Li Lu’s 2010 Lecture at Columbia

Bruce Greenwald: Warren Buffett says that when he retires, there are three people he would like to manage his money. First is Seth Klarman of the Baupost Group, who you will hear from later in the course. Next is Greg Alexander. Third is Li Lu. He happens to manage all of Charlie Munger’s money. I have a small investment with him and in four years it is up 400%.


Q&A:

Q: I wanted to ask you about BYD. I heard that you thought it was important for them to introduce a model to the US and wanted to know why you thought that.

Li Lu: That might be a better question to ask the BYD chairman than myself. Well, If you are just talking about electric vehicles, you know the key — the heart and soul of the electric vehicle age the heart is the battery. There is the battery, electric motor, and the electric control control panel. The electric motor has been there for 100 years, control system is software that can be improved over time.

The battery is really where you get the biggest appreciation and is what determines the value of the electric vehicle. 100 years before the Model-T was introduced, the competition between electric vehicles and gasoline was not nearly as optimistic. Up and till then, 1/3rd of cars being produced were electric. It wasn’t until Rockefeller got oil extracted easily enough that it worked. Henry Ford was able to make the internal combustion work even though it wasted 85% of the energy. He was able to build the engine and produce automobiles that were cheap enough for people to buy and it took off. That is where you find the real winners.

Now, years later, we know that the way that oil is burned contributes to global warming. If it continues, the planet might still be here but all the human beings might not. Human beings have only been on the planet for a tiny bit of the earth’s history. So there are all sorts of good reasons for electric cars. Battery development has advanced so much that it is now comparable to the price and performance of traditional cars. So now with the help of companies like BYD, the balance is about to tilt towards where performance and price are getting to the level that makes them a desirable alternative. It will be desirable everywhere. Eventually, if you have a car that does all that, it will be sold everywhere.

Q: What about BYD versus others in the industry?

Li Lu: The market will determine that.

Q: Yeah – but why BYD versus others?

Li Lu: Well because we also studied all those other guys. We will see when the winner emerges whether we are right or wrong.

Q: Right – but what did you look at to reach that view?

Li Lu: There are a lot of people who have worked over 100 years making great cars. The technology for building a traditional car has been refined enough to where it can be learned in a short period. The place we are still seeing a curve of continuous rapid improvement is with the batteries for cars. Whoever is leading the charge will have a major advantage. There is really only one company that is a leader in battery manufacturing and automobile manufacturing. There is only one company. To put this together you need a Ford to put that together. So far those two elements need to be put together. It is not an easy process.

Q: We read your profile online. I had a question – do you have any problems when trying to invest in China?

Li Lu: Yeah I do have some difficulty. I did not really see a factory plant at BYD until the end of 2008. I really did not have a better understanding till then. That really causes you to question what it is before you make an investment. With investing, you have to work with imperfect information because you are buying a piece of the future. I did not really get a chance to get more information because the problem in Asia till much later but it did not stop me from making my investment decision. So there is a point, where if you have enough margin of safety– that is why I kept coming back to the elementary concept of margin of safety– you can allow much more uncertainty and unknowns. So the answer of the question is does that stop you from making the investment? No.

Q: So I did some research on lithium ion batteries, and I saw that BYD has a manufacturing advantage with consumer batteries. But I saw that automobile batteries are much more complex. I did not think that the idea of a good consumer battery manufacturer + an automobile maker made much sense. So when Buffett looked at the stock maybe it was a better deal but today it is this dream of vehicles that is really priced in. It does not feel like a good value investor stock. So why would you own it today?

