Course:
Money
What does it take to become one of the greatest investors of all time, and how can those same principles apply in the age of cryptocurrencies? In a world where financial markets seem more unpredictable than ever, the story of Li Lu, an under-the-radar investment genius, offers timeless lessons for both traditional and modern-day investors. His journey from political refugee to financial powerhouse demonstrates the power of patience, long-term vision, and understanding the true value of an asset. As we dissect the principles that guided Li Lu to success, we’ll explore how these ideas might shape the future of finance—particularly in the context of cryptocurrencies and decentralized finance (DeFi). If you’re looking for actionable wisdom that bridges the worlds of traditional investing and cutting-edge blockchain technology, you’re in the right place.
Li Lu’s journey began in a place of incredible adversity. Born in China during the Cultural Revolution, he faced the collapse of his country’s economy, natural disasters, and the political unrest of the Tiananmen Square protests. Forced to flee, he found refuge in the United States, where an unexpected encounter with Warren Buffett changed the course of his life forever. Li Lu embraced Buffett’s philosophy of value investing, which centers on understanding the intrinsic value of an asset, rather than focusing on short-term price movements.
At the heart of Li Lu’s strategy is the concept of “economic moats”—finding companies with sustainable competitive advantages that can fend off competitors. His investment firm, Himalaya Capital, managed to grow by 20 times in just over a decade, achieving legendary returns by focusing on long-term opportunities. But as much as this is a story of personal triumph, it’s also a lesson for investors about patience, research, and understanding the nature of risk. Can these traditional investment principles be applied to the wild and unpredictable world of cryptocurrencies? Let’s find out.
One of the most compelling aspects of the video is its emphasis on intrinsic value, a fundamental concept in value investing that is often misunderstood. By explaining how Li Lu saw stocks as ownership in businesses rather than speculative price tags, the video provides a clear roadmap for any investor trying to navigate today’s volatile markets. Intrinsic value reminds us that, beneath the daily noise of market movements, the true worth of an asset is based on its potential to generate future cash flows or utility.
In the world of cryptocurrencies, intrinsic value can take many forms. For Bitcoin, it might be its scarcity model and use as “digital gold.” For Ethereum, it could be its role as a decentralized platform for smart contracts and decentralized applications (dApps). These fundamental properties are crucial for investors to consider, rather than being swept away by speculative trends.
Another strong point is the concept of economic moats—a company’s ability to protect its market position through unique competitive advantages. This idea is directly transferable to the crypto world. Consider Ethereum’s dominant position in the blockchain space. Its vast network of developers and first-mover advantage in the DeFi space gives it a moat that’s hard for competitors to breach. Binance Smart Chain and Solana may try to replicate Ethereum’s success, but Ethereum’s head start gives it a significant advantage, much like how established companies in traditional markets fend off newcomers.
The video also highlights the importance of long-term investing, contrasting short-term volatility with long-term value. This is especially relevant in crypto, where markets can experience extreme volatility. Li Lu’s approach shows that investors should look past the noise of daily price swings and focus on the bigger picture. For crypto, that might mean understanding the technological innovations and real-world use cases of a project, not just its latest pump or dump.
While the video presents compelling arguments, there are areas where its perspective might be questioned. For instance, the focus on long-term investing may not always be practical in the rapidly evolving world of technology and cryptocurrencies. Traditional businesses evolve slowly, giving investors time to hold positions for years or decades. But in the crypto world, technological breakthroughs or regulatory changes can disrupt entire ecosystems overnight. Investors in crypto need to be more agile, constantly reassessing the viability of their investments.
Moreover, the video glosses over the risks associated with value traps—situations where an asset appears undervalued based on traditional metrics but never actually realizes its intrinsic value. This happens in both traditional and crypto markets. In traditional finance, this could be a company in a declining industry. In crypto, it might be a project with great potential but poor execution or a saturated market. Many blockchain projects with promising whitepapers have failed to deliver, leaving investors stuck with worthless tokens.
Finally, the video could have delved deeper into the psychological aspects of investing, particularly in how emotions like fear and greed play into decision-making. While Li Lu is presented as a model of calm, rational thinking, most investors (especially newcomers) struggle with emotional responses to market volatility. The crypto market, known for its wild swings, often intensifies these emotions, leading to impulsive decision-making.
The parallels between Li Lu’s investment principles and the cryptocurrency market are undeniable. Intrinsic value in traditional finance asks, “What is this company truly worth?” In crypto, the question becomes, “What is this token’s utility, and how does it generate value?” While stocks generate dividends and profits, tokens may provide access to decentralized services, governance in a protocol, or simply act as a store of value (like Bitcoin).
