it is a tougher game than
simply investing in securities because you have to
evolve to the day to day changes in operations
and it is just not as easy to build great businesses.
Every generation has a handful of great busi-
nesses that come from nowhere and come to
dominate their fields. It is much more rewarding
as an investor to pick those. Also, you are more
likely to find managers much more capable than
yourself. Overall, I learned a lot. I learned a lot in
how businesses succeed and how businesses fail.
It really was a lot of fun. I probably carried it too
far—I eventually ran one of the businesses and it
was of course a mistake.
Q. I read that when you look at an industry,
you look at the most miserable failures
of that industry to see whether you will invest
in it. Can you talk a bit about that?
It goes back to understanding the business. Once
you have that understanding you can extend it to
understanding an industry. A certain industry
might have characteristics that make it different
than others. In certain industries you might have
better prospects than others. Find the best of the
players in the industry and the worst players.
And see how they perform over time. And if the
worst players perform reasonably well relative to
the great players—that tells you something
about the characteristics about the industry. That
is not always the case but it is often the case.
Certain industries are better than others.
So if you can understand a business inside
out you can then eventually extend that to un-
derstanding an industry. If you can get that in-
sight, it is enormously beneficial. If you can then
concentrate that on a business with superior
economics in an industry with superior econom-
ics with good management and you get them at
the right price—the chances are that you can
stay for a very long time.
Q. Did you have any specific example?
I have studied many over the years. As I have
said, don’t copy other people’s insights because it
doesn’t work. Automobiles are amazing. If you
look at the early days it started with several play-
ers and concentrated with just a few players that
became enormously profitable. Then they be-
came miserable. You then see how the life cycle
turns with new automakers in China and India.
Everything has a reason. If you want a good
idea—look at General Motors from the early
days, look every 5 years and see how the per-
formance metrics change. The Graham and
Dodd Center should collect all the data and per-
form some kind of commentary on it.
BRUCE GREENWALD: Do you want me to give
you the answer to that? In the 1960s, their return
on capital was 46%. In the 1970s their return on
capital was 28%. In the 1980s it was 9% in the
1990s it was 6%. You want to guess how negative
it is now?
LI LU: So that is really fascinating. If you have
that data, the amount of insight that would yield
would be astonishing. So instead of just accept-
ing the conventional wisdom that the auto busi-
ness is bad—that is just not true. Or if you say
well those guys are just unbelievable money ma-
chines—that is not true either. So if you can real-
ly examine those statistics and understand it that
will give you an advantage for analyzing new sit-
uations like in China and India. That is really
what turns me on. Understanding this gives you
a tremendous leg up.
Q. I wanted to ask you about BYD. I heard
that you thought it was important for
them to introduce a model to the US and
wanted to know why you thought that.
That might be a better question to ask the BYD
chairman than myself. Well, If you are just talk-
ing about electric vehicles, you know the key—
the heart and soul of the electric vehicle age the
heart is the battery. There is the battery, electric
motor, and the electric control panel. The elec-
tric motor has been there for 100 years, control
system is software that can be improved over
time.
The battery is really where you get the big-
gest appreciation and is what determines the
value of the electric vehicle. 100 years before the
Model-T was introduced, the competition be-
tween electric vehicles and gasoline was not
nearly as optimistic. Up and till then, one-third
of cars being produced were electric. It wasn’t
until Rockefeller got oil extracted easily enough
that it worked. Henry Ford was able to make the
internal combustion work even though it wasted
85% of the energy. He was able to build the en-
gine and produce automobiles that were cheap
enough for people to buy and it took off. That is
where you find the real winners.
Now, years later, we know that the way that
oil is burned contributes to global warming. If it
continues, the planet might still be here but all
the human beings might not. Human beings
have only been on the planet for a tiny bit of the
earth’s history. So there are all sorts of good rea-
sons for electric cars. Battery development has
advanced so much that it is now comparable to
the price and performance of traditional cars. So
now with the help of companies like BYD, the
balance is about to tilt towards where perfor-
mance and price are getting to the level that
makes them a desirable alternative. It will be de-
sirable everywhere. Eventually, if you have a car
that does all that, it will be sold everywhere.
Q. What about BYD versus others in the
industry?
The market will determine that. (Yeah – but why
BYD versus others?)
Well because we also studied all those other
guys. We will see when the winner emerges
whether we are right or wrong.
Q. Right—but what did you look at to
reach that view?
There are a lot of people who have worked over
100 years making great cars. The technology for
building a traditional car has been refined enough
to where it can be learned in a short period. The
place we are still seeing a curve of continuous
rapid improvement is with the batteries for cars.
Whoever is leading the charge will have a major
advantage. There is really only one company
that is a leader in battery manufacturing and au-
tomobile manufacturing. There is only one
company. To put this together you need a Ford
to put that together. So far those two elements
need to be put together. It is not an easy process.
Q. So you went to BYD in 2005 and then you
brought Berkshire as well. I saw that you
sold a small amount of your BYD position at
the end of last year. Was it just rebalancing?
I just wanted to get your thoughts on that.
