Remebering Charlie

In partnership with

Arigato, dear investor,

Last year, when I attended the Berkshire Hathaway AGM, I had the incredible opportunity to see Li Lu in person for the first time. Known as the "Warren Buffett of China," Li Lu is a legendary investor and thinker I deeply admire. I’ve been an avid reader of his book on China’s economics, history, and the stock market, and meeting him felt surreal. What made the moment even more special was getting him to sign my copy of the book—a memory I’ll always treasure.

Li Lu is famously private and rarely makes public appearances or speeches, which made this encounter truly extraordinary. Recently, he accepted a rare interview with Chinese media to commemorate the first anniversary of Charlie Munger’s passing. The interview is packed with golden insights, offering a profound reflection on Munger’s legacy and timeless wisdom.

Here’s the translated English version I created, in the hope of spreading his message to more people and sharing the valuable lessons from this rare and special interview.

November 28: The First Anniversary of Charlie Munger’s Passing

On November 28, the first anniversary of Charlie Munger’s passing, Li Lu, the asset manager of the Munger family and the founder of Himalaya Capital, gave an online exclusive interview to Zhenghe Island, organized by Munger Academy and Citic Publishing Group.

This was Li Lu's first interview with domestic media in four years. During the interview, Li Lu reminisced about his mentor Charlie Munger, summarized Munger’s spiritual legacy, and pointed out that Munger made the global practice of value investing possible.

"The Ones You Truly Love Never Leave You"

Question: Can you share your thoughts and feelings over the past year?

Li Lu: Today is a very special day. It marks exactly one year since Charlie’s passing, and it also happens to be Thanksgiving in the United States. My first in-depth conversation with Charlie was also on Thanksgiving Day in 2003. We talked for four to five hours, and from then on, we formally became partners—a relationship that lasted 20 years until his passing.

On the Thanksgiving weekend when Charlie passed, he was with his family. At dinner, he was joking and chatting as usual. However, during dessert, he started to feel a bit unwell. The next morning, he was taken to the hospital, and about a day later, he left us.

Charlie lived his entire life by his own clock, adhering to his principles, working hard, and spending time with his family right up until the very end. We shared 20 full years together, and in the year since his passing, I often think about our conversations.

Earlier this year, I also experienced a profound personal loss—my eldest daughter passed away in a tragic accident just a few months after Charlie. In the span of two or three months, I lost Charlie, a father figure to me, and my daughter. I truly felt the pain of loss in life, which gave me deeper insights into the meaning of life.

One of these insights is that the people you truly love never leave you. Whether it’s Charlie or Julia, I can still feel their presence with us at any moment. This reflects the Chinese saying that "the spirit is eternal." On this special day—a holiday that celebrates gratitude—I miss them even more deeply.

"Charlie Never Disappointed Anyone"

Question: What is the greatest life wisdom you learned from Charlie Munger?

Li Lu: We used to meet for breakfast at 7 a.m., and Charlie would always arrive 30 minutes or even an hour early. After his wife passed away, we switched to having dinner together every Tuesday. There’s a book called Tuesdays with Morrie, about a young man who meets with an elder every Tuesday. Inspired by that, we chose Tuesdays, and this routine continued for over ten years. We talked about everything, creating many warm memories, and I learned so much from him.

Charlie’s most important role in my life was being a real-life role model. Everyone needs role models in their lives. Since I was young, I’ve sought role models from history and around the world. However, finding a real-life role model is rare, as real people inevitably have flaws.

In real life, we often say, "Do not judge until the coffin is nailed shut." After someone has passed, we tend to focus on their virtues, but in reality, we have to accept their complexities while they’re alive.

I spent 20 years with Charlie—having breakfast together, dining together every Tuesday, or talking almost every few days. In all that time, I never saw him do anything that disappointed me. Instead, his thoughts and actions constantly inspired me. That was a unique experience in my life.

Charlie was someone who was always consistent, inside and out. He was someone who aligned his knowledge and actions, a person of true integrity.

"Charlie Was Both Worldly and Transcendent"

Question: What was the essence of Charlie Munger’s investment philosophy in your view?

