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in this video i want to talk through um basically some of my highlights from a 2006 talk that lilu did at columbia university now lilu is kind of famous in the value investing world for basically being the only fund manager that charlie munger has ever invested his own money with and throughout this talk at columbia lilu basically shares his fairly straightforward investment checklist as well as gives a couple of example investments that he actually made using that checklist and he kind of walks through his logic with each of those two particular companies now like i mentioned lilu is kind of famous in the value investing world for uh charlie munger being an investor in his fund and his fund has experienced phenomenal performance the latest update i can find was in 2018 and the after fee return out of layla's fund over a 20-year period so from 1998 through to 2018 was 15.7 per year like i say after fees so the before fee performance is obviously going to be a little bit better than that and uh through that same period of time the underlying index the s p 500 actually only returned six point six percent so he's got a little over nine percent outperformance over about a 20-year period which is very impressive in anyone's language and before lilu ever became a fund manager he has a pretty incredible backstory he was actually involved in the tiananmen square protests in the 1980s and china escaped china to get to the us i actually wrote a book on kind of his early life in china which was called moving the mountain my life in china and he actually then sold the rights to that book and it was turned into a sort of documentary movie by the same name moving the mountain so um really kind of rough i guess start to life for lilu he then went on to study at columbia university and this story of his studies at columbia is kind of insane in my book so during his time at columbia he actually studied three degrees and once uh he studied law he did a ba in economics and he also got his mba and during his time at columbia he had a negative net worth as he described it but he did have cash he had kind of money from his student loans and uh using value investing principles that he really got obsessed with after hearing warren buffett actually come into a guest lecture at columbia he took that student loan money invested it really really well and actually ended up leaving columbia university with about two hundred thousand dollars to his name now unfortunately there aren't a lot of lilu talks out there uh the only sort of two or three four that i can kind of find but they are all very very good uh this 2006 presentation at columbia is by far my favorite because it gets into some of these specifics of his investment strategy and i may just be saying this because i've recently been watching some of these talks from lilu uh but the more i think about it the more i believe that lilu may be one of if not the best investor on the planet today i'm just going to put that out there i know warren and charlie are incredible but if you want to look at some slightly younger professional money managers kind of who's still got a long runway for growth i think lilo is very very close to the top of my list of people to follow so what is lilu's investment checklist it's pretty straightforward actually there's only four points on it and the context in which he talks about this investing checklist is basically flipping through things like moody's manuals or value line information where you basically just get a one pager of basic info about a company and he's essentially just spending kind of a couple of minutes on each page flicking to the next one to look at the next company and he's trying to make a very quick decision on whether basically he should spend more time looking into that particular company so um the four-step checklist for lilo is firstly is it cheap so are there some surface level numbers that suggest it might be worth a closer look uh is it a good business who's running it and what did i miss and later on in the talk he goes on to say that the overarching thing he wants to be able to uh sort of ask himself once he's at the end of going through that investment checklist he wants to ask himself is my analysis both accurate and complete and is it backed by sound complete accurate information with a huge insight so that's the checklist from leeloo so let's get into a couple of the example investments that he talks through in this 2006 columbia presentation and i will leave the link to that talk down in the description below i shared it on my community page uh just yesterday so you may have already seen it potentially from that but uh i'll share the link down in the description and one of the things you will notice when you watch that talk is that lilo is pretty ruthless with these students he is um very sharp mentally and running some of these numbers very very quickly with basic information on a company and just being able to uh you know figure out market caps and she is outstanding and returns on invested capital and so on very very quickly and kind of snappily if that's a word and um he really grills some of these students at columbia for not being able to give him numbers very quickly and he tells a couple of people off we're trying to use a calculator in that process as well so that's quite entertaining i was actually talking to uh investing with frank uh i actually rebranded the channel recently to frank tabor uh just yesterday and i was sort of talking through a video idea along these lines maybe i'll um get a one pager myself out of an old moody's manual or a copy of value line or something and maybe i'll watch that lilu presentation and pretend that he's asking me the questions about you know give me the market cap and so on and on i'll see if i can keep up maybe that might be a fun video to do at some point but anyhow let's get into the two companies so the first one that lilu talks about is timberland you may remember timberland from the late 90s and early 2000s potentially i've got very vague memories of like you know famous musicians and stuff wearing timberland boots and they're basically a shoe company uh and it was one that came across lilu's radar uh in the late 90s or early 2000s so the first thing that catches lilu's eye is he sees a couple of basic metrics on the company firstly he sees that it's trading had about five times earnings and secondly he sees that it's trading at about one times book value so um that kind of immediately gets them past the first point on the checklist that it's potentially cheap it's trading at a low p e ratio and uh we'll have to do more work on the book value but