In one sentence: For their 300th episode Phil and Danielle read Li Lu's 2015 Peking University speech "The Prospect of Value Investing in China" and disagree a little about whether its message is about advisor ethics, Chinese markets, or both.
Key ideas
- The giveaway. Entering means leaving a voice message on the podcast page; prizes and winners are in the show notes and the next episode (301). This is not teaching content. [05:00–09:30]
- Who Li Lu is, as Phil describes him. A Buffett-schooled value investor who has compounded around 30% a year for 25-plus years (Phil's figure) and is the only outside manager Munger is said to have invested with. Treat these as Phil's claims. [24:30–26:00]
- The speech opens on ethics, not markets. Two points: make it your ethical duty to seek truth and wisdom, and be a good fiduciary for clients as if it were your own money or your parents'. Danielle was struck that this came first. [19:00–20:30]
- Why advisory is different from other services. A car owner or hotel guest can tell good service after using it; in asset management buyers (and often professionals) can't easily judge quality, so most theories follow "where you sit determines what you say". Danielle and Phil read the passage differently: whether advisors lack knowledge of their own products or of everyone else's. Phil's own reading is that most advisors are trained as salespeople. [11:00–16:00]
- See what's in the portfolio. Phil agrees with Li Lu that you can only judge a manager by studying what they hold over a long time. He says a friend asked him to evaluate Bernie Madoff, but no holdings or records were ever provided, a red flag. [15:30–17:00]
- Professionals believe fallacies. Phil says Li Lu, Munger and Buffett all hold that most professionals trust the idea of perfectly priced markets, which they dismiss. Munger's "95%" figure is Phil's recollection. [17:00–19:00]
- Danielle's reading between the lines. She thinks Li Lu, speaking in China, was nudging students toward honesty and the government toward trustworthy markets without criticising either. This is her opinion, and she says she has no proof. [20:00–23:00]
- Civilization 3.0. Li Lu says the third era of human civilisation is driven by science and technology plus a free market economy. Danielle thinks he omits reliable exchanges and information, a role regulators played when the NYSE grew. Phil adds that the iron law is that countries which resist this get left behind. [22:00–27:00]
- The value-investor angle on China. Li Lu says prices are far from intrinsic value, short-termism is common even among institutions, so patient investors face fewer rivals and can lean on a big margin of safety, whether things improve or not. [27:00–29:00]
- Next time. The long-run returns of stocks versus cash and gold in the middle of the speech will be covered later; Phil says stocks win by a huge margin over the long run. [28:30–30:00]
How it maps to RuleOne
- Li Lu's rule that you can only judge advisors by looking at their holdings is the case for the /holdings/ page: record what you own, what you paid and why, and judge yourself the same way.
- The page's notes on SEC filings back the point about relying on reliable information. A market without trustworthy reporting can't be screened with these methods.
- Nothing in the site covers China or foreign markets yet.
Buffett, Munger and Graham links
- Fiduciary duty and treating others' money as your own: see Buffett's partnership letters, which Danielle reread (299).
- Munger's remarks that much of finance runs on false theory appear in his talks collected in Poor Charlie's Almanack (the "Psychology of Human Misjudgment" and "Academic Economics" talks).
- Graham's Mr. Market (The Intelligent Investor, ch. 8) is the alternative to the efficient-market idea Phil rejects.
Words to know
- Fiduciary: someone legally and morally bound to put the client's interest first.
- Efficient market hypothesis: the idea that prices already reflect all known information.
- Civilization 3.0: Li Lu's term for the era (from about 1800) of modern science and free markets.
Try this
Read the speech on Himalaya Capital's website (publications page) and underline the sentences about advisors. Then write a short note on one holding in /holdings/ as if you were reporting to a family member whose savings you were looking after.
Check yourself
- What were Li Lu's two ethical points to the students?
Answer
Seek truth and wisdom as an obligation, and act as a true fiduciary as if the money were your own or your parents'. - How can you judge a manager, in Phil's view?
Answer
By seeing what they hold and watching it over a long period; no disclosure is a red flag. - Which two things does Li Lu say drive civilization 3.0?
Answer
Science and technology, and a free market economy.
Short quotes
"Make it your ethical obligation to seek truth and wisdom." (Phil, reading Li Lu, ~19:30, auto-transcribed)