LI-LU:A VALUE

INVESTOR

I N P U R S U I T O F
I N T E L L E C T U A L
H O N E S T Y

LI-LU
2022

CURATED BY DHAVAL (INVESTMENT BOOKS)

About Lu Li
Li Lu is the founder and Chairman of Himalaya Capital, a multi-billion-dollar investment fim that
primarily focuses on long-term investment opportunities in Asia and the U.S. He has been running the
firm's principal fund, Himalaya Capital Investors, LP, continuously since January 1, 1998.

In 1989, while studying semiconductor physics at Nanjing University, he became one of the principal
student leaders of the Tiananmen Square demonstration. After the Beijing Massacre, Li Lu was put on
the Chinese government's "21 Most Wanted List." Subsequently, he escaped from China to the United
States through underground channels.

From 1990 to 1996, Li Lu attended Columbia University and became the first student in its 200-year
history to simultaneously receive three degrees: a B.A. in Economics from Columbia College, a J.D.
from Columbia Law School, and a M.B.A. from Columbia Business School.

Upon graduation, Li Lu worked in the investment banking community until he founded Himalaya
Capital Partners in 1998. He subsequently founded Himalaya Capital Ventures in 2000. The funds are
dedicated to public and private global investments, as well as early-stage companies in the
information technology, networking infrastructure, and new media sectors. Li Lu serves on the board
of directors of startup technology companies, non-profit organizations, and academic institutions.

His awards and honors include the World Economic Forum's 100 Global Leaders for Tomorrow for
2001;Term Member of the Council on Foreign Relations; the Millennial Class of The Aspen Institute's
Henry Crown Fellows; the Raoul Wallenberg Human Rights Award from the Congressional Human
Rights Foundation; and the Reebok Human Rights Award.

Mr. Li currently serves as a member of the Board of Trustees of Columbia University and a member of
the Board of Trustees of California Institute of Technology (Caltech). He is featured in the Family of
Voices, a part of the ongoing twenty-year Exhibition, starting in 2017, "Many Voices, One Nation" at
the Smithsonian National Museum of American History.
 Original Himalaya Capital with Venture Fund

Investment Areas

 software and hardware infrastructure companies that support web-enabled appliances and
fulfil the promise of the networked economy;
 new media destinations that feature multimedia content, and companies that offer innovative
solutions for the online distribution of rich media content,
 new companies in traditional business areas that incorporate the Internet into their business
model to become more profitable and efficient; and
 Biotechnology companies poised to capitalize on the advances in medical research and
technology.

Investment Criteria

Himalaya Capital focuses on three core tenets when making an investment:

1) Scope of Business: Himalaya Capital invests in businesses that have tremendous potential to serve
significant markets through either a revolutionary technology, product, or a unique new business
model.

2) Strong Management: Himalaya Capital backs management teams that are dynamic, driven,
adaptive, and committed to the rapid execution of their business plan.

3) Early-Stage Opportunity: Himalaya Capital invests in early- stage opportunities, where it can work
alongside the management team to provide:

 strategic advice
 access to our extensive network of relationships among technology and business leaders
 aid in the recruitment of top executives
 assistance in future financing

A Value-Adding Investor

Our investment includes our long-term commitment to add strategic value by working actively with
management to build a dominant enterprise. We add value by:

 Assisting with financing strategies and raising additional funds

 Providing strategic advice and direction
 Creating partnership opportunities through leveraging our extensive network of relationships
among technology and business leaders
 Aiding in the recruitment of top executives
 Developing a community across portfolio companies

Fast and Nimble

Our intense focus, relatively small fund size, and non-hierarchical organizational structure allow us to
effectively prioritize deals, execute in-depth due diligence, and make well-informed investment
decisions in very short spans of time. We take advantage of our agility to assume our preferred role
as lead investor in early-stage companies, initially investing between $500,000 and $3,000,000. We
have an outstanding working relationship with top-tier funds that look to us as a source of deals for
follow-on funding.
 Modern Himalaya Capital (Long-only Equity Fund)

Philosophy

"In making investments, I have always believed that you must act with discipline whenever you see
something you truly like. To explain this philosophy, Buffett/Munger likes to use a baseball analogy
that I find particularly illuminating, though myself am not at all a baseball expert. Ted Williams is the
only baseball player who had a 400 single-season hitting record in the last seven decades. In the
Science of Hitting, he explained his technique. He divided the strike zone into seventy-seven cells, each
representing the size of a baseball. He would insist on swinging only at balls in his 'best' cells, even at
the risk of striking out, because reaching for the "worst spots would seriously reduce his chances of
success. As a securities investor, you can watch all sorts of business propositions in the form of security
prices thrown at you all the time. For the most part, you don't have to do a thing other than be
amused. Once in a while, you will find a *fat pitch that is slow, straight, and right in the middle of your
sweet spot. Then you Swing hard. This way, no matter what natural ability you start with, you will
substantially increase your hitting average. One common problem for investors is that they tend to
swing too often. This is true for both individuals and for professional investors operating under
institutional imperatives, one version of which drove me out of the conventional long/short hedge
fund operation. However, the opposite problem is equally harmful to long-term results: You discover
a "fat pitch' but are unable to swing with the full weight of your capital."

-Li Lu (also featured in Poor Charlie's Almanack)

Core Values

Honesty, Accountability, Integrity, Meritocracy, Confidentiality and Loyalty

Honesty: We tell the truth to the best of our knowledge. We tell what we know and more importantly
what we don't know.

Accountability: We work hard to keep our promises so that our investors, co-workers, investee
companies and business partners can depend on us.

Integrity: We keep the highest standards of business ethics and professionalism.

Meritocracy: We work hard and try our best to deliver the highest quality of work.

Confidentiality: We safeguard confidential information and respect the privacy of our investors, co-
workers, investee companies and business partners.

Loyalty: We are loyal to our investors, co-workers, investee companies and business partners. We
operate in a seamless web of deserved trust.
Disclaimer:
All sources used in the book are taken from available information in the public domain. This
is a curated book compiled from already available public information and no copyright
infringement by any means. Moreover, the credit of the work is attributed or given to the
author/writer and the source of the information is mentioned in the reference, where ever
possible/needed.
 PART- 1 Investing

1. Columbia Talk (2006)----------------------------------------------------------07

2. Chinese Edition of Poor Charlie’s Almanack Launch Speech---------16
3. Columbia Lecture (2010) -----------------------------------------------------28
4. know what you don't know – G&D Interview (2013) -----------------38
5. Peking University Lecture: Value Investing in China (2015)----------50
6. New Year's Testimony-- Humanity and Financial Crisis (2016)------77
7. Interview in Weekly in Stocks (Transcript) (2018)----------------------80
8. Li Lu & Bruce Greenwald - Value Investing in China (2021)----------93
 “Knowledge compounds almost in the same way that

Your money compounds. In fact, only when your

Knowledge compounds at a faster pace, your money is

Safe. To me, that is a very fascinating journey and

Rewarding life.”

"You should consider it a moral duty to compound your

Knowledge and your ability.”

- Li Lu
Li Lu's talk at Columbia 2006
Li Lu is a possible Berkshire Hathaway CIO candidate. Tariq Ali (The Street Capitalist) recently
posted his notes from Lu's lecture at Columbia in 2006.

Li Lu

This past weekend was the Berkshire Hathaway (NYSE:BRK.A / BRK.B) annual shareholder
meeting. At one point during the Q&A, a questioner asked Warren Buffett about the status of
Berkshire’s CIO candidates. Charlie Munger remarked that one candidate who he is particular
close with was up 200% in 2009 with 0 leverage. Some people think that the person Munger is
referring to is Li Lu, a fund manager who turned Munger and Buffett onto BYD.

Lu personally owns at least 2% of BYD, which rose 400% in 2009. I don’t know anything about his
investments beyond that one position, but I know he is a huge believer in taking concentrated,
high conviction positions. If that is the case here, BYD’s spectacular results must have contributed
a lot to his returns for 2009 which may make a 200% for the year possible.

Here is a brief bio on Lu:

Li Lu was born in China in 1966. He attended Nanjing University in China and later came to the
U.S., and earned three degrees (BA, JD, MBA) simultaneously from Columbia University. After
graduation, he worked in an investment bank until 1997, when he founded Himalaya Capital
Management, which today manages both LL Investment Partners and Himalaya Capital Ventures,
funds focused on publicly traded securities and venture capital. Li Lu was named a global leader
for tomorrow by the World Economic Forum in 2001, and a Henry Crown fellow by the Aspen
Institute in 1998. He is a member of Council on Foreign Relations and Young Presidents’
Organization.

Fortune: Barnstorm Green

There isn’t a whole lot of information about Lu’s investing style out there. But I thought I would
share some notes from a lecture he gave to Columbia Business School back in 2006. All of this is
paraphrased, so don’t take anything as a direct quote and there may even be some inaccuracies.
Still, I believe you will find these notes insightful, especially with respect to improving your own
abilities as an analyst and investor. Even if Lu is not a Berkshire Hathaway CIO candidate, he is an
investor with a tremendous work ethic that we could all learn from.

Below are my notes from Lu’s lecture:

Li Lu at Columbia Business School – 2006

 15 years ago, Lu was accidentally brought in to a lecture by Warren Buffett. Had epiphany
moment, Lu thought he could do something in the investment business.
 At the time, Lu had just escaped China. Did not know very many people. No money, deep
in debt. Worried about making a living in the US.

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  In the middle of Buffett speech, made him think differently about the stock market.
 The more Lu thought about it, the more he thought it was something he could do.
 Value investors see themselves as owners of a business. Therefore, fortunes are up and
down with the nature of the business.
 You demand a margin of safety.

3 Traits of a Value Investor:

1. Basically, you don’t think of yourself as a paper shuffler who constantly buys and sells
securities. You think of yourself as a real owner of the business.
2. You only own a small piece of the business, so you demand a huge margin of safety.
3. Because you think of yourself as an owner, not trading all the time, you think everyone
else is different — like Ben Graham’s Mr. Market

On Value Investing

 Under 5% of all assets are run under value investors, a real minority in the investment
world.
 The stock market is created for the other 95% of people that is where your opportunity
and challenge is. -That was one lesson that stuck in Lu’s mind when listening to Buffett’s
lecture.
 Biggest challenge: understand whether you are the 5% or the 95%
 It is tempting to do what the other 95% of people do. Emotionally very difficult to be in
the 5%, but value investors typically have better returns. The money is really for traders
and they tend to amass more assets.
 5% have a spectacular return, but 95% of money probably always resides to somewhere
else.
 Understand who you are. You will be tested. You will have to ask yourself whether you are
or aren’t a value investor.
 If you are a value investor, you are probably genetically mutated and comfortable being
in the minority. This is unnatural to human beings. You have to be comfortable being by
yourself. You have to adopt the idea that you are right because your reason and evidence,
not because others agree with you.
 You will probably spend most of your time being an academic researcher rather than a
professional. You are a researcher or journalist, with insatiable curiosity. You are trying to
figure out how everything works.
 The more you know, the better you are as an investor.
 Politics, science, technology, literature, poetry, everything can affect businesses and help
you.
 Occasionally you can find insights that will give you tremendous insights that other people
don’t have.

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  Then you find if the business is cheap. Is the management good? What else? Why is the
opportunity there?
 Started fund in late 1997. Been through really traumatic events: Asian Financial Crisis, Tech
Bubble.
 Fall of 1998: Lu’s search process is very general. Got hooked on value line, loved to read
the whole thing from beginning to end. The best kind of education, you should do this if
you want encyclopaedic knowledge of companies. Go through it page after page, it is
enormously helpful. -First thing Lu checks is new low list. New low P/Es, P/Bs, etc.
 Does not care where something traded before.
 First looks at valuation. If the valuation doesn’t fit, doesn’t go beyond it.
 If you see a low P/B ratio, ask – What is in the book? How much is the book?
 Encyclopaedic knowledge is helpful when looking across different industries.
 Look at pre-tax and pre-interest earnings. Look from an un-leveraged basis. Figure out
how much capital is deployed in the business. Look at ROIC.

Example: Timberland

 Start by giving a 5 second look at the business. Timberland. The business is trading around
clean book value, consisting mostly of tangible liquid assets, working capital, plus 100M in
real estate. Deployed capital is 200M with 100M return.
 Then check why the business fell apart and became cheap. Think if you had owned the
entire business at that price.
 At the time, was the height of the Asian Financial Crisis, saw their sales falling off the cliff
in Asia. Anything with exposure to Asia was falling apart. Try to check what other people
are thinking about this. You may not listen to their advice but you may want to know what
other people are looking at.
 Timberland had no other analysts covering it.
 Why no coverage?
 Look at business across years. Timberland has been growing, pretty profitable, did not
need financial markets. Family owned. Owns 40% controlling 98% vote.
 Immediately, that is a turnoff to most people. You can do a quick data search.
 You need to have a curious, active mind to ask questions and find answers.
 Timberland had most of the vote, no analyst coverage, a bunch of shareholder lawsuits. If
you were a member of the other 95% of the investment business you might say maybe
management is milking the business.
 Download every court document lawsuit. Read it. You NEED a very curious mind to figure
out WHAT is happening. Dig every single time. READ EVERYTHING.
 The first time, it takes a couple minutes to look over financials. Then gather questions and
do deep research.

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  Most lawsuits came from Timberland missing guidance, annoying investors, which
annoyed the owner of the business. They decided to stop talking to Wall Street. So it was
not about milking the business or fraud. They were not crooks.
 How do you determine if they are good managers? Decent people?
 Act like an investigative journalist. Most business owners leave a trail for you to follow and
see how they deal with different situations. Most professional managers would not see
this as part of their job, but YOU are part of their 5%.
 Go to their community, visit people they know, their Church, their Synagogue, and
introduce yourself to their friends and neighbors. It is worth it to spend as much time as
possible, to find what these business people have done and what their neighbors say
about them to accurately get an idea of their personality.
 The father seemed like a simple, decent guy, just a high school graduate. The son went to
business school, was already COO of the company even though he was Lu’s age. Lu saw
what boards the son sat on, and noticed that they had a mutual friend. Managed to get
himself on the board with the son and became friends quickly. Came to realize these
where high quality, very ethical businessmen.
 After all that, saw the stock was still trading low. Decided he did not miss anything. The
other 95% may not have done enough research to see this or have some kind of
institutional imperative that prevents them from owning.
 If you are not a good analyst, you will never be a good investor.
 But we decide to buy. How much do we buy? Imagine having $900. The other 95% will
take tiny positions, 50 basis points. You need to use concentration, a $200 position. Think
of how much work you did. Lu visited all the stores to see how margins improved – they
had a fad going on where kids wanted the shoes. Their Asian business is tiny, reduced
earnings by less than 5%.
 Lu put a ton into Timberland. What happened after next 2 years? Stock went up 700%.
Propelled by earnings. No real risk – went from trading at 5x earnings to 15x with earnings
growing 30% a year. It adds up.

Be a Learning Machine

 When an investment opportunity comes, you have to seize it. Devote day and night so you
can act quickly. Do everything complete but do it fast. You have to train yourself to jump
on opportunity.
 When opportunity presents itself you can smell it. The only way to do that is by training
yourself and reading page after page of financial report.
 Uses S&P manuals for viewing foreign stocks.
 As an owner, don’t think about per share information.
 Use your brain, when looking at stock manuals, each page should really only take 5
minutes. Don’t use calculators. Use mental math.

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Example: Korean Company

 60M market cap, pre-tax earnings of 31M, roughly 2x pre-tax earnings.

 Book value of 230M, what constitutes book value? If you are an owner, look at: fixed
assets, working capital, don’t count on goodwill.
 Basically you see with 60M in market cap, 30M in pre-tax, $240M in book value ($180M
in fixed assets)
 It might be cheap.
 Determine what the earnings is. The book. The working capital.
 Use common sense, common logic and think about the business.
 Most employees never went to business school, Lu finds they are easier to train.
 Of the 70M in current assets, it is all cash
 Of 180M in fixed assets, they own 100% of a hotel, recorded 30M as book. Own 13% of a
department store recorded as 30M.
 Look up the department store, it roughly has a market cap of 600M. 13% gives you roughly
80M. So the book value undervalues it by another 50M.
 They own 15% of 3 cable companies and a whole bunch of real estate.
 The department store has exactly the same profile. Trading roughly around cash and
investments, good earnings, and own a whole bunch of assets. Turns out they are the
second largest cable operator as well
 The department store operates like a hotel, do not take inventory, more like a shopping
mall.
 They charge a percentage on the top line of all merchant sales.
 Put it all together: Paying 60M, 70M in net cash, another 100M in stock, 30M in hotel with
a value that has not been changed in last 10 years while real estate market has gone up in
10 years. Went to Korea, looked at hotel and department stores.
 Checked recent transaction of properties in neighborhood, value is likely 2-3x what is on
the book. But take what is on the book anyway, add 150M. Add that to rest and you get
320M in assets that you are paying 60M for and earning 30M annually from operations.
 Insiders own 50%
 Many factors going in your favor, but you need to look at how local investors see it. They
need to be buying it for the price to go up.
 Department store used to trade at 22 went to 100
 This company was at 12 now trades around 70
 each went up 5-6x
 Don’t just listen. Do it.
 This type of an approach is not natural to an investor.
 If you decide your personality fits in with the mutated gene pool, that this is something
you might be looking to do, there is a lot of money in it — proven by Ben Graham to Buffett
 You have to put in a lot of work into your analysis.
 You can make a lot of money if you are really interested, listening, and actually DOING IT.

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  Lu benefited from listening to his value investing class and then actually going out and
doing the work required.
 Value investing is not really about theory, it is about what works.
 Young analysts have energy and nothing to lose, so they should go and do the work.
 Before you become a good investor, you need to be a good analyst.

Lu says you need two things to be a good analyst:

1. Provide accurate and complete information. You have to go to an extra length to get it
done. Most of the time you will stand alone against everybody else. If you are not
competent about what you know, you cannot possibly take conviction positions when
things go into free fall and everybody else is laughing at you.
2. Most money is not made in stocks from the examples. They do not provide out-sized
returns. You can do the Tweedy Brown/Graham or the Buffett/Munger school. Your
returns will come from a handful of stocks. You need tremendous insight by continuous
intense curiosity and study.

Investment Mistakes

 Most mistakes come from inaccurate or incomplete information.

 Biggest mistake: most people wanted 2 week or monthly returns. They wanted to go up
in down markets.
 Lu’s biggest mistake was straying, was working with Julian Robertson, started shorting —
have to think like a trader when you are shorting because your downside can be unlimited.
It’s like Charlie Munger says — having your hands tied behind your back while getting into
a fight.
 Missed the opportunity to buy a business below cash, even though Lu knew the
management and had great insights. The business subsequently went up 50-100x. Could
not bring himself to buy it because of his mindset at the time.
 You make a mistake when you have not finished your work but like it enough. You start
betting on probabilities instead of real analysis.

Constantly search for ideas

 In your life, you may only have 5-10 key moments of insight. You only get it from
continuous learning. Find an American business and then find the Asian counterpart. Some
businesses studied for 15 years. You need to know what that business is, how it ticks, so
you can swing with conviction. If you cannot do that you will not make huge out-sized
returns.
 If you do what Ben Graham or Tweedy Brown does, you will make 15-20% returns but you
won’t make the huge returns of Buffett.

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  The biggest ideas can give 10,000x returns.
 Opportunities are not easy to find. They require a lot of factors to come together – Charlie
Munger’s lollapalooza. You need a whole bunch of things working together where you
have the insight and are willing to bet.
 This is what drives Lu in business.
 Lu started in physics, mathematics, law, and economics, got interested in other subjects.
Wife has a PhD in biology, he has learned a lot from her.
 Learn from everything, be intensely curious
 Eventually you will stumble into one big opportunity.
 In the meantime, you will stumble into Timberland style investments which aren’t bad.
 There might be years without opportunities, then years with a lot of opportunities.
 Depends on what becomes available to you.
 They do not come in a steady pace, not like once a week an idea.
 In 6 years, Lu had maybe 3-4 great ideas. But you get progressively better and better,
improving the amount of opportunities for you since you will be quicker at your analysis.
 Go through every day by learning something. In a year you have to learn a great deal.
 When Lu reads biology, physics, history, it is all searching for ideas. If one idea jumps out,
it is all Lu does. Rest of the time is spent with wife and kids and Lu learns from them too,
especially with seeing how human cognition develops which is enormously important.

Li Lu’s Investing Checklist:

1. Is that cheap?
2. Is it a good business?
3. Who is running it?
4. What did I miss?

 Lu goes through the checklist, ‘what did I miss’ is greatly affected by psychology. This kind
of cognition happens early on and Lu learns it from interacting with his girls.

Three characteristics of a value investor:

1. Business owner mentality

2. Difference in time horizon
3. Demand a huge margin of safety

Think like a Business Owner

 It all comes from one thing, that you are a business owner. You cannot force management
changes, so you demand a margin of safety. You have a long time horizon because you
think like an owner.

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  But why dabble with stock market? Stock markets are made for people who can dream.
That is why 95% of people never buy into value investing. Human nature prevents it.
 You do not belong to the stock market but you have to understand its perspective to
position yourself properly. If you are truly think like a business owner, you will eventually
leave the asset management business and run a real company. That is why Buffett and
Munger left it.
 Or you become a private equity investor.
 The people who the stock market is designed for are fundamentally flawed people.
Traders are bound to make mistakes due to fear or greed. They will always make room for
value investors.
 Used to be strict about selling with great business. Now, sometimes Lu feels he has insights
about the business that allows him to believe the probabilities are in his favor for the
business actually improving year after year.
 That is the law of distribution in good businesses. The leaders perform spectacularly well.
 Selling makes you pay a huge amount of tax and you might not get that good buying price
again.
 If a business can generate 50-100% ROIC, the mathematics get interesting very quickly.
 Caveat: you have to be very confident. Investment bankers use BS and project into infinity.
You cannot project that long. There are only a few opportunities where you can project
that long.
 If you are good, and spend your entire lifetime studying, across 50 year career maybe 5-
10 opportunities where you can confidently project the next 10-20 years. At that point,
you don’t want to sell. By holding you don’t pay the tax on capital gains, so you are really
compounding 40% interest free, the business is deploying the capital at 40-100% a year in
a tax efficient manner. That is what you do.
 You have to identify businesses that are getting stronger and stronger every year.
 What makes one business more successful than others? Why are they making more and
more money compared to others?
 The only way you can find that is by studying the ones that are established.
 Look for great businesses, not just businesses owned by Warren Buffett

Example of a great business: Bloomberg LP

 Product was superior to others, high switching costs

 Bloomberg is a fabulous case study, it came out of nowhere.
 Gained market share little by little, crossed a milestone point, became a monopoly
 At a certain point, after being highly relied upon for daily work, the switching costs become
to high so winner takes all.
 Suppose you have an opportunity to see how an industry evolves early on. At a certain
point they cross the line

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 Maybe when introduced to all businesses. There is a time when that line gets crossed and
a public company is poised to benefit by becoming a monopoly business.
 Why did Microsoft succeed over Apple? Little by little they eroded Apple’s 100% market
share.
 Offices were using Windows. Today – do you have a choice of not using Bloomberg?
 Bloomberg visits almost every month and asks what you do, how you use the system.
Bloomberg terminals have tens of thousands of functions, they don’t give you a manual
 They want you visually hooked so it is a behavioral connection and you don’t mind paying
tens of thousands of years where you don’t have a choice if they raise prices
 They keep coming back to you because they know you are a trader and want to provide
you with more services so you are hooked.
 That is why Bloomberg is a fabulous business because you get hooked. Think about
switching from that or a competitor coming up with a rival product. How do you compete
with that?
 Lu doesn’t know. Suppose you know the inflexion point. Do you want to invest? Lu would
invest in Bloomberg at that point.
 You need insight. Study every business. They all have more or less this type of dynamic.
 Your job as a good financial analyst is to study that business ALL THE TIME. Observe those
trends.
 Once in your life, maybe you will find that opportunity.
 Why doesn’t Bloomberg want to sell? He doesn’t need to sell.
 When you have a business like that, you don’t need to sell.
 Lu has made many private investments, ex: Capital IQ, which copies Bloomberg’s business
model. Same method with an investment in an engineering service.
 Lu likes to know as much as he can. He likes to be friends with people, with Timberland,
the CEO and his son actually became investors in Lu’s fund.
 You can learn and observe from everyday business decisions and learn dynamics.
 Nothing is constant. Everything is changing that is why you have to keep learning.
 Businesses change, Microsoft has threats now.
 You need an active mind, so you are prepared to act and you can seize opportunity due to
your insights.