Li Lu: Well that is interesting. One of the most fascinating things about being an investor is that surprises are part of the game. When you get into situations like BYD, you see lots of good surprises. Chuanfu and his team have this fabulous culture, everything people thought they knew turned out to be a few years late. He got into battery manufacturing in that particular way because he really had no other option. He had no money, he only had $300,000 in venture capital funding before IPO and that was it. He raised money in an IPO and Buffett gave him $200M, now they have 160,000 employees. $6-7B in revenues, $500M in net profit. It is amazing. So he has this ability to adapt in a competitive environment. He has demonstrated that ability again again and again. The way he does automation is far cheaper than anyone else and more reliable. He continues to surprise me with his ingenuity, to figure out ways to do something better than everyone else. What he is currently doing is very different than what everyone else has done. At the end of the day, you might look at what he has done.

So how do you look at it as an investor with imperfect information? Well I suggest you look at what he has accomplished. 8 years ago I had no idea they would go into the automobile or laptop or cellphone battery business. So that demonstrates how he is. This investment is not easy to understand because it is changing so fast, at such a large scale. An almost unheard of speed. Their manufacturing capabilities will double soon. This year they will hire 10,000 college graduates, 8 or 9 thousand engineers. The scale is almost unparalleled. So this is why the study of history, of all the great corporations will give you a good insight in seeing what will happen with BYD. I suggested that we start with GM and analyze its performance every 5 years for 100 years to understand at least one aspect of BYD’s business.

Q: What is the difference between being a top political criminal in China versus a hedge fund manager today (referring to the ire directed at Wall Street)?
Li Lu: I don’t consider myself a criminal. I don’t think China considers me a criminal. What I think we are doing today with our investment in BYD in China is really helping China march towards a modern era of prosperity. BYD is providing a solution to both China and the US, to migrate from the past to a way that gets us out of the unsustainable carbon age that we live in. Global warming is a vital concern to every human being, so China is providing a great contribution to everybody with BYD. America has had a great history of invention and here is a great company in China that is about to make a major contribution to human civilization with cheap electric vehicles and solar power.

Ultimately we will have to get our energy from the sun. Most of the energy, even fossil fuels (plants that die and then go into the ground), all originally come from the sun. So if you can figure out a way to take energy from the sun and power vehicles, while using batteries to store it, inexpensively — will really make renewable energy power everything. The combination of those things holds the key to the future of industrial civilization that we are about to embark on. We didn’t set out with BYD with this in mind, it just happened that way. With great companies, it only looks logical in retrospect. Think about how Bill Gates started Microsoft. I don’t think he knew up front that he would take the entire market — at that time it did not exist. It is the same way with our investment in BYD. Ultimately, I think finding an inexpensive way to store energy that we harness from the sun will be a huge contribution for both China and the US, but more broadly our entire civilization.

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Link to the Video

Thanks to Corner of BRK & Fairfax , Value Investing World and Street Capitalist

Chinese Foreword by Li Lu (Chinese Version of Poor Charlie’s Almanack)

一个偶然的契机，我遇到了终生的良师益友查理·芒格先生。初识查理是我大学刚毕业在洛杉矶投行工作时，在一位共同朋友的家里第一次见到了查理。记得他给人的第一印象是拒人于千里之外，他对谈话者常常心不在焉，非常专注于自己的话题。但这位老先生说话言简意赅，话语中充满了让你回味无穷的智慧。

【《中国企业家》杂志】20多年前，作为一名年轻学生只身来到美国，我怎么也没有想到后来竟然从事了投资行业，更没想到机缘巧合有幸结识了当代投资大师查理·芒格先生。2004年，芒格先生成为我的投资合伙人，自此成为我终生的良师益友。这样的机遇恐怕是过去做梦也不敢想的。

1996年我从哥伦比亚大学毕业，并于1997年创立我的投资公司，自此开始了我的职业投资生涯。从那时到现在，绝大多数个人投资者和机构投资者在投资理念上基本上还是遵从一些“坏理论”。比如他们相信市场完全有效理论，因而相信股价的波动就等同真实的风险，判断你的表现最看重你业绩的波动性如何。而在我看来，投资股市最大的风险其实并不是价格的上下起伏，而是你的投资未来会不会出现永久性的亏损。单纯的股价下跌不仅不是风险，简直就是机会。不然哪里去找便宜的股票呢?然而我发现，表面上那些成名的基金经理接受巴菲特/芒格的理论，而且对他们表现出极大的尊重，但在实际操作上却根本是南辕北辙，因为他们的客户也是南辕北辙的。他们接受的还是一套“波动性就是风险”、“市场总是对的”这样的理论。