Ethereum’s transition to Ethereum 2.0 offers an excellent example of how intrinsic value evolves in crypto. As Ethereum moves from proof of work to proof of stake, its value proposition expands, offering greater scalability and energy efficiency. These innovations strengthen its moat, much like how a traditional company invests in new technologies or business strategies to stay ahead of competitors.
Additionally, the concept of volatility as opportunity is amplified in the crypto world. While Li Lu faced volatility during the Asian financial crisis, crypto investors live with even more extreme swings. However, as the video suggests, this volatility is not necessarily a sign of risk but of opportunity. Smart investors use dips to accumulate tokens they believe have strong long-term value, much like Li Lu bought into distressed Asian companies during financial crises.
DeFi (Decentralized Finance) is another area where these traditional principles find new meaning. DeFi projects like Compound or Aave leverage blockchain technology to recreate financial services such as lending and borrowing, but in a decentralized manner. Understanding their intrinsic value requires not just looking at token price but also at the user adoption, governance mechanisms, and revenue generated through protocol fees. This is where Li Lu’s meticulous approach to analyzing a company’s fundamentals becomes relevant in the crypto space.
The broader implications of Li Lu’s approach to investing extend far beyond his personal success. His focus on long-term value, competitive advantages, and risk management provides a blueprint for how finance may evolve in the future. In a world increasingly dominated by speculative behavior—both in stocks and crypto—the discipline of understanding intrinsic value is more important than ever.
Looking forward, we can speculate on how blockchain technology might reshape traditional financial models. DeFi is already offering alternatives to centralized banking systems, and we’re seeing a growing interest in tokenized assets, where real-world items like real estate or company shares can be represented on a blockchain. This trend may democratize access to investment opportunities, enabling more people to build wealth, much like how Li Lu’s story is one of financial democratization—escaping China to seek freedom and opportunity in the West.
However, with these opportunities come risks. Blockchain is still in its infancy, and regulatory challenges, security vulnerabilities, and scalability issues must be addressed before it can fully replace traditional systems. Much like Li Lu’s early investments in distressed Asian companies, the current crypto landscape is full of potential pitfalls—but also incredible opportunities.
As someone who has been both an observer and participant in the cryptocurrency market for years, I find Li Lu’s principles to be not only timeless but highly relevant today. The idea of long-term investing resonates deeply in the crypto space, where “HODL” has become a mantra for those who believe in the transformative power of blockchain. Yet, I’ve seen many investors burn out from the constant volatility and lack of understanding of the projects they’re investing in.
I’d argue that one of the most valuable lessons from Li Lu’s journey is the importance of doing your homework. In crypto, this means reading whitepapers, understanding the team behind a project, and assessing the real-world utility of a token. While it’s easy to get caught up in the hype, true success comes from patience, discipline, and a deep understanding of the market—values Li Lu exemplifies.
The story of Li Lu is not just one of financial success but of perseverance, discipline, and vision. His approach to value investing offers timeless lessons that can be applied to both traditional markets and the rapidly evolving world of cryptocurrencies. By focusing on intrinsic value, long-term growth, and managing risk, investors—whether in stocks or crypto—can navigate the complexities of the market with greater confidence. As we move into an increasingly digital and decentralized future, these principles will continue to guide those who seek to build lasting wealth in a world of constant change.
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In this lesson, we’ll dive into the fascinating story of Li Lu, one of the greatest yet lesser-known investors of all time. Through his journey from escaping political persecution in China to mastering the principles of value investing under Warren Buffett’s mentorship, we’ll explore the core concepts of finance and investing. But why stop at traditional finance? We’ll also bridge these classic principles with the emerging world of cryptocurrencies, demonstrating how timeless strategies can be applied to this fast-paced, digital asset ecosystem.
Intrinsic Value
Economic Moat
Volatility
Long-Term Investing
Permanent Loss of Capital
For each of the sections above, the traditional finance concepts have clear connections to the crypto world. Whether it’s recognizing an asset’s intrinsic value, like Bitcoin or Ethereum, or understanding how volatility presents both challenges and opportunities, the core principles remain the same. However, crypto comes with its own unique risks—like the potential for permanent capital loss through scams or security breaches—that make it critical to apply these lessons carefully.
In the traditional world, we have legendary investors like Li Lu. In the crypto space, figures like Satoshi Nakamoto (the creator of Bitcoin) or Vitalik Buterin (founder of Ethereum) serve as modern-day equivalents. Just like traditional markets, crypto markets also respond to fundamentals like technology upgrades, user adoption, and regulatory shifts, much like how traditional businesses respond to earnings reports, competitive pressures, or new regulations.
