13th Columbia China Business Conference | Fireside Chat: Value Investing in China

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greenward and mr lee liu professor bruce greenward is the founding director of the helpful center for graham dodd investing at columbia business school his leading voice in value investing mr lilu is the founder and chairman of himalaya capital a multi-billion dollar investment firm that primarily focuses on long-term investment opportunities in asia and the us he's a distinguished alumnus of colombia amisha lilu currently serves as a member of the board of trustees of columbia university professor greenward routinely wins parties for his classes and has trained a generation of value investors including lisa lillu himself recently liu has in-depth knowledge about the chinese market his insights are trusted by investment legends like buffett and monger now imagine yourself stepping into the most overcrowded investment classroom at one of the best business schools across the globe welcome professor greenwood and mr lee okay thank you um i think this is going to be a rare privilege for everybody i've known lee liu now for more than 20 years and not only is he a great investor but he's a great conversationalist so why don't we just start out uh by talking about how your investment philosophy has changed because value investing is after all always an evolving field since you began the field literally i think i would say 25 years ago 20 years ago or like 28 now time so how has it evolved so how have you been influenced by people like uh charlie munger and so on yeah go ahead well so uh before i started i just want to uh first of all thank you for all the organizers of this great conferences i mean i look into the uh the speakers are just really unbelievable so uh the uh the quality of the student has dramatically improved since i was a student there so thank you for all for that wonderful work of putting together these great conferences and it just really gave me such a pleasure to be on the same panel with my professor bruce greenwald in fact i got into uh the this field really because of uh professor greenwald's class um i think you know basically you you got uh buffet to come to uh speak to a student really roughly 28 years ago and it was really out of that first lecture that i really got into this field so thank you so much and of course i later as a business group student i took all the courses that professor greenblatt offered and learned a great deal and made a lot of money too so thank you yeah so the philosophy is that uh it it is it is you know relatively simple uh the practice is really hard so i wouldn't say the philosophy really evolved all that much for me before i got really exposed to value investing through buffett's lecture at a bruce greenwald's class but i think my whole approach to life was pretty much a set along similar lines and so there was not much of a jump for me the idea of buying something at a discount or something that really worth more is just is simply intelligent so i would say almost all intelligent investing involves some kind of a value investing and now the difference is is that your focus on values evolves over time and two different individuals they tend to focus different areas of that for me when i first started as a value investor this is now 27 28 years ago when i lost my first stock uh i don't really know much about uh business uh i i know i was born and raised in uh china during the uh cultural revolution there was not much of a private business over market economy back then so i have to learn everything new uh so uh at the beginning i obviously have looked for value uh primarily uh on the balance sheet in the in the classic uh style of benjamin graham looking for a cigarette butt uh looking for the alastair puff basically looking for statistically cheap businesses and ignore what the business really is and that served me well and that over time i evolved into understanding smaller businesses and because i was just intensively curious about how business run so much so actually i involved into health funding or co-creating a dozen those early stage startup companies and that experience has taught me a lot about how businesses what constitutes a good or bad of mediocre businesses and so over time involved into looking for really good businesses small maybe but really good businesses uh and then that that leads me to look for good businesses in asia and eventually for businesses was enduring competitive advantage uh with a long uh growth trajectory ahead and so the places where we're looking for a bad evolves over time but the basic philosophy have pretty much remained the same it's just our core competence expended over time now i have been very fortunate to be influenced at the very beginning by the investment giant buffett and and later on i was really really lucky it was just a streak of uh stroke of a whole lot that he can't even make it up uh in fictions that i uh strike a good connection with charlie munger and he become an investor of 2003 2004 and we've been partners since then basically he has been a mentor an investor a business partner and a great friend all these years and for many many years we've been we have dinner every tuesday night that's my version of a tuesday night with charlie uh every week uh that lasted for years until just right around the pandemic and we talk a lot more so obviously i had a great deal of influence by him but i have to say that the greatest influence from charlie was really beyond just investment it was he was more of a role model and the way he conducted himself in real life now i think for every profession everybody it is wonderful to have role models in life and often we find role models among the imminent dead um because it's safer so it's pretty risky to pick a role model and still still alive and that i always have a risk of disappointing but in my case i got really really lucky in the sense that my role model never failed in instead of continuing to inspire me right into his 97th year basically um and so mostly it's really basic his attitude towards life and his ability to keep um equanimity in a sense in the phase of up and downs successful setbacks and i witnessed quite a bit of them over the 17 years or so we've been working closely um maintain that rational composure commonsensical approach to all problems investment in our life that is extraordinary hard and it is a bit of against very natural tendencies and i've really washed the clothes up close and personal how charlie have conducted himself and it is in that regard that he is probably the most influential person in my life and i have been very very lucky in that regard okay um so in this concentration instead of now investing in great businesses um can you be specific about what kind of business you look for what are the characteristics of a great business in particular what detail characteristics you look for and how you put a value on those businesses yeah well uh great businesses are the ones who really have evolved average returns that's the capital but that kind of businesses socially attract imitators competitors everybody wants to have above average return to the invested capital and so truly good business is the one who can fend off competitors we can really have enduring competitive advantage and cap that higher than average return on invested capital and hopefully also have a long runway of continuous growth those are the businesses we're looking for and they could really come in all industries in all shapes and forms um but they're rare they're really really rare to have a business that generates above average returns over a long time on a compounded fashion this again is really against the natural orders of things it really only a small slice of all businesses belong to that category so if you're really lucky enough to really find one of those long-term compounders all you have to do is really uh to own them and own them for the longest period of time now it helps when you really buy them at the time when they were happen to be treated at a discount to their intrinsic value so that if you were wrong about