📖Li Lu

Circle of Competence

🌿 Intermediate★★★★★

Invest only within your circle of competence to avoid costly mistakes. Without process, there is no reliable feedback loop. Structured execution and review improve decision quality over time. Run a decision loop of research, thesis, execution, and post-mortem; document assumptions and update playbooks with evidence, not hindsight bias. Li Lu advocates a repeatable process: define criteria, execute consistently, and review decisions against evidence. Process quality drives outcome consistency. Key insight: Li Lu emphasizes that investors must honestly assess what they truly understand versus what they think they understand. Start with a minimal checklist: Does this meet my highest standards?; Would I put a substantial portion of my net worth here?; Is this better than my current best holding?.

  • Does this meet my highest standards?
  • Would I put a substantial portion of my net worth here?
  • Is this better than my current best holding?
  • Create a checklist of must-have criteria

Avoid misuse: Having opinions without execution criteria

💬

Stay within your circle of competence. Only invest in what you truly understand.

— Li Lu Columbia Lectures，2010

🏠 Everyday Analogy

A process is like a pilot checklist: discipline prevents simple mistakes when pressure rises and keeps outcomes more repeatable.

📖 Core Interpretation

Li Lu advocates a repeatable process: define criteria, execute consistently, and review decisions against evidence. Process quality drives outcome consistency.
💎 Key Insight：Li Lu emphasizes that investors must honestly assess what they truly understand versus what they think they understand. Venturing outside your circle of competence means making decisions without sufficient knowledge to evaluate risks. The most expensive mistakes come from overconfidence in areas beyond your expertise. By staying within your circle, you leverage accumulated knowledge and pattern recognition developed over years. This discipline means passing on many opportunities, but the ones you pursue have much higher success probabilities.

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❓ Why It Matters

Without process, there is no reliable feedback loop. Structured execution and review improve decision quality over time.

🎯 How to Practice

Run a decision loop of research, thesis, execution, and post-mortem; document assumptions and update playbooks with evidence, not hindsight bias.

🎙️ Master's Voice

In investing, the ability to say no is more important than the ability to say yes.
Li Lu passes on hundreds of opportunities for every one he takes. His discipline comes from understanding that one excellent investment is worth more than many mediocre ones. Quality of decisions matters more than quantity.

⚔️ Practical Guide

✅ Decision Checklist

  • Does this meet my highest standards?
  • Would I put a substantial portion of my net worth here?
  • Is this better than my current best holding?

📋 Action Steps

  1. Create a checklist of must-have criteria
  2. Track every opportunity you pass on
  3. Review your rejections to ensure discipline

🚨 Warning Signs

  • Investing out of FOMO
  • Lowering standards when cash is high
  • Saying yes to avoid the discomfort of saying no

⚠️ Common Pitfalls

✕Having opinions without execution criteria
✕Reviewing outcomes but not decisions
✕Abandoning rules during volatility spikes

📚 Case Studies

1
BYD Initial Investment (2002)
Li Lu studied Chinese battery maker BYD, leveraging his deep understanding of China and technology to judge its moat, management, and growth prospects within his circle of competence.
✨ Outcome：Invested early; BYD compounded massively over decades, becoming one of Berkshire-related circle-of-competence success stories.
2
Himalaya Capital and Chinese Banks (2003)
Li Lu analyzed major Chinese financial institutions, focusing on simple, comprehensible retail banking models, state backing, and durable deposit franchises he understood well from years studying China’s reforms.
✨ Outcome：Invested selectively; positions appreciated significantly as China’s banking system strengthened and valuations normalized.

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