if that book value was relatively liquid and it could be sold at the value actually stated on the balance sheet of the company then that potentially gives us some good downside protection as well so um yes it's potentially cheap now and secondly we need to figure out is it a good business and this is where lilu basically starts to investigate what's actually in that book value and tries to figure out things like the return on invested capital in the business and this is not an uncommon approach we know that people like phil town like joel greenblatt like warren buffett like charlie munger all really like to focus on returns on capital or returns on equity as really good indicators of the quality of a business so um this is the thought process that lilu goes through with timberland so he finds that uh the book value consists of mostly tangible assets so it's not goodwill there's not a whole lot of brand value stated on the balance sheet or anything like that um it's mainly real estate cash uh inventory and you know fairly liquid assets that could be converted to cash very very quickly and what he specifically says he's trying to get a feel for is basically the unlevered returns on capital so he doesn't want to know what the return on equity is he doesn't want to see that juiced up by debt or anything he's trying to get a feel for if this business had no leverage in it if we back out any of the assets that aren't necessarily required to run the business uh what's just the pure kind of return on capital within that core business of timberland and these are kind of the numbers for that particular situation so they had about 300 million dollars in book value the market cap is again was also about 300 million dollars so it was trading about one times book uh he found that about a hundred million dollars of that book value was actually real estate so with his return on capital calculations he basically threw that out of the window doesn't really care about the real estate investments he just wants to focus on the core timberland you know shoe business so he found that if we exclude that hundred million we take 300 minus 100 we're down now down to 200 million capital deployed in the actual business and the earnings pre-tax for the company that particular year was about 100 million dollars so 100 over 200 we have a very high quality business because it's producing about a 50 return on invested capital so within only a couple of minutes now we're halfway through the checklist we've figured out that it's cheap uh we figured out that it's a good business so now we need to look at who's running it and what did i miss so uh in terms of who's running it this was probably the biggest turn off for most investors looking at timberland so uh you'll see when you look at some of the ownership of the business and the management sort of incentives and so on uh the family owns about 40 percent of this year's outstanding now this is typically a really good thing because you're going to have uh you know incentives of the family typically aligned with the minority shareholders as well if the family's net worth is strongly linked to the stock price that obviously gives them a lot of incentive to make the stock uh obviously go up over time and perform well so the family owns about 40 of it the real issue here was that although they only own 40 of the stock and i say only but that has a very large amount um they actually had 98 of the controller of the voting rights within the business and although that's kind of a turn off sometimes to a lot of investors uh this prompted lilu to basically dive deeper and try to really understand who these people are and what kind of motivates those people and he describes his role uh kind of going through this as being a bit of an investigative journalist that's how he sort of describes this particular part of the process and um basically he gets really into the details so he tells the students you know go to their community visit the people they know go to their church their synagogue introduce yourself to their friends and their neighbors obviously this is not going to be fully possible for every company you look into and i'm sure lilu has much better access to a lot of these people than you know me down here in new zealand and that sort of stuff but um he really wants to get uh and deep and really understand who these people are and he found that at timberland the father as he described it seemed like a simple decent guy just a high school graduate uh the son went to business school uh was already ceo of the company even though he was only lilu's age at the time which was probably in his late 20s maybe early to mid 30s at the most i would say and interestingly uh lee liu actually saw that the son at timberland who like i say was the ceo was actually on the board of a separate uh entity with one of lilu's friends uh so lilu decided to also get on that porch so that he could he could get to know the the ceo at uh at timberland and he basically liked everything he saw he thought they were very high quality people and that got him through kind of the first three steps of his checklist he then asked himself the final question what did i miss and he really felt like he hadn't missed too much uh you've got a good business you've got uh trading at a cheap price run by great people and uh he then basically went out and bought a lot of the stock now before lee liu actually shared the kind of results of that investment he put to the students you know if hypothetically you had a hundred dollars how much of your 100 portfolio would you invest in that particular investment and you know he talks about how 95 of participants in the market would go out and at most maybe put on like a one or two percent position in the portfolio he kind of makes fun of people talking in basis points instead of in percentage points because if they say you know we're putting on 50 basis points or 500 basis points it makes it sound like a really large number even though it's not and even though lee liu doesn't describe exactly how much of his portfolio he put into timberland it's very clear from how he's kind of answering this question that he put a hell of a lot of his portfolio into timberland so i put a shitload anybody know what happens afterwards so in terms of how that played out basically over the next two years the stock went up 700 it was a massive home run with timberland and uh lilu also described that return as uh not kind of a very risky return if that makes sense so he had a business that was trading at five times earnings uh the highest that multiple ever got was about 15 times earnings so there was a lot of multiple expansion definitely but the