them you won't lose money and if you're right you're having more returns over time but over the longest period of time if you do own them through the up and downs um your return roughly approximates basically the actual business return to the actual capital we invested in the business itself over the long term the two tends to really converge pretty closely and so understanding the study the nature of that business with the dynamic but competition is of really the most important thing as the investor and as a student of the business and as i said there isn't really a set of things uh that really make them that way every business really builds their fortress uh slightly differently and you just have to really actually be honest with yourself and study from every possible angles until you're really convinced that the azure they're currently enjoying uh enjoying truly enduring and they truly have a long runway ahead of them and if they proved to be exactly as you predicted over the years we really want to really stay on them through the up and down second thing not to be really this way uh easily okay can i actually uh talk a little bit about those businesses i mean in limiting competition and i think charlie munger is the master of this you're really interested in moats that is the barriers to entry into the business because it's keeping people out that's going to limit competition if you think about a moat there are probably two elements to that mode so think of it from the point of view of a company trying to get into the business one is economies of scale how big do you have to get how big a market share do you have to capture in order to be viable as a competitor so in automobiles in the global automobile market it's really large and if you look at one to two percent share you're going to be fine in other markets like for example local distribution of caffeinated soft drinks you got to get to 20 to 25 of the market to support uh the infrastructure that you need uh and to compete so the first thing is economies of scale and the second thing i think and again i'm sort of thinking about charlie munder here is how hard is it to get that market share which is all about customer captivity in a contested environment where unique technology will help you with that and so on so suppose you got to get to 25 share we know for caffeinated soft drinks that two tenths of a percent share changes hands every year in a contested market so to get to 25 you're talking about 125 year mode do you do a calculation like that for the companies you're looking at you look at those two elements explicitly well that and more okay then what's the more the skill is important uh in there actually there is a scale economy in those businesses uh not everything actually has a scale economy so sometimes that the skill becomes a contract point make it actually more difficult to really manage um right but in a scalar economy uh that the scale does really become a competitive advantage um and then but but the dynamic would have changed after a certain scale the information automobile this interesting example you know what happens in different phases of the industry um the uh the the the uh consumer uh aside is also important in a sense that if you have um quite a bit of um uh consumer addiction which goes for products and brand loyalty obviously that is important and they're good for a long time until they're not good um things could change new product categories would have come along and run get tired and owed not refreshed need for new generations really don't like to have the same taste as their parents and grandparents so that's really the most interesting aspect of businesses is is what is only constant is the constant change all great business changes over time and i absolutely know business it can really remain that competitive edge for forever but some of the business really can keep it for a very very very long time and of course when it changes it's really upon the management team to be able to really we allocate capital towards those businesses actually now we enjoy a robust competitive definition and taking sample with berkshire you know starting out as a lousy businesses losing businesses of texas in new england and warren and charlie skillfully really took the last bit of the cash flow and the skillfully invested in some other businesses really on the right side of the trajectory but over time some of those businesses began to lose its competitive advantage and then they took their capital and they allocated to the ones that so obviously the management capability of allocating capital also plays a very important role and of course that the culture of a a company in the industry that's rapidly changing so that you always a few step ahead of your competitors which allows you to always observing on the edge that also becomes uh enduring competitive advantage if that culture endures so in every specific businesses what really make them successful are very very different and they change over time and so that is the most fascinating aspect of of the competitive dynamics and also the most fascinating aspect of being an investor how do you today as of today how do you do this differently would you say for most other investors are there things that you look at specifically are there ways that you approach companies now i'll tell you the thing that when i started investing with you and i'm honored to say that i made a lot of money doing it that appealed to me was what you mentioned in your introduction which is small but small businesses are or small markets are necessarily markets we have to get a big share uh because one firm can dominate and that's not something that most investors look at so in what other ways do you do things differently from most other value investors and investors yeah well you're right you're investing with me or you begin to invest in me thank god you're still with me so thank you for continuing to trust in confidence uh no back then we were looking for a smaller business because those the business i feel i can understand them and as we evolve we begin to look for bigger businesses that we can also understand that bigger business does come with a whole set of advantages that if they are right in a sense um they also come in with a whole bunch of problems and so we're not really looking not just big or medium or small size is is one consideration but it's not in the most important uh certainly now that determining factors when we're looking for businesses there are big businesses because of a certain dynamic dynamics are still growing at a robust pace that are becoming even more entrenched as they become bigger and they still have long runs of growth so that just exists you know the most recent phenomenon of the technology platform because of the network network effect some of the businesses are fitting that characteristics now they don't necessarily always grow forever but they have been growing for a long long time and likely to continue for some time and so just the the size itself uh is certainly not the most determining factor by yeah but then what other dimensions do you do things differently today than other investors who are less successful i don't spend my time studying people doing that we spend most of our time study uh industries studying specific companies we're looking for the ones we're already successful try to answer what really make them successful can that success be continued and some of the time we have answers and some of the time we don't we just continue to really study them and continue edit until we have an answer i think one thing that really that is always important for us is this um intellectual uh honesty basically knowing that we really don't know um but we do know and what we don't in other words if you claim a circle of confidence you have to understand the ash of the confidence you have to know what is false and what is close you have to be very honest with yourself uh so we really insist on knowing inside and out a particular businesses and to the point we're able to predict is outcome for example in the next 10 years at least i want to know that the worst case scenario