直到我们认识的第七年，在2003年一个感恩节的聚会中，我们进行了一次长时间的推心置腹的交谈。我将我投资的所有公司，我研究过的公司以及引起我兴趣的公司一一介绍给查理，他则逐一点评。我也向他请教我遇到的烦恼。谈到最后，他告诉我，我所遇到的问题几乎就是华尔街的全部问题。整个华尔街的思维方式都有问题，虽然伯克希尔·哈撒韦已经取得了这么大的成功，但在华尔街上却找不到任何一家真正模仿它的公司。如果我继续这样走下去的话，我的那些烦恼永远也不会消除。但我如果愿意放弃现在的路子，想走出与华尔街不同的道路，他愿意给我投资。这真让我受宠若惊。

我于是进入到投资生涯的又一个黄金时期。我无须再受华尔街那些投资者各式各样的限制。虽然数字依然上下波动，但最终结果却是大幅度的增长。新的基金从2004年第四季度至2009年底，除去营运成本外，每年的复合回报率超过36%。而自1998年1月原基金创建开始计算，每年的复合回报率则超过29%。12年间，回报增长超过20倍。

一次，一位漂亮的女士坚持让查理用一个词来总结他的成功，查理说是“理性”。然而，他对理性有更苛刻的定义。正是这样的“理性”，让他具有敏锐独到的眼光和洞察力，即使对于完全陌生的领域，他也能一眼看穿事物的本质。巴菲特把查理的这个特点称作“两分钟效应”——他说查理比世界上任何人更能在最短时间之内把一个复杂商业的本质说清楚。伯克希尔投资比亚迪的经过就是一个例证。记得2003年我第一次同查理谈到比亚迪时，他虽然从没有见过王传福本人，也从未参观过比亚迪的工厂，甚至对中国的市场和文化也相对陌生，可是他当时对比亚迪提出的问题和评论，今天看来仍然是投资比亚迪最实质的问题。

查理喜欢与人早餐约会，时间通常是七点半。记得第一次与查理吃早餐时，我准时赶到，发现查理已经坐在那里把当天的报纸都看完了。虽然离七点半还差几分钟，但让一位德高望重的老人等我让我心里很不好受。第二次约会时，我大约提前了一刻钟到达，发现查理还是已经坐在那里看报纸了。到第三次约会，我提前半小时到达，结果查理还是在那里看报纸，仿佛他从未离开过那个座位，终年守候。直到第四次，我狠狠心提前一个钟头到达，六点半坐那里等候，到六点四十五的时候，查理悠悠地走进来了，手里拿着一摞报纸，头也不抬地坐下，完全没有注意到我的存在。以后我逐渐了解到，查理与人约会一定早到。到了以后也不浪费时间，会拿出准备好的报纸翻阅。

查理非常欣赏孔子。我有时会想，若孔子重生在今天的美国，查理大概会是其最好的化身。若孔子返回到2000年后今天的商业中国，他倡导的大概会是：正心，修身，齐家，致富，助天下吧!

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Set Aside Fears of Inflation -- Just for Now

CLIENTS CAN ALWAYS COUNT ON RAY DALIO AND HIS TEAM at Bridgewater Associates to consider every angle in sizing up the global financial condition and find money-making positions, no matter what the environment. With a special focus on the global credit and currency markets, the firm manages about $75 billion from its base in Westport, Conn. -- for governments, central banks, pension funds and endowments. Recently, a lot of attention has been paid by various bloggers to certain offbeat management practices at Bridgewater that -- quelle horreur! -- en-courage truthfulness and openness and constructive criticism as a means to excellence. A better focus might be the firm's outstanding performance. What Dalio is focused on at the moment is as follows.

