Li Lu Portfolio Magic: A Blueprint for Investors

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Jacob Wolinsky
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Li Lu is a renowned Chinese-born American value investor. He was inspired to get into investing after he attended a lecture at Columbia University by Warren Buffett. In 1997 he founded Himalaya Capital Management which is known for its disciplined and value-oriented approach to investing. Li Lu’s portfolio holdings are concentrated. His portfolio currently has stakes in 6 companies.

Li Lu has divided his portfolio into two almost identical halves with concentrations in the technology and finance sectors. The total value of the portfolio is currently at $2.1 billion, and the biggest holding is Alphabet. In it, he holds Class C and Class A stocks. Besides Alphabet, he is holding stakes at Bank of America, Apple, Berkshire Hathaway, and East West Bancorp.

His career is an inspiration for many because Lu managed to accomplish so much through his determination and focus. From a student that came to the United States with a limited understanding of the language, he managed to meet Buffett, and Munger, and become one of the most respected value-oriented investors.

Li Lu’s Portfolio Holdings

Major Stock Positions

Li Lu currently operates a highly concentrated portfolio, comprising only 6 holdings. His portfolio is currently valued at $2.1 billion, and the stock share consists of these holdings:

 

li lu portfolio performance

 

  • Bank of America Corp (NYSE:BAC) with 28.76% of the portfolio

Li Lu is currently the 4th biggest owner of Bank Of America shares, and he owns 18.1 million shares. He started buying shares back in Q 2020 and he is still stacking up his shares, which are currently valued at $593 million. In the last year, BoA stocks had some minor fluctuations, but values at the beginning and end of the year were almost the same, valued between $35 and $36.

  • Alphabet Inc Class C (NASDAQ:GOOG) with 21.3% of the portfolio

Li Lu owns 3.04 million Class C alphabet shares currently valued at $439. He bought them on two occasions investing a total of $273 million, which means that these shares netted a gain of 61%

  • Alphabet Inc Class A (NASDAQ:GOOGL) with 17.6% of the portfolio

These premium Alphabet shares take the overall 3td position in Li Lu’s portfolio. He bought them two times during 2022 and he is holding onto them. Li Lu invested in this holding a total of $263 million, and it is currently valued at $363 million. When translated into percentages, these premium stocks brought Lu Li a gain of 38% so far.

  • Berkshire Hathaway Inc Class B (NYSE:BRK.B) with 15.83% of the portfolio

Lu Li invested in B-class shares of Warren Buffett’s holding in Q3 2021. When comparing Berkshire Hathaway Class A with Class B stocks, we can see that they have almost identical historical performance, and the biggest difference is in the price of the stocks. By investing in this holding Li Lu is probably looking for a way to diversify his portfolio.

He bought 898 thousand shares which cost $252 million. Now their value has risen significantly to a figure of $326 million, bringing a total gain of %29. These shares saw a gradual increase in value during 2023. They started at $308.9 and ended at $356.66.

  • East West Bancorp Inc (NASDAQ:EWBC) with 9.67% of the portfolio

One of the newest Li Lu holdings was formed in Q1 2023. He bought 480 thousand shares for $183 million. He is currently the second largest shareholder of East West Bancorp behind Ken Griffin. This is the 5th largest holding in his portfolio currently valued at $199 million. In just a year, the shares gained in value from $65.90 to $71.95 bringing him a gain of 9%.

  • Apple Inc (NASDAQ:AAPL) with 6.8% of the portfolio

Li Lu first invested in Apple back in 2012 after they released Apple 5. Since then he sold out all his shares, but in 2020 he again started investing in one of his personal favorites. He once bought 760 thousand shares and he has been holding them since. In Q4 2020 he invested $91.4 million, and the share today is worth $141 million. Translated into percentages, he earned a gain of 55% until now.

Notable Investments

Among others, Berkshire Hathaway (BRK.A) is one of the crucial holdings in Li Lu’s fund Himalaya Capital. Charlie Munger was a keen admirer of Li Lu’s investment philosophy, often calling him the Chinese Warren Buffett. The respect goes in both directions since Li Lu looked up to both Buffett and Munger from the beginning of his investment career.

In one moment, Li Lu was the front runner for managing Buffett’s portfolio once he stepped down from his duties. Soon after Li Lu himself resigned from that race, and decided to move his investment career in the other direction.

So it doesn’t come as a surprise Lu’s keeps Berkshire Hathaway shares as a part of a big holding.