what the business would look like 10 years from now and so we do have a long-term horizon in terms we can't really predict it forever but i want to see whether i can predict with a very high degree of competency 90 percent of confidence that at a minimum what the business would look like in 10 years given all different contingencies and so and and most of the time we don't have an answer and we just keep studying and keep at it and sometimes we study for years and years before we see okay we really get it and then we wait for price to come to our striking zone and a lot of the time they don't and so that makes our selection very very difficult and so when we do select them we tend to really own them for a very very long time because the businesses they're really good um and we really fully understand are very rare you know how do you mean when you really do you understand that so anything that we would own we would buy a lot more as they go down and how do you start yeah if they go down fifty percent is sixty percent seventy right we buy more so that really gives you a measure of our definition of whether we understand them okay so what about the market today i mean it seems highly valued i mean if you look at fixed income it seems unprecedented uh that said uh does the market today remind you of any historical periods you've lived through in good ways or bad and would you have advice for anybody on how to navigate well we usually don't study too much about the market except when they're really extreme and this is what happened to be one of those more extreme period of time it is truly in many ways and we're in unchartered territories uh the amount of liquidity that's been printed and the level of interest rate and also the slow pace of the growth all of those are quite really remarkable uh in this period of time so how do you really deal with them [Music] we don't necessarily think that history will repeat and so every time is slightly different instead of guessing the patterns of history and whether they repeat we focus on selecting companies that can really lift through the thick and thin um whatever the environment business will continue somebody will do well we just want really investing in those companies was incapable of dealing with those extraordinary set of uncertainties and i'll be doing fine and how much is management a part of that and how do you look for managements that have that capability well in a lot of the companies uh the management will make big differences the culture of those management we're produced will make a big differences but in the small set of experiences and management really matters almost nothing but the best the strings of business all really has a dynamic of his own that really almost anybody can run it and run it well relatively now those businesses are really rare they're not that many you can probably put them in one hand or two hand and so each again i come back to the situation each time is different you have to really look for each specific company company in specific ways and ask all kinds of appropriate questions and study them over a long period of time in order to read honestly say that you actually understand them understand them enough you can predict the outcome in 10 years even given all the up and downs in the macro environment so you've lived through in your 23 years running himalaya a number of major financial crisis the asia crisis in 97 the tech bust in 2000 the financial crisis in 2008 and actually last year the code 19 are situation specific things you learn about managements or companies that you look for in those crises yeah well uh so as you said my 24 years of managing him like capital we have gone through several of those big crisis each time when that happens uh it was billed as once in the century um crisis it probably was except it happens uh on the time frame of every five to ten years so the financial market boom and bust is has been a constant phenomena since the beginning of the financial market uh several hundred years ago and it was driven by human nature as long as human nature remain that way it would never change it will always be with us now as a product of evolution we human are basically i run not necessarily in a very rational way now we're we're very good at rationalization but we're really not very good at being rational uh so so we always are looking for uh is in in a sense we're governed by some instead of a heart a hard wired a hard coded instincts and we're looking for a zero sum now and we're looking for fast money and and then you get really totally scared when things goes against you so that's basic sense of agreed and fear would always enjoy a drive the financial market up and down particularly when it comes to money humans are very funny it tends to evoke the primal part of human nature and so so particularly relates to financial market and security market money that that human tendency of the extreme instincts become more amplified and more extreme and that's why the financial market from the very beginning has always been characterized by moon and bust and what remains so now how do you deal with uh such a environment that will be constant well one way to deal with that is to anticipate that always on the corner at all times and that's basically our attitude that financial crisis will happen all the time people will always be driven by fear by euphyrium by uh i mean by by this extreme kind of up and downs and so we're looking for businesses they're capable of looking at leading through that and even businesses that could really thrive in that environment it says have a certain characteristic of anti-fragile and so so that up and down becomes somewhat friendly for us in the sense that when our favorite company is on sale you know discounted by 50 60 70 if we have money we'll buy more of it if we don't have a money it's it is a hallmark of a good investor you can sit through watching your portfolio down by 50 and not being affected at all on the other hand other side of the coin is that you're equally unaffected when everybody around you are making fast money fast and furious a lot of them now you're really seemingly totally left behind so and that's really part of the temperament that most people don't have and that's why not everybody can succeed in this game of the investment and so to succeed in this game and require certain temperament and a certain understanding of human nature also a certain common sensible approach and knowing that they will invest in return eventually will mirror the actual business return by actual businesses and we know in real life real businesses don't really change by day by hour by week by month it took years for them to really either go up or down and so you should expect your investment without the coming over slowly gradually over a long period of time so the short-term phenomena should not really impact you as much either on the upper or down and so if you have that basic temperament and basic approaches what you're going to find is that both of the eupheria as well as the crush actually can serve you well and this is really going back to ben graham's basic concept of mr market that is there to serve you not to instruct you except the real game of the investment those phenomena both on the up and down tend to be quite extreme and testing and so the other thing that will be very testing is that um you really do need to understand uh the business itself and if you really try to pretend you understand and you're really driven by something else other than deep understanding you'll be tested and so that's the salient nature of the of the financial market and sometimes they almost feel that uh they existed the too many to catch human weaknesses uh that if you really don't understand something that you pretend to you will be busted at some point um but if you truly understand you will be able to add when the security really down 50 60 70 yeah can i actually um talk a little bit about a specific example there and maybe get you to talk about an example because one of the things that you talked about was the stability of these companies and their managements in the face of a crisis so