Barron's: We last spoke in February 2009, exactly a month before the bottom in the U.S. stock market. A lot of money has been printed.

Dalio: Governments always print money. Last year was very similar to March of 1933, although we hadn't contracted for nearly as long, and the Federal Reserve was much quicker on the trigger. They didn't let the economy get so bad; they moved a lot faster and in large quantities. The whole world did -- all the major central banks and all the major governments did what was done in March 1933. Classically, there is big monetary stimulation and big fiscal stimulation, and we had that globally in a magnitude that we had never had before.... It caused the stock market to retrace about 60% of its decline, and it caused the U.S. economy to retrace 40% of its decline. But it did not produce new financial assets. There has been very little new lending. The stimulus produced very little in the way of economic activity.

A year ago you thought it wouldn't be until late 2010 that we would get the best opportunity to buy stocks.

The government response was quicker and larger than I thought it would be. But the boundaries of the old highs and the boundaries of the lows in the stock market and in the economy will be with us for a long time. If there were to be a decline in economic activity below the prior low, it would be intolerable, and central banks would print money again. The risk to that right now is that public sentiment has turned more negative about perceived bailouts. There is a lot of criticism about saving financial institutions and running a big budget deficit, but if the government didn't do those things we would be in a terrible situation. It will be impossible to stimulate that way in the future because politically it is untenable. That's a risk because, between now and 2012, the economy will probably go down again, and it will be important for monetary policy and fiscal policy to be able to be stimulative, and for the Federal Reserve to be able to purchase assets again.

Are you suggesting we will experience something of the magnitude of 2008-09?

No, that won't be allowed to happen again, although, inevitably, there is another recession out there. It will probably come sooner than most recessions do. Usually, there is about five years between recessions, but for various reasons related to the size of the debt, the next recession is going to come sooner. We are in the equivalent now of a quantitative easing-induced cyclical recovery. But it is a fragile recovery, and credit growth is not picking up very much, and it goes back to the fact we still have too much debt. We have not reduced our debt burdens in any way significantly. What we've done is to largely roll them to the vicinity of 2012 to 2014. Corporate balance sheets are much, much better because they extended the maturities of their debt and slashed expenditures by laying off workers. I would be shocked if we saw new lows in the economy, but you can't go to new highs anytime soon, either.... The average American's net worth is less, and incomes are less and so the amounts they can leverage will be less -- so for a long time spending rates will be less than they were at the peaks.

How do you view current developments in Europe?

Europeans are faced with the same three choices we were facing in dealing with debt -- print money, redistribute money, or restructure. The European situation is a particularly risky one for a number of reasons. One, the size of the debt dwarfs that of any other debt crisis. It dwarfs the Latin American crisis. It dwarfs the Asian Contagion. These are enormous, enormous amounts. A lot of attention is paid to the sovereign debt, but there are also big private-sector debts. It doesn't make much difference whether it is government or private, there is way too much indebtedness in these countries....

It's a very frightening situation because there is a risk here that the Europeans will not move decisively or quickly enough. There is a pulling back of capital at a time when the need for capital is greater. There is rollover risk. Spain, for instance, has to roll over 40% of its external debt, which is about $700 billion to roll over, and because it is running a current-account deficit, it actually has to borrow more than that, which is almost another $80 billion. Just the government has to roll over about 20%, or about $125 billion. Spain will have to borrow more than it has ever borrowed before in the next year at the same time as people's inclination to lend to Spain is reduced. The government debt of all the peripheral countries in the euro zone that has to be rolled over in the next three years is the equivalent of $1.9 trillion, and that doesn't include the private-sector debt.

What's your response to the International Monetary Fund program with the European Union?