15
Foreword to the Chinese Edition of Poor Charlie’s Almanack: The Wit and Wisdom
of Charles T. Munger
By Louis Li
Translated by Kai Lam, Enoch Ko, Shy Song, Ee Lin Sim, and Mervyn Teo
Edited by Max Olson, Joe Koster, and Lincoln Minor
Twenty years ago, I came alone to the United States as a young student. I would never have
guessed that I would later become a professional investor, nor did I foresee the fortuitous
circumstances that led me to becoming acquainted with the contemporary investment guru, Mr.
Charles T. Munger. In 2004, Mr. Munger became my investment partner and has since become
my lifelong mentor and friend—an opportunity I would never have dared to dream about in the
past.
Like millions of Warren Buffett and Charlie Munger admirers around the world, the teachings of
these two teachers and Berkshire Hathaway’s amazing performance have shaped my investment
career. I have benefited over the years from closely studying Mr. Munger's own words and
actions. As such, I have come to a deep appreciation for his profound thoughts.
I have always hoped to share my knowledge with other like-minded individuals. Peter Kaufman’s
book is the best effort in this regard. Peter is a long-time friend of Charlie’s, an outstanding
entrepreneur, and a “professional bookworm.” His book, Poor Charlie’s Almanack: The Wit and
Wisdom of Charles T. Munger, is by far the most comprehensive publication that captures the
essence of Charlie’s philosophy.
Since Peter happened to be a good friend of mine as well as an investment partner, I paid close
attention to the publication of this book from the very beginning. When the first edition was
published in 2005, I treated the book as a treasure and read it cover to cover multiple times. Each
time I read it, I learned something new. At that point, I wanted to carefully translate the entire
book for Chinese readers, a wish that took another five years to fulfil.
In 2009, Charlie turned 85 years old. A friend helped me to realize that translating the book into
Chinese would be the best way to thank my respected mentor and, at the same time, complete
my long-time wish to share Charlie’s wisdom with my fellow Chinese.
Now that the Chinese edition is about to be released, I would like to offer my personal experience
with learning, practicing, and understanding Charlie’s philosophy. I hope that sharing my journey
will help readers to better acquire the wisdom contained within this book
Part One: Starting in Investments and Meeting Charlie Munger
I was first introduced to the theory of value investing advocated and practiced by Warren Buffett
and Charlie Munger 20 years ago. At that time, I had just arrived in the United States. I had no
family or friends here and was familiar with neither the local culture nor the English language.
Fortunately, I was enrolled at Columbia University for my undergraduate studies. I immediately
faced the problem of paying for tuition, fees, and the high cost of living. While I did receive some
scholarship and grant money, the amount of my debt appeared astronomical to the penniless
student I was at the time. I worried about my future, which was filled with confusion and anxiety,

16
and about when I could pay off the loans. Many Chinese students studying abroad in the United
States, especially those who depend on loans and part-time jobs to pay for tuition, fees, and living
expenses, share similar experiences.
Growing up in the 1970s and 1980s in China, I knew little about business or investing. At that time,
business was not important in China. One day a classmate at Columbia said to me, “If you want
to know how to make money in America, there will be a speech at the Business School that you
must hear.” The name of the speaker, Buffett, was a little weird and sounded like “buffet.”
Intrigued by this interesting name, I attended the speech. Because Warren Buffett was not as
famous then as he is now, not many students attended, but the lecture was an enlightening
experience for me.
Buffett’s lecture was about how to invest in the stock market. Prior to this, my impression of the
stock market was that of Shanghai in the 1930s as depicted by Cao Yu’s play “Sunrise” - full of
cunning deceits, luck, and bloodshed. But here stood a successful and wealthy businessman who
made money from the stock market. He looked decent, friendly, and intelligent, even scholarly.
In short, he was completely different from the stereotypically ruthless, cruel, and crooked
businessman that I had imagined.
Buffett’s lecture was concise, logical, and convincing. In the hour-long talk, he clearly explained
the principles of the stock market. Buffett said that stocks are, in essence, part-ownership of a
business. The stock price is determined by the intrinsic value of the underlying business, which
should be judged by the business’s profitability and net assets. Although the volatility of the stock
price might be unpredictable in the short term, the price will be based on the intrinsic value of
the business in the long run. Therefore, intelligent investors need only to buy a stock when its
price is far below the company’s intrinsic value and sell as its price approaches or exceeds its
intrinsic value. In this way, a lot of money can be made with very little risk.
At the end of the speech, I felt that I had grasped a life-saving straw. Could an intelligent, upright,
and educated person, without needing family support or managerial skills, without inventing or
creating new products, build a company from scratch and become successful and wealthy in
America? Here was Buffett, a living example for me to follow, standing before my eyes. Back then
I did not think I was suitable for management because I didn’t understand the American society
and culture. I was not confident about becoming an entrepreneur, either. But what if studying
the value of a company, its complicated business data and financial reports, was my specialty? If
what Buffett said was true, then couldn’t a new immigrant like me, who had no connections or
experiences of any kind, still make a fortune from the stock market? That sounded very enticing.
After listening to the lecture, I went back and immediately found all the books written about
Buffett, including his annual letters to Berkshire shareholders and articles about him. I also
learned that Charlie Munger was Buffett’s decades-long partner. I spent nearly two years studying
them, and everything that I read reinforced my first impression at Buffett’s speech. Having
completed this research process, I was confident that this industry was a feasible choice for me.
One or two years later, I bought the first stock in my life. Although my personal net worth was
still negative at the time, I had saved some cash to invest. The 1990’s began an era of globalization
that positioned U.S. companies across all industries for growth, thus there were many

17
undervalued stocks in the market. By the time I graduated from Columbia University in 1996, I
had earned a considerable return from my stock market investments.
After graduating, I worked at an investment bank while continuing to invest in stocks on my own.
In my first year, I participated in the initial public offering of a large firm and received a large
bonus. However, I did not like my investment-banking job. In addition, I realized that my salary
and bonus from the investment bank were no more than my stock market returns from investing
in my spare time. I then realized that investing was not only a life-saving straw or a spare-time
hobby, but it could also become a lifelong career. After one year, I quit my investment-banking
job and started my career as a professional investor. At that time, my family and friends were
very concerned about my seemingly abrupt decision, and I was unsure about my future as well.
Frankly, for me, the courage to start a business also came from Buffett and Munger’s influence.
In January 1998, I started my own company. I had very few supporters, but was able to pool
together a small sum of money with the help of a few close friends. I wore many hats, acting as
the chairman, fund manager, secretary, and analyst, and used only a cell phone and a laptop. The
timing coincided with the 1997 Asian financial crisis and the price of oil dropping below $10 per
barrel. I started buying the stocks of many excellent Asian companies as well as the stocks of oil
companies in the U.S. and Canada, but the volatility of the stock market that followed created a
19% paper loss that year. This caused some investors to become concerned about future
operating conditions and they dared not invest more. One of my largest investors decided to
withdraw his investments the following year. Coupled with the high operating costs of the
previous period, my company was struggling to survive.
Losing the first battle put me under great pressure to live up to my investors’ trust. This
psychological burden affected my investment decisions. I dared not commit to action even when
presented with a good opportunity. Yet that period of time presented the best investment
opportunity. At that moment, Buffett and Munger’s philosophy and examples were a great
support for me. During the 1973-1974 recession in the U.S. both of them had similar experiences.
At my lowest point, I used their examples to encourage myself to always take the long-term view.
Then, in the second half of 1998, I withstood the pressure and had the courage to make a few
important investment decisions. It was these investments that brought my investors and me
exceptional returns during the next two years. Looking back, I know I was lucky with the timing,
but Buffett and Munger’s examples, books, and ideas were important influences on me.
However, the outstanding performance did not bring me any new investors. From then until now,
the vast majority of investors, especially institutional investors, still follow investment
philosophies that are based on theories that do not make sense to me. For example, they believe
in the efficient market hypothesis, and therefore judge performance by volatility-adjusted
returns, as if price volatility is equated to real risk. It seemed like we spoke different languages
when I talked to them.
In my view, the biggest risk in investing in the stock market is not the volatility of prices, but
whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not
a risk, but also it may present an opportunity. Where else would you find cheap stocks? If your
favorite steak restaurant cuts its prices by half, you will enjoy eating there more. Buying stocks at
a discounted price should make the seller uncomfortable while you, as a buyer, should be pleased.

18
I explained to prospective investors that my investment principles followed the investment
philosophy of Buffett and Munger. Then I realized that while Buffett and Munger were very
successful, the actual practices of individual and institutional investors were diametrically
opposed to Buffett and Munger’s investment philosophies. On the surface, famous fund
managers appear to accept the theories of Buffett and Munger and show great respect for their
performance, yet in practice they do the exact opposite because their clients’ behavior is also the
exact opposite of Buffett and Munger’s. They still accepted theories that claimed, “Volatility is
risk” and “the market is always right,” but to me, those theories were completely absurd.
In order to retain and attract more investors, I had to make compromises for a period of time. For
a few years’ time, I had to adopt an equity long-short strategy to manage the volatility of the
funds under management. Compared with a long approach, short selling could hardly be used for
long-term investment. There were three reasons for this. First, for short selling, the upside
potential is capped at 100%, but the potential downside is unlimited—the exact opposite of going
long. Second, shorting must be accomplished by borrowing. So, even if the short-sell decision is
correct, if the timing isn’t right, the investor could face losses or even bankruptcy. Third, the best
short investment opportunities are generally due to frauds and manipulation. But fraudulent
activities are usually covered up and disguised really well and require a long time to be exposed.
For example, disgraced former investment manager Bernard Madoff’s fraudulent activities went
undetected for several decades. Because of these three reasons, short sellers must keep a close
eye on the ups and downs of the market and be constantly trading.
The long-short approach I used for a couple of years significantly reduced the volatility of the
investment portfolio. During the financial crisis in 2001-2002 following the Internet bubble, we
did not suffer any loss and even earned a small return. Meanwhile, our assets under management
increased significantly. A legendary figure in the hedge fund industry became one of my major
investors and another invited me to set up a joint investment fund for Asia. Everything appeared
great on the surface, but, deep down, I was very frustrated. By simultaneously going both long
and short, I needed to manage the risks of short selling and trade constantly. But to be constantly
trading meant that I didn’t have the time to really study the long-term investment opportunities.
Although the volatility of the fund was better than before, the returns weren’t good. In fact, there
were a number of great investment opportunities at that time. Frankly speaking, the biggest
mistakes of my entire career were not losses due to bad decisions (of course, I made some of
these mistakes too), but rather the inability to invest heavily in my best-quality ideas. The returns
I failed to capitalize on are still increasing to this day.
That period of time was a low point in my professional career. I even once thought about shutting
down the fund because I spent most of my time on activities that weren’t my main business.
Right at this crossroads, a serendipitous opportunity led me to meet my lifelong mentor and
friend, Mr. Charlie Munger.
Charlie and I first met at a mutual friend’s house while I was working for an investment bank in
Los Angeles after graduating from college. Charlie struck me as someone distant and absent-
minded, only focused on his own topics. But the wisdom sparked by his words was inspiring. At
that first meeting, Charlie was, to me, a respectful, wise gentleman far beyond my reach. He
probably had no impression of me then.

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Thereafter, we met a couple of times and had a few chats. At a Thanksgiving gathering in 2003,
seven years after we first met, we had an in-depth, sincere discussion. I introduced every single
company I had invested in, researched, or was interested in to Charlie and he commented on each
one of them. I also asked for his advice on the problems I’ve encountered. Toward the end, he
told me that the problems I’ve encountered were practically all the problems of Wall Street. The
problem is with the way Wall Street thinks. Even though Berkshire Hathaway had been such a
success, there wasn’t any company on Wall Street that truly imitates it. If I continued on this path,
my worries would never be eliminated. But if I was willing to give up this path right then, to take
a path different from Wall Street, he was willing to invest with me. This really flattered me.
With Charlie’s help, I completely reorganized the company I founded. The structure was changed
into that of the early investment partnerships of Buffett and Munger (note: Buffett and Munger
each had partnerships to manage their own investment portfolios) and, at the same time, all the
shortcomings of a typical hedge fund were eliminated. The investors who agreed to stay signed
long-term lock-up agreements and we also stopped accepting new investors. The new fund
retained a portion of the original investment portfolio, including our investment in BYD.
Thus, I entered another golden era in my investment career. I was no longer restricted by the
various limitations of Wall Street, and our investment returns proved the correctness of the
decision to transform the fund structure. The numbers still fluctuate as before, but the eventual
result was a substantial growth in returns. From the fourth quarter of 2004 to the end of 2009,
the new fund achieved an annual compound return of 36% net of all expenses. Since the inception
of the fund in January 1998, the fund achieved an annual compound return in excess of 29%. Over
a 12-year period, the capital grew more than 20-fold.
Putting aside those figures, the work became smoother over the years, and I enjoyed a much
better life running the fund. I was no longer bothered by the ups and downs of the stock market
nor the incessant trading and shorting. On the contrary, I could devote all my time to researching
and understanding companies. My investment experience clearly demonstrated that the value
investing theory adopted by Buffett and Munger could lead to great success over time. However,
because of their own limitations, most investors do not use this method. Therefore, it creates a
great competitive advantage for those who do, and this is an advantage that will not disappear
anytime soon.
Part 2: The Uniqueness of Charlie Munger
Buffett has said that despite the countless people he has met in his life, he has never encountered
anyone else like Charlie. After years of getting to know him, I couldn’t agree more. Even after
considering all the biographies that I’ve read, which includes characters from ancient to modern
times, I have yet to find anyone similar to him. Charlie is so special and unique in his thinking and
personality
For example, when Charlie thinks, he always starts by inverting. To understand how to be happy
in life, Charlie will study how to make life miserable. To examine how businesses become big,
strong, and successful, Charlie first studies how businesses decline and fail. While most people
care only about how to succeed in the stock market, Charlie is most concerned about why most
have failed in the stock market. His way of thinking comes from the saying in the farmer’s
philosophy: “All I want to know is where I’m going to die so I’ll never go there.”

20
Throughout his life, Charlie has been constantly collecting and researching the notable failures in
each and every type of person, business, government, and academic research. He then arranges
the causes of failures into a checklist for making the right decisions. Because of this, he has
avoided major mistakes in his decision making over his life and career. The importance of this on
the performance of Buffett and Berkshire Hathaway over the past 50 years cannot be emphasized
enough.
Charlie’s mind is original and creative. It is never restrained by rigid rules or doctrines. He has the
insatiable curiosity of a child and possesses the qualities of top-notch scientists and their scientific
methodologies. He has had a strong thirst for knowledge throughout his life and is interested in
practically everything. To him, with the right approach, any problem can be understood through
self-study. Further innovations can be built on the foundations laid by the intellectual forefathers.
In this matter, he is very much like Benjamin Franklin.
Most modern, first-class experts and academics can maintain relative objectivity within their own
areas of specialty. But once they leave their area of specialty, they become subjective, dogmatic,
or rigid, and perhaps even lose their capacity for learning. Thus, like the story of the blind men
and the elephant, they are unable to see the whole picture.
Charlie’s mind is never restrained by any fixed doctrines. His unique thinking is applied to every
corner of his career, life, and learning. In his view, everything in the universe is an interactive
whole, and all of human knowledge is just pieces of the comprehensive whole. Only by combining
this knowledge through a latticework of mental models can it become useful in decision-making
and in developing a proper understanding. So he advocates studying all the truly important
theories in all disciplines and building on this foundation—the so-called “worldly wisdom”—as a
tool for studying the important issues in business and investments. In this book, Charlie gives a
detailed description of how to acquire this worldly wisdom.
Charlie’s way of thinking is based on being honest about knowledge. He believes that, in this
complex and changing world, there will always be limitations to human cognition and
understanding. Therefore, you must utilize all available tools and constantly uncover evidence to
disprove and adjust your existing knowledge or beliefs; hence the Confucian saying, “Real
knowledge is to know the extent of one’s ignorance.” In fact, everyone has blind spots in their
thinking. We might be objective in our own specialty, with others, or with one single subject
matter, but maintaining objectivity with all the issues of the world is very difficult and may even
be against human nature. And yet, Charlie can maintain objectivity about everything. In this book,
Charlie also talks about training and cultivating the spirit of objectivity. To cultivate this way of
thinking will enable you to see things others do not see and predict the future that others cannot
predict, thus leading to a happier, more independent, and more successful life.
But even with objectivity, the real knowledge that one can acquire through life is still limited. So
we also need to stay within our circles of competence. A “competence” that has no defined
borders cannot be called a true competence. How do you define your own circle of competence?
Charlie once said that he was not entitled to have an opinion on a subject unless he could state
the arguments against his position better than the people who support the arguments against his
position. As a result, once Charlie establishes an opinion, it is almost always creative, unique, and
seldom wrong.

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A beautiful lady once insisted that Charlie use one word to sum up the source of his success.
Charlie said it was “rationality.” However, he has a more stringent definition of rationality. It is his
kind of “rationality” that grants him sensitive and unique vision and insight. Even in completely
unfamiliar territory, with just one look, he can see through to the essence of the subject. Buffett
calls this characteristic of Charlie the “two-minute effect”—he said that Charlie could, in the
shortest time possible, unravel the nature of a complex business and understand it better than
anyone else. The process of Berkshire’s investment in BYD Auto is an example. I remember when
I first discussed BYD with Charlie in 2003. He had never met Wang Chuanfu (Chairman of BYD),
never visited BYD’s factory, and was relatively unfamiliar with the Chinese market and culture.
Yet the questions and comments he made at that time remain to this day the most pertinent
questions to investing in BYD.
Everyone has blind spots, and even the brightest people are no exception. To quote Buffett,
“Benjamin Graham taught me to only buy statistically cheap stocks, and Charlie allowed me to
change my thinking. That’s the real impact Charlie had on me. I needed a powerful force to break
the well-entrenched limitations imposed by Graham’s theories. Charlie’s mindset was that source
of power. He expanded my horizons.” I have also had this profound experience. With at least two
important issues, Charlie pointed out the blind spots in my thinking. If it weren’t for his help, I
would still be in the process of evolution from ape to human. Over the past 50 years, Buffett has
emphasized repeatedly that Charlie’s impact on him and Berkshire is irreplaceable.
Charlie spent his entire life studying disastrous human mistakes and is particularly fond of
catastrophic errors caused by human psychological tendencies. The most valuable contribution is
that he predicted the disastrous consequence of the spread of financial derivatives and the
loopholes in the accounting and auditing system. Back in the late 1990s, he and Mr. Buffett had
already warned about the disastrous potential of financial derivatives. They escalated their
warnings with the proliferation of these products, calling them “financial weapons of mass
destruction,” as they would have a devastating impact on the economy and society if they were
not stopped and regulated in time. The financial tsunami and global economic recession in 2008
and 2009 unfortunately validated Charlie’s far-reaching vision and insights. On the other hand,
Charlie’s research into these catastrophic events has provided valuable experience and
knowledge to help prevent similar disasters from occurring and is especially worthy of the
attention of governments, the financial industry, businesses, and academia.
Compared to Buffett, Charlie has a more diverse range of interests. For instance, he has
extensively studied almost every field in both the hard and soft sciences. Integration of the
interdisciplinary studies has formed the original and unique Munger ideology. Compared to
anything coming from within the ivory towers’ system of thinking, Munger’s doctrines are built to
solve practical problems. For instance, as far as I know, Charlie was the first to propose and
systematically study human psychological tendencies and their huge impact on decision-making
processes in investing and business. Now, decades later, behavioral finance has become a popular
topic in economics research, with a practitioner recently winning the Nobel Prize. The theoretical
framework Charlie describes in the final chapter of this book, “The Psychology of Human
Misjudgement,” will provide helpful guidance to people in better understanding the role of
psychology in decision-making.