crisis tells you a lot and the one company that obviously recently has done extremely well and you could see it is john deere so if you looked at john deere in 2000 demand fell by five percent and their profit margins fell to zero if you look at what happens to them in you know 1314 demand falls 35 and their profit margin stays at roughly half what it was before which is higher than it had been historically so clearly that's a company that's changed and in the face of sort of catastrophic uh external conditions has gone from doing quite badly to doing much better do you have examples of that from the companies you've invested in where you've seen them perform through a crisis i i do my 27 28 years of investment that's the kind of things you'll collect uh but normally we don't talk about uh specific companies but could you share maybe a historical experience of that so that the students in the audience might have a sense of what to look for and looking for this stability well bruce we tried this multiple times in your class i know i'm going to change it's very familiar to me and there is a simple logic reason why we don't do that once you achieve a certain uh notoriety uh in a certain field um the people tend to really copy that and that's not the behavior we want to encourage uh instead of gaining people fish it is much better to really teach people how to fish okay so let me do one last question do you prefer to be a generalist or a specialist investor and would one work better in the chinese right in the chinese market than another well in a sense you always want to be a generalist uh in terms of a student of businesses and you're interested you know you have to have uh to be good at this game you have to have the innate intensive curiosity about the business all kinds of businesses it doesn't mean you're going to really really get to the bottom of it oftentimes you don't if you're honest with yourself but by the time you really get into the companies you really decided to invest you really better become a true specialist and to the point you really know hopefully better than anybody in the world you can find including the top management team and the top management team because they manage the company they tend to be deeply personally vested in their own biases and may not be able to look at the business as objectively rationally as you do so that's a really test so you want to be a true specialist in the company you chose to really invest but you want to be a generalist always of business in general so that your core confidence your circle of confidence constantly evolving and the enlarging over time if i still really know what i knew when i started when i first took her class where when you first invest with me we will not really anywhere near the results and we both joined so luckily that uh that we continue to expand and we continue to learn but on the other hand it is a fascinating to see that how business evolved over the last few decades will continue to evolve in the next few decades and that really makes me feel that boy i'm lucky to choose this field that i get paid to really satisfy my curiosity and to learn all these great people and great enterprises serving society so i feel happy every day doing what i do well okay so let's talk about the evolution of markets and in particular at a 2010 panel at columbia business school you mentioned that asia's role in the global financial system was becoming increasingly important looking back how has asia's role evolved in the last 10 years and what about china's role going forward in both the world's business economy and in the financial well the word is a turnout exactly as we predicted in asia indeed to become a lot more important particularly china in it become even more important as i look at in the next few decades i would say that the chinese market and asia in general will become even more important the set of dynamics that already set in place will continue to play off in a robust way so the chinese security market in general and asia economy that will become increasingly a very very important ever more important component of the global market well all right so let me give you some data that i don't think is widely appreciated i mean the chinese numbers are obviously very difficult to interpret at least the official numbers and whenever you see that from a company the data you really want to look at is the data where there's a reliable counter and the trade data is where there's a reliable counterparty because every chinese export has to be an import from another country and every chinese import has to be an export from another country over the last eight to ten years china trade has grown by only about two and a half percent a year that's less than one percent faster than u.s trade what does that say about chinese growth i mean that's clearly much slower than the trade growth prior say to 2010 2011 uh and it's if it's fluctuated obviously but if anything it's been slowing down what does that say about china's future well it tells you that the characteristic the chinese economy has changed fundamentally you know up until 10 years ago what really propels the chinese growth is has been uh was uh international trade uh to a certain extent and i would say back in 2010 uh the net trade a meeting the export import netted out was roughly about 9 of gdp and so china's economy was heavily dependent on the global market now what happened is that and they were growing at really double-digit growth at the time when the rest of the globe global economy was growing at much much less a fraction of that and so at a certain point once you become the largest treaty nation uh you can't really the rest of the world wouldn't be able to keep up and the other thing that is happening is after the citizens become middle classes their demands changes from basically just work saving uh two into really work and saving and consume it is just also human nature so roughly around 10 years ago as you point out the chinese economy has slowly evolved into more of a consumer consumer-driven economy to the point that interestingly last year was a watershed year in a sense that the retail sales the total volume of retail sales for the first time overtaken the united states china was at the largest retail market in the whole world at a six trillion or so us dollars the u.s has roughly 5.5 children now granted that that was a special year in the sense that uh the global pandemic ahead other countries hotter than china it's also said that china have done a better job you manage the pandemic but basically the trend is there china is emerging to become the most dynamic fastest growing consumer market in the whole world and that is likely to continue for many many more decades to come and so that really make chinese even more attractive to the global economy in terms of people who want to sell it back to the consumers with the middle class in china and the characteristic of the economy would change and would also really provide unique and interesting opportunities for global investors let me just talk a little bit about that i mean the thing about retail sales is that it's selling goods the thing about the developed economies is that they're overwhelmingly service economies they're not goods economies and on that dimension it doesn't look like china's doing particularly well and as i say the export data you could understand that that would slow down but the fact that the import data has slowed down just as much or more tells you something about the nature of domestic growth in china what about the challenges in the service sector in china well you're certainly right that at the current stage the surface sector has yet to become as powerful and uh dominant as most of the mature developed economies in the west and that's really amazing real set of opportunities right for the decades ahead of them and that's by the way not that much different than all the other developed economy and a comparable stage of the development state at ten thousand eleven thousand dollars per capita gdp which is where china is today and but even look at the underlying dynamics of the various different