What Did Li Lu Teach About Value Investing at San Francisco State University in 2012?

TL;DR

Li Lu’s 2012 San Francisco State University speech explains value investing through three ideas: stocks represent fractional business ownership, financial assets should be valued by future cash earnings, and investors should treat the market as emotionally irrational. Because predictions are uncertain, investors need a margin of safety and a long-term mindset. Read on to understand why this proven approach remains uncommon among professionals.

Transcript

when i was a student uh at columbia one day i was accidentally brought into a lecture uh by somebody whose name that sounds very strange to me it was the first couple years as i arrived in america english wasn't quite there the name sounds like a free lunch buffet but that lecture buff buffett really fundamentally uh changed the correct true direct... Read More

Key Insights

• 💐 Value investing offers a long-term approach to investing that focuses on evaluating companies as a whole and predicting future cash flow.
• ❓ Despite evidence of its success, value investing remains a minority strategy among investment professionals.
• 💦 The financial market, especially when it comes to financial assets, does not work as efficiently as markets for physical goods and services due to the speculative and unpredictable nature of future earnings.
• ❓ Successful value investing requires discipline, patience, and the ability to go against the market when necessary.
• 💗 Opportunities for value investing can be found by studying historical examples of extreme dislocations in asset prices and identifying enduring franchises with growing earnings.
• 🥺 Diversification is important in order to mitigate risk, but concentration on high conviction ideas can lead to superior returns.

Questions & Answers

Q: What are the three basic principles of value investing explained by Li Lu?

First, a stock represents fractional ownership of a company and should be evaluated by examining the whole business. Second, investors should value financial assets using future cash earnings while allowing a margin of safety; third, they should view the market as an emotional and irrational “Mr. Market.”

Q: What does Li Lu mean by a margin of safety?

A margin of safety means buying at a sufficiently low price to withstand mistakes and adverse future events. It does not guarantee that an investor will never lose money, but it helps prevent losses large enough to force the investor out of the game.

Q: Why does Li Lu describe investing as a long game?

Li Lu says investing compounds over the course of a person’s career. Investors therefore need to remain financially capable of participating over the long haul, even when unfavorable outcomes occur.

Q: How should value investors think about stocks?

Value investors should treat a stock as fractional ownership of a company, not merely as paper that can be traded. Evaluating the stock should therefore begin with evaluating the company as a whole.

Q: What is the “Mr. Market” concept?

“Mr. Market” is a frame of mind for interpreting market prices as potentially emotional, irrational, and neurotic. When the market moves against a well-researched investment, a value investor should not automatically assume the market is correct.

Q: Why do relatively few investment professionals practice value investing?

Li Lu attributes this partly to human psychology and the discomfort of standing alone when the market and other investors disagree. Maintaining conviction under those conditions feels unnatural and can make the investor appear wrong or even self-deluded.

Q: What does Li Lu say about the historical performance of value investing?

Li Lu says studies using records covering the previous 100 years concluded that properly practiced value investing consistently outperformed the market. He contrasts this with other strategies that either matched the market or severely underperformed it over long periods.

Q: How did Warren Buffett influence Li Lu’s career?

While studying at Columbia, Li Lu was accidentally brought to a lecture by Buffett. He says that lecture fundamentally changed the direction of his life in America and led to the career he came to enjoy.

Summary & Key Takeaways

• Value investing is based on the idea that stocks represent fractional ownership of a company and should be evaluated based on the company's overall value. It also emphasizes the importance of predicting future cash flow and leaving a margin of safety to account for uncertainty.

• The three key principles of value investing are: viewing stocks as ownership in a company, valuing assets based on future cash earnings, and recognizing the emotional and irrational behavior of the market.

• Despite the evidence supporting the success of value investing, it remains a minority strategy among investment professionals, likely due to human psychology and the desire to follow the crowd.