Li Lu was one of the first investors that introduced major U.S. investors to Chinese car makers. He recommended to Buffett and Munger the BYD Company, today’s biggest electric car, truck, and bus manufacturer in the world. He owned 2.5% shares of the company. Today, Berkshire Hathaway is the single largest shareholder of BYD with 7.98% owned shares.

Another example that is worth mentioning is Li Lu’s investment in Gazprom during the 90s and the breakup of the USSR. In that period the Russian economy plummeted, and devaluation of the currency reached a peak of 90%.

These factors allowed investors willing to take the risk to buy shares at huge discounts. Li Lu earned massive returns from the Gazprom investments, mainly from ridiculously low prices of stocks. As the ’90s came to an end, the price of stocks rose, and investors who bought shares 5 years earlier earned ten or more times more than they invested.

Sector Allocation

His currently concentrated portfolio shows that Li Lu has a focus on the tech and finance sectors. Financial giants Bank of America and East West Bancorp take 38.43% of their portfolio. The tech industry is prevalent in Lu’s portfolio with a stake of 40.2%. Those 40.2% encompasses shares of Alphabet and Apple. The rest of the portfolio is the holding in the Berkshire Hathaway holding company.

Geographic Diversification

Li Lu is known for his preference for geographical diversification. In the past, he often invested in companies beyond the United States. Commonly he chose companies from China to invest in. Besides investing in the electric vehicles manufacturer BYD, he also invested in China’s e-commerce giant Alibaba, several times in the past.

Li Lu’s Investment Philosophy

Li Lu’s Approach to Value Investing

Li Lu is known as an investor utilizing value investing strategies. Throughout his career, he was often searching for undervalued companies trading below their intrinsic value. He also digs deep when conducting company analysis, trying to find potential in a company. He knows well enough that low stock price is not the only factor that drives the sales.

From his current portfolio, we can easily see that he insists on a long-term investment horizon. He rarely pays attention to current stock value and frequent short-term fluctuations in price. From his experience, he prefers investing in companies that can bring long-term returns.

Some aspects of value investing he heavily relies on, like margin of safety and compound returns. He uses the margin of safety as a risk management strategy to protect his portfolio from sudden market surges. Also, since he prefers to hold onto holdings for a long, he enjoys capitalizing on compound returns.

However, he is often critical of value investing strategy and points out that rarely follows these principles by the book. While he understands the importance of deep analysis, he says that rarely will anyone invest in a company based on its fundamentals, but will rather look at the stock price. He emphasizes the ability to predict price fluctuations because then you will know the right moment to act.

One of his pieces of advice regarding maximizing returns through value investing is based on going through history. An investor should go through the market history and identify periods when it went to extremes in a particular sector. Then find what companies provided the maximum margin of safety, and managed to come on top. From these examples, you can learn how to identify stocks that are trading at low valuations today.

He also has his view on the margin of safety. Investors when calculating the margin of safety look at the P/E and P/B multiple of the company to determine if the company is over or undervalued.

His take on this is “if the quality of the asset is very high, your demand for the asset will be low. You need to have an insight as to what those assets could generate for you”. This practically needs the investor to not solely focus on the margin of safety, but to learn the company fundamentals. That way you can anticipate what that holding could bring in a specific time frame.

Take A Look At 3 Key Concepts In Value Investing – Li Lu:

Investment Principles and Guidelines

Besides some value investing principles that Lu holds onto, he also points out the importance of understanding the market. He several times mentioned that the market is not perfect, but you need to learn how to understand it. Through the market, you will sell your stocks, and to do that, you need to know how the market functions.

Once you understand that the market is not perfect, Lu advises to avoid trading frequently. By understanding the market you need to know to identify the specific timing when it is good to invest. His preferred investment is to bet rare and big. Lu doesn’t hold more than 20 holdings in his portfolio, and he likes to keep it concentrated.

This can be seen as a contradiction that investors were always attached to. Diversification was seen both as a risk management tactic, and a way to reach higher returns. But, Lu has stuck with his investment philosophy through most of his career, and he is not backing down.

Lu mentioned in several interviews that he enjoys the most when he identifies a stock for life. These opportunities rarely happen, but when they do, he rarely gives up. To be sure that you found a stock for life it should combine a cheap price on the asset, the fundamental quality of the asset, and the chance to bring constant returns on a compounded growing basis.

Take A Look At Li Lu: How I Got Started In Value Investing?:

Focus on Undervalued Companies

Identifying Undervalued Stocks

A solid part of Li Lu’s investment approach is identifying undervalued stocks. He is ready to dig deep through companies’ financial reports, researching their competitive landscape, and identifying potential factors that could bring an edge.