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Many of the best investors in the world are extremely well-known through interviews and public appearances. But one of the greatest investors of all time is hardly known at all. I visit Omaha every year to listen to Warren Buffett and Charlie Munger’s lectures, and the man who manages $15 billion and has generated almost 30% per year was sitting quietly two rows back. His name is Li Lu, but who is he, and why do you need to know him? Charlie made Li Lu an even better investor. Li Lu has one of the most interesting backstories of all the investors I’ve studied on the show. His story of being hunted by the Chinese government, fleeing to the United States, stumbling into a Warren Buffett lecture, and becoming an investing genius is incredible. It’s a story everybody should hear, and it’s also sprinkled with investing lessons for those trying to find success in the stock market. So here is the story and investing philosophies of China’s great investor.
Li Lu was born on April 6, 1966, in Tangshan, China. It was the beginning of the Cultural Revolution. Communist dictator Mao Zedong was pushing to eliminate any shred of capitalism that remained in the nation. This generation of Tangshan men was born in the darkness of the Cultural Revolution. The year Mao died and his reign ended, the city of Tangshan was hit by a 7.6 magnitude earthquake. Eighty-five percent of the buildings were destroyed, and it’s estimated more than 300,000 people died. Li Lu was among the survivors; he was just 10 years old at the time. Looking back, that devastating natural disaster in 1976 was very symbolic of the seismic shift happening in the economic and political landscape in China. It was the beginning of many iterations of capitalist reform that has led to the much more prosperous country we see today.
But just like China itself, Li Lu’s journey to becoming one of the most successful investors of all time was extremely difficult. He attended Nanjing University in 1985, first majoring in physics before transferring into economics. In his fourth year, he participated in the ill-famed Tiananmen Square protests. The student-led movement began after the death of a pro-reformist member of the CCP, Hu Yaobang. China’s economy was growing rapidly, largely due to economic reforms such as increasing foreign trade, but many believed that the growth was disproportionately benefiting a small group of people while those at the lower end of the socioeconomic scale were continuing to suffer. That was a time of hope for the entire nation, for this young generation. It was a dream, but of course, it was also a time of fear.
The CCP installed martial law, using the military to shut down the protests. Many innocent protesters and bystanders were killed. Some estimates put the death toll in the thousands. People who participated would have to face, one way or another, severe persecution. Li Lu’s role in the protests made him one of the most wanted students by the Chinese government. Once you’re on China’s most-wanted list, your name and picture began to appear all over, on the radio, television, train stations, bus stations, and on the streets. Li Lu went into hiding, fearing harsh prosecution from the Chinese government. While being hunted, he was able to connect with a smuggling network that was helping students escape the country.
So I never thought I could escape, and then I was approached while I was hiding with people from both inside and outside, and they said they were organizing an extensive network to rescue people. He needed to apply for political asylum, but many countries, including the United States, were refusing to take students. France was the only country at that time accepting us, so we all went to France.
After fleeing to France, he was able to migrate to the United States, moving to New York to study at Columbia University. The first 23 years of Li Lu’s life were filled with difficulties that I couldn’t even begin to imagine. So he well and truly deserved some luck on his side, and he got it. Li Lu had received some scholarships to attend Columbia, but he still accrued large debts to receive his education. One day, when pondering ways to make some money, a classmate said to him, “If you want to know how to make money in America, there will be a speech at the business school that you must hear.” Knowing nothing about the lecture, he walked in and sat down to learn about investing. A friendly 63-year-old man stood in front of the small audience and introduced himself as Warren Buffett.
At the time, Buffett was already a billionaire from his incredibly successful investing career, but he was far less famous than he is today. Over the course of the lecture, he broke Li Lu’s preconceived notions of the stock market as a place of ruthless and crooked behavior. I look back and feel I’m extremely lucky, and I feel nothing but gratitude. I feel lucky to have accidentally stumbled into Buffett’s lecture at Columbia.
Buffett wasn’t talking about stocks like a typical hedge fund manager from Wall Street. He didn’t view stocks as ticker symbols and prices on a screen to be traded but rather as ownership pieces of businesses that should be accumulated over time. Li Lu’s investing journey started that day in 1993 with a fundamental idea: intrinsic value. Buffett claimed that stocks acted differently depending on the time scale. In the short run, prices bounced around all over the place, reflecting minor shifts in investor expectations—the collective decision-making of thousands of buyers and sellers focused on economic outlook, the business environment, or even the political landscape. But over the long run, stock prices trended toward the intrinsic value of the underlying business.
Ironically, the concept wasn’t Buffett’s original idea either; he learned it from his Columbia University professor, Benjamin Graham. Graham is known as the father of value investing. He described the market dynamic by saying that in the short run, the market is a voting machine, but in the long run, it’s a weighing machine. Short-term volatility of stock prices meant it was possible for an investor to buy a stock for less than it was worth and make money as the price trended back toward its true value. Intrinsic value, in the case of stocks, is derived from the profitability and net assets of the business. Or in other words, theoretically, if you owned the whole business, how much cash could you pull out of that business over its remaining life?
