Everyone Is Avoiding China. Charlie Munger’s Friend Isn’t.

Li Lu sees opportunity where the crowd sees China

Wall Street has a remarkable ability to get excited about a business after the easy money has already been made. Give the crowd a popular story, a rising stock chart and a sufficiently large price target, and somebody will explain why paying almost anything makes perfect sense.

Meanwhile, a company making actual products, earning actual money and selling for an attractive price can sit there collecting dust.

That is why I pay attention when Li Lu talks.

In his conversation at Columbia, the founder of Himalaya Capital offered a different way to think about China, artificial intelligence and the opportunities created when investors all decide to stand in the same corner of the room.

His comments gave me five places to start looking for investment ideas. China figures prominently, and some of the opportunities extend well beyond its borders.

Before we get to them, you should know a little about the man making the argument.

Li Lu was a student leader during the 1989 Tiananmen Square protests. He helped organize the hunger strike and became one of the movement's leaders. Following the crackdown, he went into hiding and eventually escaped China, reaching the United States after traveling through Hong Kong and France.

He later attended Columbia, where he earned an undergraduate degree, a law degree, and an MBA in 1996. Apparently, one difficult degree would have left him with too much spare time.

He founded Himalaya Capital in 1997 and developed a close relationship with Charlie Munger. His early investment in BYD became an important part of his investing story, and his approach reflects the influence of Munger, Warren Buffett, and Benjamin Graham.

The Tiananmen background matters when considering his views. His experience gives investors a reason to hear him out when he discusses both China's potential and the costs imposed by its political system.

He sees an investment landscape that deserves more thought than a television segment allows.

His starting point will sound familiar to regular readers. A stock represents ownership in a business. The market exists to serve you. A margin of safety matters because the future has a habit of embarrassing people who claim they can predict it.

He adds Buffett's circle of competence and Munger's advice to fish where the fish are. If everybody else is elbowing for room at one fishing hole, you might find better opportunities someplace quieter.

That makes the interview useful long after the headlines change, because the method can guide our research even when particular industries lose their appeal.

His final principle is especially useful: Wealth should be considered in terms of your share of global purchasing power. Owning productive businesses that grow more valuable over time offers a way to preserve and increase that purchasing power.

That brings us to China.

His willingness to separate an unpopular market from the businesses inside it is worth studying. A broad index can disappoint while individual companies expand their capabilities. It can also rise while plenty of its members struggle. Buying a country and buying a business are different decisions, even when the same headlines influence both prices.

Li Lu also raises a possibility about Chinese household wealth. If property becomes a less dominant part of family balance sheets, what takes its place? He argues that equities eventually have an important role because businesses participate in economic growth and help create it. That could give policymakers a reason to care more about the development of the stock market.

I would treat that as an additional possibility rather than the foundation of a purchase. A business that needs a national change in investment habits before shareholders can make money asks us to predict too much. I would rather find earnings, assets and cash flow that justify the price already, with any broader improvement providing something extra.

Li Lu describes an economy moving in two very different directions. On one side are households dealing with the consequences of falling property values. On the other are industrial companies developing capabilities that allow them to compete around the world.

Both can exist simultaneously. Investors who insist on choosing a single description for the entire country can miss what is happening inside individual businesses.

Think about a family that has most of its wealth tied up in a home. If that home loses substantial value while the mortgage remains, the family feels poorer. Spending gets postponed. Savings become more important. Paying down debt looks a lot more appealing than buying something new.

Li Lu argues that this household response helps explain weak Chinese consumer confidence and demand. It is a serious problem, and he spends considerable time acknowledging it.

But he also describes a manufacturing transformation that the property story can obscure.

China, in his telling, deliberately set out to move beyond producing inexpensive goods and assembling products designed elsewhere. The goal was to develop more advanced manufacturing and reduce dependence on foreign technology.

He connects that effort to Made in China 2025 and the subsequent push for technological independence. Trade restrictions and export controls, he argues, reinforced the determination to develop domestic alternatives.

The result, in his view, is a country with troubled household balance sheets and increasingly capable industrial businesses.

That is a much more interesting investment proposition than simply asking whether China is good or bad.

There is a catch, and Li Lu explains it with a distinction I think investors should remember. In China, you need to understand whether your business is an objective of government policy or a cost of achieving that objective.

Real estate helped advance urbanization and build household wealth. Later, in his interpretation, property and household balance sheets absorbed much of the pain associated with changing national priorities.

A sector can enjoy support during one phase and become expendable during another. A government priority also does not guarantee that shareholders will earn satisfactory returns.

For me, that means political analysis belongs alongside the financial statements. I want to know what management can control, how profits reach outside shareholders and whether the purchase price compensates for the things that can go wrong.