What also helps him in finding hidden gems, is that he is ready to invest where others wouldn’t dare to. Although sector condition is important, Lu is ready to invest in a sector that currently doesn’t show much promise. He trusts his research and is willing to see chances where others see only risks.

Some of the best examples where we can see the success of his approach are these companies:

  • BYD Company (OTCMKTS:BYDDF). Lu discovered this at the time a small Chinese company focused on the production of electric vehicles and batteries. He purchased stocks when they were worth next to nothing and later sold them when BYD became a powerhouse. Today amongst the biggest investors in BYD are Buffett, Western Capital Group, and The Vanguard Group.
  • Vale SA (NYSE:VALE). Lu invested in this Brazilian mining company’s stocks at their lowest value when commodity prices were low. Once the market turned around, and mining products gained value, Lu harvested major returns.
  • Hanwha Solutions Corp (KRX:009830). Another gem hidden in the eyes of the majority of investors. Lu, since his background often found Chinese and South Korean companies that had the potential to make it big. This South Korean company, although complex in structure, had strong fundamentals, and brought Lu significant returns.

Investment Process and Criteria

How Lu chooses his investment targets can be seen by navigating one of the famous case studies that he discussed at a Columbia University lecture.

He started the identification process by going through The Manual of Stocks. He immediately jumps to 52-week lows. He takes his time trying to get out of that one page as much as possible.

One day in 1998 clothing company Timberland caught his eye. The whole business was valued at around $300 million at its book value, after a 52-week low. He found this interesting and decided to go deeper into analysis. He wanted to find what is valued at $300 million.

Almost all of that $300 book value was working capital. Since it is a retail company, the majority of that is inventory of goods for the season. He then looked at the previous two years and found out that the company collected around $100 million at the end of the quarter. It had $200 million in liquid assets and an additional $100 million in buildings. That provided solid downturn protection.

The next thing to factor in is how much the company is earning. To calculate that Lu identified pre-tax and pre-interest earnings. Then he compared it with the unleveraged capital needed for the business. In sales that was about $800 to $850 million. Its operating margin was 13% ending up with $110 million in pretax earnings per year.

So he considered all these figures and found that the company has $200 million in liquid assets and $100 million in buildings and the capital used for business was $200 million. That means that the return on capital was about 50%, which means that there is potential.

The problem was that the whole retail sector suffered from the Asian financial crisis. Lu then checked how much international sales took off the total Timberland sales. It was at a solid 27%. But, as for the Asia market, it was only 10%. This means that even if the sales in Asia dropped to 0 it wouldn’t mean much in the big picture.

The company was highly insider-owned since it was a family company. They had shareholders that raised lawsuits due to missing earnings guidance. He investigated deeper and was there a chance to get to the family and talk. It turned out that the son of the owners had the same friends as Lu. He investigated the family and it turned out they were honest.

Lu put all his findings on paper and saw a good company with growing sales, high returns on invested capital, and low downside risks. All these factors point to a potentially good investment.

He invested big, and it turned out to be a great investment decision. Over the next two years, the stock value rose by 7 times.

Risk Management Strategies

As a value investor, Li Lu always points out the importance of the margin of safety. He advocates for identifying potential investments with the largest margin of safety, so it can provide a massive barrier against potential risks.

One of the concepts of value investing is understanding and trusting the company’s fundamentals. But, investors cannot control so many different factors. That is why the margin of safety needs to be concrete. In case management messes up, there is the MoS as a self-defense mechanism.

Although a concentrated portfolio may seem like the complete opposite of risk management, Lu’s deep analysis and convictions in the chosen companies mitigate risks. Often he points out that a really good investor should trust his hunch. If you are scared of the crowd you will never be a good investor.

As one of his biggest regrets, he mentioned a lack of belief in himself when he refused to invest in a company in which he had very detailed insight, just because no one else wanted to invest in it. So, deep analysis and knowledge that he chooses the right companies also works as a risk management technique.

Deep analysis acts as a risk management strategy in value investing. This can be seen from many examples, starting with Benjamin Graham, and moving to Warren Buffet, and it can be seen in the Li Lu example. By identifying fundamentally sound companies he is making sure that they have stable cash flow, capable management, and competitive advantages.

From there he invests in the long term and follows the value investing approach. He is not swayed by sudden market twists, because he knows that a good company will come up top.

