Li Lu, known as an investor, hedge-fund manager and one of the leaders of the Tiananmen Square Student Protests gave a talk at Google on China and its modernization. Below is a snippet of my takeaways from the talk. Notes, though in first-person, are only paraphrased, and mistakes are all mine.  

On Li Lu himself:

    • Moving the Mountain is a documentary that offers insight into Li Lu’s difficult childhood and his persistence.
    • “Life is so much more interesting in what lies ahead. Keep moving on…” – when his life is mentioned.

China’s modernization:

  • “I had the good fortune of living through true poverty. In one generation in China, six to seven hundred million people were elevated from poverty to prosperity and a middle class of three to four hundred million was created. Nothing of that size or character had happened in human history.”
  • What explains that miracle? What does it mean for China and the rest of the world? Whether it will continue is a trillion-dollar question. We are talking ~40 years of ~10% YoY growth. It has confounded almost every theory in existence.
  • Most people, especially folks from the west, try to explain it away as a  statistically rare phenomenon. Very few people want to contemplate the possibility that
    • a. China will continue to grow like this
    • b. It will be continue to be distinctly different from the rest of the world in how they run government and technology.
  • If what happened over the past 25 years continues, it will be a logical follow-on that China would dominate the rest of the world. What does it mean for the rest of the world?
  • What exactly is modernity? China is modernizing in a very unique, non-Western way. When I say modernization I am referring to, (a) free market and society (b) technological progress. This fuels long-term compounding growth.
  • Few people can conceive the power of compounding – compounding growth is at the core of investing success.
  • Civilization 2.0 was mostly based on domestication of plants and animals. It was limited by photosynthesis and land. When you break the balance b/w the land available and the # of people, it results in disasters for a drastic reduction of human population to rebalance.
  • Last 300 years have been a straight up curve, showing the power of compounding with human growth. China was the latest, but India will happen too, and so will Africa. The way they have or will spread it are very different, and that has everything to do with the unique culture of the place, and how they organize themselves. Over time, they (each of these places – China, India etc) formed a unique history.
  • Chinese modernization is distinctly different from the rest. Most of the other modernized nations have closely followed the Western path.
  • China’s difference has a lot to do with it’s geography –
      • South/East – sea
      • West – Himalayas
      • North – uncultivable, harsh land
  • Geographically, China has never been in contact with the rest of civilization. Almost in complete isolation to what happened on the other side of the Himalayan mountains.
  • Until the modern era, western Europe was still a feudal society.  A government based on merit didn’t exist in Western civilization until the modern era. Until 300-400 years ago in the West, if you were not born with royal blood, you didn’t have a way to distinguish yourself.  That stopped in China about 2400 years ago.  
  • While social reform existed (Centralized power with no nobility, large # of free, land-owning citizens, citizens have a social ladder to rise to the highest level (upto PMs)), it only extended partially to the economic field. That changed in the modern era.
  • The government plays a role as a trusted and beloved institution, for everyone –  it is a contractor, providing planning and infrastructure. The Chinese government has since inception played the role of an unlimited liability agency. This is in stark contrast to a surprisingly large number of local governments that have filed for bankruptcy – the most recent example is Costa Rica.
  • The Chinese culture is characterized by people who are  hard-working, value education, rarely complain and have a savings rate of 40-50%.  This is where the power of compounding shows up? (KR notes: Buffett’s Thriftville and Squanderville comes to mind).
  • England was the first fully modernized country. America was the strongest country post WWII. Before China came along, the international language of business was set. Every other country who came along, played by the existing rules (else they would miss out on the scale).
    • If you have two competing markets, the larger one will succeed.
    • The operating language of globalization is English. The same story applies to currency (most countries accept and peg to the US dollar). 
  • Chinese have a unique advantage that other countries don’t have – 1.3bn people who speak Chinese, so one large common market.
    • Other countries don’t have that advantage.
    • This is why Internet companies in China were able to build a scale in a relatively short time.
  • Every country has a founding myth. America’s is liberty. The Chinese have a different way – they do not believe in all of them being truly individuals, but by organizing together in a cohesive way (e.g. the Great Wall wouldn’t exist otherwise).

On Technology:

  • One of the killer apps of AI is seamless and simultaneous translation. There is  a very real chances that we will break down the barrier of language – without latency, without compromises.
  • Baidu v/s Google
    • All of a sudden government becomes less important.
    • Google has an edge, they have figured out a way to have everybody be happy, content, productive, creative.
  • Up until now, what powers Silicon Valley is one graph articulated by Gordon Moore, which worked until 4-5 years ago.
    • What happens when computing power exceeds our human neural power? Something dramatic is going to happen, and that will hard to predict.
    • e.g. AlphaGo. The AI played two (perceived to be) utterly dumb moves that in the end turned to be genius.
  • What is to come when artificial computing power approaches or exceeds a carbon-based living neuron system?
  • Civilization 3.0 – spread of technology is expanding at a gigantic pace. In one generation we have seen so many wonderful things.

On Value Investing:

  • If you invest in China, you would have to at some level answer the questions I brought up above. It took me 35 years.
  • “Look down before they look up” – this is a distinguishing quality of value investors. They are concerned, first and foremost, primarily, with not losing money.
  • Investment necessarily involves predicting the future. Train yourself, study for a long time and be careful about a few things that you can predict with a very high degree of confidence. Study, study, wait, wait, wait. Until something like that (finding those few things that you can predict with high confidence) happens. At that point, you don’t really care what everybody else says.
  • There is one area of life where each of you will feel that you can see the future. Everybody has a different ability of predicting different things, and everybody will encounter different opportunities in their lifetime. But all great value investors will have one thing in common – they are extremely intellectually honest with themselves.