36th Annual Graham & Dodd Event with Li Lu '96, Founder and Chairman of Himalaya Capital

Summary

Li Lu presented value investing as a long-term discipline for owning productive businesses. He also discussed how AI, China’s industrial transformation, and changing global trade affect business and investment decisions.

Frameworks and principles

• Six principles of value investing:

  1. A stock represents ownership in a business—not merely a tradable piece of paper.
  2. The market serves investors; it should not dictate their judgment.
  3. The future is uncertain, so require a margin of safety to limit downside.
  4. Work within a circle of competence, and understand its boundaries as well as its strengths.
  5. Look for less crowded opportunities—“fish where the fishes are”—rather than competing in markets that attract too many investors.
  6. Measure wealth by ownership of global purchasing power. Li Lu’s approach is to own strong businesses in dynamic economies at attractive prices and hold them as value compounds.

• Distinguish value creation from speculation: Li Lu described markets as serving both productive investment and speculation. Investors should decide whether they are seeking long-term business value creation or trying to anticipate short-term trading behavior. He argued that mixing the approaches without a clear discipline can lead to speculative decisions.

• Compound knowledge as well as capital: Gradually expand expertise from businesses that are easier to understand toward more complex ones. Li Lu emphasized preserving what one has already built—knowledge, trusted relationships, and capital—as a foundation for compounding.

AI: Business opportunities, costs, and governance

• Li Lu sees generative AI as a potentially transformative tool for synthesizing human-generated information and expertise, with applications across knowledge-based services and tasks such as coding.
• He advised evaluating both what the technology can do and what it can do for customers, rather than focusing only on pushing technical capabilities to their limits. He contrasted this customer-oriented question with the frontier-research focus he associated with Silicon Valley.
• He argued that AI’s costs are ongoing, not just a one-time investment that can be amortized indefinitely. That makes incremental costs, revenue, profitability, capital requirements, and financial discipline important considerations for companies developing or adopting it.
• He advocated keeping a human in the loop, especially where AI systems may act autonomously, and balancing potential productivity gains against risks and disruption, including effects on employment and cybersecurity.
• In discussing AI-related market concentration, Li Lu cautioned against letting market sentiment determine investment decisions. He said periods of extreme enthusiasm can also create opportunities in overlooked or lower-priced businesses.

China: Industrial strategy and business conditions

• Li Lu described China’s policy direction over the past decade as a deliberate effort to move manufacturing from low- and mid-end production toward higher-value manufacturing, alongside a push for technological self-sufficiency.
• He cited Made in China 2025, which he described as a 10-year plan with roughly 10 major objectives, and said China had met those objectives. He also said the country had made substantial progress in reducing technology bottlenecks.
• He pointed to semiconductors as an example of how restrictions can stimulate domestic demand for local suppliers. In his account, Chinese firms had achieved near self-sufficiency in mature-node semiconductor equipment and fabrication, while continuing to close gaps in more advanced areas.
• He also cited electric vehicles, batteries, energy storage, and heavy machinery as areas where Chinese companies had become global leaders.
• Li Lu characterized China’s economy as two-tiered: industrial upgrading had advanced, while property-market losses had weakened household finances and confidence. He described a policy model in which sectors that were once priorities can later bear the cost of shifting national objectives. His practical advice to investors and entrepreneurs was to assess whether their sector is currently a policy priority or a source of adjustment costs.

Metrics and timelines cited

The figures below were stated by Li Lu or the moderator during the event:

• Himalaya Capital: Founded in 1997; the event introduced the upcoming 30th anniversary of its founding. Li Lu described his investing practice as spanning about 33 years.
• China property and households: Li Lu said average nationwide property prices had fallen about 40% from their peak over roughly five years. He said a typical middle-class family had about 70% of its net worth in housing, with mortgages representing roughly 50% leverage.
• China demand and savings: He characterized domestic demand growth as roughly zero and savings deposits as about 120% of GDP, or approximately RMB 165 trillion.
• Property sales and industrial investment: He said annual new property sales were down about 70%, while roughly RMB 10 trillion per year was being spent on manufacturing upgrades and technology efficiency.
• U.S. equity returns: Li Lu cited average S&P 500 returns of about 14–15% annually over the 16 years from 2010, versus approximately zero or slightly negative returns from 2000 to 2010. He said the long-term average over the combined period was in the high single digits.
• Market concentration: The moderator cited the market capitalization of the largest company relative to GDP as historically around 2–4%, versus approximately 15% for Nvidia at the time of the event.

Actionable takeaways

• Evaluate companies as operating businesses, not just securities; focus on durable value creation and downside protection.
• Identify the limits of your expertise before making a decision, and expand that expertise incrementally.
• When assessing new technology, test the customer value proposition and the economics—not just the technical achievement. Track recurring costs, revenue potential, profitability, and capital needs.
• In markets shaped by policy, monitor whether a sector is being promoted or is absorbing the costs of a broader economic transition.
• Build a career or organization around trusted, mutually beneficial relationships and capabilities that accumulate over time.

Presenters and source

• Li Lu, Founder and Chairman of Himalaya Capital
• Tano Santos, Robert Heilbrunn Professor of Asset Management and Finance and Faculty Director of the Heilbrunn Center for Graham & Dodd Investing
• Source: Columbia Business School, 36th Annual Graham & Dodd Event