It is a good program. It lines up nearly a trillion dollars and puts the IMF in a leadership position. However, it is doubtful whether the European Union will allow the IMF to take an unimpeded leadership role in arranging debt-adjustment programs. Even if they do, the process will be painful because, any way you slice it, countries in the euro zone have to cut expenditures. It will be painful for Europe for 10 years in the way it was to Latin America and Japan. The British will happily say, "Thank God we have never joined the euro zone." The English also have way too much debt, but they have an independent currency and can print money and avert a debt crisis. Debtors with no ability to print money are the ones in trouble.

What's your view on emerging markets?

The emerging world has not reached its debt limits and is competitive because labor is cheaper and there are high levels of investment. They're roaring ahead. They are at new highs in economic activity. Yet, we are tied together with the same monetary policy because China has a currency peg to the U.S., essentially linking our interest rates. We are also tied together through trade and investment.

The emerging creditor countries should be tightening monetary policies, but their ability to do that is limited by exchange-rate linkage. Here is China, with a nominal growth rate of 12%to 14%, with interest rates about the same as ours. In China, it is a sure thing you don't want to deposit your money to get that interest rate, and it is a sure thing you want to borrow and buy a piece of the economy.

But China has made some attempts to tighten.

Yes, they are moving to tighten without significantly changing interest rates. They are raising reserve requirements and they are imposing administrative controls, essentially trying to limit bank lending. They are trying to control credit, but they are having a problem controlling the creation of money. The risks of tightening increase as time passes. They will, in one fashion or another, tighten more and more. But I don't think there will be a major change in the exchange rate, even though it is in their interest.

You have been concerned about U.S.-China relations.

We are entering a period of time in which relations will be more challenging for the U.S. and China. It isn't healthy that the two biggest countries in the world have a very big debtor-creditor relationship. There is going to be a tendency by both countries to blame each other and be antagonistic. There will be trade disputes and currency disputes. I don't think the deficits will be resolved, but I think there will be growing protectionism in the U.S., and implied threats by the Chinese regarding capital flows.

How are your portfolios positioned?

Our portfolio is mostly skewed to Treasury bonds, gold and emerging-market currencies, especially Asian currencies. We also hold commodity assets that are limited in supply and that high-growth emerging countries need. I want to minimize my exposure to the major developed countries' currencies -- the U.S. dollar, the euro, the British pound and the yen -- because those countries have a lot of debt, and they are going to need to print more and more money and will have more sluggish growth rates. I prefer the yen to the others. However, none of these can get too far out of line with the others, and when there is downward pressure on one, there is pressure on all. Just as the notion that the G-7 countries represent the major world powers is obsolete, it is also an obsolete notion that their currencies are the major reserves of wealth.

The depreciation of the major currencies and the printing of money will not cause a significant general level of inflation anytime soon.

Explain why the printing of money won't cause inflation.

The printing of money will offset the deflation that is coming from the weak demand for goods and services due to weak credit growth. For example, in March of 1933 the U.S. printed a whole lot of money, and that had the effect of converting deflation into modest inflation, but not a high rate of inflation.... My point is, in developed countries there is too much of most things at the moment, and that's creating a deflationary environment. There is too much manufacturing capacity. There is too much labor. There is too much housing stock. As Europe's economy weakens and its debt crisis worsens, the printing of money does not mean that it will produce an accelerating inflation because simultaneously there is also less being purchased, and the surpluses are already causing deflationary pressures. That is why, contrary to almost everybody's belief, I believe the bonds in countries that can print money will be good investments.

Thanks, Ray.

Link to the Article

BYD's latest product

Solar Energy

Overview

In green energy industry, BYD provides Solar Module (Started from BYD Silica Mine to solar module assembly), Inverter, Li-ion battery and LED lighting. Based on these technologies, BYD has developed electric vehicles, energy storage system, solar power system, Hybrid energy system and other green energy solution. In the future, BYD will continue to lead the new energy revolution, to help people get rid of environment issues.