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Charlie’s interest is not limited to the philosophy of thinking. He also likes to work with his hands
and focus on details. He owns the world’s largest catamaran, which he designed himself. He is
also a great architect. He built his house according to his own preferences, fully participating in
every detail from the initial design to the finished product, and he designed all of the buildings
that he has donated money for, including the student dormitories of Stanford University, the
Munger Science Center at Harvard- Westlake School, and the Munger Research Center at the
Huntington Library.
Charlie is naturally full of energy. He was 72 years old when I first met him in 1996. He is 86 years
old this year. In the decade and a half I have known Charlie, his level of energy has never changed.
He is always energetic and is an early riser. Breakfast meetings always begin at 7:30 AM. At the
same time, because of dinner events, he spends less time sleeping than the average person, but
that does not affect his exuberant energy level. His memory is also amazing. He still remembers
BYD’s operating figures I discussed with him many years ago while my memories have already
blurred; the 86-year-old man has a better memory than this young man! These are his innate
competitive advantages, but he acquired through hard work the unusual qualities that
contributed to his success
To me, Charlie is not only a partner, a mentor, a teacher, and a friend, but also a role model
toward leading a successful career and life. Apart from the principles of value investing, I also
learned from him how to live life. He made me understand that a person’s success is not
accidental. Timing and opportunities are important, but the inherent character of a person is even
more important. Charlie likes to meet people for breakfast, usually starting at 7:30 AM. I
remember the first time I had breakfast with him. I arrived on time and found Charlie sitting there,
finished with the day’s newspapers. It was only a few short minutes before 7:30, but I felt bad
letting an older man I respected wait for me. For our second meeting, I arrived about fifteen
minutes earlier and still found Charlie sitting there, reading the newspaper. For our third meeting,
I arrived thirty minutes earlier and Charlie was still reading the newspaper, as if he had been
waiting there all year round and had never left the seat. At the fourth meeting, I arrived an hour
early and sat there waiting at 6:30 AM. At 6:45, Charlie strolled in with a pile of newspapers and
sat down, not even looking up, completely unaware of my existence. Thereafter, I came to
understand that Charlie always arrives early for meetings. However, he does not waste time
either, because he reads the newspapers he brought along. Now I also arrive early, with a
newspaper in hand, to keep him company until we start our breakfast meeting at 7:30 AM.
Occasionally, Charlie may be late. Once I was to introduce a young Chinese entrepreneur to him,
and Charlie ran half-an-hour late from another lunch meeting. The moment he arrived, Charlie
apologized profusely for being late and explained in detail what had caused his delay. During the
conversation, he even proposed a few methods to improve the valet parking system to be more
efficient so as not to cause customer delays with a 45-minute waiting time. This young Chinese
man was both surprised and touched as he could hardly imagine anyone in the world as well
established and regarded as Charlie that would keep apologizing to a junior for being late.
There was another event that made a huge impact on me. One year, Charlie and I were attending
an out-of-state meeting. After the event, I was hurrying to get back to New York and unexpectedly
bumped into Charlie again at the airport terminal. When he passed through the security detector,
it repeatedly set off. Charlie returned again and again for the security check. He finally passed

23
through the security checkpoint after a long and laborious effort, but by then, his plane had
already departed.
Charlie did not seem upset. He took out a book he carried with him and sat down to read while
he waited for the next flight. Incidentally, my flight was also delayed so we waited for our flights
together.
I asked Charlie, “You have your own private jet and so does Berkshire. Why do you bother going
through the hassles of flying commercial?
Charlie replied, “Firstly, it is a waste of fuel for me to fly in my private jet. Secondly, I feel safer
flying in a commercial aircraft.” However, Charlie’s third reason is the real one: “I want to live an
engaged life. I don’t want to be isolated.”
The last thing that Charlie wants to happen in his life is to lose contact with the world because of
money and wealth. To isolate yourself in a large office occupying the entire floor, to require layer
after layer of approvals to set up meetings, and to hide behind a complicated bureaucracy so you
become hard to reach for anyone—alone, isolated, and inaccessible—that is how you become
out of touch with the realities of life.
“As long as I have a book in my hand, I don’t feel like I’m wasting time.” Charlie always carries a
book with him. Even if he is sitting in the middle seat in economy class, as long as he has a book,
he will have no complaint. Once he went to Seattle to attend a board meeting, taking the economy
class as usual. He sat beside a Chinese girl who was doing her calculus homework throughout the
flight. He was impressed with her because he has difficulty imagining American girls her age
having such intense concentration to ignore the noise and chaos on the aircraft and concentrate
on studying. If he were aboard a private jet, he would never have had the opportunity to come
into close contact with these stories of ordinary people.
Although strict with himself, Charlie is extremely generous with those whom he cares about and
loves. He is not stingy with money, hoping others will benefit more. For his own travels, Charlie
always flies economy, but when he is traveling with his wife and family, he will take the private
jet. He explained that his wife deserved a better treatment because she had been so devoted in
raising their kids and taking care of the family. Now that her health is not as good as it used to be,
he takes good care of her.
Charlie is not a graduate of Stanford University, but he donated more than $60 million to Stanford
just because his wife is a Stanford alumna and also a former board member of the University.
Once Charlie has found something he wants to do, he can carry it on for the rest of his life. For
example, he has been a board member of the Harvard-Westlake School and of a charity hospital
in Los Angeles for more than 40 years. Charlie is a very generous sponsor of the charities he’s
engaged in. He not only donates money, but also devotes a considerable amount of his time and
energy to these charities to make sure they run successful operations.
Charlie spent his lifetime studying the causes of human failures, resulting in a profound
understanding of the weaknesses of human nature. Because of this, he believes people must be
strict and demanding of themselves, continuously improving their discipline in life in order to
overcome the innate weaknesses of human nature. To Charlie, this way of life is a moral

24
requirement. To an outsider, Charlie might seem like a monk; but to Charlie, this process is both
rational and pleasant and it leads to a successful and happy life.
Charlie is such a unique person. But if you think about it, if Munger and Buffett weren’t so unique,
how could they have built Berkshire’s performance over 50 years into one that is unprecedented
in the history of investments and has yet to be replicated? Over the past two decades, interest in
Buffett and Munger has been increasing worldwide, and it’s likely to be intensified in the future.
There are an immense number of books about them in both Chinese and English and there is no
lack of original insights. To be honest, it is still too early for me to assess the entire value of
Mungerisms, because every time I talk to Charlie and reread his lectures, I learn something new.
On the other hand, this shows that my understanding of his philosophies is still insufficient.
However, having the good fortune to be exposed to Charlie’s philosophy and character with a
more direct and personal experience, I am honored to share my personal observations and
experiences with the readers. I sincerely hope that the audience will have a deeper understanding
of the essence of Munger’s philosophies after reading this book and be greatly encouraged to
improve their own careers and lives.
I know that Charlie himself is also fond of this book, which has pulled together all the wisdom and
experiences of his life. In his later years, Charlie has often concluded his speeches with one of his
favourite quotes, which is a line from the old Mr. Valiant-for- Truth in the Christian Classic, The
Pilgrim’s Progress, “My sword I leave to him who can wear it.” With the publication of this book,
I hope that more readers will have a chance to study and understand Munger’s wisdom and
character. I believe every reader can, through learning and practice, become the lucky valiant
wearing the sword.
Part 3: Charlie Munger and the Traditional Chinese Literati
Over the years that I’ve known Charlie, I have often forgotten that he is an American. In my mind,
he is more similar to the traditional Literati (scholar-officials) of Imperial China. In my 20 years of
living in America, I often ask myself, “What is the soul and essence of Chinese culture?”
Objectively speaking, as a Chinese growing up after the “May Fourth Movement,” I generally
adopt a negative attitude toward Chinese traditions. After arriving in the United States, I was
fortunate to be able to systematically learn about all the classic literature that shaped Western
civilization in my studies at Columbia University, covering areas such as literature, philosophy,
science, religion, and the arts. The studies started from Greek civilization, extended to Europe,
and ended with modern civilization. Later, because Columbia offered a number of courses on
Confucian philosophy and Islamic civilization, I renewed my understanding and knowledge of the
Confucian philosophy. At that time, most textbooks were in English, and since I was not adept in
ancient Chinese prose, I was left with no choice but to start my root-seeking journey for ancient
Chinese philosophy through English versions of these books.
The more I read and think about it, the more I feel that the soul of Chinese culture lies in the
traditional Chinese Literati culture. The value system of the Literati was presented as one of self-
improvement, the process of surpassing one’s self. Confucius wrote in The Higher Education,”
When the heart is right, the personal life is cultivated. When personal lives are cultivated, families
become harmonious. When families are harmonious, government becomes orderly. And when
government is orderly, there will be peace in the world.” This set of values was widely expounded

25
upon by the various schools of thought under Confucianism and should be where the true core
value of Chinese culture lies. The ancient Imperial examination system was a primary platform to
identify the Literati. It allowed followers of Confucianism to pursue their journey of personal
cultivation and, at the same time, provided a platform for them to utilize their talents. Through
passing the exams and becoming Imperial officers, thus reaching the highest hierarchy of their
society, they could make use of their knowledge and realize their own values.
Hundreds of years after the Imperial examination system ended, the spirit of the Literati has now
been lost. Especially in these modern times of highly developed commercial society, the Chinese
scholars who bear the spirit of the Chinese Literati are often perplexed by the value and ideals of
their own existence. In this modern world where tradition has been lost, is the spirit of the Literati
still applicable or useful? In the late Ming Dynasty, capitalism began to sprout in China, and the
merchants raised the ideals of “a businessperson with a Confucian soul.” Today, commercial
markets have become the driving force of the modern society, thus improving the chances for
this ideal to become a reality.
Charlie can be said to be the best role model of “a businessman with a Literati’s soul.” First of all,
Charlie is extremely successful in business. What he and Buffett have achieved is unprecedented
and will never be replicated. However, in the in-depth interactions I have had with Charlie, I have
found him to be essentially a moral philosopher and a scholar. He reads widely, is knowledgeable
over a broad range of topics, is truly concerned about his own moral cultivation, and is ultimately
concerned about society. Like Confucius, Charlie’s value system, from the inside out, promotes
self-cultivation and self-development to become one of the “saints” who help others.
As described earlier, Charlie is very strict with himself. Despite his extraordinary wealth, he lives
life like a monk. He is still living in the same ordinary house he bought several decades ago, only
flies economy on trips, always arrives 45 minutes early for meetings, and will specially apologize
on the few occasions when he is late. Having achieved huge success professionally and financially,
he then devotes his efforts to charity to benefit the people of the world.
Charlie was completely dependent on his wisdom in achieving his success, and he is undoubtedly
an exciting role model for Chinese scholars. His success came from investing, which came from
self-cultivation and learning—completely different from the power-for-money deals and
“unwritten law” transactions we see in China today. Having the utmost integrity, Charlie used the
purest method and made full use of his own wisdom to achieve his success. Today, in the market
economy, can Chinese scholars be filled with the spirit of the Literati and, by improving
themselves through learning and self-cultivation, achieve the successes of the secular society
while realizing the value of their own ideals?
I sincerely hope that Chinese readers will be interested in Charlie and this book. Charlie is a great
admirer of Confucius, especially Confucius’ teaching spirit. As with Confucius, Charlie is also a
great teacher, happy to share his wisdom patiently and tirelessly. This book contains all of the
knowledge and wisdom Charlie collected over his lifetime to be shared with the world without
any reservation. Charlie is full of hope for China’s future and admires the Chinese culture. The
successful application of Confucianism in the modern Asian business world has helped to build
more confidence in the renaissance of Chinese philosophy and culture. Nearly one century after
the May Fourth Movement, we probably no longer need to struggle between the applications of

26
Chinese- versus Western-style learning. All we need is to be liberal minded, keep ourselves open
to all useful worldly knowledge, and place ourselves within the moral value system that has been
respected and abided faithfully by the Chinese for thousands of years.
I sometimes think that if Confucius were to be reborn in America today, Charlie would likely be
the ideal incarnation. If Confucius returned 2,000 years later to today’s commercialized China he
would probably teach: “Be righteous with a good heart, cultivate one’s moral character,
harmonize one’s family, enrich society, and help the world.”
Part 4: Contents and Acknowledgements
The first three chapters of the book introduce the life of Charlie and his famous quotations, and
summarize the main ideas of his views on life, career, and learning. Chapter 4 contains Charlie’s
11 most representative speeches. Many readers will be most interested in the following four of
these presentations: The first speech uses humour to explain how to avoid pains in life. The
second and third speeches explain how to obtain Worldly Wisdom and how to apply that wisdom
to the practice of successful investing. The final speech, recording Charlie’s most original study of
psychological systems, elaborates on the 23 most important psychological causes of human
misjudgements
Over the past year, many friends have contributed to the publication of the Chinese version of
this book. Mr. Li Jihong, a Chinese translator, undertook the majority of the work. His dedication
and superb writing style left a deep impression on me. My long- time friend, Mr. Chang Jing, put
in a lot of work proofreading, translating, and annotating. Without his help, I cannot imagine the
book finishing on time. I am more familiar with Charlie’s ideas and language style, and naturally
took on the work of the final check. Of course, if the book’s translation contains errors, I will bear
the responsibility for them. The elegance, patience, fidelity and generosity of Mr. Hung- Chun Shih
of the Shanghai Century Publishing Group make him a rare collaboration partner. Miss Zhang Xin
played a crucial role in driving the book’s translation, proofreading, editing and publication. These
distinguished colleagues made the translation and publication of this book a meaningful and
enjoyable experience. In addition, I need to thank many friends in China, especially in the value
investing community, for their encouragement and support for the publication of this book.

Louis Li
March 20

27
 Li Lu’s Lecture At Columbia: April 2010

The transcript of the lecture was done by Tariq Ali.

In fact, Tariq makes a good case that Li Lu is among the top candidates to become the CIO at
Berkshire Hathaway when Warren Buffet “retires.”

Li Lu is quickly rising to become a cult figure among value investors.

According to Bruce Greenwald (who teaches a value investing course at Columbia), Li Lu

manages all of Charlie Munger’s money, and has suggested the Warren Buffet would give
money to Lu if he (Buffet) ever retired.

Li Lu’s comments regarding how to look at any company (understand it as though

you just inherited it as the 100% owner of a family business), and how to determine
and identify what you know and what you don’t know, is absolutely fundamental to
an appropriate investing strategy.

Bruce Greenwald: Warren Buffett says that when he retires, there are three people he would
like to manage his money. First is Seth Klarman of the Baupost Group, who you will hear from
later in the course. Next is Greg Alexander. Third is Li Lu. He happens to manage all of Charlie
Munger’s money. I have a small investment with him and in four years it is up 400%.

[Applause]

Li Lu: Columbia is where my whole life in America started. I could barely speak the language.
In Columbia it was where I had a new life. It was really in the Value Investing class where I
got my career start. I was really worried about my student loan debt at the time and a friend
told me about this class and said I need to see a lecture from Warren Buffett.

What I heard that night changed my life. He said three things:

1. A stock is not a piece of paper, it is a piece of ownership in a company.

2. You need a margin of safety so if you are wrong you don’t lose much.

3. In the market, most people are in it for the short term. It allows you a framework for
dealing with the day to day volatility.

Those were three powerful concepts. I had never viewed the stock market like that. I viewed
it negatively as a place made up of manipulators who were lining their own pockets. I
embarked on an intensive two year study learning everything about Buffett.

Two years after that I bought my first stock. After I graduated I worked at an investment bank
for a year and realized it was a mistake. I tried to start a fund but I didn’t have a track record.
The first year I managed money I lost 19%.

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Being a value investor means you look at the downside before looking at the upside. Before
becoming an investor you need to look at how you can fail at this game. There are all sorts of
ways you can fail. You need to examine who you are and see if you could be good at it. If you
could ever find something you can do well that you really like — that will be your best
investment. You will do better than competitors. If you can do it with intrinsic passion, that
really over time will add enormous value to you.

Back to the game of investing. This concept of margin of safety is an essential concept to be a
good investor. The future is unpredictable, you will always be dealt surprises, some positive
most negative. You need to build in a level of safety so that whatever happens, you will not get
crushed. If you can really successfully know what you are getting into, you can pretty much
navigate. Most people are troubled by what they don’t know. The world is divided by those who
know and those who don’t know. If you really know — you will not pull triggers like Wall St.
traders. If you are truly intellectually honest, you would not do anything.

This class teaches you to know what you are getting into, especially accepting what things you
don’t know. The game of investment is really continuous learning. Everything affects an
investment, it constantly changes. You are not investing in the past but the accumulative cash
flow of the future. You have to want to find a certain set up where you can know
something that most people don’t know. There are plenty of things I don’t know but they don’t
factor into the purchase because I am using a huge margin of safety. Buying a dollar at 50
cents. So if things turn against you, you will be okay. That is not easy. This business is
brutally competitive. It is so impossible to know everything and know exactly what is going to
happen to a business from now till the end that you really have to accept that what you don’t
know.

Finding an edge really only comes from a right frame of mind and years of continuous study.
But when you find those insights along the road of study, you need to have the guts and
courage to back up the truck and ignore the opinions of everyone else. To be a better investor,
you have to stand on your own. You just can’t copy other people’s insights. Sooner or later, the
position turns against you. If you don’t have any insights into the business, when it goes from
$100 to $50 you aren’t going to know if it will back to $100 or $200.

So this is really difficult, but on the other hand, the rewards are huge. Warren says that if you
only come up with 10 good investments in your 40 year career, you will be extraordinarily
rich. That’s really what it is. This shows how different value investing is thanany other subject.

So how do you really understand and gain that great insight? Pick one business. Any business.
And truly understand it. I tell my interns to work through this exercise – imagine a distant
relative passes away and you find out that you have inherited 100% of a business they owned.
What are you going to do about it? That is the mentality to take when looking at any
business. I strongly encourage you to start and understand 1 business, inside out.

29
That is better than any training possible. It does not have to be a great business, it could be
any business. You need to be able to get a feel for how you would do as a 100% owner. If you
can do that, you will have a tremendous leg up against the competition. Most people don’t take
that first concept correctly and it is quite sad. People view it as a piece of paper and just trade
because it is easy to trade. But if it was a business you inherited, you would not be trading.
You would really seek out knowledge on how it should be run, how it works. If you start with
that, you will eventually know how much that business is worth.

When I started in the business in 1997, it was in the middle of the Asian Financial Crisis. A few
years later there was the Internet bubble. A couple years ago was the Great Crash of 2007 –
2008. They are billed as once in a century disasters but happen every few years. Every time it
goes against you, your net worth or value of your investments might go down 50%. This is
really where that insight and temperament comes in. In a sense, you have to have a certain
confidence in your own judgment and not be swayed by other people’s views. It is not easy.
But that is life. It is just a given. It happens to everyone. Berkshire had at least three times
when the stock went down 50%. It happened to Carnegie too. It happened to Rockefeller. It
happens to everyone. If you really made a mistake, it would notstop at 50% but go to 0.

This happens to even mighty companies. Look at the top 50 companies in America every 10
years. By the time 20-40 years go by, 2/3rds of them will be gone. By the time it goes to 100
years, there might be only a couple left. It’s just the way it is. Look at what happened to the
once mighty General Motors. So thats why I’m saying is, investing is a continuous learning
process because your investments are constantly changing

So for those of you that have curiosity and the temperament, this game couldn’t be better.
Capitalism rewards people who are talented at capital allocator. So if you have the aptitude
and temperament, it is the great game. If you don’t have that then I urge you not to go and
become a nuisance. That is really what Wall Street did, they don’t really create anything they
just move money around. Letting the financial industry get too big is bad for the economy, it is
just as bad as getting addicted to casinos, drugs, and alcohol. None of them are really useful,
they just transfer wealth. That is what I think happened on Wall Street over the last several
decades. So avoid being harmful.

With that I am open to questions.

Q: Mohnish Pabrai recently spoke about his reluctance about investing in China due
to the multiple accounting books / the possibility of fraud. How do you deal with this
given your own investments in China?

Li Lu: Well, you know I think he is right. Every thing has an exception though. Just because a
next door neighbor is a fraud doesn’t mean you are. That is one question to ask — whether
you can trust the accounting and people running the business. That can have a huge impact
on the business. I suggest you spend a lot of time looking at these factors, especially if you
are investing for the long haul.

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Q: Why did you decide to go into venture capital? How is that different than your other
investing?

Li Lu: I always had this bent that I want to build a real business. I started a venture and it
was really a lot of fun. Overall, it is a tougher game than simply investing in securities
because you have to evolve to the day to day changes in operations and it is just not as easy
to build great businesses. Every generation has a handful of great businesses that come from
nowhere and come to dominate their fields. It is much more rewarding as an investor to pick
those. Also, you are more likely to find managers much more capable than yourself. Overall, I
learned a lot. I learned a lot in how businesses succeed and how businesses fail. It really was
a lot of fun. I probably carried it too far — I eventually ran one of the businesses and it was of
course a mistake.

Q: I read that when you look at an industry, you look at the most miserable failures
of that industry to see whether you will invest in it. Can you talk a bitabout that?

Li Lu: It goes back to understanding the business. Once you have that understanding you can
extend it to understanding an industry. A certain industry might have characteristics that
make it different than others. In certain industries you might have better prospects than
others. Find the best of the players in the industry and the worst players. And see how they
perform over time. And if the worst players perform reasonably well relative to the great
players — that tells you something about the characteristics about the industry. That is not
always the case but it is often the case. Certain industries are better than others.

So if you can understand a business inside out you can then eventually extend that to
understanding an industry. If you can get that insight, it is enormously beneficial. If you can
then concentrate that on a business with superior economics in an industry with superior
economics with good management and you get them at the right price — the chances are that
you can stay for a very long time.

Q: Did you have any specific example?

Li Lu: I have studied many over the years. As I have said, don’t copy other people’s insights
because it doesn’t work. Automobiles are amazing. If you look at the early days it started with
several players and concentrated with just a few players that became enormously profitable.
Then they became miserable. You then see how the life cycle turns with new automakers in
China and India. Everything has a reason. If you want a good idea — look at General Motors
from the early days, look every 5 years and see how the performance metrics change. The
Graham and Dodd Center should collect all the data and perform some kind of commentary on
it.

Bruce Greenwald: Do you want me to give you the answer to that? In the 1960s, their
return on capital was 46%. In the 1970s their return on capital was 28%. In the 1980s it was
9% in the 1990s it was 6%. You want to guess how negative it is now?

31
Li Lu: So that is really fascinating. If you have that data, the amount of insight that would yield
would be astonishing. So instead of just accepting the conventional wisdom that the auto
business is bad — that is just not true. Or if you say well those guys just unbelievable money
machines — that is not true either. So if you can really examine those statistics and understand
it that will give you an advantage for analyzing new situations like in China and India. That is
really what turns me on. Understanding this gives you a tremendous leg up.

Q: I wanted to ask you about BYD. I heard that you thought it was important for them
to introduce a model to the US and wanted to know why you thought that.

Li Lu: That might be a better question to ask the BYD chairman than myself. Well, If you are
just talking about electric vehicles, you know the key — the heart and soul of the electric
vehicle age the heart is the battery. There is the battery, electric motor, and the electric
control control panel. The electric motor has been there for 100 years, control system is
software that can be improved over time.

The battery is really where you get the biggest appreciation and is what determines the value
of the electric vehicle. 100 years before the Model-T was introduced, the competition between
electric vehicles and gasoline was not nearly as optimistic. Up and till then, 1/3rd of cars
being produced were electric. It wasn’t until Rockefeller got oil extracted easily enough that it
worked. Henry Ford was able to make the internal combustion work even though it wasted
85% of the energy. He was able to build the engine and produce automobiles that were
cheap enough for people to buy and it took off. That is where you find the real winners.

Now, years later, we know that the way that oil is burned contributes to global warming. If it
continues, the planet might still be here but all the human beings might not. Human beings
have only been on the planet for a tiny bit of the earth’s history. So there are all sorts of good
reasons for electric cars. Battery development has advanced so much that it is now comparable
to the price and performance of traditional cars. So now with the help of companies like BYD,
the balance is about to tilt towards where performance and price are getting to the level that
makes them a desirable alternative. It will be desirable everywhere. Eventually, if you have a
car that does all that, it will be sold everywhere.

Q: What about BYD versus others in the industry?

Li Lu: The market will determine that.

Q: Yeah – but why BYD versus others?

Li Lu: Well because we also studied all those other guys. We will see when the winner
emerges whether we are right or wrong.

Q: Right – but what did you look at to reach that view?

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Li Lu: There are a lot of people who have worked over 100 years making great cars. The
technology for building a traditional car has been refined enough to where it can be learned in
a short period. The place we are still seeing a curve of continuous rapid improvement is with
the batteries for cars. Whoever is leading the charge will have a major advantage.

There is really only one company that is a leader in battery manufacturing and automobile
manufacturing. There is only one company. To put this together you need a Ford to put that
together. So far those two elements need to be put together. It is not an easy process.

Q: So you went to BYD in 2005 and then you brought Berkshire as well. I saw that you sold a
small amount of your BYD position at the end of last year. Was it just rebalancing? Can I just
wanted to get your thoughts on that.
Li Lu: Actually I started my BYD position in 2002. I sold a small amount of shares because an
investor of mine had an emergency redemption.

Q: We read your profile online. I had a question – do you have any problems when
trying to invest in China?

Li Lu: Yeah I do have some difficulty. I did not really see a factory plant at BYD until the end
of 2008. I really did not have a better understanding till then. That really causes you to
question what it is before you make an investment. With investing, you have to work with
imperfect information because you are buying a piece of the future. I did not really get a
chance to get more information because the problem in Asia till much later but it did not stop
me from making my investment decision. So there is a point, where if you have enough
margin of safety– that is why I kept coming back to the elementary concept of margin of
safety– you can allow much more uncertainty and unknowns. So the answer of the question is
does that stop you from making the investment? No.

Q: So I did some research on lithium ion batteries, and I saw that BYD has a
manufacturing advantage with consumer batteries. But I saw that automobile
batteries are much more complex. I did not think that the idea of a good consumer
battery manufacturer + an automobile maker made much sense. So when Buffett
looked at the stock maybe it was a better deal but today it is this dream of vehicles
that is really priced in. It does not feel like a good value investor stock. So why would
you own it today?

Li Lu: Well that is interesting. One of the most fascinating things about being an investor is
that surprises are part of the game. When you get into situations like BYD, you see lots of
good surprises. Chuanfu and his team have this fabulous culture, everything people thought
they knew turned out to be a few years late. He got into battery manufacturing in that
particular way because he really had no other option. He had no money, he only had $300,000
in venture capital funding before IPO and that was it. He raised money in an IPO and Buffett
gave him $200M, now they have 160,000 employees. $6-7B in revenues, $500M in net profit.
It is amazing. So he has this ability to adapt in a competitive environment. He has

33
demonstrated that ability again again and again. The way he does automation is far cheaper
than anyone else and more reliable. He continues to surprise me with his ingenuity, to figure
out ways to do something better than everyone else. What he is currently doing is very
different than what everyone else has done. At the end of the day, you might look at what he
has done.