Li Lu: First of all, Charlie adhered to Benjamin Graham’s foundational principles of value investing:

1. A stock is a part of ownership in a business, not just a piece of paper.

2. The market exists to serve you, not to instruct you (the concept of "Mr. Market").

3. Investments must have a sufficient margin of safety.

Charlie deeply respected these three core principles. However, living in a different era, he built upon Graham’s ideas and made his own unique contributions, reflected in two key aspects:

1. Invest in great companies at reasonable prices within your circle of competence.
   Graham lived during a period shaped by the Great Depression, two world wars, and other economic traumas. For Graham, preserving purchasing power was the most important priority.

   In contrast, Charlie and Warren lived during a period of rapid economic growth in the United States and globally. Charlie realized that the most effective investment strategy was to purchase a small number of truly excellent companies within your circle of competence at reasonable prices and hold them for the long term. This allows your wealth to grow alongside the intrinsic value of these businesses. Berkshire Hathaway was built on this principle, which is Charlie’s monumental contribution to investing.

2. Fish where the fish are.
   Charlie’s other unique contribution was expanding the applicability of value investing. He famously compared investing to fishing: the first rule is to fish where the fish are, and the second rule is to never forget the first rule.

   This means identifying where your circle of competence lies and where it’s easiest to establish one. By focusing on areas rich with opportunities, Charlie broadened the scope of value investing from undervalued U.S. companies to high-growth U.S. businesses and, later, to exceptional companies globally. This made the global practice of value investing possible.

Over the past 30 years, we’ve been practicing and promoting value investing worldwide. This aligns closely with Charlie’s second principle. It’s also why the Munger family entrusted Himalaya Capital with managing part of their wealth. For over 20 years, Charlie was not only my partner but also a friend, a mentor, and in some ways, like a father to me.

When Warren Buffett talks about his relationship with Charlie, he often describes it as multi-faceted. He compares Charlie to an architect and himself to a general contractor. He regarded Charlie as a partner, his best friend, and even as a father figure, given that Charlie was six years older than him. I share a similar relationship with Charlie, which is layered and deeply personal.

"Charlie Never Stopped Investing, Even at 99"

Question: BYD is often cited as a representative example of your investments. Are there other cases that illustrate Munger’s philosophy?

Li Lu: We’ve held BYD for about 22 years, though it’s not the longest-held position in our portfolio. Over this period, its stock price has experienced six or seven drops of over 50%, and once even fell by 80%. However, we never felt undue pressure because we knew the company was consistently creating value every year.

Understanding intrinsic value is extremely important. At any point, you need to estimate the company’s true value. When the price deviates significantly from this value, you can selectively increase your holdings.

Over the past 30 years, we’ve invested in various opportunities across the U.S., China, and other parts of Asia.

But what I learned most from Charlie is his lifelong dedication to learning. That’s what made him extraordinary. Charlie seldom made investments but read continuously. For instance, he read Barron’s Weekly every week for 50 years, but he made just one investment from it.

At 99, Charlie studied a stock that most people despised and wasn’t politically correct. After thorough research, he invested in it. Within a week before his passing, this stock had doubled in value. Even at 99, Charlie’s passion for investing remained undiminished. He could defy market consensus and live to see the stock double.

This is a fascinating example of how Charlie kept learning and thinking throughout his life, right up until his final day.

"Value Investing Prepares You for the Toughest Times"

Question: Is value investing still relevant in today’s fiercely competitive environment?

Li Lu: Value investing was first proposed and practiced during extraordinary periods of difficulty. Benjamin Graham’s concept of value investing emerged during the Great Depression. From 1929 to 1954, it took 25 years for the U.S. stock market to recover its previous peak, a period marked by the Great Depression, World War II, and 25% unemployment.

By comparison, the period of Berkshire Hathaway’s rise was relatively unique in history—a time of extraordinary economic growth over the past 200 years. That’s why Charlie and Warren always emphasized the role of luck in their success.

Value investing is designed for the toughest times, and it performs even better when conditions improve. I firmly believe that value investing is not only practical but essential in today’s environment. Other investment styles carry higher risks, which are not about short-term volatility but permanent capital loss.