A final part of the risk management strategy is the exit strategy. An investor of Li Lu’s reputation knows when it is time to get out. This can be seen from the investment into BYD. He invested early and big, while rarely picking up them. After they reached their peak, he sold the whole holding, earning him massive returns.

Li Lu Performance Evaluation

Evaluating Li Lu portfolio performance can be tricky, due to several factors. As the first, and most obvious Lu keeps most of his investment operations as private as possible, making it difficult to find relevant performance data.

Since Lu is a value investor, using traditional benchmarks to measure its performance may be misleading. This is due to the different aims of his investment approach, and different risk-reward landscapes that surround this investment strategy.

But, from publicly available data we can conclude that since Lu’s fund inception had managed to achieve over 30% compound annual returns. The peak performance Lu’s portfolio achieved during the whole of 2021 and Q1 and Q2 2022. In the last year, returns dropped by around 10% but were still over 30% margin.

Influence on Value Investing

Li Lu is one of the most successful value investors, an approach that is not very popular in the investing world. His success story shed some light on this strategy, and it has gained quite a few followers. He advocated for looking beyond the current share price and focusing on the fundamentals.

When compared to other value investors, he is often overlooked. He is mostly responsible for this because he likes to keep a low profile. But, due to his background, he had a major impact on American investors by introducing them to Chinese companies. Since then, many different holding and hedge funds have gone on a buying spree of Chinese companies.

Lu likes to share his insights and knowledge through lecturers, writings, and interviews inspiring a new generation of value investors. He also frequently mentioned that he learned the basics of value investing from Warren Buffett, and learned from the pioneer, Benjamin Graham.

One of his key tips to all investors is to be ready to invest in dirt-cheap stocks if they can prove that the companies have something to offer in the long term. That approach came from the beginnings of value investing. Lu saw that someone needs to keep reminding people how much they can earn by just doing good fundamental research.

Himalaya Capital Management

Himalaya Capital Management is an investment company founded by Li Lu in 1997. The base of operations is Seattle, Washington and it reflects Li Lu’s value investment approach. Li Lu and his partners are focused on locating value investing opportunities both in the United States and China.

Through his work in Himalaya Capital, Li Lu opened a door for American investors to the Chinese market. This evolved into a trend that is still active.

While looking for potential investment opportunities Li Lu emphasizes strong company fundamentals, that have competitive advantages, and a responsible management team. Himalaya Capital’s portfolio is highly concentrated, rarely owning more than 15 to 20 holdings in one moment.

By utilizing Li Lu’s skillful approach Himalaya Capital has been for decades one of the best-performing funds in the world. They are averaging 30% returns annually, while in recent years those percentages are even higher.

FAQs

What Companies Does Li Lu Own?

Li Lu currently owns shares in 5 companies:

  • Bank of America
  • Alphabet (Class A and C shares)
  • Berkshire Hathaway
  • East West Bancorp
  • Apple

Does Li Lu Own Alibaba?

Li Lu doesn’t own any Alibaba shares. He included this company in his portfolio on two occasions. The first time it was in Q1 2018 selling his shares in Q4 2019. The second time he bought shares in Q1 2020 and sold it very soon in Q2 the same year.

When Did Charlie Munger Invest in Li Lu?

Charlie Munger met Li Lu in 2003 at Thanksgiving lunch and was impressed by him. When in 2004 Li Lu started a new fund, Munger backed him with his money.

Final Thoughts

Benjamin Graham was regarded as a father of value investing. He was a tutor of Warren Buffett, which is often regarded as his crucial disciple. Li Lu was immensely impressed by the work of Buffett and his partner Charlie Munger. All of these people were considered to be the top value investors in their prime. Li Lu is today maybe the biggest influence on young investors to learn and utilize value investing principles.

But, just like Buffett adjusted Graham’s approach, so did Lu. He is not following Graham’s recommendations in the book, but he is a believer in investing in good companies. That is why he emphasizes the importance of deep analysis and margin of safety. From his long-term and concentrated approach, we can learn more than a thing or two. But, if we decide to follow him, we should be ready for his by today’s standards, unconventional approach.

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Jacob Wolinsky is the founder of HedgeFundAlpha (formerly ValueWalk Premium), a popular value investing and hedge fund focused intelligence service. Prior to founding the company, Jacob worked as an equity analyst focused on small caps. Jacob lives with his wife and five kids in Passaic NJ. - Email: jacob(at)hedgefundalpha.com FD: I do not purchase any equities to avoid conflict of interest and any insider information. I only purchase broad-based ETFs and mutual funds.