businesses different performance both consumptions retailers and the surface are basically the ones that growing the fastest and overall trade internationally still growing at a robust rate but not nearly as much as the domestic side of the economy and so that's why that their share of the gdp has gradually began to shrink so domestic consumption becomes far more important both goods and the surfaces as we point out and so that just tells you that a different stage of the economy where it is today so where do you see the unique challenges and opportunities instead of finding value investment opportunities in china well uh the china remains uh i think one of the best market uh if you're a valuable investor um in many sense in a sense the market is still somewhat underdeveloped the market today is not as representative as the real economy the way for example united states and so there's a lot of the development in that regard uh and the trading and the investors are still not as mature and there's still a mentality of a fast trading high turnovers which actually renders some of the companies again going through a faster pace of this boom embossed again that usually provides opportunities for those mature patient investors who truly know what they're doing and also as you said the service sector of economy when it comes to financial services is still yet to be developed and china was really right at the stage when the financial services industry actually is about to take off in a big way for many reasons and it just so happens also the chinese government is quite a kin in making macroeconomic policies quite conducive for the development of the financial service industry and they began to open up to the global firms as well in a way they have never done that before so all those confluence of uh factors really make the market that much more attractive today than it was before yeah can i say something about that financial services is probably the fifth and sixth largest service sector the biggest is housing by far the second biggest is medical care the third biggest is education and the fourth and fifth biggest are like wholesale and retail distribution and personal services and then financial services although in the us it's a little higher than that what about those sectors in china that sector is also growing right but do you see opportunities in absolutely we do housing we see an opportunity shelter support basically uh virtually every industry are going through a robust uh uh growing stage some more than the others uh and even if the industry they're not growing as a fast because you'll find interesting companies values and i don't have to you're the blue for this field and so different people tend to focus different aspects of the industries and different aspects of the growth profile some looking value and high growth companies some looking values that moderate growth companies some outlook value in places that doesn't grow at all in fact they're probably declining and therefore they find even bigger markets so if you are a true uh uh good investor in the sense that you can find a bad in everyone but you're probably more capable of finding values in a dynamically growing economy such as china they're still growing at a multiple times of the mature economy in the west and there's still enormous amount of inefficiency in this security market so that combination of those two really make it enticing on top of that one whole series of government report i mean government reform will make those inefficiencies gradually be more efficient and so that transition offers even more interesting opportunities so this is this is a good time for global investors and certainly for us investors as well okay in those terms that as chinese financial markets are developing do you have certain reforms or other things you'd be interested in seeing implemented do you sort of have a top development that you'd like to see happen in the china financial markets or even in the china economy well in the sense it's already happening and that's what i mean the chinese government and regulator this development security market for years and years the chinese security market is not very representative of china's economy partially because it really the uh the ipo rules are based what they call approval model uh you have to go through lenses of approval layers of approval process in order to be listed and so the one up with this thing are the ones will be proved by government for whatever reason sometimes often not really market driven compare with other markets such as the united states that it is based on a gradual situation based and so as a market rhythm as a result of the financial market security market here are quite representative of the true economy and as the chinese economy moving from a export import driven economy into more of consumer demand economy the entrepreneurial companies with market driven dynamics are increasingly play a larger role and therefore this financial market have to reflect the change in dynamics and china that the chinese government is determined reform is uh ipo process from one of approval process model into one that is much like united states of registration based model and so we are probably still early in that process but as that process began to play out and we will see the financial market become more reflective of the real economy and the other big changes that is happening is that most of the financing are done through the banking sectors up to the point you know 80 plus percent and over time the financing is best to really do through what they call direct financing mostly through market driven dynamics of fixed income equity and central social and so we see the overall financing model the chinese economy from one that is more indirect into more direct and so thus is the reason for opening up this financial service company a financial service industry both for domestic players and global players as we're seeing that dynamic plays on it over the next decade or so there will be a lot more opportunities and the financial market will become more mature there will be more institutional players coming into it and the financial market size will become much much bigger than what it is today so those are really all bold well for investors who truly understand what they're doing basically in china yeah let me ask another question that connection i mean the thing about a service economy is the services are overwhelmingly locally produced and concerned there are very few global universities for example there are very few global high schools very few global hospitals um that means that typically if you look at developed economies like united states with big service sectors the firms which tend to be local the service firms that tend to be local tend to be locally financed so i assume you know that local banks in the united states are much more profitable than the big global banks do you see a comparable trend developing in china that you can take advantage of some and some years and some know i wouldn't say that to the local banks in the u.s no but i'm just thinking in terms of local experts within china and local service businesses that would include of course local banks yeah well they tend to really know the local area but the chinese regulation of banking is slightly different so they're only roughly about 15 bags and they really have the mandate of being able to take deposit on a national basis and all the other the rest of the financial institutions are able to really take deposits in a very very small defined well-defined local region into their town villages cities it's very special and so the it is a heavily heavily regulated um uh businesses and so that really gives them almost oligopoly type of a status in terms of taking deposit which is very important of course in terms of the source of capital so that dynamic is slightly different than the united states for example that the licensed ability to really be able to open a bank is much much more relaxed in the united states than in china as a result the the basically the dynamics of the larger national versus local or regional banks and other financial