Legendary Investor Li Lu 2012 Columbia Lecture

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Today we'll discuss class notes from Li Lu's 2012 Columbia lecture. Li Lu shares his COMPLETE investing process using TWO investments he's made as examples.

0:35 Li Lu's Introduction
Li Lu starts by outlining the three concepts that define Value Investing:

1) Stocks are Pieces of Businesses
Stock isn't paper traded carelessly
2) Investors use a Margin of Safety
Investors make predictions about the future which is unpredictable. So we need a buffer just in case.
3) The Stock Market (Mr. Market) is Irrational
The market gives us opportunities through irrationality but requires us to have an opposing view of the market which is very hard. To be confident in our predictions, Li Lu quotes Charlie Munger who said, "I'll never allow myself to have an opinion on something that I don't know the other side's argument better than they do." This is Li Lu's benchmark for knowing when he can invest and the theme of this lecture.

02:06 Megastudy
Megastudy is an online tutoring company based in South Korea. High School students in South Korea take a zero-sum, college entrance exam that virtually determines their career prospects. This creates a demand for tutors. At the time, Megastudy was selling for $18.50 and had 6.3 million shares outstanding for a market cap of ~$120 million. $50M of which was cash. In 2013, Megastudy had net profit of $15 million which meant it was selling for a price-to-earnings ratio of ~8, or ~4 if you exclude cash. Li Lu was investigating the purchase in December 2004 right at their IPO. Just 10 months prior to their IPO, the government announced an online tutoring program of their own, but was free, and was weighing on the future outlook of Megastudy. However, Li Lu argued that Megastudy had a durable competitive edge over public and private sectors. He was going against the herd, but he'd turn out to be right and watch the stock appreciate more than 10 times!

07:18 Amorepacific
Amorepacific is an international cosmetics company based in South Korea. It offered common and preferred shares, but were trading at remarkably different valuations. Preferred shares in America and South Korea trade very differently. In America they act like bonds, while in South Korea they act like common stock without voting rights. To compensate for the voting rights, preferred shares trade at lower prices and offer higher dividends. For some reason, the market was placing a 400% premium to the common shares, even though the Amorepacific owners had a majority share of the voting rights. It was almost as if Mr. Market believed the preferred shares had less claim to the earnings of a company. Upon inspection of the financial statements, Li Lu found out that Amorepacific was expensing preferred shares awkwardly. Had they done it more appropriately, like how Samsung does it, we would have seen that the common and preferred shares have an equal claim to earnings.

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CREDITS: Produced & Edited by Opportunity Cost Media
DISCLOSURE: As an associate I earn from qualifying purchases. I would never recommend something that I, myself, would not do and can genuinely say that there is great value in these recommendations.
DISCLAIMER: The information contained in the video is not financial, tax, or legal advice. Always seek consultation from a competent authority. I am not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, in this video. The ideas presented are my opinions and are for entertainment and educational purposes only.
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[pradeeprawat]

That's a lot of effort you made. Thanks a lot for going through each and every details and making such an articulate video.

[nandishkhandelwal]

Hi Jessie, great work! keep more like this coming. PS: The link for the transcript isn't working anymore, could you please upload and share it through a different link if you have a copy of it?

[IntelligentStockInvesting]

This is gold. Thanks so much. Awesome editing too, Scott!

[punchi]

thanks jessie- didn't know this gem existed and thanks for the breakdown!!

[dhirajmeenavilli]

That Megastudy case was the biggest brain thing I've heard in a while, really goes to show I guess that investing really is an area where you use everything you know and then some.

[JasonBay-RealEstateInvesting]

I have never heard of li lu but this is very interesting. Great video!

[jonbartel]

Thanks for the video! Great find! Going to Columbia pays off even more when Li Lu gives stock tips to your class.

[hevarsaid]

Great video! The link doesn't seem to work. Do you have a copy of the notes you could share? Thanks

[sudhanshu]

Awsome ...Jessi ..lots of love from india