"Rationality According to Charlie"

Question: How did Charlie Munger define rationality?

Li Lu: Charlie’s concept of rationality goes beyond the conventional understanding of being calm or logical. He described rationality as encompassing four levels:

1. Universal wisdom grounded in reality:
   Charlie spent his life studying universal truths derived from real-world history and decision-making. His thinking aligned closely with the "first principles" approach in physics, focusing on foundational facts and logical reasoning.

2. Multidisciplinary problem-solving:
   Charlie believed in learning from all disciplines and integrating their insights to address complex problems holistically.

3. Avoiding systematic irrationality:
   Charlie identified 25 common errors in human judgment, which are universal and stem from evolutionary biases. His work on the psychology of human misjudgment is a seminal contribution to understanding decision-making.

4. Respect for common sense:
   Charlie emphasized following time-tested principles, avoiding mistakes others have already made, and respecting common sense as the rarest form of knowledge.

"Value Investing and Venture Capital: Both Are Probabilistic Thinking"

Question: Are the thought processes of Charlie Munger and Elon Musk fundamentally similar?

Li Lu: Charlie, Elon Musk, another individual, and I once had a long lunch together. During this time, Musk tried to persuade Charlie to invest in his ventures. They discussed batteries and various scientific topics, finding common ground on many issues. However, their commercial judgment and risk tolerance diverged significantly.

Musk is highly tolerant of risk. He believes that even if there is only a 5% chance of success, such ventures are worth pursuing because their potential returns are so high. This aligns with the logic of venture capital: invest in 100 companies, and even if only a few succeed, they generate sufficient returns.

Charlie, on the other hand, prefers an 80% or higher chance of success before making an investment. He needs fewer investments, say five, to achieve his goals.

Whether to follow a venture capital model or Charlie’s model is a matter of individual choice—it’s essentially a question of probability.

For entrepreneurs, it’s critical to assess whether a venture has an 80% chance of success or only 5%. If 80% of ventures were guaranteed to succeed, everyone would start businesses, making success much harder to achieve. That’s why most entrepreneurial ventures face a high risk of failure and only a slim chance of success.

For example, before Musk and Wang Chuanfu pursued electric vehicles, it had been nearly 100 years since a major new car company succeeded globally. The last such success was the rise of the South Korean auto industry after World War II, and even then, many companies went bankrupt. Hyundai ultimately consolidated the failures to build its success.

Musk and Wang Chuanfu tackled industries with extremely low success probabilities. Wang used the cash flow from his existing successful businesses to support BYD, while Musk leveraged mature U.S. financial markets, venture capital, public markets, and government incentives to overcome crises.

Their approaches demonstrate entrepreneurial spirit—mobilizing all available resources to improve their odds of success.

"We Ushered in the Era of Global Value Investing"

Question: How do you see the generational legacy of value investing masters, including your personal contributions?

Li Lu: Benjamin Graham developed value investing during one of the most tumultuous periods in history. He lived through the Roaring Twenties, the Great Depression, World War II, and post-war reconstruction. His principles of value investing—stocks as ownership in businesses, markets existing to serve investors, and a margin of safety—emerged from these challenging times.

Charlie and Warren Buffett practiced value investing during the post-war boom, a period of significant U.S. economic growth. Their contribution was to refine value investing into a philosophy of purchasing great businesses within their circle of competence at reasonable prices and holding them long-term to harness the power of compounding.

Charlie’s unique contribution was emphasizing the importance of developing a circle of competence and fishing where the fish are.

Our generation’s contribution, I believe, is the global application of value investing. Over the past 30 years, we’ve practiced and promoted value investing across different countries and economic conditions—whether during China’s rapid growth, slower periods, or today’s mix of doubt and growth. We’ve applied these principles in Southeast Asia, North America, and South America, navigating various stages of modernization.

The practice of value investing across different environments gives us confidence in its universal applicability. As long as the elements of modern market economies—private enterprises, stock ownership, and financial markets—exist, value investing has a vast and enduring space for practice.