With that framework, the first opportunity is the one most directly connected to my own habits: overlooked businesses selling at attractive prices.

Li Lu argues that enthusiasm for a small group of technology companies can leave otherwise excellent businesses neglected. He sees that split in the United States and believes it can be even more pronounced in China.

There is no requirement that every good company participate in the market's favorite story.

A manufacturer can improve its products, gain customers and generate cash while investors remain preoccupied with whatever technology announcement is due next Tuesday.

That creates the possibility of buying a better business than its stock price suggests.

The search could include industrial companies, established consumer businesses, distributors and specialized service providers. In China, it means separating companies dependent on a rapid property recovery from businesses with their own sources of growth.

I would be interested in companies with manageable debt, understandable operations and enough cash generation to finance themselves. Dividends and sensible repurchases can help shareholders get paid while waiting for recognition.

A low valuation alone will not do it. A business can look cheap because its earnings are disappearing or because shareholders have little claim on the money it makes.

For a retail investor, the practical work starts with a few ordinary questions. Where do the sales come from? How much cash remains after the company pays its bills and maintains the business? When does its debt mature? What has management done with shareholders' money? These questions are useful whether the headquarters is in Shanghai or somewhere down the road.

I also want to compare reported profits with cash generation over several years. One strong quarter can flatter a company that needs constant spending just to stay in place. A record of converting earnings into cash gives us more to work with. We can then decide whether the shares offer enough value to justify the uncertainties involved.

But when the business holds up and the price assumes very little, the arithmetic starts getting interesting. We do not need universal enthusiasm. We need results that justify more than we paid.

The second opportunity is Chinese advanced manufacturing, particularly businesses that have moved from competing mainly on price to competing on capability.

Li Lu highlights electric vehicles, batteries, energy storage and heavy machinery. His argument is that investors focused on China's domestic problems may underestimate how much progress selected manufacturers have made.

This is where his discussion becomes especially useful. A country can have weak consumer confidence while an individual manufacturer expands sales into other markets.

A company's customers, competitive position and production costs matter more to its earnings than a broad label attached to its home country.

Within this theme, I would want to examine manufacturers of equipment and components that customers need repeatedly. Replacement parts, service revenue and products that are expensive to switch can make a business more durable.

Battery and storage companies deserve attention within Li Lu's framework because he identifies them as areas of Chinese strength. Heavy equipment and specialized industrial machinery offer another way to investigate the same broader transition.

BYD provides context for his interest in the subject. It was mentioned as an important early investment in his career, rather than presented in this interview as a fresh purchase recommendation.

The work still comes down to margins, cash flow, debt and valuation. A factory can produce an impressive number of units while earning disappointing returns on the capital required to build it.

I want the manufacturer whose advantage shows up in the financial statements. National pride does not pay my bills. Cash distributions and rising business value are considerably more useful.

The third opportunity comes from one of his most provocative observations: Restrictions on access to foreign technology can create demand for domestic semiconductor suppliers.

The intention behind a restriction and the commercial response to it can be different things. If a customer cannot buy the foreign product, finding a local substitute becomes much more urgent.

Li Lu argues that this has given Chinese semiconductor businesses something every entrepreneur needs: orders.

Orders bring revenue. Revenue can support research, engineering and improvements. Better products can win more orders. That process does not require the first domestic product to be the world's best. It requires a customer willing to use it and a supplier capable of improving it.

He is particularly enthusiastic about progress in mature semiconductor technology, while also discussing the remaining gaps in more advanced production.

For investors, that suggests research into equipment, materials, fabrication and software used within the domestic semiconductor supply chain.

Some of the more interesting candidates may be companies solving a narrow production problem. A supplier does not have to dominate every part of chipmaking to become important to a particular customer base.

I would want evidence that customers are paying for the product, repeat orders are growing and the company can fund development without continually issuing shares.

The distinction between a government ambition and a profitable investment remains essential. Subsidies can build factories. They cannot, by themselves, create attractive returns for shareholders.

Competition, spending requirements and technological limitations all matter. Li Lu's argument gives us a reason to investigate this group, followed by the usual hard work of determining which businesses deserve our money.

His fourth opening takes us from the semiconductor factory to the electrical system: the infrastructure needed to support AI.

Li Lu identifies chips, electricity and labor as constraints on development. My investment inference is that companies helping relieve those constraints deserve a close look.

AI can generate a remarkable answer on a screen. Getting that answer still requires physical equipment and power.

That leads toward generation, transmission, transformers, switchgear, storage, and the contractors who install and connect the equipment. These are businesses we can investigate through orders, capacity, margins and cash flow.