This relatively simple concept fascinated Li Lu, and he became obsessed with studying the investing journeys of Warren Buffett and his investing partner Charlie Munger. When he graduated in 1996, Li Lu had already earned phenomenal returns by applying these principles. He was a guy who was on student loans, had no money, and on the float of the student loans—which is, you know, he’d get the money in January, maybe has to pay it in April or something—he said he would invest the float of the student loans, and when he graduated, he had a million dollars.
Not only was he spending countless hours researching and analyzing companies, but he also earned his bachelor’s in economics, an MBA, and finished law school—all at the same time. He then went straight into the investment banking world, working for two years while continuing to invest his own money. In 1998, he decided it was time to try running his own firm, so he founded Himalaya Capital, right at the beginning of the Asian financial crisis. The meltdown started in Thailand. Huge foreign debts forced the country to unpeg its currency from the US dollar, causing it to collapse, and the economy along with it. The pain spread to other Southeast Asian countries and then to Japan and South Korea as their currencies collapsed too. Stocks across Asian financial markets fell in a meaningful way, and this was Li’s opportunity to invest in businesses below intrinsic value.
He describes investing in the shares of what he considered to be great Asian companies. Great businesses are the ones who really have above-average returns on invested capital. What makes a great company is, in essence, the same as what makes a great investor: it’s able to invest money into assets and produce lots of profit in return. The problem is that if one business is able to do it, why couldn’t other businesses competing against it just replicate what they have? And this is where the concept of the economic moat is really important. A truly good business is one that can fend off competitors, that can really have an enduring competitive advantage.
The business needs to be able to produce high returns on capital but also be able to defend those returns from the many other businesses competing against it. This is called an economic moat—some kind of characteristic about the business that can’t be replicated by high competition. Running shoes are all pretty similar at a basic level, so why does Nike sell far more than its competitors? Well, it’s because it has something that they can’t replicate: the Nike brand. The history, the cultural and social significance that make their shoes more desirable than other brands.
Each time is different; you have to really look for each specific company in specific ways. No two companies or industries are the same, so you need to get good at figuring out which elements are important in each case. This is particularly the case when it comes to management. In a lot of companies, the management will make a big difference. The culture of that management will produce a big difference. But in a small set of experiences, management really matters almost nothing. One of the most important things that Li Lu figured out is that you need to be both a generalist and a specialist at different stages of the investing process. In a sense, you always want to be a generalist in terms of being a student of businesses, but by the time you really get into the companies you’ve really decided to invest in, you better become a true specialist.
Have a broad interest that allows you to scan many types of businesses, and then a willingness to become an expert in the few areas you ultimately decide to invest in. Going
back to the Asian financial crisis, Li Lu found some companies he considered to be high quality and was able to buy them far below intrinsic value because the crisis had pulled everything down. In his first year running Himalaya Capital, his fund lost 19%, but he held on to his bets. Within two years, the suffering Asian economies received bailouts from the IMF and China, and as the economies recovered, Li’s investments surged in price.
Investing through this crisis gave Li a deeper understanding of risk. The traditional finance industry believes the biggest risk to the investor is volatility, but the truth is that the biggest risk is the permanent loss of capital. If the underlying business behind the stock is strong, and there’s very little risk of it going out of business, then price movements on a week-to-week or monthly basis are completely irrelevant. In fact, not only is volatility not a risk, but it’s also an opportunity to own great businesses at better prices. Unfortunately, his clients didn’t see it that way. Li’s poor short-term performance led many of his investors to take their money out of his fund. They couldn’t grasp the idea that short-term prices didn’t reflect the long-term value of the companies he had bought with their money. It’s the fundamental problem with the traditional finance industry.
Li would find the solution to his problem through his friendship with Charlie Munger. Li had been Munger’s mentor from afar for years, through the lessons he and Warren Buffett shared each year at the Berkshire Hathaway shareholder meetings. During their first in-depth conversation in 2003, Munger said it was the same problem that he had faced himself when running his own investing partnership a few decades back. The solution came down to the structure of the fund: find clients and only work with clients who are willing to be locked into long-term contracts so they can’t withdraw money during periods of poor performance, and then most of the time have your doors closed to new clients so you don’t have this constant need to find new investing opportunities to invest that new money.
Li did just that, even receiving investment from Munger himself, and his performance since then has been astounding. Himalaya Capital earned 36% per year returns net of expenses from 2004 to 2009. From 1998, when it was founded, to 2010, the firm grew its invested money 20 times in size. Today, Li manages almost $15 billion in assets, most of which is invested outside of the US.