So how do you look at it as an investor with imperfect information? Well I suggest you look at
what he has accomplished. 8 years ago I had no idea they would go into the automobile or
laptop or cellphone battery business. So that demonstrates how he is. This investment is not
easy to understand because it is changing so fast, at such a large scale. An almost unheard of
speed. Their manufacturing capabilities will double soon. This year they will hire 10,000 college
graduates, 8 or 9 thousand engineers. The scale is almost unparalleled. So this is why the
study of history, of all the great corporations will give you a good insight in seeing what will
happen with BYD. I suggested that we start with GM and analyze its performance every 5
years for 100 years to understand at least one aspect of BYD’sbusiness.

Q: One investor came in and said talking to management is a waste of time. They will
say what you want them to say. Obviously it sounds like you don’t agree with that.
What do you think? Will you pay a premium for a business with a moat?

Li Lu: There is no general rule. The key in investing is to know what you know and know what
you don’t know. You can know about management teams without meeting with them. Every
situation is slightly different. So I come back to the point that if you know enough on other
things that there is enough margin of safety. Even if you meet with management, you may not
learn something. Obviously, actions speak louder. You want to see what they have done.
Everything being equal, the more you know about management, the more honest and upfront
they are, the more motive they have, the better the situation is and the deeper the discount.
You have to analyze it all. The key to analyzing it is you have to ask: do I really know what I
think I know, do I really know what I don’t know? If you can’t answer that question, chances
are you are gambling.

Q: What kind of preparation do you do before meeting a management team?

Li Lu: I don’t really have a set method. Because I usually am just curious about the
business and don’t know a lot. So you are prepared and not prepared. If you are really
curious, you want to learn more and study it more. When working at a hedge fund or
mutual fund, you are expected to learn a business in one week. You can’t truly
understand everything about a business in one week. It took me 10 years and I
am still learning new things about BYD. It is a continuous learning process. You
could spend a lifetime studying a business or industry, but in a few seconds I can
tell you whether or not I like it. You want to build knowledge by continually
learning. There is not set preparation.

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Q: Recently, Jim Chanos gave us his thesis on the China Syndrome with there possibly
being a bubble.

Li Lu: Well, it is too big of a question for me. I don’t know

Q: 20 years ago you said you challenged conventional wisdom in China. Out of curiosity, in
terms of value investing what do you challenge in the conventional wisdom?

Li Lu: Well, the fundamental philosophy of value investing is very sound. Its basically the
three things:

1. A stock is not a piece of paper, it is a piece of ownership in a company.

2. You need a margin of safety so if you are wrong you don’t lose much.

3. In the market, most people are in it for the short term. It allows you a framework for
dealing with the day to day volatility.

That is really an intelligent approach. So therefor any intelligent investing is really value
investing. There is a certain level of intellectual honesty. If you have all that insight going into
analyzing businesses I don’t have any arguments with it.

Q: What is your point of view on long / short positions in value investing?

Li Lu: The most profitable kind of investing is long term investing. You want to allow the time
that it might take because you don’t know when the market will catch on. If you can find a
business with good management with good industry fundamentals blowing it forward, you have
a good opportunity and you can save money on taxes.

A short cannot be a fundamentally long term position. In the long game, the upside is
unlimited. Your downside is 100%. In shorting it is opposite. Shorting is also essentially
borrowing, so you need money and time on your side. If time is not on your side, you can be
right but lose all your money. The best kind of short usually has some kind of fraud. In those
situations, management is determined to keep the fraud. Look at Bernie Madoff, 20 years
time. You cannot afford to borrow money for 20 years. So shorting is a short term game.
When those positions go against you, there is huge leverage that can utterly crush you.

In theory, long / short is okay, but if you are trading all the time you need to be in tune with
all the things moving the market. None of them might be fundamental to the actual business.
So you spend all your time chasing noise than studying a long term situation. If you cannot
concentrate on things in the long term, and spend all your time thinking about the short term,
you will not be able to develop the kinds of insights necessary to identify great investments.

From time to time, you will lose some money on paper. But it is just part of the game. This is
why I closed long / short. You know I went through three bubbles. The Asian Financial Crisis,
the Internet Bubble, and this most recent financial crisis. The biggest mistake I made is not

35
being able to pick up undervalued companies where I had a unique insight but was tied up
with this whole long / short thing. The money I left on the table is still adding up. I am still
paying for those mistakes.

Q: In a bull market environment, how do you re-evaluate your thesis?

Li Lu: I don’t ever want to profit from a bubble. Soros does that, that is just not my game. I
don’t profess any ability to understand how long a crowd will buy into a bubble. I invest in
things that appear to be compelling values that continues. So that is why this game is a
continuous learning process – because everything affecting the investment is constantly
changing. Including the price. Including the prospects and elements of business success. You
really do want to never stop learning. This game looks to be easy but it is not easy.

Q: Given your focus on international investments, how do you think about

diversifying your investments regionally?

Li Lu: First of all, I did not really specialize in international investments. I started off doing
most of my investments in the US and Canada. In recent years, I just find better bargains
outside of it. One of the great things about being an investor is you can look anywhere and
find great pockets of opportunities. You cannot do that as a venture capitalist as I
experienced myself. So you can look anywhere for opportunities. I do not take a regional
approach to diversification. I have views towards certain countries and currencies, but it is not
the driving force for a potential investment. If you have your fundamental things right, if you
happen to have macro economic factors behind you, you can run a great wave.

Q: How is your investment style different today than when you started the fund?

Li Lu: A lot of things have changed. One bonus about this profession is you get better over
time. Most professions, as you get older, you get out of the game. Take the example of
competitive sports. If you are a figure skater or gymnast, after your teenage years you are
out of the game. With investing, if you are doing it the right way, you get better over time.
Your knowledge accumulates exponentially. When I look back at everything I have done, I
would have done it all slightly differently, but that is because I am better at it today. So if you
approach it in a fundamentally sound way, as you mature, you become better and better.
That process and progression is like compounding money. In fact, you can compound
knowledge faster than money. If you truly love this game, I would suggest that you don’t
take short cuts. It might take longer but it is more rewarding.

Q: What is the difference between being a top political criminal in China versus a
hedge fund manager today (referring to the ire directed at Wall Street)?

Li Lu: I don’t consider myself a criminal. I don’t think China considers me a criminal. What I
think we are doing today with our investment in BYD in China is really helping China march
towards a modern era of prosperity. BYD is providing a solution to both China and the US, to

36
migrate from the past to a way that gets us out of the unsustainable carbon age that we live
in. Global warming is a vital concern to every human being, so China is providing a great
contribution to everybody with BYD. America has had a great history of invention and here is a
great company in China that is about to make a major contribution to human civilization with
cheap electric vehicles and solar power.

Ultimately we will have to get our energy from the sun. Most of the energy, even fossil fuels
(plants that die and then go into the ground), all originally come from the sun. So if you can
figure out a way to take energy from the sun and power vehicles, while using batteries to
store it, inexpensively — will really make renewable energy power everything. The
combination of those things holds the key to the future of industrial civilization that we are
about to embark on. We didn’t set out with BYD with this in mind, it just happened that way.
With great companies, it only looks logical in retrospect. Think about how Bill Gates started
Microsoft. I don’t think he knew up front that he would take the entire market — at that time it
did not exist. It is the same way with our investment in BYD. Ultimately, I think finding an
inexpensive way to store energy that we harness from the sun will be a huge contribution for
both China and the US, but more broadly our entire civilization.

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 Li Lu — Know What You Don’t Know (Graham & Doddsville Interview)

Li Lu ’96 is the founder of Himalaya Capital, an investment partnership focused on both public
and private opportunities in Asia and North America. Mr. Li grew up in China and was a
student leader in the 1989 Tiananmen Square protests. Prior to founding Himalaya Capital in
1997, Mr. Li worked in investment banking. He earned his B.A. in economics from Columbia
College, a J.D. from Columbia Law School, and an M.B.A. from Columbia Business School
G&D: How did your unique experience as a Tiananmen Square protest leader lead you to
where you are today, running Himalaya Capital?
Li Lu (LL): When I first came to Columbia University, I was dirt poor. I did not choose to come
here – I just ended up here because I had nowhere else to go, having just escaped from China
after Tiananmen. I was in a new country where I didn’t understand the language, didn’t know
anybody, and didn’t have a penny to my name. So I was desperate and afraid. In retrospect,
that is good inspiration for trying to figure out how to make money! I just wanted to know
how to survive.
For the first couple of years, I really struggled with the language, but I eventually became
much more comfortable. I always had this fear in the back of my mind of how I was going to
make a living here. I didn’t even think about success at the time – I just wanted to pay my
bills. I grew up in Communist China and never had much money to my name, and then all of
a sudden I had giant student loans. So naturally I tried to make a buck or two.
One day, about two years after I arrived, a friend of mine who knew my issues said, “If you
really want to make money you have to listen to this fellow. He truly knows how to make
money.” I wasn’t sure what it was all about. I just remember thinking that there was a “buffet”
involved. So I assumed that it was some kind of talk with a free lunch! I said it was a good
combination – a free lunch plus a talk about how to make money. So I went. To my dismay
there was no lunch. [Laughs] There was just a guy with the name “Buffett.”
Mr. Buffett really made a lot of sense during that talk. It was like a punch in my eyes. It was
like I had just woken up and a light had switched on. His honesty came through right out of
the gate. And I thought this fellow was just so intelligent – he could put very complex ideas
into such simple terms. I was immediately drawn to value investing. By the time the lecture
was over, I thought that this was what I was looking for; I could do this.
At the time, I couldn’t really start companies, and I didn’t want to work in a big company
because of the differences in language and culture. Investing, on the other hand, sounded like
it require a lot of reading and mathematics, hard work, and good judgment – I was confident
that I could do those things well. And the fundamental principles of value investing appealed
to me – buy good securities at a bargain price. If you’re wrong, you won’t lose a lot, but if
you’re right you’re going to make a lot. It fit my personality and temperament very well.
Warren used to say, “Value investing is like an inoculation – either it takes or it doesn’t.” I
totally agree with him. There are few people that switch in between or get it gradually. They

38
either get it right away or they don’t get it at all. I never really tried anything else. The first
time I heard it, it just made sense; and I heard it from the best. I guess it turned out better
than a free lunch.
G&D: How did your investing process develop differently from Buffett’s?
LL: Part of the game of investing is to come into your own. You must find some way that
perfectly fits your personality because there is some element of a zero sum game in investing.
If you buy, somebody else has to sell. And when you sell, somebody has to buy. You can’t both
be right. You really want to be sure that you are better informed and better reasoned than
the person on the other side of the trade. It is a competitive game, so you’re going to run into
a lot of very intelligent, hardworking fellows.
The only way to gain an edge is through long and hard work. Do what you love to do, so you
just naturally do it or think about it all the time, even if you are relaxing, and even if you’re
just walking in the park. Over time, you can accumulate a huge advantage if it comes naturally
to you like this. The ones who really figure out their own style and stick to it and let their
natural temperament take over will have a big advantage.
The game of investing is a process of discovering: who you are, what you’re interested in,
what you’re good at, what you love to do, then magnifying that until you gain a sizable edge
over all the other people. When do you know you are really better? Charlie Munger always
said, “I would not feel entitled to a view unless I could successfully argue against the best
counterargument of the smartest opponent.” He is right about that.
Investing is about predicting the future, and the future is inherently unpredictable. Therefore
the only way you can do it better is to assess all the facts and truly know what you know and
know what you don’t know. That’s your probability edge. Nothing is 100%, but if you always
swing when you have an overwhelmingly better edge, then over time, you will do very well.
G&D: How did you become friends with Charlie Munger? Do you have a friendship with
Warren Buffett as well?
LL: Charlie and I have some very close mutual friends. Over time, we started talking about
businesses, and then it evolved into a strong bond. I view him as a mentor, teacher, partner,
and friend, all in one. I am also friendly with Warren, but not nearly as close as with Charlie
because Warren is in Omaha. I admire him, and I learn more about him from his writings and
deeds than through interpersonal interactions. I have a lot of interaction with Charlie, so I
know him both as person and through his writing and personal deeds.
G&D: Do you have a favourite Charlie Munger quote?
LL: Oh, there are so many. We share a fundamental ethos about life and about approaching
investing. So I learn more about how to conduct myself personally as much, if not more, than
investing.
G&D: How would you define your circle of competence?

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LL: I let my own personal interests define my circle of competence. Obviously I know
something about China, Asia, and America – those are things that I am really familiar with. I
have also over the years expanded my horizon [in terms of analyzing businesses].
I started out looking for cheap securities. When you start out, you really have no choice. You
don’t have enough experience, and you don’t want to lose money, so what do you do? You
end up buying dirt-cheap securities. But over time, if you are interested in businesses in
addition to securities, you begin to become a student of businesses.
Eventually, one thing leads to another and you begin to learn different businesses. You learn
the DNAs of businesses, how they progress, and why they are so strong. Over time, I really
fell in love with strong businesses. I morphed into finding strong businesses at bargain prices.
I still have a streak in me that favours finding really cheap securities – I just can’t help it! But
over time, I’ve become more attracted to looking for great businesses that are inherently
superior, more competitive, easier to predict, and with strong management teams. I’m just
not quite satisfied with the secondary market. As I said, there is an aspect of the securities
business that is zero-sum. And that’s the area in which I don’t feel entirely comfortable. I’m
more interested, by my nature, in win-win situations.
I want to create wealth together with the business operators and employees when I invest.
So that led me to venture businesses. I try to apply the principles of intelligent investing there,
but I actually can contribute quite a bit, so it becomes a win-win situation.
Over my career, I’ve had the satisfaction of building a number of different venture businesses.
Some of them became enormously successful, even after we sold them. You could say we
sold them too early! I was the first investor in Capital IQ, and then look at what happened. If
we would have kept it, we would have been far richer! It’s not like we didn’t make a lot of
money in that investment. We did. [Laughs] But I like it that way. I like to create something
that everybody finds useful. We created employment, and we created a beautiful product
that’s sustainable, and everybody made a lot of money, even the people who bought the
business from us.
I like win-win situations. I do not complain about selling Capital IQ too early. We made a lot
of money on that investment, and we contributed a great deal. I remain friends with the
founders. That aspect gave me enormous pleasure. But the venture side is hard to scale; you
must put in a lot of effort. So, over time, I gradually moved into helping in a different way.
Even in public securities, you can still be very helpful and constructive. So, that’s who I am.
I’m still learning, and I’m still interested. I’m still young, and still incredibly curious. So, who
knows? Hopefully, I will continue to gradually expand my circle of competence.
G&D: How were you able to figure out that Capital IQ would become so successful?
LL: In the beginning it was Bloomberg. We wanted to create something just like Bloomberg,
and in the process, we grew to appreciate Bloomberg much more because it was so hard to
compete with them. Then we realized the investment banking side was not fully penetrated.

40
So we basically applied what we learned about Bloomberg and created a similar product for
the investment banking side. Over time, we also penetrated different businesses like private
equity we learned quickly that we couldn’t really compete with Bloomberg.
G&D: You don’t short stocks at Himalaya, correct?
LL: That’s right; not any more. That change occurred nine years ago. Shorting was one of the
worst mistakes I’ve made.
G&D: Is your lack of a short book due to your desire to be a constructive third-party for
companies and their management teams?
LL: Yes. But also, you can be 100% right, and you could still bankrupt yourself. That aspect of
shorting just frustrated me too much! [Laughs]
Three things about shorting make it a miserable business. On the long side, you have 100%
downside but unlimited upside. On the short side, you have 100% upside and unlimited
downside. I do not like that math. Second, the best short has some element of fraud.
However, a fraud can be perpetrated for a long time. Of course you borrow to short, so they
could really just wear you down. That’s why I could be 100% right and bankrupt at the same
time. But, you know what, you go bankrupt first! Lastly, it screws up your mind. Shorts just
grab your mind and take away from the concentrated effort that is required to do proper long
investing. So, those are the three reasons why I just stay away from shorting.
It was a mistake on my part. I shorted for a couple of years. I don’t discard people who are
really doing well at shorting – it’s just not me. If I want to add a fourth reason, it is that the
economy overall has been really growing at a compounding rate for 200-300 years, ever since
the modern science technology era. So, naturally, the economic trend favors long positions
rather than short.
But you cannot live life without making a mistake. Every time I make a mistake I learn
something.
G&D: How were you able to get Charlie Munger interested in a company like BYD [a Chinese
company which manufactures electric cars, batteries, electronics and solar equipment]
given that Berkshire Hathaway typically shies away from technology-oriented companies?
LL: I don’t think that Warren and Charlie are ideological. Neither am I. It’s really how much
you know. The story of BYD is relatively simple. This guy, who is a really terrific engineer,
started the business from just a $300,000 loan with no additional money until the IPO. He
created a company with $8 billion in revenue and 170,000 employees and tens of thousands
of engineers. He solved a whole bunch of different problems. So you have to admit the record
is impressive. They also happen to be in the right industry and the right environment, and
they get the right support from the government. Their engineering culture consistently
demonstrates its ability to tackle big, difficult problems. It works. So it’s hard not to be
impressed by the record the guy has. At the time we invested, we had quite a bit of a margin
of safety.

41
They play in a big field with open-ended possibilities and have a reasonable chance of being
successful. As I said, nothing is a sure thing, but this strikes me as having as good of a chance
as any. Charlie was equally impressed by the company, which then led to the investment.
Berkshire is not ideologically against technology stocks. They’re just against anything they
don’t feel comfortable with. They have that $11 billion investment in IBM, which, I can argue,
is a technology company. But I can guarantee that’s not how they think about things. It has
nothing to do with whether it’s a technology stock or not.
G&D: Buffett admitted in a 2009 Fortune article that he doesn’t really understand BYD.
LL: That is true. Warren and Charlie have a great partnership and Charlie knows more about
BYD than Warren. But I would not bet against the collective track record of those two. It’s not
that they don’t make errors from time to time. Everybody is capable of doing that. They have
a few, but very, very few over a long investment career.
G&D: Do you see the quality of BYD cars improving?
LL: This Company is a learning machine. Think about it – they really didn’t get into industry
until 10 years ago. They didn’t produce their first car until eight years ago. They are in a market
where every single international major brand is competing, with an all-out effort, because it’s
such a big market. So they never had any home advantage whatsoever because China’s auto
market started out completely open with everybody competing. Yet there’s a little car
company with very little money, and, in less than 10 years, it’s selling more than half a million
cars a year and has carved out a position for itself. You have to say, the record is not too bad,
and so there’s something to it. They also have an engineering culture and a can-do spirit. They
consistently demonstrate that they’re able to tackle really complex engineering problems and
come up with very practical solutions faster, cheaper, and better than most other people.
That is an advantage in the manufacturing economy.
G&D: Can you talk about your investment process?
LL: Ideas come to me from all sources, principally from reading and talking. I don’t
discriminate how they come, as long as they are good ideas. You can recognize good ideas by
reading a great deal and also by studying a lot of companies and constantly learning from
intelligent people – hopefully more intelligent than you are, especially in their field. I try to
read as much as I can. I study all of the interesting and great companies, and I talk to a lot of
intelligent people. You know what? In some of those readings or conversations, ideas just
click. Then you do more research and then you get comfortable or you don’t get comfortable.
G&D: Are the people that you talk to fellow investors or are they people like customers,
suppliers, and management?
LL: All of them. I don’t talk to as many investors – very few. I am more interested in talking to
people who are actually running businesses and entrepreneurs or CEOs or just good
businessmen. I read all of the major newspaper publications and annual reports of the leading
companies. I get a lot of ideas out of those too.

42
G&D: How do you assess if the management is being forthright with you? How useful is it
to speak with the management?
LL: Well, management always has a big influence on your success, no matter how good or
how bad the business is itself. Management is always part of the equation of making the
company successful, so the quality of management always matters. But to assess that quality
is not that easy. If you can’t assess the quality of management, you may have to make a
decision in spite of that. That’s just part of the process. So you have to figure out other ways
such as looking at the quality of the business, the valuation, or something else until you can
justify an investment.
If you do have a way to assess the quality of the management team, either because you’re an
astute student of human psychology, or you have a special relationship with the people, then
you’ll take that into consideration. Why wouldn’t you? The management team is part of what
really makes a company.
But, it’s not that easy. It’s not that easy to have an in-depth, solid understanding of the
management team. Very few people are able to do that. I admire people that say, "Hey, look.
Whatever the information, whatever the kind of presentation they make, I will never be able
to learn about management beyond that. I know it’s a show for me, so I might as well just
discard it." I respect that.
Investing is about intellectual honesty. You want to know what you know. You want to know,
mostly, what you don’t know. If understanding the management team is not in the cards, it’s
not in the cards.
G&D: What is your domestic versus international allocation?
LL: I don’t have a preconceived notion about allocation. I let the opportunity dictate where I
end up. I just happen to have more interest in Asia and the U.S., so that’s where I end up. I do
not feel that interest in Europe. I do not feel that in Africa. But I approach it with an open
mind. I want to really find the best company at the best price, run by the best people and
available to me at the time I am looking. Those don’t necessarily always meet, and it’s OK.
You start out by holding cash, and that is a pretty good opportunity cost, because it doesn’t
go down. So any time you find an investment, it has to be an improvement on an overall risk-
adjusted basis. You may find some very interesting things, and now you’ve got a basket of a
few interesting securities plus cash. That is a pretty good opportunity cost, and the next time
you add another security, it better make the portfolio better than the existing one. You just
constantly improve your opportunity cost.
G&D: Is your fund open to new investors?
LL: The fund has been closed to new investors for nine years. However, we will open it up a
bit this year. We have more opportunities than we have money around, but that’s rare. I
usually don’t want to increase our size. My ambition has never been to run the largest fund.
I never wanted to earn the most money out of a fund. I just wanted to have, by the time I
finished my career, one of the best track records on a risk-adjusted basis.

43
If I achieve that, I will feel very good about myself. That’s my goal, and therefore the
compensation structure of the fund reflects that. Over time, I switched into the best
compensation structure I knew in the industry, the original “Buffett partnership formula”. We
don’t take any management fee. We provide a 6% return for free to our investors and then
take 25% after that. I don’t invest anything outside of the fund. I put all of my investment
capital into my funds. So it’s a true partnership. There are very few conflicts between the
general partners and the limited partners.
That way we’re all in the same game together. I have zero incentive to take new money for
the sake of taking new money because I don’t take things off the top. The minute that new
money arrives, it begins to compound 6% on an annual basis against me, so I better be able
to find something that is worthwhile and doing better. When I make money, I feel like I earn
it, and when my investors make money, they earn it. It is just a better way to structure a
business – you feel that everybody’s success is deserved. That ethos is what makes Charlie
and Warren so special. They believe in fundamentally earned success. That’s why, despite
their enormous success, nobody criticizes them very much. When you create the hundreds of
billions in wealth for everybody while taking a salary of $100,000 per year for more than 40
years, it’s hard to criticize them.
G&D: Are there industries that you completely stay away from?
LL: I’m not ideologically opposed to anything. I am against any ideology. [Laughs]
There are lots of things I don’t know. I’ll be the first one to admit. But it doesn’t mean that
I’m not curious from time to time. Maybe I know some aspect of the story. That little aspect
might even constitute the investment. I don’t know. I don’t want to rule it out, but I can say
that when you present me an idea, I can quickly tell you whether it’s a “no” within a few
minutes.
There are basically three buckets that Charlie has. “Yes”, “no”, or “too hard”. Most of the
things fall in "too hard." Some get a quick “yes” or “no”, but if it’s too hard, it’s too hard. So
you end up not doing a lot. You end up really concentrating on the ideas where you truly have
the time and energy to fully understand the situation better than anybody.
G&D: How to you get comfortable with the risk/ reward of a high tech company like BYD
that is undergoing pretty rapid technological change? Do you think you have a good sense
of what BYD will look like 10 years from now?
LL: Most businesses are subject to change if you stay with them long enough. There’s not a
single business that I know of that will never change. That’s the fascinating thing about
business. Successful businesses have some combination of things that enable them to adapt
to changes better than anyone else. In each situation, it’s slightly different.
Every company in today’s age is a technology company somehow, but the technology may
not be on the cutting edge, and may not play an important role in the success or failure of the
overall business.