Features

■ High efficiency

■ Excellent optical performance 

■ Steady output voltage in direct current 

■ Easy to be installed

Warranty

■ 5 years for product

■ 10 years on 90% for performance

■ 20 years on 80% for performance

Recommended Applications

■ Roof top systems

■ On-grid commercial systems

■ On-grid utility systems

■ Off-grid commercial systems

■ Off-grid utility systems

Product list

Module List:

Article	Description	Dimensions (W*H*D)	Solar Cell Qty(pcs)	Weight
BYD 080P5-18	80 Watt	1199mm×552mm×35mm	5inch solar cell 36 (4x9)	8Kg
BYD 085P5-18	85 Watt	1199mm×552mm×35mm	5inch solar cell 36 (4x9)	8Kg
BYD 090P5-18	90 Watt	1199mm×552mm×35mm	5inch solar cell 36 (4x9)	8Kg
BYD 125P6-18	125 Watt	1482mm×676mm×35mm	6inch solar cell 36 (4x9)	13Kg
BYD 130P6-18	130 Watt	1482mm×676mm×35mm	6inch solar cell 36 (4x9)	13Kg
BYD 135P6-18	135 Watt	1482mm×676mm×35mm	6inch solar cell 36 (4x9)	13Kg
BYD 140P6-18	140 Watt	1482mm×676mm×35mm	6inch solar cell 36 (4x9)	13Kg
BYD 165P5-36	165 Watt	1580mm×806mm×35mm	5inch solar cell 72 (6x12)	15.5Kg
BYD 170P5-36	170 Watt	1580mm×806mm×35mm	5inch solar cell 72 (6x12)	15.5Kg
BYD 175P5-36	175 Watt	1580mm×806mm×35mm	5inch solar cell 72 (6x12)	15.5Kg
BYD 180P5-36	180 Watt	1580mm×806mm×35mm	5inch solar cell 72 (6x12)	15.5Kg
BYD 215P6-30	215 Watt	1640mm×992mm×50mm	6inch solar cell 60 (6x10)	20.5Kg
BYD 220P6-30	220 Watt	1640mm×992mm×50mm	6inch solar cell 60 (6x10)	20.5Kg
BYD 225P6-30	225 Watt	1640mm×992mm×50mm	6inch solar cell 60 (6x10)	20.5Kg
BYD 230P6-30	230 Watt	1640mm×992mm×50mm	6inch solar cell 60 (6x10)	20.5Kg
BYD 235P6-30	235 Watt	1640mm×992mm×50mm	6inch solar cell 60 (6x10)	20.5Kg
BYD 240P6-30	240 Watt	1640mm×992mm×50mm	6inch solar cell 60 (6x10)	20.5Kg
BYD 255P6-36	255 Watt	1956mm×992mm×50mm	6inch solar cell 72 (6x12)	24Kg
BYD 260P6-36	260 Watt	1956mm×992mm×50mm	6inch solar cell 72 (6x12)	24Kg
BYD 265P6-36	265 Watt	1956mm×992mm×50mm	6inch solar cell 72 (6x12)	24Kg
BYD 270P6-36	270 Watt	1956mm×992mm×50mm	6inch solar cell 72 (6x12)	24Kg
BYD 275P6-36	275 Watt	1956mm×992mm×50mm	6inch solar cell 72 (6x12)	24Kg
BYD 280P6-36	280 Watt	1956mm×992mm×50mm	6inch solar cell 72 (6x12)	24Kg

Cell List:

Type of cell	BYD125P	BYD156P
Dimensions	125×125 ± 0.5 mm	156×156 ± 0.5 mm
Wavg	2.55W	3.97W

BYD 156P	Mechanical Data and Design
Product	Multicrystalline silicon solar cell
Dimension	156mm×156mm ± 0.5mm
Thickness	200μm±30μm
Front	1.8 mm wide bus bar (silver) Silicon nitride antireflection coating
Back	3.5 mm wide soldering pads (silver /back aluminum) surface field (aluminum)

Taken from

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