institutions are more driven by basically the business dynamics the market dynamics and this is very different than in china it is driven first and foremost by regulation regime and so that makes the uh a comparison uh of the banks really quite different uh in china than the united states so would a somebody investing in banks in china have to be an expert in chinese regulation absolutely specialist [Music] if you don't decide to team us anything i recommend you better become the most knowledgeable on the planet before you really interested really invest in all them through the up and downs and thicken things and if you do understand them they are good it is far more profitable to own them over the long period of time okay so why don't we talk more broadly about new trends in value investing so among the many popular and up rising technological fields such as 5g bitcoin ai have any of that has any of that attracted your interest as a value investor and why well as i said if you're a investor you really want to find out what really influenced the change of your companies if there's one big forces that are really quite prominent is the fast acceleration of technological changes and of course you need to be well aware of those mega technological trends um it's this current wrong in wave and it started uh called you know 40 50 years was the invention of semiconductor particularly the integrated circuit uh that really ultimately led to a personal computer and the computation collaboration the computation power uh to ordinary citizens and from there there's also the evolution of communication technologies and then the invention of the internet uh somewhat 25 30 years ago from there the mobile internet so the intersections of compute as well as in the omnipresent and uh instantaneous basically communication really led uh to this new phenomena of artificial intelligence and the data economy as a result of it and so this wave of technological change over the last 40 years has fundamentally altered the business landscape of all kinds basically and so whatever kind of investor you are we do need to be aware of that huge changes and how do you deal with that in a sense what you're investing in businesses that are either well insulated from those technological changes or in companies whose management management team are quite capable of adaptive to those technological changes better than their competitors or in companies that are leading those changes or enabling those changes so that those changes are really on your side basically so now do you have to be a true expert to the point of that engineer i don't think you do but you you do need to be broadly aware all those big technology changes now if you happen to be a venture capitalist in those who feel it of course you do but if you're a generalist and study all the businesses you need to be aware of those trends how does it really impact in the industry and the companies that you're investigating so so we are still uh really at that in the middle of that gigantic wave that started with the invasion of a semiconductor by the way you know when the transistor was indented well that's a longer i know yeah that was 19 over 42 yes yes yes and the first thing i 1961. yes yes i'm referring to the time right you get uh integrated into industry and so that's you know that really started this whole revolution that we're actually still in the middle of it and the current uh wave of neuron network based artificial intelligence is just kind of the recent iteration and the data economy uh that as a result of it is the newest adaptation by industries in response to that new technology we're going gonna see more of it as time really began to evolve from here do you see opportunities to invest in new technologies do you have an example maybe in your past where you did invest successfully in a new technology we have in a sense back in in the days i was trying to really learn about businesses i invested in a number of uh startups uh and so i i i am fascinated about the technologies um and today we have somewhat uh smaller exposure to that but but it is it is fascinating it's not really you're not interested in technology it's just it's not that easy to predict or impact because of the pace of the change it does require a different aptitude different domain expertise and the other thing is we just have other set of easier opportunities that we just happen to be lucky [Laughter] yeah well all right so let's talk about a specific example a lot of smart people believe that renewable energy is the next big revolution and you've done a lot of work on battery technology and byd so is that something that you think about beyond batteries what's your outlook for the electrical vehicle industry say in the next five years or is it overheated now where is tesla going [Laughter] so the car industry is simultaneously kind of being impacted by you know four or five big mega trend the electrification the right sharing and the autonomous driving and the intelligent design all of those really going into the industry simultaneously and so that really had attracted more entrance and that really heeded the competition also against the broad background of uh climate change current uh carbon neutral revolution in the sense so uh as a result the industry that really haven't lasted for a hundred years has really turned being turned upside down on the other side it is a gigantic industry so other than housing is probably one of the biggest industry and so the price is also big in the end in the process though the competition is going to become very very intense still you know it does still have that characteristic of being a scale economy as we talked about at the beginning of our dialogue um so the survivors of the winners do need to have a certain uh scale in order to really to win in the end and so it is still early to predict who will be the ultimate winner but it is not early at all to predict those mega trends are here to stay so five years there will be far more electric cars sold we have seen the european countries began to declare a deadline to stop basically gasoline-powered cars china is following that up i think in dual course that we were going to see those magnitudes here to stay and five years from now and that trend will become even more prominent than what it is today but it is very difficult to predict at the ultimate whenever any continue to attract a new entrance at this point but i do think that the ones that really precise unique technology have the scale and have the right strategic would focus do well do you have a sense of which companies those are well i bashed one so so i like my money speaker itself but we're not going to be the only one that's a ruby field but it is a gigantic industry okay so in terms of value investing education you actually played a big role in promoting and advocating value investing from the books to actually you underwrote in this class that we talked about where i went to beijing university and i think it still survives what's your vision for the kind of education that a new investor should embrace and where that education might be available well first of all thank you bruce for uh come to uh teach at the beijing university value investing classes that my colleague jeanne channel and i started uh six years ago and now is six years still running and running farewell and you have played an important role to that and i think our original inspiration for that class was really based on pretty much your class and your classes are pretty much inspired and the continuation of the bank and ben graham's class graham and don and which had among others warren buffet as student and i'm your student it'll be many more much brighter investors coming after us and that's a good thing uh so we're trying to really do our part to really to pass on those that we philosophy the thinking and the practical parts of value investing to the uh to the next generation in a sense uh so in terms of like younger uh students when you started today so i think a few things will be important um when i when i talk to young students and people who started out um trying to get into the