Actually I started my BYD position in 2002. I sold
a small amount of shares because an investor of
mine had an emergency redemption.
Q. We read your profile online. I had a
question—do you have any problems
when trying to invest in China?
Yeah I do have some difficulty. I did not really see
a factory plant at BYD until the end of 2008. I
really did not have a better understanding till
then. That really causes you to question what it
is before you make an investment. With invest-
ing, you have to work with imperfect informa-
tion because you are buying a piece of the fu-
ture. I did not really get a chance to get more in-
formation because the problem in Asia till much
later but it did not stop me from making my in-
vestment decision. So there is a point, where if
you have enough margin of safety– that is why I
kept coming back to the elementary concept of
margin of safety—you can allow much more
uncertainty and unknowns. So the answer of the
question is does that stop you from making the
investment? No.
Q. So I did some research on lithium ion
batteries, and I saw that BYD has a
manufacturing advantage with consumer bat-
teries. But I saw that automobile batteries are
much more complex. I did not think that the
idea of a good consumer battery manufactur-
er + an automobile maker made much sense.
So when Buffett looked at the stock maybe it
was a better deal but today it is this dream of
vehicles that is really priced in. It does not feel
like a good value investor stock. So why would
you own it today?
Well that is interesting. One of the most fascinat-
ing things about being an investor is that surpris-
es are part of the game. When you get into situ-
ations like BYD, you see lots of good surprises.
Chuanfu and his team have this fabulous culture,
everything people thought they knew turned out
to be a few years late. He got into battery manu-
facturing in that particular way because he really
had no other option. He had no money, he only
had $300,000 in venture capital funding before
IPO and that was it. He raised money in an IPO
and Buffett gave him $200 million, now they have
160,000 employees, $6-7 billion in revenues, and
$500 million in net profit. It is amazing. So he has
this ability to adapt in a competitive environment.
He has demonstrated that ability again and again
and again. The way he does automation is far
cheaper than anyone else and more reliable. He
continues to surprise me with his ingenuity, to
figure out ways to do something better than eve-
ryone else. What he is currently doing is very dif-
ferent than what everyone else has done. At the
end of the day, you might look at what he has
done.
So how do you look at it as an investor with
imperfect information? Well I suggest you look
at what he has accomplished. 8 years ago I had
no idea they would go into the automobile or
laptop or cellphone battery business. So that
demonstrates how he is. This investment is not
easy to understand because it is changing so fast,
at such a large scale. An almost unheard of speed.
Their manufacturing capabilities will double
soon. This year they will hire 10,000 college gra-
duates, 8 or 9 thousand engineers. The scale is
almost unparalleled. So this is why the study of
history, of all the great corporations will give you
a good insight in seeing what will happen with
BYD. I suggested that we start with GM and ana-
lyze its performance every 5 years for 100 years
to understand at least one aspect of BYD’s busi-
ness.
Q. One investor came in and said talking to
management is a waste of time. They
will say what you want them to say. Obviously
it sounds like you don’t agree with that. What
do you think? Will you pay a premium for a
business with a moat?
There is no general rule. The key in investing is
to know what you know and know what you
don’t know. You can know about management
teams without meeting with them. Every situa-
tion is slightly different. So I come back to the
point that if you know enough on other things
that there is enough margin of safety. Even if
you meet with management, you may not learn
something. Obviously, actions speak louder. You
want to see what they have done. Everything be-
ing equal, the more you know about manage-
ment, the more honest and upfront they are, the
more motive they have, the better the situation is
and the deeper the discount. You have to analyze
it all. The key to analyzing it is you have to ask:
do I really know what I think I know, do I really
know what I don’t know? If you can’t answer
that question, chances are you are gambling.
Q. What kind of preparation do you do be-
fore meeting a management team?
I don’t really have a set method. Because I usual-
ly am just curious about the business and don’t
know a lot. So you are prepared and not pre-
pared. If you are really curious, you want to
learn more and study it more. When working at
a hedge fund or mutual fund, you are expected to
learn a business in 1 week. You can’t truly under-
stand everything about a business in 1 week. It
took me 10 years and I am still learning new
things about BYD. It is a continuous learning
process. You could spend a lifetime studying a
business or industry, but in a few seconds I can
tell you whether or not I like it. You want to
build a knowledgeable of continually learning.
There is not set preparation.
Q. Recently, Jim Chanos gave us his thesis
on the China Syndrome with there pos-
sibly being a bubble.
Well, it is too big of a question for me. I don’t
know.
Q. 20 years ago you said you challenged
conventional wisdom in China. Out of
curiosity, in terms of value investing what do
you challenge in the conventional wisdom?
Well, the fundamental philosophy of value in-
vesting is very sound. It’s basically the three
things:
1. A stock is not a piece of paper, it is a piece
of ownership in a company.
2. You need a margin of safety so if you are
wrong you don’t lose much.
3. In the market, most people are in it for the
short term. It allows you a framework for deal-
ing with the day to day volatility.