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Successful technology companies are the ones that are capable of reinventing themselves and
dealing with change. Take the example of Intel. The whole business changes every 18 months.
Failure to change leads to quite a substantial disadvantage and yet they’re able to build their
culture based on that change.
Take Samsung – their early memory chip business decreased in price by 1% every week, and
yet they really developed a culture that precisely deals with that change. So when they apply
the same culture to something like a cell phone, they get ahead very quickly. Now they’re
outselling Apple. So culture really plays an important role in those faster-changing
environments, enabling certain companies to always surge ahead of everybody else.
G&D: Do you need to understand the technology on an engineering level to have a good
sense of the risk/reward?
LL: It certainly is a plus, but not a must. If you were really a great engineer in the product the
business is selling, obviously it’s a plus. But it’s certainly not a must because no matter how
good you are at a certain area, you’re not so good in other areas. The pace of change is such
that whatever you are now specialized in will become obsolete. But that doesn’t disqualify
you from making a judgment on how a company can develop a culture to deal with that.
Successful companies are able to deal with change consistently by hiring the right people,
building the right culture, and staying ahead of their competitors. That’s the aspect that really
makes them successful. And that’s kind of a predictable aspect of businesses.
There is always a certain element that is unpredictable. And there is a certain element that is
predictable. You want to have a little of both. But overall, I think you’re right. In a business
that is subject to rapid change, it is a lot more difficult to make a reliable forecast. There is no
question about that. But it doesn’t mean an investor cannot make a few predictions that could
indicate that the odds are in your favor. You want to play when you feel very comfortable that
the odds are in your favor. Many times, that’s searching among typically stable businesses
where something has changed all of a sudden.
Take Eastman Kodak for example. It used to be one of the best companies; it invented
photography. But look at where they are now. Take Bell Labs and AT&T. They used to really
have all the power. They had monopoly businesses. Where are they now? Just a name. That
is the nature of brutal capitalism. It’s the nature of the business. Things that appear to be
predictable and stable are not. Things that don’t appear to be very stable actually turn out to
be.
I think you want to avoid wrong decisions as much or more than you want to get it
approximately right. If you avoid the wrong decisions, you’ll probably come out okay over
time. But, I agree with you, it’s not easy and it’s not precise or a science at all. Hopefully one
improves overtime.
G&D: How do you make your sell decisions?
LL: One should make sell decisions on one of three occasions. Number one, if you make a
mistake, sell as fast as you can, even if it’s a correct mistake. What do I mean by a correct
mistake? Investing is a probability game. Let’s say you go into a situation with 90% confidence

45
that things will work out one way and a 10% chance they work out another way, and that 10%
event happens. You sell it. Then there’s a mistake that your analysis is completely wrong. You
thought it was 99% one way but it was actually 99% the other way. When you realize that,
sell as fast as you can. Hopefully at not too much of a loss, but even if it is a loss it doesn’t
matter – you have to sell it.
The second time you want to sell is when the valuation swings way too much to the other end
of the extreme. I don’t sell a security because it’s a little overvalued, but if it is way overboard
on the other side into euphoria, then I will sell it. If you are right and hold a company for a
long time, you have accumulated a large amount of unrealized gains. A big portion of those
unrealized gains act like borrowings from the government interest free and legally. So when
you sell that position, you take all the leverage and you take a bunch of the capital out, so
your return on equity has just become a little less. The third occasion when to sell is when
you find something that is better. Essentially, a portfolio as I said is opportunity cost. Your job
as a portfolio manager is to constantly improve on your basket. You start with a high bar. You
want to increase the bar higher and higher. You do that by constantly improving the
opportunity costs; you find something better. Those are the three reasons that I would sell.
G&D: In your 16 years running Himalaya, you’ve experienced three major financial crises:
the Asian financial crisis of 1997, the dot com bubble burst in 2000, and the financial crisis
of 2008. How have you navigated these crises as a fund manager, and what have you
learned from them?
LL: That’s an excellent question. You know every time that that happens, they always bill it as
“once in a century,” except these major events happen every five years in my case. [Laughs]
What is interesting about crisis is that it puts your intellectually honesty to the test.
The most important thing in our business is intellectual honesty. What I mean is four different
things: know what you know, know what you don’t know, know what you don’t have to know,
and realize that there is always a possibility that “you don’t know that you don’t know.” Those
four things are distinctly different. In a crisis, things emerge that test you on all four
categories.
For example, during the Asian financial crisis, all of the sudden the world was saying, “how
much debt do these companies have?! Oh my goodness, they really have that much of a
dependence on debt! Oh my God, the whole country could go down!” Everyone was
constantly in crisis mode. All of the things come out that you don’t normally care about and
normally don’t pay attention to. Normally you think, “Well, that has nothing to do with my
investment in this company.” Then all of the sudden, you say, “Oh Jesus, it has everything to
do with my company.” Well, you are right or you are wrong. That crisis will put those
questions to the test.
That’s why people freeze in the midst of a crisis. People freeze because they were not
intellectually honest before. They never quite distinguished certain issues or questions and
put them into the appropriate basket. If you make an overall judgment, for example, of how
the U.S. is going to perform over time through ups and downs, and you go into it knowing
that there is a possibility something much worse could happen. Maybe it’s small, but when it

46
happens, it happens. At that time, the question becomes “Is it an unknown unknown,” or do
you know that you don’t have to know? You absolutely will be asked that question.
So the financial system might be in trouble. Yes, a business needs financing, but I suppose if
life goes on, my business will be there, however it will end up. So the question then becomes,
“Do I have to know how the financial system will sort out its problems for me to predict my
business?” That’s the question and that’s the question that you want to answer before a
financial crisis hits.
If you can answer that question honestly and correctly, you will do more after the financial
crisis. Christopher Davis’s grandfather used to say that you make the most money out of a
bear market financial panic – you just don’t know it at the time. It’s always the case. Less
intelligent investors will be sorted out. Intelligent investors are the ones who are always
intellectually honest. They can distinctly know whether they know or they don’t know, and
know what they don’t have to know, and that there exist unknown unknowns. If you can really
put things into those categories correctly, you will pass the test. Otherwise, you will have
gotten yourself in trouble.
G&D: In 2010 panel at Columbia Business School, you mentioned that Asia’s role in the
global financial system is becoming increasingly important. Can you talk about this view for
our readers?
LL: Asia will become an important economic force, not necessarily just in a financial sense.
The financial part is a derivative of Asia’s overall economic performance. Asia, and particularly
China, is shaping up to become a bigger economic force in our global marketplaces because
of the sheer size of it and the path that they’re on.
China is on a historic path of continuing to grow into a modern economy. They still have a
long way to go, but they have come a long way from the starting point. Because of the
enormity of the size of China, it will have a huge impact in Asia and the rest of the world. So
China and the U.S. together would make the Pacific Basin somewhat of an economic centre
the same way that the Atlantic Ocean was around Europe and the U.S. A lot of opportunity
will emerge. That doesn’t mean that it’s a one-way street or a smooth pass. All sorts of things
could happen. It doesn’t mean you’re going to make money guaranteed. But it does offer a
tremendous amount of opportunity to those who can navigate this development. The
importance of China cannot be ignored.
G&D: Do you have any concerns on a real estate bubble in China? We saw a 60 Minutes
piece about the ghost cities in China, and it was very striking.
LL: China is so big. It has all sorts of extreme phenomena. Yes, there are ghost towns, but
there are also towns that are utterly, utterly crowded. I mean, every space is occupied, and
there are towns seemingly out of nowhere that have an enormous number of high rises that
are all occupied. I remember, twenty years ago that Pudong was viewed as a semi-ghost town.
Today, you cannot help but be impressed by the economic vibrancy there.
We live in Manhattan, but think about it: there are 10,000 high rises in Shanghai that are taller
than thirty floors, multiple times that of Manhattan – that is enormous. Manhattan probably

47
has the highest concentration of high rises in the whole world other than Shanghai. The scary
part is that China’s not done. So, I say China is a case of contradiction, as it has always been,
and will always be; you’ll always find evidence of every theory you want to prove.
But overall, the economy still has a long way to go. They still have a sense that this is their
time. It doesn’t mean that they don’t have problems; they have an enormous amount of
problems, but so does America, and so did America over the last 200 years.
If you go through the American Civil War, the country killed two percent of its population.
And yet, not only was it rebuilt, but it was rebuilt at a furious pace. And it went through two
great world wars. After World War II, if you thought Japan and Germany were doomed, boy
were you wrong.
G&D: Do you think real estate has gotten a little ahead of itself where there would be a
need for a correction, or do you think that demand will just catch up?
LL: I put that in the "too hard” basket. I also put in the basket of "I know I don’t have to know."
It certainly is “I don’t know”, but I also know that I don’t have to know! I don’t want those
things to worry me.
G&D: How do you view the overall attractiveness of equities today?
LL: I also put that into "too hard" and "I know I don’t have to know." I only think about it when
things go to an extreme. I don’t foresee that as going to the extreme, either way. In that case,
I know I don’t have to know.
G&D: A lot of smart people believe that renewable energy is the next big revolution. You’ve
done a lot of work on battery technology and BYD, so is that something that you think about
beyond batteries? What do you think the energy revolution will look like?
LL: I pay attention to those macro trends only in the hope that I can have comfort that they’re
a tailwind as opposed to a headwind. Now, how much they can help if they’re a tailwind, or
how much they can hurt if they’re in my face, I don’t know. But I want such macro trends to
be behind me rather than in front of me. So that’s the extent that I want to know mega trends.
But as a concerned citizen, I’m intellectually curious about it. But it doesn’t mean that I’ll be
able to know for sure how a given development is going to come about. In fact, we don’t
know, and that’s why the free market with millions of participants acting in their own self-
interests will figure out a way. To predict ahead of time is not easy, and the good thing is that
you don’t have to be able to do that.
If such trends are at your back, that’s fabulous, especially if you don’t need them to be at your
back. If they’re really a headwind, you do want to examine them a little more. So that is how
I view this renewable energy issue. I know that at some point, human civilization will have to
find something other than fossil fuels. We don’t have enough fossil fuels, and we need to
preserve them for agricultural and food security reasons. We also can’t afford to have the
weather deteriorating the way it has been over the last few decades. Eventually it will catch
up to us.

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So for multiple reasons I understand why we need to figure out alternatives to fossil fuels. But
am I qualified to make an informed investment decision based on that now? Probably not.
But if that one happened to be at my back, hey I’m all for it.
G&D: Do you have any advice for students who are interested in getting into investment
management, especially for those readers who can’t go and listen to Warren Buffett speak
during their lunch break?
LL: If you do get a chance to meet Mr. Buffett, I’d run to it if I were you. I wouldn’t even take
an airplane; I would just run to Omaha! [Laughs]
Start by learning from the best – listening, studying, and reading. But the most important
thing in understanding the investment business is by doing it. There is no substitute to actually
doing it. The best way to do it is to study one business inside and out for the purpose of
making the investment – you may not actually invest. But having gone through the discipline
of understanding one business as if you own 100% of that business is very valuable.
To start, take an easy-to understand business. It could be a tiny business – a little concession
store, a restaurant, or a small publicly traded company. It doesn’t matter. Understand one
business and what really makes it tick: how it makes money, how it organizes its finances,
how management makes its decisions, how it compares to the competition, how it adjusts to
the environment, how it invests extra cash, and how it finances the business.
You should understand every aspect of one business as if you own 100% but you don’t actually
run it. This causes you to be desperate to understand every aspect to protect your investment.
That will give you a sense of a disciplined approach. That’s how you truly understand business
and investing. Warren always says that to be a good investor, you need to be a good
businessman, and to be a good businessman, you need to be a good investor in terms of
capital allocation.
Start by understanding one thing within your control that you can understand inside and out.
That is a terrific starting point. If you start from that basis, you are fundamentally in the right
direction of becoming a great security analyst.
G&D: It was a pleasure speaking with you, Mr. Li.

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 The Prospect of Value Investing in China
Li Lu’s Lecture on Value Investing at Peking University
Oct. 23, 2015

This is an English translation of the Chinese transcript for a lecture by Li Lu gave at the Peking
University Guanghua School of Management’s Value Investing course on October 23, 2015.
First of all, I would like to thank Guanghua School of Management and Professor JIANG,
Guohua, for the opportunity to jointly create this course on value investing. I consider the
timing for offering such a course on value investing opportune and significant. As far as I know,
this is the only course of its kind offered in China. The only other course of its kind is taught
at Columbia University. It was first created in the 1920s by Professor Benjamin Graham,
Warren Buffet’s mentor, at Columbia Business School. Himalaya Capital is very honored to be
the sponsor of this course.
I would like to spend today’s lecture focusing on the following four topics:
First, I want to touch upon some basic characteristics and fundamental ethical principles of
this profession, as I assume that most of you here will eventually join the financial service and
asset management profession after graduating.
Second, as asset management professionals, we need to know in the long run which financial
assets can achieve sustained, effective, safe and reliable growth in wealth.
Third, through what effective means, in addition to your own efforts, can we prepare you to
become outstanding investors so that you can provide value-added services to your clients,
protect their assets, and grow their wealth continuously? We will explore the right way and
main path for investment.
Fourth, we will discuss whether investment approaches (theories) which have proven
effective in mature and developed nations are applicable to China, as many may consider
China unique, rendering them irrelevant and inapplicable.
I have pondered these questions for several decades. Today I would like to share my thoughts
and observations with you.
1. What are the unique characteristics of the asset management industry, and what is the
bottom line of ethical conducts in this profession?
Given that asset management is a service industry, what distinguishes it from others? What
are some of its common and distinct characteristics? I think that it has two:
First, most of the time, users in this industry don't know anything about its products, and how
to discern their quality. This sets the investment industry apart from almost all others. A car
owner, restaurant goer, hotel guest can pretty much tell how good the product and/or service
is once he experiences it. However, this is not so in the asset management industry. Most of

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the time, consumers have no way of judging whether a product is good or bad, and cannot
determine whether a service is superior or inferior.
Not only consumers and investors, but also the professionals, including some of the top
players, find it difficult to discern the quality of a product or service offered by other players.
This is why the financial service industry, and asset management in particular, is completely
different from other service industries. If you hand me the track record of a fund manager,
which only contains performance data for 1 or 2 years, I cannot tell you whether the manager
is good or not. Even if you give me a track record for the past 5 or 10 years, I still cannot make
a determination. I must know what’s in his portfolio, and I can only make my judgment after
observing him over a very long period of time. Since people can’t distinguish good products
and services from bad ones in this industry, most investment theories are subject to the axiom
“where you sit determines how you think and what you say.”
The second prominent feature is that overall average compensation for this industry is much
higher than any other, and is often delinked from the contribution to the growth of client
wealth. The services provided to clients are, in fact, very limited. The product offerings often
provide a very high return to investment professionals but not their clients. The pricing
structure basically reflects the interests of professionals, and not so much those of the client.
Generally speaking, industries prefer raising their quality of service level and making it
transparent to customers in order to charge a premium. This is not the case in the asset
management industry. This industry implements a uniform fee structure mostly in proportion
to the net asset value (NAV). In other words, you will always be paid regardless of whether or
not you actually make money for your clients. This is especially the case in private equity, in
which the fees are even higher to the point of being ridiculous! You collect fees no matter if
you make or lose money for your client. It is possible for a client to invest in a passive index
fund. Furthermore, you can still get paid a lot of money even if your performance lags far
behind that of the index. This is very unreasonable.
I believe you all want to join this profession for both the intellectual challenge and high
compensation it offers. The compensation for this profession is indeed very high. However, I
have to question whether professionals in this industry deserve it.
Together, these two distinctive characteristics lead to some obvious malpractice within the
industry. The quality of professionals in this industry varies greatly, as there are many
unqualified players passing themselves off as professionals. The industry lacks clear
standards. It is filled with half-truths and even fallacies which mislead users. Many
professionals themselves cannot distinguish truth from fallacy.
Given the unique characteristics of this profession, some basic ethical principles must be
requisite for all professionals.
First, make it your ethical obligation to seek truth and wisdom, and consciously refrain from
allowing where you sit to determine how you think.
Once you start working in the industry, you will discover almost all theories are closely
connected to where you sit and what you say. If you do not undertake careful consideration,

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you will quickly substitute your own interests for those of the client. This is human nature and
inevitable. This industry is complicated, and filled with many paradoxical views and half-
truths. It is not a precise science, and there is great latitude for judgment and discretion.
That’s why I would like to urge young people who aspire to join this profession to develop this
sense of ethical obligation. You should continue to acquire knowledge, search for truth and
seek wisdom. You should be a sensible professional, and not disseminate theories promoting
your own interests at the expense of your client. Don’t be swayed by the specious theories of
others. I cannot overemphasize the importance of this principle.
Second, develop a sense of fiduciary duty.
What is fiduciary duty? Every penny entrusted to you by your client should be treated as
though it were the money your parents had worked hard to earn and saved thriftily over their
lifetime. Even if it is a small amount, it is the fruit of a family’s lifetime of hard work and
frugality. When you can treat every penny of your client’s money as the life savings of your
parents, you will begin to understand the meaning of fiduciary duty.
I tend to think that fiduciary duty is something innate, part of someone’s DNA. I know some
who have it and some don’t. Those born without cannot acquire it later by any means or
through any effort.The best candidates for entering this professional are those who have it.
You can always test yourself and see if you have it or not. If you don’t, I would advise you not
to join this professional. Otherwise, you do more harm than good by destroying the wealth
of many families. If you are to entrust your money to someone, you need to find out whether
he has this DNA or not. To a certain extent, the economic crisis of 2008 and 2009 was the
result of the long-term 'successful' conduct of those who had breached their fiduciary duty,
which proved devastating to society as a whole.
These are the two most fundamental ethical principles for guiding aspiring professionals. As
many of you here will become professionals in this industry, and as the ultimate purpose of
this class is to prepare future leaders in China’s asset management industry, I hope that you
take to heart the following two unbreakable ethical principles when you join this industry one
day.
2. As asset management professionals, we need to know in the long run what financial
assets can produce sustained, effective, safe and reliable growth in value.
The second topic is, in the long run, what financial assets can produce real, long-term reliable
return on wealth. We just witnessed a collapse in the stock markets, and many people think
cash is the most reliable asset. Some even think gold is very reliable as well. Is there any way
for us to measure the historical long-term performance of these assets? How long is ‘long-
term'? I believe the longer the better, as long as we can find the data. The best data cover a
long and continuous period of time, since only such data is really convincing. The Western
world is the cradle of today’s modern economy, and its markets matured the earliest.
Furthermore, the Western economy is the largest and has the largest amount of market data
available. It therefore provides the greatest explanatory power. I use US data here because it
can be traced back 200 years. Let's see how the US has performed on various financial assets.

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In the past several decades, Professor Siegel of the Wharton School of Business, University
Pennsylvania has worked diligently to compile solid data for returns on several major classes
of financial assets in the US during the past couple of hundred years. These data can be traced
reliably back to 1802. Following I will examine his chart (refer to Chart 1) to understand the
performance of various asset classes over the last 200 years.

Chart 1：1801 ~ 2014 Total Real Return Indexes by Asset Classes in US

The first asset class is cash. The recent ups and downs in the (Chinese) stock market caused
a lot of (Chinese) people to appreciate the importance of cash. Many may think cash is the
best way to preserve value. Let's see how well it has performed. If you had 1 US dollar in 1802,
how much would it be worth today? What would be its purchasing power? The answer is 5
cents! In other words, it would lose 95% of its value or purchasing power over 200 years. The
reason is plain to all: inflation! Let's look at the other asset classes next.
Traditional Chinese people believe gold, silver and precious metals are also very a good
investment to preserve value. The developed Western nations embraced the gold standard
as their monetary system for quite some time. Gold prices indeed increased. However, gold
prices witnessed a continuous fall in the 20th century. How has gold, the most important
symbol of precious metals, performed in the past 200 years? How much is the amount of gold
bought with 1 US dollar 200 years ago worth today? What is its purchasing power? The result
is 3.12 US dollars. Yes, it clearly retained its value. But a 3 or fourfold appreciation in 200 years
may be quite unexpected as its value has increased very little.
Now let's look at treasury bills and bonds. Interest rate for short-term treasury bills, on par
with risk-free interest rates, has never been too high, slightly higher than the inflation rate.
Treasury bills have achieved a return of 275 times their original value in 200 years, while
bonds enjoy a higher return at 1600 times their original value.

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Next, let’s take a look at stocks. This is another major class of assets. Many may think stocks
are a much riskier investment than the other classes of assets and, therefore, less likely to
retain their value. This is especially the case after the rollercoaster ride of the Chinese stock
market in the past 3 months. After experiencing a both huge bull market and a huge bear
market in a short period of 8 months, many people have a considerably better understanding
of the risks involved in the stock market. So, how did stocks perform over the past 200 years?
If we had invested 1 US dollar in the stock market in 1802, what would be the value of our
investment today?
Here is the result: 1 US dollar in stocks, after discounting for inflation, experienced an
appreciation of 1 million times the original value over the past 200 years! Its value today
would be 1.03MN US dollars. Even the remainder of this number is bigger than the return on
every other class of assets. What are the reasons behind such an astonishing performance?
The answer lies in the power of compounding. The average annualized rate of return for
stocks, discounting inflation, is only 6.7%. No wonder Einstein called compound interest the
eighth wonder of the world.
Some questions are posed by the data: why is it that cash, the safest investment by common
wisdom, lost 95% of its value in 200 years, whereas stocks, the riskiest investment by popular
consensus, appreciated to nearly 1 million times its original value (after discounting for
inflation)? What caused the huge disparity between the returns on these two classes of assets
in the past 200 years?
There are two reasons for this phenomenon.
The first is inflation. In the past 200 years, inflation has had an annualized rate of 1.4%. If
inflation has been growing at 1.4% annually, then purchasing power has been decreasing at
the same rate. After 200 years of depreciation at 1.4%, 1 US dollar will be worth 5 cents, losing
95% of its value. This is purely a math problem, and easy to understand.
The other reason is GDP growth. In the last 200 years, GDP has grown to 33,000 times its
original size at an annual rate of slightly higher than 3%. If we understand economic growth,
then we can comprehend other phenomena. Stocks represent the large scale companies in
the economy. By and large, GDP growth can be measured by the growth in revenue for these
companies as reported in their financial statements. Generally speaking, companies incur
costs, but these costs are relatively fixed and don't grow as fast as revenue. Therefore, net
profit will grow faster than revenue growth. When the nominal growth rates for revenue are
4% to 5% net profit will grow roughly at 6% to 7%. The cashflow generated by companies will
grow at the same rate. As we can see, the actual data support our theory. The core value of
stock lies in the growth of its earnings discounted to present value. In the past 200 years, the
average price/earning ratio (PE ratio) has been around 15. If we flip the PE ratio, we get the
cash return per share (EPS), about 6.7%, which reflects the market valuation of a company
based on its profit margin. Therefore the price of stocks will grow at 6% ~ 7% annually, and
ultimately increase 1 millionfold after 200 years. It is easy to understand the phenomenon
when we look at the math. The stock index, which aggregates all stocks in the market, grows
at 6 to 7% when GDP demonstrates long and sustained growth at 3 to 4%.