field i say several things that is important a you to always adopt a owner's mentality and so i like to really ask a young student or an analyst at our firm basically to imagine all of a sudden that one of your unknown uncle died and handed over 100 ownership to the company to you and that's the business you're going to study so any company think starting point that way and once you really kind of think of your own 100 of it your mentality is totally different so you never know that business existed now you're 100 and you have no idea how to run it you don't know the people will run it what do you do you want to know everything everything you can possibly get your hands on and a lot of the things you know you don't understand you just know the facts you don't understand it but that's okay you're going to continue to learn until you get a hundred of it and even if then because of the constant change you're going to continue to evolve your knowledge of it now if you adopt that mentality study any businesses you have really started the process of becoming real valuable investor so that's the first thing the second thing is you really want to maintain intellectual honesty and that is very very very important you have to be really honest of what you know what you assume would you pretend uh subconsciously and what you don't know um and how do you really know that one of the things that charlie have talked about that i think make the most sense is it we said that i'm never entitled to have a view and two i could find the smartest people on the planet who took the other side of that view and i can argue better that opposition than he does and when i can do that i would be entitled to have a view same thing and applies to investing in a sense that intellectual honesty is a good life philosophy to begin with it is a critical it is a vital when it comes to investment because as i said that the security market almost exists to really point it to really to find your weaknesses your dishonesty your potential um your bushy mushy knowledges and if you do not really process that fundamental attitude of intellectual honesty you'll be destroyed at some point during this uh during your career by the financial market it was almost designed that way to catch you can i can i say something about that because it was better than designed that way every time you buy a security thinking it's going to do well somebody else is selling you that security thinking it's going to do bad and vice versa and one of you is always wrong so you better be sure that you're the one that's on the right side of that transaction well it is there is some zero-sum aspect but not always oh no it's a hundred percent zero sum the average return to all investors in any asset class and therefore in all asset classes is the average return to all those assets it brings out just to take a slightly different view but i'm never going to argue against my professors i'm just going to say let's just agree with disagreement that's okay okay it is a fair point that is a fair point another thing i would say is that uh you you want to really devote as much time as possible uh to a study of the history of the businesses and the history of a great businessmen in the past the more you'll study more companies the better you are when it comes to judgment on good opportunities and the judgment about the fundamental characteristic of the company of interest in you and so i see all three things important to start with the 100 owner mentality to continue to trim yourself to have a high degree of intellectual honesty and lastly to be a really a thorough student of the history of the businesses all three things are really going to be very helpful if you are beginning to get into the field of investment or you want to really improve your game so that's an advice my advice doesn't understand good advice i'm not going to argue with that when you look back over your own career yeah are there things that whether at columbia business school or in your career since then you would have done differently that would have helped you get to where you are today sort of more quickly and more easily yeah well i look back i feel i'm extraordinarily lucky and i feel nothing but gratitude i feel lucky to accidentally step into uh buff his lecture at your class basically the first time he came uh i feel extra lucky that uh when i got into the business and uh that in a striker relationship um was attracting monger i feel extraordinarily fortunate to live in a period of time when both united states and china of going through a fundamental economic growth and provide enormous amount of opportunity that i happen to really know both marketing well and so i i looking back my career but not nothing i feel nothing but really gratitude um but in terms of uh on the [Music] on the on the on the transition from the u.s to china so uh i think a lot of people such as myself included went through a period of time to really try to understand um the nature of the chinese economy and the nature of the chinese market the nature of the chinese company investment in china's companies so one of the key learnings that i have um and it is not that obvious is the role that the chinese government play in that whole question equation if you have been a successful investor in the united states for example or in the development market you tend to come with a set of assumptions about the role of the government and the role of the market participants and when you really look into the chinese market that assumptions you will see a lot of challenges and so you might really from time to time arrive to views that are inconsistent with your own experiences partially because historically the chinese government and the us government western government perform a very different moves and that's one of the key aspect of really investing china really requires a much deeper understanding and also systematic comparison to get rid of those biases and that's why that you can really get rid of this typical global investor going to china either involved abiding your fear or enthusiasm or basically pessimistic kind of calming collapse of a china type of a mentality when things are not going too well and so that is the education the most of international investors particularly when it comes to china would have to really go through and that is important but bear in mind the other aspect to understand the chinese economy is that the nature of of the modern economy is its ability to generate sustained uh compounded economic growth something that is only recently emerged as a human phenomena and this is where we we talk about the zero-sum versus uh versus a minion type of mentality now for the longest period of time that almost all natural or human affairs are characterized by cycles in a sense that everything goes up cycles you know we born basically always increased energy goes from you know hot to cold things from order to disorder great business eventually losses ash so that has been the nature of things and economy going through boom and bust but what something unique happened over several hundred years ago was the beginning of the industrial revolution we began to see this phenomenon of continued sustained compounded economic growth and that is really when that value investing become very important and that's why you'll begin to have a phenomenal record such as the one produced by warren buffett and now by a few other people as well the basic logic behind that as i said over the long term your investment return is likely to approximate the actual business return of the company invested and so the fact that you're capable of generating that long-term result is a reflection of a changing nature economy what really drives that phenomenon is something that is utterly fascinating i literally spent 30 40 years thinking about that until i think i come to a certain knowledge i wouldn't say i really don't know at all but i think what really produced that phenomena is is the combination of free market enterprise way of organizing social economic affairs and combine that one with the invention of modern science and technology the combination of those