Civilization, Modernization, Value Investing and China
Published in Chinese only; no English edition exists.
Summary
Li Lu runs Himalaya Capital, is closely associated with Charlie Munger, and manages money that includes Munger family capital. This volume collects his essays, speeches and interviews, originally published in Chinese and later in English.
The material divides into two parts. The historical essays present his account of why sustained economic growth appeared when and where it did. He distinguishes three civilisational stages: hunter-gatherer, agricultural and what he calls modern or 3.0 civilisation, which he argues emerged from the combination of free market exchange with modern science and technology, producing compounding returns to scale that earlier arrangements could not generate. He argues that China's failure to industrialise first, despite technological leads, resulted from institutional arrangements that suppressed exchange, and that its post-1978 growth results from adopting the same combination.
The investment essays set out value investing as he practises it: buying businesses rather than securities, requiring a margin of safety, staying within a circle of competence, and holding for very long periods. He argues that the Chinese market offers opportunities because it is dominated by short-horizon retail participants, and that a patient investor with a business owner's perspective faces less competition there than in developed markets.
He is direct about the risks in Chinese investment, including governance and the political environment, and he argues for concentrating in businesses whose economics do not depend on political favour.
The civilisational framework is a personal synthesis rather than scholarship, and specialists in economic history would dispute parts of it. The investment material restates the Graham and Buffett tradition without adding to it. The value is in seeing how an investor operating in both markets thinks about the differences.
Key takeaways 7
- Sustained compounding growth appeared only when free market exchange combined with modern science and technology.
- China's failure to industrialise first, despite technological leads, resulted from institutions that suppressed exchange rather than from any lack of capability.
- The Chinese equity market is dominated by short-horizon retail participants, which leaves opportunity for patient business-owner investors.
- An investor in China should concentrate in businesses whose economics do not depend on political favour.
- Value investing requires treating a security as ownership of a business rather than as a tradeable instrument.
- Circle of competence is a constraint on where an investor can operate rather than advice about focus.
- The civilisational framework is a personal synthesis rather than established economic history and should be treated as such.
Who should read it
Investors interested in how a value investor operating in both Chinese and Western markets thinks about the differences between them.
About Li Lu
Founder and Chairman, Himalaya Capital Management
Charlie Munger's chosen manager for his family's China capital, and his Peking University lectures are the primary text on applying value investing in China - but his main book has never been translated.
Where it sits in the reference 2
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