During this interview with Bruce Greenwald, Li Lu discusses how to find great businesses. Here’s an excerpt from the interview:
Lu: Great businesses are the ones who really have above average returns of invested capital, but that kind of business usually attracts imitators and competitors.
Everybody wants to have above average returns on invested capital. And so, truly good businesses are the ones that can fend off competitors, who can really have enduring competitive advantage, and keep that higher than above average return on invested capital, and hopefully also have a long runway of continuous growth.
Those are the businesses we’re looking for, and they could really come in all industries and in all shapes and forms. But they’re rare, they’re really, really rare.
To have a business that generates above average returns over a long time in a compounded fashion is against the natural orders of things. Only a small slice of all businesses belong to that category.
If you are lucky enough to really find one of those long-term compounders, all you have to do is to own them for a longest period of time. It helps when you really buy them at the time where they are traded at a discount to their intrinsic value, so if you were wrong about them you don’t lose money, and if you’re right you have more returns over time.
Over the longest period of time if you do own them through the ups and downs, your return roughly approximates the actual business return to the actual capital invested in the business itself. Over the long time the two tend to really converge closely.
Understanding the study and the nature of that business, the dynamics, the competition is really the most important thing as an investor. And as a student of the business. As I said there isn’t a set of things that make them that way.
Every business really builds their fortress slightly differently and you just have to be honest with yourself and study them from every possible angle until you are really convinced that they are truly enduring and truly have a long runway ahead of them.
You can watch the entire discussion here:
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