underlying earnings were growing as well so it's not like the business was flat and you just had multiple expansion only and it was started trading at like 100 times earnings or something it was one of these big high flyer stocks that could really come back down to earth at any time quite quickly it was propelled by yes multiple expansion you know to a significant extent it tripled in terms of its its pe but it also grew earnings the underlying earnings at about 30 percent a year so absolute home run for lilo and that's the first investment story that he shared in this talk now the next example that lilu gave was actually in a korean company i couldn't quite make out the name in this particular talk there were a few bits where the audio cut out and i don't know if he ever actually even said the name but we do know that it's a korean company and i will also say that there wasn't as much kind of qualitative analysis in this particular stock as far as i could tell so with the timberland example you know he actually got to know some of the executives in the company uh yes it was cheap but he was doing a lot of the sort of qualitative work on who's actually running the business uh with this korean company i think it was a little more quantitative so once he worked through some of the actual stats for the business we can tell that it's extremely cheap which i'll get into in a sec and i think that it was kind of even cheaper than the timberland example so he was perhaps a little less reliant on the qualitative side of this analysis but nonetheless let's kind of get into this example so this korean company had a market cap of 60 million dollars and it was trading at about two times earnings so it was earning about 30 million dollars a year so if we go back to the checklist again is it cheap as point number one and i think um that more than ticks that box to kind of keep looking a bit deeper if it's trading at two times earnings so um the second thing around kind of cheapness and that first step of the checklist for lilu was actually looking at the book value of the company so the book value was about 230 million like i mentioned just before the market cap was 60 million so it's trading at a very deep discount to its book value so just like timberland he then goes in and tries to understand what's actually in that book value is it tangible is it intangible if we liquidated the company could we actually realize that book value or is it kind of just a make-believe figure on a piece of paper and this is basically what he found kind of within that book value so he found that about 70 million dollars of the current assets was actually cash so that is certainly something that can be uh liquidated i guess immediately essentially so uh 70 million in cash they had 180 million and fixed assets so uh within that they had 100 ownership in a hotel which on the balance sheet was recorded at 30 million dollars they also had a 13 ownership and a department store uh recorded on the books at 30 million uh that department store was actually traded publicly and when he was talking through about flicking through value line this department store was on the next page of value line which is quite handy um when he looked up that company that department store it actually had a market cap of 600 million dollars so that 13 ownership although it was listed on the books at 30 million was actually worth more like 80 million so there is some kind of off-balance sheet value that lilu's just found there um they also had a 15 ownership and three cable companies and as he described it a whole bunch of real estate and uh the real estate again was listed at cost and uh over the 10 years or so since that cost was kind of put on the books of this particular company the korean real estate market had actually gone up a lot so again potentially you have a little bit more kind of hidden value that's not necessarily displayed on the balance sheet so if we add all of this stuff together we're paying 60 million that's the market cap we have 70 million in cash another 100 million and stock holdings from these minority ownerships i just talked about uh 30 million in value from a hotel that again hadn't changed in 10 years even though the stock market or the real estate market had gone up a lot i should say so where he eventually got to is uh the book value is probably two or three times greater than is actually than it's actually stated as and even then you're paying a deep deep discount to book with the current market cap and you've also actually got a business that's producing a lot of cash and it's trading at two times earnings so if you put all of that together that definitely passes through the two filters of is it cheap and is it a good business now in terms of the last two questions that lilu asks himself around who's who's running the company and what did he miss uh he again found really high inside ownership so he saw that about 50 percent of the stock outstanding was owned by insiders he really didn't talk a lot more about the management in this case but he did talk quite a bit about what he missed and you know he actually asked some of the students in this class at columbia what uh what they think he might have missed and they listed off things like you know a hundred kilometers north of north korea you've got this crazy guy with nuclear weapons and so on so there's a few kind of things to things to consider here but um lilu felt that the risk reward was really really stacked in his favor so um he ended up just like timberland again bidding quite big on this particular situation uh turned out the department store which this company had a holding in the stock went from 22 to about 100 so that was about five x and uh the actual you know straight up company itself uh went from twelve dollars a share to seventy dollars this year so um about a five or six x multiple in terms of his return so that is lilu's investment checklist and a few of my highlights from that particular talk uh like i said the start lee liu was an absolute beast he's got a really interesting back story worked super hard through colombia to not only come out with three degrees but also a positive net worth after doing some great investment with some borrowed student loan money which is just crazy impressive and he's also got one of the best professional investment track records i've ever seen and you know he attracted charlie munger to his fan so he is almost certainly one of the greatest investors alive today and he's uh very high up my list in terms of people to follow so if you haven't done so already but that's it for me and i will see you in the next video cheers
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