That is really an intelligent approach. So
therefore any intelligent investing is really value
investing. There is a certain level of intellectual
honesty. If you have all that insight going into
analyzing businesses I don’t have any arguments
with it.
Q. What is your point of view on long /
short positions in value investing?
The most profitable kind of investing is long term
investing. You want to allow the time that it
might take because you don’t know when the
market will catch on. If you can find a business
with good management with good industry
fundamentals blowing it forward, you have a
good opportunity and you can save money on
taxes.
A short cannot be a fundamentally long term
position. In the long game, the upside is unli-
mited. Your downside is 100%. In shorting it is
opposite. Shorting is also essentially borrowing,
so you need money and time on your side. If
time is not on your side, you can be right but
lose all your money. The best kind of short
usually has some kind of fraud. In those situa-
tions, management is determined to keep the
fraud. Look at Bernie Madoff, 20 years time. You
cannot afford to borrow money for 20 years. So
shorting is a short term game. When those posi-
tions go against you, there is huge leverage that
can utterly crush you.
In theory, long / short is okay, but if you are
trading all the time you need to be in tune with
all the things moving the market. None of them
might be fundamental to the actual business. So
you spend all your time chasing noise than stud-
ying a long term situation. If you cannot con-
centrate on things in the long term, and spend
all your time thinking about the short term, you
will not be able to develop the kinds of insights
necessary to identify great investments.
From time to time, you will lose some mon-
ey on paper. But it is just part of the game. This
is why I closed long / short. You know I went
through three bubbles. The Asian Financial Cri-
sis, the Internet Bubble, and this most recent fi-
nancial crisis. The biggest mistake I made is not
being able to pick up undervalued companies
where I had a unique insight but was tied up
with this whole long / short thing. The money I
left on the table is still adding up. I am still paying
for those mistakes.
Q. In a bull market environment, how do
you re-evaluate your thesis?
I don’t ever want to profit from a bubble. Soros
does that, that is just not my game. I don’t pro-
fess any ability to understand how long a crowd
will buy into a bubble. I invest in things that ap-
pear to be compelling values that continues. So
that is why this game is a continuous learning
process—because everything affecting the in-
vestment is constantly changing. Including the
price. Including the prospects and elements of
business success. You really do want to never
stop learning. This game looks to be easy but it
is not easy.
Q. Given your focus on international in-
vestments, how do you think about di-
versifying your investments regionally?
First of all, I did not really specialize in interna-
tional investments. I started off doing most of
my investments in the US and Canada. In recent
years, I just find better bargains outside of it.
One of the great things about being an investor
is you can look anywhere and find great pockets
of opportunities. You cannot do that as a venture
capitalist as I experienced myself. So you can
look anywhere for opportunities. I do not take a
regional approach to diversification. I have views
towards certain countries and currencies, but it is
not the driving force for a potential investment.
If you have your fundamental things right, if you
happen to have macro economic factors behind
you, you can run a great wave.
Q. How is your investment style different
today than when you started the fund?
A lot of things have changed. One bonus about
this profession is you get better over time. Most
professions, as you get older, you get out of the
game. Take the example of competitive sports.
If you are a figure skater or gymnast, after your
teenage years you are out of the game. With in-
vesting, if you are doing it the right way, you get
better over time. Your knowledge accumulates
exponentially. When I look back at everything I
have done, I would have done it all slightly diffe-
rently, but that is because I am better at it today.
So if you approach it in a fundamentally sound
way, as you mature, you become better and bet-
ter. That process and progression is like com-
pounding money. In fact, you can compound
knowledge faster than money. If you truly love
this game, I would suggest that you don’t take
short cuts. It might take longer but it is more re-
warding.
Q. What is the difference between being a
top political criminal in China versus a
hedge fund manager today (referring to the ire
directed at Wall Street)?
I don’t consider myself a criminal. I don’t think
China considers me a criminal. What I think we
are doing today with our investment in BYD in
China is really helping China march towards a
modern era of prosperity. BYD is providing a so-
lution to both China and the US, to migrate
from the past to a way that gets us out of the un-
sustainable carbon age that we live in. Global
warming is a vital concern to every human be-
ing, so China is providing a great contribution to
everybody with BYD. America has had a great
history of invention and here is a great company
in China that is about to make a major contribu-
tion to human civilization with cheap electric
vehicles and solar power.
Ultimately we will have to get our energy
from the sun. Most of the energy, even fossil fu-
els (plants that die and then go into the ground),
all originally come from the sun. So if you can
figure out a way to take energy from the sun and
power vehicles, while using batteries to store it,
inexpensively—will really make renewable ener-
gy power everything. The combination of those
things holds the key to the future of industrial
civilization that we are about to embark on. We
didn’t set out with BYD with this in mind, it just
happened that way. With great companies, it on-
ly looks logical in retrospect. Think about how
Bill Gates started Microsoft. I don’t think he
knew up front that he would take the entire
market—at that time it did not exist. It is the
same way with our investment in BYD. Ulti-
mately, I think finding an inexpensive way to
store energy that we harness from the sun will
be a huge contribution for both China and the
US, but more broadly our entire civilization.