An electrical contractor can get paid for completing a project even when nobody knows which AI company will ultimately earn the best returns. An equipment supplier may serve several competitors pursuing the same market.

I find that appealing. Picking the winner of a technology race can be difficult. Finding a fairly priced business that supplies something the competitors need offers another route into the spending.

This opportunity extends well beyond China. His discussion of physical constraints suggests a research approach that can be applied wherever the construction and investment occur.

There is also an important warning inside his enthusiasm for AI's usefulness. He emphasizes that the technology has ongoing costs and will eventually face financial discipline. Revenue, profit and capital requirements still count.

That argues for looking carefully at the supplier's customer concentration, financing needs and order quality. A large backlog is more useful when the customer can pay and the work earns a decent margin.

I would also prefer businesses with customers in several industries. If AI spending takes a breather, other demand can help keep the company working.

There should be plenty to study here without deciding that every business with the words data center in its presentation deserves a premium valuation.

The fifth opportunity is in established businesses that can use AI to become more productive and more valuable.

Li Lu makes an interesting distinction between pursuing the frontier of what AI can do and asking what it can do for a customer. He believes Chinese companies place considerable emphasis on that second question.

I like the question because the answer can be measured.

Does the software help a customer finish a task faster? Does it improve service? Does it reduce errors? Does it make the product useful enough that customers stay longer or buy more?

Those questions lead toward established software companies, information providers and specialized service businesses with existing customer relationships.

The attractive candidate already has a product customers need. AI helps it improve that product or deliver it at a lower cost. Management then has to show that some of the benefit reaches shareholders.

A hypothetical service business illustrates the point. Suppose employees can process more customer work without a matching increase in expenses. If service quality holds and pricing remains sensible, profits could improve.

But if competitors immediately cut prices and customers collect all the savings, the investment result is very different.

That is why I would look for proprietary information, specialized expertise, trusted relationships and products embedded in customers' daily work. Those advantages may help a company retain the benefits of better technology.

This is another theme that travels across borders. Chinese companies may offer examples of the customer application approach Li Lu describes, while businesses elsewhere can pursue the same economics.

The evidence I want is improved margins, stronger retention, better cash generation or profitable additional sales. A chief executive saying AI 27 times on a conference call is a less useful measurement.

All five opportunities fit together through Li Lu's broader view of the world economy.

He believes the global market is more durable than the political arrangements surrounding it. Countries argue, impose barriers and compete for advantage, but businesses keep looking for customers and customers keep looking for useful products at sensible prices.

Trade can change routes. Supply chains can adjust. The economic incentive to do business remains powerful.

His argument is that the costs of withdrawing from this shared market encourage countries to maintain enough stability for commerce to continue. That is his view, and it helps explain why he remains willing to investigate China despite political tensions.

I would still assess each business on its own exposure. A manufacturer with several markets and a strong balance sheet has a different risk profile from a company dependent on one export route or one policy decision.

What I take from his comments is permission to keep looking. We can examine Chinese companies carefully without needing to settle every debate about the future relationship between Washington and Beijing.

We also have to keep our own limitations in mind. Li Lu emphasizes knowing the edge of your circle of competence. That is good advice when an exciting story tempts us into an industry we barely understand.

There is no prize for pretending to understand a complicated semiconductor process. If the financial statements, ownership structure or competitive position remain a mystery, another opportunity will come along.

His answer about underperformance is equally practical. Investors want attractive returns over time, but they also want their choices validated every month. Those desires can pull in opposite directions.

A sound business can remain unpopular much longer than we expect. Owning it requires a reason grounded in facts and a financial position that allows us to wait.

That is where valuation and balance sheet strength earn their keep. Paying a sensible price and avoiding excessive debt give us more room for mistakes and delays.

His comments about compounding knowledge belong here too. Investors can become better at this through repeated study of businesses they understand. Reading annual reports, comparing competitors and checking earlier assumptions gradually improves judgment. That effort is available to an individual investor without a trading desk or an economist on staff. The advantage comes from doing the work consistently and remembering what it teaches us. Patience becomes easier when we understand why we own something and which developments would change that judgment.

Li Lu's China argument deserves attention because it identifies specific developments to investigate. Household stress can coexist with industrial progress. Government priorities can create customers for certain businesses while imposing costs on others. Poor sentiment can conceal improving companies.

The opportunities are there to research: neglected profitable businesses, advanced manufacturers, domestic semiconductor suppliers, electrical infrastructure companies and established businesses putting AI to practical use.

I intend to keep looking for companies in those groups that can turn opportunity into cash and sell us a share of that cash at an attractive price. The crowd can keep arguing about the next exciting announcement. I am interested in what we can own, what it can earn and how much we have to pay.