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In this initial analysis, we may conclude that inflation and GDP growth are the two most
fundamental reasons for the difference in performance between cash and stocks.
Next, we address a more important question: how could the US economy experience 200
years of sustained and compounded GDP growth while inflation continued to exist at the
same time over a long period? Furthermore, how could the economy grow almost every year?
It experienced downturns in some years and above-trend growth in others. However, when
we examine the past 200 years, we see a continuous upward trajectory. If we take a year as
the unit of measurement, GDP grew almost every year. This is real, long-term, cumulative and
compounding growth. How can we explain this phenomenon? In China's past 3000 to 5000
years of recorded history, such a phenomenon has never occurred. This is in fact a modern
phenomenon not present in China three decades ago.
This being the case, is it possible to quantify the basic pattern of GDP growth, and determine
what this growth looks like for the past several thousand years of human history? Can we find
some periods in which sustained growth did not occur?
To answer these questions, we need to understand what the changes in overall GDP,
consumption, and production in human history, which took place after the appearance of
civilization, look like. If we take a longer span of time, and look back further to the era of
hunters and gatherers, the agrarian age, and the age of agricultural civilization, what would
GDP growth for the entire human race be? It is an intriguing question. I happen to have a
chart that may answer our questions (refer to Chart 2). It was created by Professor Ian Morris
(a renaissance man) of Stanford University who, over the past ten years, led a research team
which measured energy capture and expenditure over 16,000 years using modern
technologies. Technological advances in various disciplines in the past 20 to 30 years made
this project possible. Throughout most of human history basic economic activities revolved
mainly around the capture and expenditure of energy, and the measure of energy is closely
correlated with the concept of GDP we are discussing today.

Chart 2：Economic Performance of Human Civilization in the past 16,000 years Source：Ian
Morris, Social Development (2010)

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From this chart, we can see the economic development of the entire civilized world in the
past 16,000 years. It also presents the comparison of Western and Eastern civilizations. The
blue line represents Western society from its earliest existence in Mesopotamia to ancient
Greece, Rome, and later on Western Europe and America. The red line represents Eastern
civilization, from its earliest inception in the Indus Valley civilization (Harapan Civilization) to
the Yellow River Valley and later the Yangtze River Valley in China, South Korea and Japan.
The horizontal axis represents the progression of time from 16,000 years ago on the left to
modern time on the right. Without applying any mathematical process, the two lines are
rather smooth, flat and almost identical. After a mathematical process is applied, we can see
a very minor discrepancy between them. During the age of agricultural civilization, human
society witnessed some level of development, but at an extremely slow rate. The
development curve resembles a wave. It fluctuates, but there is an invisible ceiling it cannot
break through. We observe 3 or 4 attempts to break through the ceiling, each of which is
followed by a back fall. The curve then crawls within a narrow band. However, in the past 300
years, we see a completely different trajectory. There is a sudden upward spike in movement
resembling the shape of a hockey stick, which is analogous to 1 US dollar growing to a value
of 1 M.
If we zoom in on the chart, take a section of 200, 300 years, and then zoom out, the new
curves (Chart 3) look very similar to the ones in Chart 1. In other words, the charts for GDP
growth and stock performance are very similar for the past two hundred years. If we condense
the chart further we find the line becomes essentially vertical. This can be explained
mathematically by the magical powers of compounding, and indicates that the economic
pattern of sustained, long-term compounding growth is a modern phenomenon, which had
never previously occurred in the recorded human history of the past 16,000 years.

Chart 3：Economic Performance of Human Civilization in the past 500 years Source：Ian
Morris “Social Development” (2010)

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For the most part, GDP has been flat in the rather long history of human development. This
was particularly so for China. In the past 500 years, we can clearly observe this trend. We see
a sudden uptick in the blue line (the West) at the separation point (around 1800 CE). This is
almost 100 years earlier than the point at which the red line (the East) starts to rise. In first
100 years (1800 CE -1900 CE), the emergence of the East was mostly represented by
development in Japan.
In order to understand stock performance in the past 200 years, and the next 20 years, we
must be able to understand and explain the basic trajectory of human civilization. Otherwise,
it will be hard for us to remain rational when a stock market crash occurs. We will think the
world is coming to an end whenever we encounter a crisis similar to that of 2008 and 2009.
Predicting the future lies at the heart of investing. As Yogi Berra once famously said “it's tough
to make predictions, especially about the future.” Why did the economy of the human
civilization perform the way it did in the past 200 years? It is difficult to make predictions
concerning the future if you can’t answer this question, one I have spent almost 30 years
pondering. I compiled my thoughts, observations and insights in writing a long thesis entitled
A Discussion on Modernization By Li Lu. If this question interests you, you may want to read
it.
You can find it online at
http://www.himcap.com/articles/a_discussion_on_modernization.html.
In this thesis I divide human civilization into 3 eras. The first era is the earliest age, that of the
hunter and gatherer. This period began 15,000 years ago when homo sapiens began to roam
the earth. I call it Civilization 1.0. During this era, humans were quite similar to the other
animals of the time. A profound change occurred around 9000 BCE, when agriculture and
animal husbandry were developed in Mesopotamia (modern day Iraq). Similar change arrived
in China’s Yellow River Valley around 6000 to 5000 BCE. These advances allowed human
civilization to make a second great leap forward. By this time, GDP growth was much stronger
than during the earlier era of the hunter-gatherer. I call this era Civilization 2.0, i.e. the
Agricultural (and animal husbandry) Civilization. This era continued for several thousand
years. The growth and development of human society was relatively flat until about the
1750s. Hereafter, GDP suddenly demonstrates steady annual growth, a trend which continues
to the present day. We take this for granted and think it is no big deal. However, we consider
a drop in China’s growth from 10% to 7% to be a major event. Though steady annual GDP
growth is a very modern phenomenon, it is deeply rooted in our collective psyche. To
understand this era, we need to understand the phenomenon of modernization. I refer to it
tentatively as Civilization 3.0 .
Dividing history into 3 distinct eras allows us to clearly understand the nature of Civilization
3.0. The most distinguishing feature of Civilization 3.0 is the sustained, cumulative, and long-
term compound growth and development of the entire economy, with which comes the
investable value of modern financial products. All discussions concerning investment are
meaningless unless the precondition of sustained compound growth has been fulfilled. Only
then we can talk about asset allocation, stocks and cash, etc. Therefore, if we are to
understand investment and the growing of wealth, we have to understand the origins of

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wealth creation rooted in 200 plus years of sustained, cumulative GDP growth. During
Civilization 3.0 modern science and technology, as well as the free market economy, emerged
in the world due to various causes. These two forces combined to create Civilization 3.0 as we
know it today.
In my thesis, I offer a detailed description of human civilization’s evolution in the past 10,000
plus years. I explain the concept of a free market economy using two formulas: 1+1>2 and
1+1>4. In the modern era, the evolution of civilization was fundamentally changed by the
arrival of free trade. In the economic context, Adam Smith and David Ricardo proposed that
free trade produced a synergetic effect, i.e. 1+1>2. With the division of labor, 2 individuals or
economies can engage in free trade, and thereby create more value than they could on their
own. The more people participate in free trade, the more value is created and added. This
type of exchange existed during the era of Agriculture Civilization. However, modern science
and technology acted as an accelerant which hastened the process of value creation, as ideas,
rather than mere goods, commodities and services, began to be exchanged. Knowledge yields
greater value in the free marketplace of ideas. It creates what I refer to as a 1+1>4 situation.
When two parties exchange ideas, they obtain the ideas of the other while retaining their
own. This may spark entirely new ideas. Exchange of knowledge requires no trade-offs, unlike
trading rice for milk (in a barter system). When knowledge is combined it generates
compounding and synergetic growth. Only when each exchange results in significant bursts
of growth can a society rapidly create enormous wealth.
When exchanges between entities continue, and with the effect of wealth multiplying by the
billions, a modern free market economy is born. This is what I mean by Civilization 3.0. It is
only in this context of exchange that the overall economy can enjoy continued and sustained
growth. This is an economic system that enables the unleashing of human potential. In the
history of creation of human institutions, this is probably the greatest creation of all. Once
this institution (free market economy combined with modern science and technology) is
created, the unique phenomenon of sustained economic development appears. That is to say,
sustained economic development mainly manifests itself in sustained GDP growth.
Inflation is, to be precise, a currency phenomenon. When the money supply is greater than
the aggregate goods and services (total output) of an economy, prices will go up. Why is this
the case? When an economy is expanding, it will require more investment. In the modern
economy the banking system provides capital for investment (through bank loans). Banks
receive deposits then pay the depositors interest. Generally speaking, as interest rates must
be higher than zero, loan interest rates must also be positive. In order to have money to grow
the economy, you must first increase money supply. If you want to achieve growth in the real
economy, you must invest first. Your investment then becomes raw materials, semi-finished
products, finished products and inventory. In this process, you first put money into the
economy. This amount of money exceeds the current total output. This time lag creates the
attendant effect of inflation during GDP growth period. Inflation and sustained GDP growth
allows us to mathematically explain why there is such a large disparity between the return on
cash and stocks over the long run.

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3. What is the right way and main path for investing? How does one become a great
investor?
If what we observe holds true, it is better for the individual investor to invest in stocks and
avoid cash. However, therein lies a bigger problem: the volatility of the stock market. If we
need money in the short-term, we may lose money because of price fluctuation. It often takes
very long time to achieve desired return. Let’s look at the following chart:

Chart 4：Returns on Stocks in the US 1802- 2012

From chart 4, we can see the average return on stocks in the US in the past 200 years is around
6.6%. If one looks at intervals representing every 60 years, the number is about the same, and
relatively stable. However, a different picture emerges when we examine shorter intervals.
For example, in the interval between 1946 and 1965 average return was about 10%, above
the long-term trend. But in the ensuing 15 years (1966-1981) stock prices declined rather than
grew. Next, we examine the period between 1982 and 1999 and find during this period stock
prices grew at a much higher rate, about 13.6%. The picture is reversed for the following 13
years, in which a downward trend was experienced. Prices continued to fall throughout this
entire interval. It is no wonder John Maynard Keynes once said famously, “in the long run we
are all dead.” As an individual investor, your investment timeframe is limited. Most investors
have about a dozen, or 20 years at the most, to invest, as we find in public records. If you
happened to be stuck in the market around 1981, or 2001 and 2002, your return would be
negative. So, as an investor, you only need to invest in the stock index if you want to achieve
the same long-term performance as the stocks. However, as to a meaningful investment
horizon specific for an individual, you may find that your returns are continuously negative
over ten or more years. In other periods you may come to believe you are a genius. You barely
lift a finger and reap a return of 14% year after year. If you cannot discern how you achieve
your return, you will not be able to determine if it good fortune or your own ability.

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If we assume our investment horizon is ten some years, then it will be hard for us to guarantee
we can earn a substantial return. This is a definite problem! At the same time, the stock
market is very volatile during different time intervals. Therefore, our next question is whether
there is a better way than investing in the stock index. Is there an investment which
outperforms the stock index, and provides more reliable protection for client wealth at
different time intervals, as well as during years in which we need money? Is there a means of
investment which will allow clients’ assets to ride the wave of compounding economic growth
for long-term, reliable, and outstanding returns? Do we have such an investment strategy,
outside of shortcuts and devious measures, which is replicable and teachable, and will
continuously provide such returns in the long run?
There are a variety of theories and practices in investing over the past decades. A far as I can
observe, and based on statistics and data, there is only one philosophy and strategy, utilized
by one group of investors, that can bring reliable, safe and outstanding returns to their clients
over a long period of time: value investing. Utilizing long-term performance to test this claim,
I find very few can sustain an outstanding performance record over the long haul, and those
who can are almost all value investors.
The largest hedge funds in today’s market mainly deal in bonds and have seen ten or more
years of good returns. However, in the past dozen or so years, risk-free long-term bonds have
seen their returns fall from 6%, 7%, and 8% to almost 0%. If you factor in that they are two to
three times more leveraged, the return is about 10%. Five to six times more leverage results
in a return of about 13%. It becomes harder to determine whether this kind of performance
is the result of luck or ability even with a track record of more than 10 years. However, you
can find value investors with good long-term performance throughout all time intervals.
Contemporarily, we have Warren Buffett, with a track record of 57 years. There are others
with 20 to 30 years of successful records. They all have one thing in common: value investing.
If I were you, I would want to be clear as to what value investing is, and understand how these
investors could perform so well in hard times and do so continuously. I recall 20 some years
ago when I sat in a lecture by Warren Buffett on investment. The audience was as small as
today’s. It was Warren’s first lecture at Columbia University. I was there by happenstance and
wanted to know what value investing was all about.
The earliest proponent of the value investing system was Benjamin Graham. He put this
system in place about 80 or 90 years ago. When we talk about value investing today, we think
of Warren Buffett, the leader and representative figure of value investing. But what does
value investing entail? It is quite simple really. There are only 4 ideas which you must
remember. Ben Graham, Buffett’s mentor, developed the first 3 concepts. The last one is
Buffett’s unique contribution.
First: stock as fractional ownership in the company. Stock is not only a tradable security but
also a certificate representing fractional ownership in the company indeed. Investing in stock
is investing in the underlying company. The company will grow as GDP grows. When the
market economy expands, value will be created as a result. As a partial owner of the company,
the value of our ownership will grow. If we invest as shareholders in the company, we support

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the growth of the company and will be rewarded accordingly when the value of the company
increases. This is a sustainable way to invest, and what I meant by the right way; you reap
what you sow. That’s why this is the right and main path for investing. Unfortunately, few
people understands stocks in this way.
Second: Mr. Market. What is a market? On one hand a stock is a fractional ownership in a
company and, on the other, a tradable security that can be sold freely. Where there is a
market, there will be bidding. How should we understand this phenomenon? For value
investors, the market exists to serve them and offers an opportunity to acquire ownership.
Many years later they can cash in the ownership in times of need. Therefore, the market is
but a service provider. It can never tell you what the true value of a stock is. It can only tell
what the price is. You can’t treat the market as your teacher, but only as a tool at your
disposal. This is the second important concept. However, almost 95% of market participants
have a diametrically opposed understanding.
Third: Margin of safety. The nature of investing is to predict the future. However, prediction
is inherently not 100% accurate, but can only range from 0% to near 100%. Therefore we must
leave a large margin for error in our judgment, referred to as the margin of safety. You should
always allow for such a margin no matter how certain you are and make sure that your
purchase price is much lower than the intrinsic value of the company. Since stock is fractional
ownership in the company, as the company is valuable and has intrinsic value, so does its
stock. And the market is there to serve you, therefore you can wait until the market price is
much lower than its intrinsic value to buy the stock and sell it when the market price is much
higher. In this way, even if you are wrong in your prediction, you won’t lose too much money.
If you are right in your predictions most of the time, and have 80% to 90% confidence, but are
not quite 100% certain, you will suffer when the outcome with 10% or 20% probability comes
to fruition. However, with a sufficient margin of safety your losses will be limited. If you are
right, on the other hand, you will be rewarded much more handsomely than others.
Therefore, seeking a huge margin of safety for every investment you make is a very important
principle.
Fourth: Circle of Competence. This concept was added by Warren Buffett through his own 50
years of practice and experience. He believes that, with tireless long-term effort, investors
can build their circle of competence, which will give them an unparalleled insight and
understanding of selected industries and companies. The circle allows investors to make more
accurate predictions concerning how companies will perform in the future. One’s competitive
strength lies well within this circle of competence.
The most important idea behind circle of competence is knowing the boundaries. No real
competence can be limitless. When you advance an argument, you must be able to tell me
which premises will disprove this argument. If you are able to do so, your argument is sound
and valid. If you simply state the conclusion without providing premise(s), your argument will
not stand up to scrutiny.
The concept of a circle of competence is critical because of ‘Mr. Market.’ The market exists to
expose the human weaknesses of its participants. Your lack of understanding, as well as

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psychological or physiological frailties, will be laid bare in the market. Those who have worked
in it can relate to this statement. A market is the sum of all participants and, If you don’t know
what you are doing, you will be beaten down sooner or later. This is why we hear market tales
all the time about people making big money but actually losing money in the end. Mr. Market
can discover the fallacies in your logic and identify all of your weaknesses. If you are operating
outside of your circle of competence, or your circle has no boundary, Mr. Market will find you
at some time, in some circumstance, and he will destroy you.
Only in this sense (investing outside of circle of competence) is there real risk in the market,
which is not ups and downs in stock prices, but rather permanent loss of capital. Whether this
risk exists for you depends on whether you have a circle of competence that is small with
clearly defined boundaries. Only within such a tight circle are you able to develop your ability
to accurately predict the future with continuous and long-term effort.
The investment method developed by Professor Graham generally identifies companies
without long-term value and growth. The concept of circle of competence is proposed by
Buffett based on his own practice of investing in great companies. If you can truly accept and
follow these four ideas, you can buy into companies within your own circle at sufficiently low
prices and hold onto these investments over the long-term. Thus you can achieve good
sustained and reliable returns through the organic growth of their intrinsic value, as well as
stock price’s regression to the intrinsic value.
These four ideas encapsulate all of the notions of value investing, as well as its fundamental
tenets. The philosophy of value investing is not only simple to explain and easy to understand,
but also the right way and main path of investing, as well as the only sustainable way. What’s
sustainable way? If what you get is what you deserved in others’ eyes, your way is sustainable.
On the contrary, if others will consider you a swindler when you disclose how you make
money without any reservation, your way will certainly be unsustainable. This is what I mean
by the right way and main path.
Value investing tells you that investing in stocks is in fact purchasing ownership in a company.
Furthermore, investment helps bring the price of the company closer to its real intrinsic value.
This is beneficial not only in helping the company grow this intrinsic value, but also allowing
it to ride the wave of Civilization 3.0. You will partake in value created through the continuous
growth of the company. At the same time, you can provide your clients with sustained,
reliable and safe returns over the long-term. You will be rightfully rewarded for your efforts
and others will believe you deserve it.
Once on the right way and main path you will not be swayed by fluctuations in the market,
and will clearly be able to valuate a company's real worth. You will respect the future knowing
that it is filled with uncertainties and build in a margin of safety to properly diversify risk. If
your prediction is wrong, you will not lose a lot of money, and stand to gain substantially when
you are right. This will allow your portfolio to continuously and steadily provide higher and
safer returns than market index in the long run.
Let's suppose you have nothing in the game. To start off, you take 2% commission and another
cut of 20% if you win. If you lose, you close down your present operation and simply open

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another the following year. If you tell people that this is the way you make money, will they
think you deserve the money or jail? However, if you persist in using the ‘Buffett Way’, and
allow for a large margin of safety on prices, diversify risks properly, help all parties win, and
charge small fees, all will think you deserve to keep the gains you have achieved. Then you
will be well on your way on the right way and true path of investing.
This is all there is to value investing, which sounds rather simplistic and logical. In the
investment world, there are many followers of various investment theories, but true value
investors are hard to find. Therefore, one notable feature of investing is that most people
don't know what you (investment professionals) are doing, and investing can ultimately be a
killer of wealth. The recent stock market crash (bull to bear) is the best case in point.
On this wide open main path of investing you find very little traffic and wonder where
everybody is. You need only look at the ‘heterodox paths’ of shortcuts with traffic backed
up for miles. Investors take shortcuts because the right and main path takes too long. In
theory, value investing is a sure way to reach your goal successfully, but the biggest problem
is it takes too long. It may be the case that a company has fallen out of favor with Mr. Market
and its price is therefore much lower than its intrinsic value when you buy it. Unfortunately,
you don't know when Mr. Market will come to his senses. In addition, the growth of a
company depends on the efforts of everyone from top executives to frontline staff, in addition
to time, persistence and some luck. It is an arduous process.
The other difficulty lies is in your ability to predict the future, as the ability to invest involves
the ability to correctly make such predictions. Understanding a company or an industry means
you can predict what state the company/industry will be in 5 or 10 years, by no means an
easy task. However, before we make an investment decision, we need to know what situation
the company will be in. What will happen if there is an economic downturn? Otherwise, how
can we know if the value of the company is higher or lower than the price? We need to have
an estimate of the company's future annual cash flow for the next 10 or 20 years to discount
them to today’s value (present value of future cash flow). It is difficult to know what shape
your company will be in, even as the founder. You may say, ‘of course I know,' and
undoubtedly say this to your customers and investors. You may even tell your employees that
the company aspires to the Fortune 500. In reality, you probably cannot predict the
company's growth more than 10 years into the future, as few can due to innumerable
uncertainties. This does not mean it is a completely lost cause. You can probably predict with
high degree of confidence the worst case scenario for selected companies and industries over
the next ten years. They may perform better than expected. However, this skill requires
relentless effort and studies, along with many years of hard work.
When you are capable of making these judgments, you have begun building your circle of
competence, which must be a very tight one at first, but will expand outward as time passes.
This is why value investing is inherently a long haul. While it will definitely take you to your
destination, most people are not willing to make the effort. You can spend a lot of time, yet
still understand very little.

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If you are a true value investor, you won't go on a TV money show to critique the stock prices
of all companies, or tell others what the stock prices should be. You won't casually state 5000
point is too low, that a bull market is imminent, or that 4000 point is a bottoming out. You
will know that such pronouncements are outside of your circle of competence. No matter
how big the circle you draw, those statements won’t fit into it, and those who set the
boundaries of the circle beyond their competence are destined to be destroyed by the market
at some point or somehow. As I stated previously, the market is a mechanism that discovers
your weaknesses. Any fault/defect you have will be magnified infinitely, to the point of
complete destruction.
Therefore, one basic requirement for professionals in this industry is to be completely and
one hundred percent intellectually honest. It is easy to deceive oneself, particularly in this
industry, but one should never do it. From where you sit, you can tell people all kinds of lies.
When you tell them over and over again, you begin to believe them yourself. However, these
kinds of people will never become outstanding investors. Rather, they will be destroyed
sooner or later by the market. That's why the industry has not produced many long-term
superstar investors. Some of those we talk about as superstar investors might have 20%
returns for 10 plus years in a row. But when they close their funds we find they have suffered
losses of more than 50%. The funds start small but get larger as they start to lose money. In
the end, the amount of money they have lost for investors is much greater than what they
have made. However, they make plenty of money for themselves in the process. Based on
the overall history of these kind of funds they should not get a penny. This is the point I made
earlier about the most distinct feature of this industry.
The wide open path is so far away from the ultimate destination of success. This frightens
away many potential travelers. At the same time, the market gives people the impression that
they can make money. It is true that there can be large swings in the value of short-term
assets, which can give people the illusion that they can make huge profits in a short time.
People naturally spend their time, efforts and intellect on making short-term predictions.
That's why many will forsake the right way and take shortcuts, which will lead them off track
to dead ends or swamplands given enough time. Most will exhaust their clients' money, and
some their own. This is why when we look at the US trading records for the long-term, we
cannot find successful long-term investments that are based on short-term-oriented theories
and strategies. The great long-term investments have all been made by value investors.
The performance of short-term investment is often influenced by the market, and based on
luck rather than competence. For example, you can always find ‘stock market geniuses’ who
succeed over a very short period of 1 or 2 years, or even 1 or 2 weeks. China has produced a
countless number of them in the past eight months. Some ended up committing suicide by
jumping from buildings. You find very few winners in the long run. Even a good track record
as long as 5 or 10 years may not be a good basis for predicting future performance. For
example, I cannot judge if an investor’s outstanding performance over such a period is the
result of good fortune or his own competence without seeing the actual positions in his
portfolio. Whether an investor is lucky or competent is a key question for value investing.