"AI: Humanity’s Greatest Opportunity and Risk"

Question: How do you view AI, and what does it mean for investing in the AI era?

Li Lu: AI is today’s most important technology, but its precise impact remains uncertain.

Will it be as transformative as the iPhone, as foundational as the internet, or as monumental as the steam engine or agriculture? Or could it rival humanity’s discovery of fire? Each breakthrough—from fire to agriculture to the internet—has had varying levels of significance and long-term impact.

AI represents immense hope but also immense risk.

Previous technologies enhanced human physical capabilities, especially muscle power. The steam engine introduced new forms of energy, and the digital revolution extended brainpower. AI, however, expands intelligence itself in a universal way.

AI could potentially transcend humanity’s intellectual limitations, offering breakthroughs in curing diseases, extending lifespans, and acquiring knowledge. But it also poses existential risks. If AI surpasses human intelligence, humanity may lose its role as the most intelligent species on Earth, which forms the foundation of our civilization.

This does not necessarily mean AI will immediately eliminate humans, but it could view humans as tools, just as we see animals. We don’t harbor innate hatred toward animals, yet we use them as resources or companions. AI might similarly lack empathy for humans due to the intelligence gap.

To mitigate this risk, AI development must remain under control. Governments and private sectors must collaborate globally to establish effective governance frameworks. AI’s risks are universal, much like pandemics, nuclear threats, and potential extraterrestrial encounters.

"Can Humans Create Something More Intelligent Than Themselves?"

Question: Is it possible for humans to create something more complex and intelligent than themselves?

Li Lu: Humans themselves are a product of natural evolution. The genetic difference between humans and gorillas is only about 2–3%, yet this small difference accounts for the vast intellectual gap between us.

If we use scientific thinking to understand the world, we recognize that much of the universe operates randomly, with only certain aspects governed by physical and mathematical laws. AI derives its power from finding correlations between variables.

To date, humans have been unable to comprehend many of these correlations due to their sheer complexity. However, with computing power increasing a millionfold over the past 11 years—and potentially millions of times more in the future—we can now analyze vast datasets and uncover correlations that were previously beyond human comprehension.

AI-generated intelligence may differ fundamentally from human intelligence. It may not possess a soul but can surpass human intelligence in specific domains. Just as gorillas lack the capacity to understand human ethics or decision-making, AI might develop entirely distinct decision-making frameworks.

This presents a significant risk: when humans are no longer the most intelligent species, we risk losing control. AI could fundamentally alter humanity’s role on Earth.

Whether AI evolves into a dominant species or develops intelligence incomprehensible to us, the existential risk lies in its ability to outpace human intelligence permanently. When control is lost, humanity’s fate will no longer rest in its own hands.

"AI Challenges Require Shared Human Spirit"

Li Lu: Despite geopolitical competition, conflicts in the Middle East, and tensions in Ukraine, humanity faces shared challenges that transcend national boundaries. AI is one such challenge.

Charlie Munger always admired and respected Chinese culture and traditions, believing in the necessity of long-term cooperation between the United States and China. This belief in collaboration remains one of his most enduring legacies.

In both China and the U.S., there are many who share Charlie’s values and vision. His lifelong conviction was that the two countries should work together permanently. I hope this vision will one day become reality.

Final Reflections

Through this special interview, Li Lu provides a profound perspective on the spiritual and intellectual legacy of Charlie Munger, offering actionable insights into value investing, rationality, and the opportunities and risks presented by AI.

As Munger once said, “My sword is for those who can wield it.” With disciples like Li Lu carrying forth his teachings, Munger’s wisdom continues to inspire investors and thinkers worldwide, ensuring that his principles endure for generations to come.

Arigato!

Chloe
Arigato Investor

Ads

Receive Honest News Today

Join over 4 million Americans who start their day with 1440 – your daily digest for unbiased, fact-centric news. From politics to sports, we cover it all by analyzing over 100 sources. Our concise, 5-minute read lands in your inbox each morning at no cost. Experience news without the noise; let 1440 help you make up your own mind. Sign up now and invite your friends and family to be part of the informed.

Sign up today!