two produced a modern form of economy it is a paradigm shift so what's happening in china is that roughly around 40 years ago china has really stumbled finally into that magic formula of free market economy now with chinese characteristics of course along with modern science and technology and any economy that has really strike a core and strike that magic magic formula began to produce a phenomenon of compound economic reform now that has to combine with the stability of overall political environment to allow the market to enforce that the new economy to really release that power and that is when sustained uh economic i mean sustained investment record can be possible in china it is it's not always there it's not always possible and often it was a zero sum but i think from that period on that a sustained win-win type of a compounded investment return becomes possible and i notice that i didn't really include the political component of it and most of the uh western observers believe that political democracy has to be part of the uh equation except the full god of that political democracy wasn't there when that phenomenon began to take place in the west in fact the political democracy happened later almost as a result not because of it anyway so that is another layer of understanding the phenomena of the investment opportunities in china it could be interesting okay so what about uh let's just talk briefly in these last eight or so minutes about your personal interest so you've devoted efforts to improving equality and welfare of asian americans and given the recent elevated attention on this community what are you doing and planning to do or think ought to be done for that community well i was really like many people from the asian american community and america that was just utterly dismayed heartbroken over the last year and a half uh that particularly since the later years of the trump administration that get worsened because of the pandemic that this new wave of anti-aging and hate crimes and by all statistics that incidence of racial discrimination against asian americans has dramatically increased over the last year and a half and full variety of different reasons the pandemics and the trump policies the u.s china tension and the systematic historical route the surface to say that many people in the asian american community are living in fears literally physical fears today after being here for so many years of being such an important part of american experiment experiment and you know particularly to the chinese-american community you know after 150 years it feels like the chinese exclusion act is coming back again so so i've been thinking long and hard what can we do to change the paradigm now i had a different experiences when i came to america i had a wonderful wonderful experiences american embraced me with open warm heart and i have gotten an enormous amount of opportunities by columbia university by all the great people that i met a long ways and by the the opportunity i was given to to be successful way beyond my wildest dreams when i first took here as a immigrant not a penny and no nobody doesn't even speak the language to be where i am today and so one thing that i always believed about america is this i think america is not defined by geography it is not defined by race it is not defined by culture not defined by religion america is defined by set of ideas and ideals anyone no matter your race religion culture background if you sign up to that set of ideas and deals can be america and i was one of those who believe in those ideas and ideas and it becomes successful in america and i wanted that experiment to really continue and obviously when you look at history it was never a perfect experiment um and it was often marked by the cleansiness sometimes actually all right crew and malicious if you think about experiences with african americans and all the other minorities but i think that america remains the only country on earth so inspired and such constructed and for that experiment to continue it calls constantly to our better angels inside each one of us and to really restrict the worst instincts of all of us and throughout a different period of time people need to rise up to counter those worst instinct and fight them and face them down and this is one of those period again so i think the entire community of asian americans have to come together the entire american community need to really come together to really fight this wave of anti-asian discrimination so along with the uh a number of wonderful colleagues we are co-founding a new national organization whose mission is to serve asian americans in their pursuit of belonging and prosperity free from discrimination slander or violence and one of the things that our community needs is is enormous amount of funding the statistics tell us that only 0.2 of all philanthropy in america goes to asian-american causes and we want to fundamentally changed man and hopefully with this new organization new group of people we really want to fundamentally change that picture and the other thing is that with the global economy the center of the global economy is shifting from the atlantic ocean to the pacific ocean asian american 20 million strong are going to perform i mean play a increasingly important role to position america as the new pacific economic power and that group of people more than other ones if fully integrate as the very fabric of american society could help lead america to better integrate it with the rising economic ties in asia it's okay that's terrific it's a great note to end on unfortunately we have two minutes left thank you very much for this really encyclopedic and enlightening talk i think i have to turn it back over however to the emcee for the last two minutes right okay because they're on the screen thank you very much thank you it's always a pleasure thank you for really having that class you know 28 years ago i wouldn't i wouldn't know what i'm doing today so thank you okay go ahead hello vivian i think i'm turning that back to you brilliant can you hear us thank you professor bruce greenward and mr lee lu for this valuable conversation this marks the end of this year's columbia china business conference in these four days of discussion we have taken a journey across various dimensions of china's amazing development and exciting future in an age of change and opportunities our speakers have given us a fascinating glimpse of what's to come on behalf of columbia business school our conference team wants to express sincere appreciation to all the guest speakers sponsors media partners and faculty of columbia business school this year's conference is generously sponsored by bank of china hayton international securities tiger brokers johnson and johnson and haito global we appreciate the support from our media partners including yahoo finance senior finance tai chi maxine barron's high central tencent video sub china and many more so lastly thank you audience around the world for your time and participation live from clonevale business school in new york city good morning and good night and see you next year we finished exactly on time welcome to columbia business school the very center of business welcome to the next level of you the columbia mba is more than just advancing your career this is about honing your unique leadership style bringing your visions to reality and delivering them to the world you will be the leader you want to be you will be able to walk into a room any room and solve welcome to new york the global business hub where startups get their start business thrives and game changing strategy gets put into play you will have direct access to today's influencers the entrepreneurs of silicon alley the wizards of wall street the trendsetters of fashion avenue the agents of change welcome to a network a family of over 42 000 alumni let the collaboration begin this is not a sit and learn environment this is grab the reins and lead you belong here you

Channel: Columbia Global Centers Beijing

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Length: 92min 18sec (5538 seconds)

Published: Wed Apr 14 2021