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During a continuous run of 15 years in which the market provides an average compound
return of 14% you don't have to be a genius at all. All you need to do is to get in the game and
ride the market to see excellent returns. The table can also be turned to where the market
shows negative returns for 10 plus consecutive years. If you can succeed under these market
conditions, you are a true genius. This is what I meant when I said that without looking at the
specific content of your investments it is generally difficult to judge your competence.
However, if my investment manager can maintain excellent performance for more than 15
years, and he does his research in the right way, then he will generally become a competent
professional. When we can tell his performance is due to competence more than luck we can
essentially say he is a successful investor. In other words, you need to work at this for a long
period time before you make it, and it may take you more than 15 years. It is not surprising
to see so few riders traveling this wide open path to success, even though it has little traffic
and is never congested. Precisely because of this, those who are willing to take to this open
but long path have the opportunity to succeed. In addition, when they reach their destination
their success will be regarded as true and well deserved. The success you have worked
tirelessly for will be sustainable and applauded by others with an objective view.
I sincerely hope all of you here today make up your mind to become a successful person by
taking the right path. You will have peace of mind when you reap the benefits. You will no
longer play with your clients’ money in order to quickly turn a profit at their expense.
However, if you lack the two cardinal moral principles I outlined earlier in this lecture, you will
surely turn into a killer of many peoples’ wealth while you may claim successes along the way.
If so, you do more harm than good. I am asking those who are still in school and aspire to
enter this profession to take a hard look at yourselves and find out if you have the DNA and
the sense of fiduciary duty. If the answer is no, please heed my advice and don't join this
profession. If you do, you will cause great harm to society. You may become rich while
harming others, but would you be able to sleep soundly at night and live with a clear
conscience? Some may, but I definitely would not.
If you don't have the DNA for fiduciary duty, but become an investment professional, you will
likely join the crowd which takes short cuts. This will lead you to some dead end, or
swampland, with your clients’ money in hand. If you are not too smart, you may even take
your own as well. This is inevitable. If you are not willing to search for truth and wisdom, set
higher ethical/moral standards, or if you don’t have the DNA, and a sense of fiduciary duty, if
you don’t treat every penny of your clients’ money as though it were your parents, I would
urge you not to join this profession.
I hope you will take these principles to heart and choose the right path in your career as an
investment professional.
4. Is value investing applicable to China?
Next I will discuss the last topic of today's lecture: Given value investing is the right way, can
it become a reality in China?
Over the past several hundred years, investing in stocks has proven capable of generating
enormous returns for investors in the long run. I have already explained why this is the case,

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though we know it has not been so throughout human history. Rather, it is a new
phenomenon, which emerged about 300 years ago when mankind ushered in a new age of
civilization, known as modernization. I call it Sci-tech Civilization 3.0: a combination of modern
science & technology and the free market. Is it the case that the phenomenon of sustained
long-term return on stocks only can be found in US and European nations, and not in China,
as it is an exception? When discussing a number of issues related to China many will say it is
special. In fact we can find many areas of difference between China and the West (including
the US). We are only interested in the particular question of investment, which is the focus of
our discussion today. Is China special?
When the majority of investors are speculative investors, market prices often become wildly
detached from the intrinsic value of the underlying assets. Under such market conditions,
how can you tell with some certainty that the future stock markets in China will follow the
trends of the US economy and its stock market over the past 200 years? If everyone is
throwing ‘bad money after good,' prices will continue to defy the intrinsic value of the
underlying assets and stay detached from the real value for long periods of time. What can I
do as an investor if this trend lasts so long that I can’t protect my assets? What can I do when
China no longer follows the fundamental principles of a market economy? The last question
is the key, and involves making predictions concerning the next several decades. Simply put,
what will China be like in 30 to 50 years?
Here I will share with you my personal views concerning the question of whether value
investing can become a reality in China, which has puzzled me for many years. Investing in
Chinese companies means investing in China. Will we see a repeat of 1929 (the great US
depression) or 2008 (the subprime mortgage crisis) in China? Everything seems possible. As a
matter of fact, many people have thought at some point during this year that we have come
to such a point in time. It is also possible that we will come across the same situation in a few
months. If you invest, or have money in the game, you will always face this problem. Before
you take any action, you need to take a step back and think it through, as you cannot avoid
this problem.
First, we let the data speak for themselves. Let’s look at some historical data collected on
China and other markets and compare their performances. Chart 5 shows US data from 1991
to the end of 2014. We can see the trends are exactly the same as the ones in the past 200
years. Returns on stocks continue to outpace others, whereas cash continues to lose value.
The reason, as discussed earlier, is continued GDP growth. This is essentially identical to the
last 200 years.

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 Chart 5：Return on Major Classes of Financial Assets in US 1991-2014

Next, we take a look at the data for China since 1991. In 1990, China saw 8 stocks being offered
as pilot projects, but it was in 1991 when stock indexes were established. What do you think
the trends look like for this period? (1991-2014)? We know what happened to the Chinese
stock markets in the last 3 months, a very sorry sight. Will the trends for this period be similar
to what we saw in the past 3 months? Let's look at Chart 6.

Chart 6: Return on Major Classes of Financial Assets in China since 1991

What we see in this chart is almost exactly the same pattern as the US over the past 200 years.
Among the major asset classes, the value of the RMB fell from 1 to 0.37, similar to the USD,
between 1991 and 2014. Gold also lost value. During the same period the Shanghai and
Shenzhen stock indexes continuously gained value. Return on fixed income also
demonstrated an upward trend. There is, however, one difference: fast GDP growth. Because

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GDP grew more rapidly than in the US, stock index growth also outpaced the US market. It is
surprising to find this peculiar pattern in a developing nation. We observe the following in the
past several decades. First, trends are basically identical to the US. Second, the main driver is
also GDP growth. China's higher GDP growth rate during this period created the attendant
higher inflation. Cash lost its value at a faster rate, while stock value grew more rapidly, all in
spite of the similarities in basic trends, an interesting phenomenon indeed!

Chart 7：Comparison of US, China Stock Indexes 1992-2014

Chart 8：Comparison of US, China, HK GDP Growth 1991-2014

We now look back at China's development in the past two decades. When China first
embarked on the path of Civilization 3.0, its growth started to show the same patterns and
trends, though at a higher velocity, than that of the US. Despite the fact that the Shanghai
and Shenzhen indexes have grown 15 times in the past 25 years with an annualized return of
12%, I dare say none of the investors, including every one of you here, has achieved this rate
of return. However, there is one entity that achieved such returns on the first day the stock
exchanges were established: the government of China. She received this return on the very
first day. Many people are worried that China is too highly leveraged, but they often forget
the Chinese government enjoys these tremendous returns. It is because she (the Chinese
government) owns the lion's share of the stocks traded in the markets. The rest of investors
are not so lucky. Initially, no one believed trends in China could track so closely with those of
the US, because their development paths/models were so different. However, when China
returned to the right track of modernization, Civilization 3.0, it achieved the same outcomes
as the United States.
If this is true on a macro level, will it also be true at the company level? Let's look at the
following well-known Chinese companies: China Vanke, Gree Electronics, Fuyao Group, GD
Power Development, Yunnan Biaoyao Medicinal, Yili Group, Wanhua Chemicals, Kweichow
Moutai, Yuyuan Tourist Mart, and Henan Shuanghui Investment and Development Co. These
companies all started very small but have grown into giants. The highest growth in market

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capitalization is more than 1,000 times the original value, while the lowest is about 30. (Refer
to Chart 9).

Chart 9: Top performing Chinese A share companies 1991-2014

Do we know any investor who has seen a return of 1,000 times the original value on
investment in the past 20 years? He could have accomplished this merely by investing in China
Vanke. The only investors who achieved a thousand fold return were those who held the
state- owned initial shares. Their initial share price saw a ten on the first date they were listed.
I singled out returns based on IPO price in my studies. After the IPO, anyone could buy stock
on the market, and still make close to a hundredfold return (based on first day close price of
China Vanke). You would have received a 110 times the return by buying Yili. The data shown
in this chart are real companies rather than abstract market indices. These companies, which
actually exist, were once miniscule but have grown into giants since their IPOs.
You can find the same pattern in Hong Kong, but the concept of initial shares does not exist
there. If you invested in Tencent on the first date of IPO, you really would receive 186 times
the return. Tencent went public in 2004 and has grown 186-fold in 10 years. Many of these
companies do business in China. (Refer to Chart 10) In the chart, you can find the following
companies: Tencent Technology, HSBC, HK&China Gas Co., HKEx, Li&Fung Ltd., Everbright
International, China Overseas Land & Investment Co., ENN Energy Holdings, and Anhui Conch
Cement Co. There are other companies (which generate superior returns) like the ones
included here. I chose them because they are better known to you. I use these examples to
make one point: there are real companies underlying stock indexes; the indexes are not
merely abstract ideas.

Chart 10：Top performing companies in HK Stock Market 1991-2014

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If we look at the US market during the same time period or earlier, there are some familiar
names on the list. Since its IPO in 1958, Berkshire’s stock (class A) price has grown 26,000
times in value. Its IRR is about the same as China Vanke. Chinese companies listed in US stock
market such as Baidu, C-Trip have topped the IRR growth list. (Refer to Chart 11.)

Chart 11: Top companies in US stock markets 1991 to 2014

I am not going to talk about individual stocks here. I merely use this chart to shed some light
on this phenomenon. Stock indexes are not abstract, but composed of individual companies.
In the past 200 years, China has travelled down many different paths. However, when China
chose the right course of Civilization 3.0, the outcomes for her economy were actually almost
identical to those of other nations in Civilization 3.0.
How can we explain this phenomenon? What are the conclusions we can draw from China’s
performance of the past several decades? More importantly, we have to ask whether we will
see the same phenomenon in the Chinese stock market in the next several decades. Will there
be a new group of companies which display superior performance like the ones in the charts?
Will it be possible for investors to achieve a several hundred thousand fold return in value
either by investing in the same companies or new ones?
To answer the question of whether China is unique, we have to examine China's history of
modernization, which began in 1840. China didn't initiate modernization. Rather, it was

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forced upon her. If China had followed her own development path, she would not have
arrived at her present situation. The main reason was the very powerful role government
played in the economy, which made the formation of a free market economy impossible. In
fact, China had several opportunities to develop a market economy throughout its history. All
attempts to do so ultimately failed however. From the time of the Han Dynasty onward (206
BC-220 AD) China had the largest and most powerful government. Furthermore, it
demonstrated the greatest stability and depth in ruling. The characteristics of the Chinese
government are correlated with its geography, terrain and topography, which we will not
discuss in detail today. Suffice it to say, China had been very powerful and stable in the past
2,000 years. Therefore, it was not possible for her to be the birthplace of Civilization 3.0.
However, this did not mean that civilization 3.0 could not be introduced to China.
Modernization, as we see it today, does not simply entail the modernization of institutions.
This fact is key to understanding the changes which occurred in China after 1840. It was not
the culture, or economic system, which was transformed in China, but its civilization. The
changes we encounter today are a transformation of the state of civilization.
This transformation in the state of civilization was similar to the agricultural revolution of
9,000 BCE. The emergence of agricultural civilization during this period (Civilization 2.0) was
accidental. The end of the first ice age in the Middle East allowed for agricultural activity. In
Mesopotamia, people discovered edible wild plants and wild animals that could be
domesticated. Agricultural Civilization happened by accident and quickly spread to every
corner of the world. Today, we see Civilization 3.0 as the free market economy + modern
technology. This new state of civilization was indeed produced by the combination of a free
market economy and modern science & technology. The spread of Civilization 3. 0 in the past
200 years demonstrated a pattern similar to the spread of Civilization 2.0.
The development of Civilization 3.0 followed that of the Civilization 2.0. It happened almost
by accident, as certain events, of which the occurrence was not ensured, took place in
particular geographical locations. As a result of its location, Western Europe first discovered
the American continent. It was 3,000 miles from the continent, in contrast to China, which
was some 6,000 miles (or 9,000 miles with the ocean current) away. In addition, China had
no motivation to undertake expeditions and discover the American continent. The Atlantic
Economy was created after Europe discovered the New World. The most prominent feature
of this new economic system was its freedom from government intervention. A brand new
economic system, in which the main participants were market-oriented companies and
individuals, was born. The emergence of this economic state of affairs began to challenge the
traditional view of the world, leading to the modern scientific revolution. This, in turn,
brought about a Revolution of Reason, referred to as the Enlightenment, in which people
were testing and questioning the validity of traditional knowledge. Civilization 3.0, the
civilization of science & technology, emerged against this backdrop after a series of historical
events.
It is almost impossible for this kind of development to take place under the Chinese social
system (for Civilization 3.0 to first emerge in China). However, if we examine the spread of
Civilization 2.0, we see once a new civilization emerges, it will spread quickly to the rest of the

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world, regardless of the origin of that civilization. The new civilization will quickly replace the
old ones. This is related to human nature. According to studies on the biology of our human
ancestors, everyone is evolved from the same Homo sapiens, and has origins one common
place. Thus, all have the same human nature. Around 50,000 to 60,000 years ago, modern
humans migrated out of Africa, and it took them 30,000 to 50,000 years to reach every corner
of the world via different routes. One branch reached Asia, China, and later the American
continent. Therefore, the distribution of human nature in a large population group is very
much the same, as is the distribution of intelligence, ambition, empathy, etc. As a species, we
all strive for equal outcomes and accept equal opportunity. The inherent nature to seek equal
outcomes allows a new and more advanced civilization to spread quickly once it has emerged,
while the ability to accept equal opportunity allows each society to develop its own cultural
spirit and institutions. In the evolutionary process, this cultural spirit, and these institutions,
have permeated every fiber of society, even those areas where there could be resistance. The
process of shaping a society into a place of equality is no doubt a painful one.
It is fair to say a civilization must eventually spread. It will do so at a faster rate in regions that
already have a relatively high level of civilization and culture, and will also spread more rapidly
in regions that were never or only partially colonized. This is why Japan was the first to
become civilized in Asia prior to China. It was never colonized. India, having been colonized in
its past, was civilized at a slower rate.
We won’t go into details on these issues. Generally speaking, China started to undertake
modernization after 1840. However, people do not completely understand what the essence
(nature) of modernization is. China experimented with various means and modes of
modernizing from 1840 on. It started with the Westernization Movement (Self-strengthening
Movement) in which she tried to learn and introduce western technologies, while maintaining
Chinese practices in all other matters. Later, she found this approach did not produce the
desired results, as China had failed in her attempt to modernize. In addition, the movement
was interrupted by the Taiping Rebellion. During that period, China also engaged in the Sino-
Japanese War for more than 50 years. China did not follow in the footsteps of Japan on her
modernization path. The main reason was that China thought she had to move in the opposite
direction. If we fast forward to 1949, we see China tried a different development path in the
ensuing 30 years: a collective economy, which is a form of planned economy. China attempted
almost every possible path on her road to modernization. At the end of the 1970s, China
began her reform and opening up. At last, she had returned to the true course and was
moving toward Civilization 3.0, i.e. a free market economy + modern science & technology.
The first 150 years of modernization, in which China experimented with many different
approaches, was a complete failure. In the previous 35 years China has only attempted 2 new
things: a free market and modern science & technology. There has been no significant change
in her political system or culture. However, we see a striking similarity between the patterns
in China’s economic growth and all other Civilization 3.0 nations.
In other words, China has only truly returned to the core of Civilization 3.0 in the past 35
years. Before that, for a variety of reasons, she spent 150 years in search of the right way on
a tortuous road which never quite reached the core.

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Thirty-five years ago China finally returned to the core of Civilization 3.0, in which the free
market meets modern science & technology. Once on the right track, we see that China’s
economic growth trended closely with other 3.0 civilizations. The charts shown earlier all
support this observation. The stock market and other major classes of financial assets,
including individual stocks and companies, have all shown amazing growth. On the specific
point of the essence of civilization China is not all that unique. Her uniqueness is mainly
expressed in her culture. Her political system is also different. But they don’t appear to be the
essence of Civilization 3.0.
Domestic and international investors alike are concerned with this question because China
has a different political system. After all, China has endeavored to modernize for almost 200
years and taken different paths during this period.
China, since her establishment in 1949, had taken a path of centralized planned economy with
nationalized properties for 30 years. This was a result of her political system. After taking the
path of market economy for 35 years, will China back paddle and abandon the market
economy under the same political system? Answering this question will bring clarity to how
Civilization 3.0 will fare in China, and in turn, whether value investing will take root in China.
There are no right or wrong answers to these questions. In the past 200 years, generations of
Chinese intellectuals have pondered these questions and not reached any consensus. I have
tried to solve this puzzle myself in the past several decades. Following I am sharing my
personal thoughts with you.
Before we answer the question, we need to examine what the essence and iron law of
Civilization 3.0 are. We touched upon them briefly and superficially earlier. The fundamental
reason why Civilization 3.0 is able to continue to promote sustained, long term, and
continuous cumulative economic growth is because free exchanges produce added value.
When the free market is combined with science & technology, the outcome acts as an
accelerator which creates added value at higher velocity. The more individuals, entities, and
nations participate in this marketplace, the greater the value created. Adam Smith is the first
person to offer this insight. Later, David Ricardo expanded upon this theory to include
exchanges among nations and markets, thus laying the cornerstone for modern free trade.
This theory states that, among different markets (independent yet competing), the ones with
the largest number of participants will grow larger and have more advantage in economy of
scale. They will eventually replace smaller independent ones. In other words, the biggest
market will eventually become the only market.
This concept would have been inconceivable during the era of Civilization 2.0. Free trade
originated in this basic insight. Without it, we would have not seen the development of free
trade, let alone the globalization process of today. In the 18th and 19th centuries the United
Kingdom promoted free trade. These efforts continued until the 1990s when globalization
emerged, which proved the theory was right all along. With the emergence of globalization,
we arrive at the new rule: the iron law of modernization. It states that when there are two
competing market systems, with the interaction of two forces of 1+1 >2 and 1+1>4; the one
with greater trade volume will see greater growth. When one system has greater volume, it

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will have greater velocity in its growth, and eventually create a single system. This singular
phenomenon appeared for the first time in history during the 1990s. Since then, there will
never be another global market. Something of this nature is truly unprecedented. David
Ricardo offered the theory that when two systems traded, they both gained, so free trade
was beneficial and desirable. But little did he know that a single market would emerge out of
the largest market. This reality only came about in late 1990s.
This is the historic trajectory of Civilization 3.0’s progress over the past few decades. It began
with the Atlantic Economy (represented by UK and US) when trade was introduced in their
colonies. The world evolved into two independent market systems after the two world wars.
One was the western market system with the US, Western Europe and Japan at its core. The
other was led by the USSR and China. Obviously, the western market system was larger in
volume. It also had higher velocity and efficiency because it was based on the free market.
Though at the very beginning the systems were quite comparable in size, the disparity became
notable within in a few decades, as evidenced by comparing the US and USSR, East Germany
and West Germany, or China with HK and Taiwan. This difference is also evidenced by the
present disparity between South and North Korea. With the collapse of the Berlin Wall in the
1990s, and the embrace of market mechanisms by China, the world witnessed the arrival of
an unprecedented phenomenon called globalization. By then Civilization 3.0 had really shown
its true nature. I call it the iron law of Civilization 3.0, which states a global economic system
will eventually emerge. It is global, unified, and common. In addition, it is based on free trade,
free exchanges and a free market.
The market possesses economies of scale. The more participants the greater the value it
creates. Larger markets provide a more optimal allocation of resources, higher efficiency, and
more wealth. They also give rise to more successes and advancements in science &
technology. When markets compete, the winner will always be the largest one. It will
eventually emerge as the only one. Any individual, society, company and nation staying
outside of the largest market will continue to fall behind, and be forced to integrate into the
system eventually. The way to enhance national strength is to tear down tariff barriers, and
integrate into the largest global free market system. A closed-door isolationist policy will only
make a nation a laggard. Through market mechanisms, modern science & technology
continue to produce an increasing number and variety of products at falling costs. This helps
meet insatiable human demand and promote sustained cumulative economic growth. This is
the essence (nature) of modernization. We can easily explain the disparity between East and
West Germany, South and North Korea, China (before reform and opening up) and HK, as well
as Taiwan. It helps explain why Iran would abandon its nuclear program, a lifeline, in order to
be part of the global market. With only one global market, a small closed market such as Iran’s
would not be able to make advancements in science & technology. In addition to Iran, China
and the USSR would not be able to either.
Information is also growing at breakneck speed. Some people 10 years ago predicted that
every 8 years the amount of data created would equal the total amount from the entirety of
previous human history. I estimate this rate has increased even more rapidly in the past 10
years. The iron law of 1+1>4 has been repeating, and at higher velocity. A small market is

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destined to fall behind. 15 years have passed since China’s accession to the WTO. Before that,
this global market had been in existence for 20 to 30 years. In this context, any economy
staying outside of this system would definitively be a small market. It would fall farther and
farther behind as it stayed isolated from the system. If China were to change her market rules,
or leave the common (global) market altogether, she would have quickly fallen behind again.
I tend to believe that most citizens of such a mature nation, with a glorious history and rich
cultural heritage, would not accept such an outcome. It may be possible for China to
temporarily remove herself from the global system. But China would not want to be a loser
indefinitely after thousands of years of success. It would quickly alter her course after briefly
deviating from the main path of Civilization 3.0.
This revision of course may seem very brief when viewed through the lens of history, but it is
very long when measured against a human lifetime. Even in this time frame, there is still a
free market economy and a sufficient margin of safety. We can live with this short time frame
because it is no more frightening than an economic downturn of ten plus consecutive years.
If you assume that China could abandon Civilization 3.0 in the future for some time, your
understanding of its iron law will provide you with the comfort of knowing you can still be a
value investor with an ample margin of safety.
Let’s bring our discussion back to investment and look at the prospect of value investing in
China.
I believe China is at interim stage between Civilization 2.0 and Civilization 3.0. Let’s call it
Civilization 2.5. China has come a long way but still has a long road ahead. Therefore, I think
there is a high probability that China will continue on the main track of Civilization 3.0, as the
cost of deviation is very high. If you have a good understanding of China’s culture, people and
history, you will agree that China will forge forward. This is particularly the case now that you
have a better understanding of the essence of modern civilization. There is almost no chance
of China leaving the common market, and the probability of China changing its market rules
is also very small. Thus, it is highly probable that, in the next 2 to 3 decades, China will remain
in the global market system, and adhere to free market principles, in addition to promoting
science & technology development. There is a high probability that China’s economy will be
on the main track of Civilization 3.0. Besides, we know the course of Civilization 3.0 has little
to do with political and cultural factors, and a lot to do with science & technology, as well as
the free market. This is its true essence. This is also the biggest misunderstanding about China
many investors have, particularly those from the West.
If China is to stay the course of Civilization 3.0, and adhere to the free market economy +
modern science & technology, her returns on main classes of assets (stocks, cash etc.) will
track the trends of the mature market economies in the past 300 years. Her economy will
continue to grow cumulatively accompanied by inflation. Stocks will continue to outperform
other classes of assets. The philosophy of value investing is the right way and main path in
China as it is in the US. Value investing will provide sustained, stable, safer and more reliable
returns for her investors. This is why I believe value investing can be realized in China.

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What’s more, I think the principle of value investing not only applies to China, but that value
investors have more advantages, despite the fact that the market is still immature. 70% of
the players in the Chinese capital market are retail investors focusing on short trades, even
institutional investors. Prices are detached from intrinsic value, thus creating very unique
investment opportunities. If you are not swayed or lured by short-term gains, but hold firm
on long-term value investments, you will have fewer competitors and a higher probability of
success.
China is at the midst of an economic transition. Financial reform will allow financial markets
to play a greater role in financing rather than relying on indirect bank lending. The stock and
bond markets will become the main sources of financing, and the major tools of resource
allocation. Given this new landscape, the scale of development, institutionalization and
maturity of the financial market will be greatly improved in the near future. Many with short-
term vision may complain that the government has been too heavy-handed in market
intervention, or that it should not bail the market out, in addition to other criticisms. However,
with longer-term vision, we find the Chinese capital market is continuing to move towards a
more market-oriented, institutionalized, and mature system. It will play a more important
role in China’s economic development. Genuine value investors should play an increasingly
important role as well.
Today, when I see your young faces here, I envy you a little. I think you are in the right place
at the right time and, as value investors, will have many more opportunities than I did. I have
been very fortunate to have the pleasure of studying under value investment masters during
these past 20 years. I have been able to learn and practice under their guidance. You will be
luckier than me. I hope you will not forget your original aspiration. In addition, never forget
the two cardinal principles. The first is to understand and live up to your fiduciary duty. Treat
your clients’ money as your own, or your parents’ hard-earned life savings. Only then can you
manage it well. Second, consider it your moral duty to acquire knowledge and seek wisdom.
Make conscious efforts to distinguish half-truths from truths. Try to gain true insight and
search for real knowledge. Through relentless effort you will become successful. You will
generate deserved returns for your clients. In the process, you will make your due
contribution to China’s economic development. It is a win-win situation for you personally,
your family, others, and the country.
I sincerely wish you all the best on the true path to success. Be brave and soldier on. This path
is a beautiful one with no traffic congestion. It is not a lonely road, because this industry is
filled with all sorts of wonders, challenges and views. I believe you will travel it well. If you
stay the course for 15 years, you will become stellar investors.

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2016 New Year's Testimony-- Humanity and Financial Crisis
January 2016
At the beginning of the 2016 New Year, I watched the movie "The Big Short." The film, adapted
from Michael Lewis's novel of the same name, tells the story of several investors who first
discovered the 2007-08 subprime mortgage crisis and the loopholes in the entire US financial
system and began to make a profit. I have personally experienced many of the events involved
in the film; I have more or less mixed characters in the various characters in the film, so I
watched more and more immersive reality, which triggered Some thoughts.
Since 2005 and 2006, I personally discovered the CDS product for accidental reasons, and did
some research. I was also prepared to enter the market on a large scale and short through
CDS. Later, after several conversations with Munger, the idea was gradually dispelled. The
reason for Charlie's objection is also very simple: if my analysis is correct, it means that the
counterparties of these products will eventually be accepted, those big financial companies
may not be honoured due to bankruptcy; or these large financial institutions are adopted by
the government. The taxpayer's money has been saved. At this time, the money you earned
is actually the taxpayer's and the government's money. Later, the results confirmed Charlie's
judgment that the money earned from the biggest shorts in this history was ultimately
obtained directly or indirectly from global taxpayers. Therefore, I have never regretted not
having earned the taxpayer's money.
Investment itself is a prediction of the future. Although it is correct, it will bring some
pleasures more or less, but the results of different ways of making money are still different.
Later, after Michael Lewis's book was published, I had several conversations with Charlie. I
talked about this decision. He said that if you made a lot of money by doing CDS, you may still
be looking for the next one today. The opportunity of a big short. The nature of human beings
is like this. Hedge fund investor John Paulson is the biggest Winner of this big short. In the
past few years, I have observed John Paulson's performance since 2008, but it has once again
verified Charlie's judgment. The gentleman loves money and has a proper way. It refers not
only to the way and method of making money. In Charlie's view, the source of the money
earned is equally important. At this point, I also take it for granted. The money earned by
these big shorts is actually filled up by the vast number of taxpayers. Ordinary taxpayers are
the biggest victims of this global financial crisis, and they are the ones who finally pay the bill
in this financial crisis. Making money in such a crisis is really unbearable. But this
unforgettable experience has made me even more scared of the dangers of the financial
industry.
More importantly, the film takes the experience of being a short-seller as an introduction,
revealing the various personnel in the 2008 global financial crisis triggered by the United
States and the profound human reasons for this crisis.
The financial crisis was caused by the characteristics of the financial industry in a big sense.
Because unlike any other service industry, financial products are difficult for most people to
judge the pros and cons for most of the time. This creates a natural soil for corruption in the

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financial industry. The global financial crisis triggered by the United States in 2008 1s only one
of the most extreme examples in recent years. Friends who are engaged in financial work,
whether or not they introduce this film in China, everyone should find a way to look at it.
The British Arlington has a famous saying: power leads to corruption, and absolute power
leads to absolute corruption. The experience of working in the financial industry for more
than 20 years often makes me feel that the tilt of power caused by information asymmetry,
combined with the huge
Temptation of financial profits, is even worse for the entire financial industry, and it can
trigger a systemic financial crisis.
However, at least until 2008, the mainstream concept of Western regulators tends to believe
that the free market economy is equally universal in the financial industry, so it is better to
have less intervention and no intervention. This concept is most respected by the former
Federal Reserve Bank Governor Greenspan.
The free market economy is of course the greatest institutional innovation in human history,
but there are exceptions. These exceptions are defined as market failures. But so far, market
failures are thought to be most important in the areas of public services, natural monopolies,
and externalities, with less discussion of market failures in the financial sector. However,
according to my own experience and observation, market failures are actually widespread in
financial markets. So in the financial sector, the negative list-style freedom is often more
destructive than the positive list freedom. The global financial crisis of 2008 and 2009 is an
extreme lesson.
In 2015, we just experienced the use of extreme leverage in China's OTC financing, which also
made the Chinese people experience a thrill. If the government did not take effective
measures in time, the fruits would be unimaginable.
Recently, due to a well-known acquisition storm, I have had the opportunity to read some
insurance companies' so-called universal insurance product contracts. After reading, I made
a chill in my back. If I am in the position of the regulatory department today, such a product
will be popular, and it will definitely make me unable to sleep at night.
The financial market is a mechanism that exposes human weaknesses. From the moment the
modern financial market was born, it has not changed. Today's financial mixed industry in
China seems to be imperative, and direct finance will become one of the most important
promoters of the future development of the real economy. In this context, financial regulators
and financial practitioners should be more alert to the challenges of the financial industry
itself. Because of the characteristics of human nature, financial liberalization will certainly
lead to corruption, absolute financial liberalization often leads to a huge financial Crisis.
I also do not advocate absolute financial regulation, nor do we advocate that the free market
does not play an important role in the financial industry, but all historical experience shows
that it is always a wise strategy to maintain a high degree of vigilance against the natural risks
of the financial industry. 2016 is the first year of China's 13th Five-Year Plan. Direct market
financing will become more important, and mixed operations will also become a trend. In this

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context, I would like to make an impression of this, thinking that in 2016, the year of
introspection.

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Li Lu Interview by Weekly in Stocks
14/06/2018
Mr Munger's biggest influence on himself: the perfect combination of birth and accession
Weekly in Stocks (WiS): You have always said that Mr. Munger is your life mentor, investment
partner and mentor and beneficial friend. Mr. Munger trusts you, invests in you, and
communicates investment issues with you without reservation. You have also expressed your
feelings that you and Mr. Buffett and Mr. Munger have chances, even Shakespeare could not
draw such a dramatic chapter. Now the investment community has always regarded you as
Mr. Munger’s heir. What do you think Mr. Munger's greatest influence on you is?
Li Lu: From 2003 to now, Charlie and I have been partners for 15 years. During these 15 years,
our cooperation has been close and fruitful. Our relationship is also a teacher and a friend,
and we are also a business partner. Every time we meet, we have endless conversations, and
I get along very well with his family.
Charlie influenced me a lot. When I first met him, he was almost 80 years old. In the past ten
years, he has experienced many setbacks. Due to his increasingly poor health, he stopped
many of his favourite sports such as golf. In addition, his relatives and friends also passed
away one by one. For Charlie, the biggest blow was his wife Nancy, who had been with him
for more than 50 years, died in 2010. Less than a year later, he was completely blind due to
another accident. Prior to the accident, Charlie had lost one eye. At the time when his eyes
were blind, he also considered studying Braille for a while, and then his right eye miraculously
recovered 70% of his vision. I watched him come out from the blows one by one. He was
never pessimistic and hopeless, let alone complaining. Charlie's attitude of letting nature go
along with her glory and shame showed a kind of complete objectivity and rationality. In
Chinese's words, heaven and man are united in one's heart-not in favour of things, but not in
grief.
Many people can do this kind of "birth", but no one else can do it. This kind of state is
extremely accession to the WTO." Charlie is curious and passionate about all issues, especially
those in the business world. This curiosity and enthusiasm has continued to this day. At the
age of 95, he does not have less working time every day than when I first met him 15 years
ago. When he encounters books and materials of interest, he will always see 4 AM. And I will
finish reading in one breath.
People who can have great passion for the world are usually unable to reach the level of
"heaven and man unite"; while those who can reach the state of "heaven and man unite"
generally do not have such great enthusiasm for the world. But Charlie's birth and accession
can be perfectly combined. The basic spirits of rationality, science, humanities, and progress
since the Enlightenment in the West were fully reflected in him.
So, Charlie's biggest influence on me was the realm of life he had. Although l can't talk about
countless people, I know a lot of people, and no one has ever looked like Charlie. There has
never been! I also hope to try to align with his state of mind.

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The pure purpose of making money will not create truly outstanding and extraordinary
performance
WiS: Mr. Munger said that many people are imitating and learning Berkshire, but they have
never been successful. Do you think that their failure is a matter of time, or do they lack the
basic spirit of rationality, humanities, science, and progress that Mr. Munger has?
Li Lu: Berkshire is indeed unprecedented in terms of performance. It has many success factors.
On the one hand, Berkshire's investment period coincided with the rise of the United States
on a global scale and was the heyday of development; on the other hand, Charlie and Warren
were energetic, extremely intelligent, and both were long-lived and prominent Personality,
outstanding personality, and more. But these are just some of the reasons for Berkshire's
success. In the investment industry, there are many people who are equally intelligent and
have the same opportunities. Charlie and Warren are different because they have an unusual
passion for work, and although they have worked hard for decades, they have They do not
place special emphasis on personal interests.
For example, when Warren took over Berkshire, the company's market capitalization was only
$10 million to S 20 million. In the more than 50 years in charge of Berkshire, he has never
issued new shares, and now Berkshire's market value is more than 500 billion US dollars. In
the process, Charlie and Warren only received S 100,000a year in salary, which has not
changed for more than 50 years. They have neither bonuses nor Options, nor will they buy
back company shares in large numbers, preventing other shareholders from succeeding with
them. All the stocks they hold are bought on the market with their own money. They devote
all their energy to their work with such great enthusiasm, but they can't see any greed in
them, and they can't see the slightest consideration for their own interests. It is very rare to
be able to combine these two qualities.
Many people may be neither hard-working nor smart, but greedy (laughs), those who are
hard-working and smart often want more of themselves. Many people envy and hope to
replicate Berkshire's success, but are reluctant to learn Charlie and Warren's indifferent
attitude to fame and fortune.
Many people just don't know that it is precisely because of the indifferent personal interests
of Munger and Mr. Buffett that Berkshire's long-term outstanding performance has been
achieved. Because only in this way, they can calmly and naturally grasp the rhythm of
investment and not be controlled by anyone. This means that without any pressure, they will
not cause radical investment due to greed, nor will they dare not start because of cowardice.
Investors who have such opportunities, but also possess the talents of intelligence,
outstanding character, and enthusiasm for work, can hardly be found all over the world. So
for now, Berkshire's achievement is still a monument that is not easy to cross
WiS: The success of Munger and Buffett is mainly the continuous spiritual transcendence. This
spiritual "inner sage" in intelligence, emotion, and personal interests has led to the final
material result..

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Li Lu: In a sense, this can be said. Investment itself is a forecast of the future. The forecast is
indeed the result of the integration of various capabilities. The performance of the forecast is
the extension of character. There is no doubt that a person's conduct, knowledge, and
attitude will affect his long-term investment results.
Mr. Munger and Mr. Buffett hope to study for a lifetime, not to make quick money, to
continuously improve themselves through hard work, to be responsible to society, and to
bring their dignity to their actions and benefit the society. Can help others. These may be
more familiar to Chinese people, because that's what Confucianism in China is.
WiS: When we interviewed Mr. Munger, he asked, "How long can China be a real value
investment master?" Mr. Munger did not answer directly. Well, you just mentioned, "People
may see that Buffett and Mr. Munger’s Berkshire's market value is getting bigger, but they
pay less attention to things that are indifferent to fame and fortune behind them." If you don’t
have these things, even if you have travelled a long, long way, will you still lack the most core
things to become a value investment master?
Li Lu: If you invest solely for the purpose of making money, it is almost impossible to achieve
extraordinary long-term performance. I haven't seen anyone who makes money for the sole
purpose of creating truly outstanding, extraordinary performance.
WiS: Mr. Munger said in an interview with "Weekly in Stocks" that in fact everyone pays
attention to the short-term and not the long-term. This factor leads you to not become an
investment master. But apart from time, cultivation is the most important thing.
Li Lu: Cause and effect each other.
WiS: What are your expectations of your investment hopes that you are deeply influenced by
Munger and Mr. Buffett?
Li Lu: My own goal is to have a long-term investment record. I have invested for 25 years now,
and I hope I can invest another 25 years, or even 30 years, the longer the better. I will not
blindly pursue the scale of fund management, let alone the cost of fund management. The
management fee system adopted by our company is the same as that of Warren and Charlie's
early partner funds, and does not charge any only share some of the management fees. The
first 6% of our company's revenue is free, and we only share some of the benefits with our
customers if the revenue exceeds 6%. Therefore, we do not suffer from short-term benefits,
or are radical or timid. As far as I know, none of the fund companies that are relatively large
in the world or have good long-term performance do so.
Knowledge grows at a compound interest rate and is faster, which will accelerate
investment compound interest growth
WiS: Will you focus on stocks in the manner of Buffett and Mr Munger?
Li Lu: Yes, it is. It is basically a concentrated investment. We do not do it intentionally, but
because the key to investing is investing in what you understand, and not doing what you
don’t understand. A person who really understands a company and can predict the results
after many years, such opportunities are actually very few. It takes a long time to truly

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research an industry or a company. It is the result of continuous accumulation of knowledge
and continuous efforts. Therefore, a person can only understand a limited number of things
in life, and these things happen to be cheaper, or even far below their value, for various
reasons. Therefore, when such an opportunity comes, it must be heavy. After heavy storage,
a dollar cannot be placed in two places at the same time. The result is naturally a
concentration of investment.
WiS: You will spend a long time to grasp the complete information of this company, then what
screening will you go through from a company that attracts your attention to being invested?
You said "long time", Is there a relative length of time?
Li Lu: Every company is different, but without many years of research, it is difficult to master
the complete information of this company. I may not be smart enough, so it always takes a
long time. It may take less time for others, and it varies from person to person.
But for me, it really takes many years to really understand an industry and figure out a
company. But the advantage of investing in this method is that knowledge will continue to
accumulate, and what you learn will not be lost. What you learn will be accumulated and
surpassed on the basis of what you have learned in the past, and knowledge will grow in a
compound interest manner. So, the longer you invest in this way, the better the results will
be. The accumulation of knowledge and capacity, if it grows at a compound interest rate and
is fast, will accelerate the growth of investment compound interest.
WiS: Both knowledge and investment growth are actually in a positive cycle. Knowledge is a
weapon, and it is also necessary to plump yourself up.
Li Lu: Yes.
What bottlenecks need to be overcome in an open Chinese capital market
WiS: You and Mr. Munger have been in China for 15 years. What do you think of the current
investment opportunities in China?
Li Lu: China is currently in a transition period. After about 40 years of rapid growth, China's
economy has entered a new era of transition. This era usually generates all kinds of
psychological anxiety and anxiety, so it will cause the future not to be clearly understood. But
in fact, this transition should be better for China's future.
From the economy itself, the traditional export manufacturing industries have turned to more
service and consumer industries, and the technology content is getting higher and higher.
From the perspective of the entire financial market, equity investment, as the most important
way in China's overall financial activities, slowly changes the way it relies on banks and indirect
financing. Equity financing will definitely play an increasingly important role in China's entire
financial structure in the future. China will also really remove the leverage, which is a very
important part of China's long-term economic growth, and will enable it to enter a long-term
and relatively benign process.
In this process, the main body of the market will gradually change. The traditional market is
mainly retail and individual investors. Now institutional investors are gradually becoming the

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main force, especially the funds of patient investors, which are slowly entering the market.
Foreign long-term, more experienced professional investors are also slowly entering the
Chinese market.
This change occurred in the United States in the late 1970s. Before the mid-1970s, the US
capital market was also dominated by retail and individual investors, and gambling
transactions existed widely. Significant changes occurred in the late 1970s. This change began
when pensions became a necessity, and companies or individuals were required to have
savings. The mandatory savings policy caused institutional investment to rise. Market players
gradually took place in the next ten or two decades. Radical change. Today the US market is
dominated by institutional investors. Although institutional investors are not all long-term
investment styles, relative to individual investors, qualitative changes have taken place, and
the value investment concept has slowly been accepted by more people.
Everything is a long-term process. If you take longer and look farther, you will see that this
period provides excellent investment opportunities for excellent, patient, and long-term
investors.
WiS: A shares officially joined MSCI in June this year, and the opening speed of China's capital
market is getting faster and faster. In this process, what reforms do you need to make in
China's capital market to break through the bottleneck? International capital investment is
smoother and can better protect the interests of domestic and foreign shareholders?
Li Lu: June is the beginning of foreign capital entering China's capital market. In the past few
years, the Chinese government has taken several important measures to make foreign
investment in the domestic market very convenient. The Shanghai-Hong Kong Stock Connect,
Shenzhen-Hong Kong Stock Connect, and MSCI are all direct reflections of reforms.
In addition, starting from this year, there is also a far-reaching reform that is the release of
foreign investment in the financial services industry, including the financial investment
industry and the asset management industry.
You just asked, what other reforms can be done to make market investment smoother?
I think that in terms of supervision, domestic and foreign countries need to have similar
connections and common compliance management methods. These methods can be linked
to major markets such as Hong Kong, New York, and London, especially about delisting, daily
limit, etc. Let the registration system gradually land even if it has Chinese characteristics.
Excellent companies can be introduced, or please return to the domestic market, and then let
more institutional investors at home and abroad gradually become the main body of
investment. Then China The capital market will enter a virtuous circle in the following
decades. I think the current domestic anti-corruption work in the financial field is doing very
well, so that the market can really realize good coins to drive out bad coins.
In addition, the direct equity financing just mentioned is playing an increasingly important
role. I think these reforms have a profound impact not only on the Chinese securities market,
but also on the reform of the entire economic system.

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China's value investment plays an important role in the transition period
WiS: You mentioned in "Sixteen Lectures on Modernization" that China now has the rudiment
ofa market economy, but the visible and invisible hands will often fight each other, and the
visible The hand is too powerful, but you also mentioned that in a free market economy, the
invisible hand is too free, which will lead to a financial crisis, which is the root cause of the
financial crisis. So looking at absolute financial control and an absolutely free market
economy, it seems that they are not too applicable to the financial industry. Can you use China
as an example to talk about how to deal with the degree between the two?
Li Lu China is a developing country, and its economy is developing from backward to advance.
The main mechanism for the development of a market economy country at the forefront of
the world is "creative destruction'"-the rise of new industries is always accompanied by the
decline of the old. And when developing countries are catching up, they can go beyond
backward and create directly. For example, China can directly enter the mobile phone era
beyond the fixed landline era; the retail sector can go directly to the e-commerce field without
doing Wal-Mart, such as Alibaba. This is the latecomer advantage of Professor Lin Yifu.
To take advantage of latecomer advantages, the government's physical hand can play a large
role in promoting. In the past 30 years, the Chinese government has invested in major
infrastructure projects such as highways, high-speed rail, airports, terminals, wireless
communications, and the Internet, which has provided a key impetus for China's economic
development. But when certain industries enter the world's advanced level, or go hand in
hand with the world level, they must be carried out through creative destruction mechanisms.
For example, our e-commerce has already been in line with the world's leading edge. The next
step is the emergence of new things. We must destroy the old things.
However, in a broad and complete economic state, China is still a while away from
"developing through creative destruction mechanisms", so both the tangible and intangible
hands will play an important role. But one day, as China's economy generally gets closer to
the world's leading countries, the roles of the tangible hand and the invisible hand must be
transformed. These are aimed at the general economic sector. The financial sector is special,
and its requirements for the government’s physical hands are not quite the same.
WiS: Why is finance special? Are there any special needs for physical hands?
Li Lu: In my opinion, at least three aspects are different.
First, financial products are relatively complicated, such as insurance, funds, loans, etc. Most
of these consumers do not understand, and the general shareholders of these companies do
not understand too;
Second, financial products generally take a long time to produce results. For example, after
the end of an insurance contract, we can know whether we have made money or lost money.
It takes decades for a life contract. It is not five years and ten years for a fund to evaluate the
level of fund manager’s result. Not only long, but also high leverage. But companies in the
financial industry, like other companies, must perform accounting reports every year. All
accounting reports use a lot of mathematical assumptions and are produced by a present

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value method. This way, it is easy to form systematic errors, which is often called the "agent"
problem. Because consumers and shareholders do not know much, there is a lack of checks
and balances. Agents and managers want to systematically bias highly flexible accounting
records to the managers' own interests. At the expense of the interests of consumers and
shareholders, this has led to a high degree of inaccuracy in the accounting of the financial
industry, coupled with high leverage, leading to a very high risk in the industry. The
fundamental reason is just mentioned, the lack of the industry's own checks and balances
mechanism;
Third, the financial industry has a strong social attribute, which is related to the overall
national economy. Each financial crisis is accompanied by a systemic economic crisis.
Especially for those financial institutions that are large enough to fail, it is a kind of social and
national credit. If these companies can't serve customers and shareholders well, they actually
use the national social credit to serve the managers themselves. Let the whole society pay.
This problem can be clearly seen in the global crisis caused by the United States in 2008 and
2009.
Therefore, strong regulation in the financial sector has always been a necessary requirement
What is the main significance of market existence? The important significance of the existence
of the
market is price discovery, so that the prices of financial products can reasonably reflect the
true state of the overall market, market mechanisms are needed, and strong government
supervision is necessary, both of which are needed.
What is the situation of China's financial market today? In the process of a major
transformation, the entire Chinese financial industry needs to transform from indirect finance
to direct finance, from debt- based to equity-based, and from policy finance to market
finance. Such a basic convergence period is the next ten years. Basic status for several
decades. Value investment will play a very important role in this, because value investment
emphasizes the discovery of real prices, emphasizes that the purpose of financial investment
is to promote the growth of the company's own value, and also emphasizes long-term stable
and rational decision-making.
In 2015, I gave a lecture at Peking University, and it was about this issue.
WiS: You just mentioned that China's financial market may have been in a transition period in
the next 20 years. What is the pattern of A shares?
Li Lu: In the context of the transition period of the three transition periods, that is, direct
finance to indirect finance, debt to equity, and policy finance to market finance, the entire
financial market is slowly changing from the casino. Disorder turns to long-term rationality
and stability. The main body of the market is also slowly shifting from individual investors to
institutional investors. I think this is a basic main line.
Where are China's investment opportunities in the next 20 years.

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WIS: Do you think that in the next 20 years, you have been paying attention to the
opportunities in the Chinese capital market. What kind of listed companies do you think you
will focus on?
Li Lu: If there are excellent companies in China, there will be excellent investment
opportunities. Today, China has produced a number of outstanding companies in various
industries. These companies are constantly rising and developing, bringing more and more
investment opportunities for investors.
WiS: In the past 50 years, the US stock market has brought investors excess returns are all
stocks related to people’s "eating, drinking and drinking". In the last 10 years, technology
companies such as Amazon and Apple have begun to make efforts. So, do you think China's
capital market will replicate the US path?
Li Lu As mentioned in my "Sixteen Lectures on Modernization," China is still in the process at
stage
Civilization 2.5, in the late stages of developing countries and the early stages of developed
countries. In this process, consumption and service will become very important, and in these
two fields, a very good company that maintains a long-term competitive advantage will be
produced.
At the same time, in the era of the Internet, China is almost in sync with the world. For
example, Tencent and Ali have their own unique creations. In some aspects, similar
companies in the United States are sighing. China has broken the bottleneck of payment, and
many things (such as sharing) are difficult to achieve without simple payment methods. There
are also some other companies, such as today's headlines, which have come to the forefront
of the United States. Of course, each company (success) has its own unique reasons, so I will
not discuss them one by one.
The market economy is a very wonderful thing. When the economy develops to a certain
degree, it will automatically create a group of excellent and great companies.
Many of the things that have happened in the United States may indeed be repeated in China
as Mr.
Munger said, but they are not simple repetitions, and investment is not that simple as
imagined. It also requires continuous efforts and learning. The most important thing to find
these companies is to recognize the boundaries of their abilities, and to be down-to-earth,
specific company-specific analysis.
I don't make big predictions, and this is not my investment style. These are meaningless to
the investment income, but will help you down and put you into a preconceived state. Down
to earth, one company at a time to analyse. But generally speaking, what the United States
has experienced will be repeated in China, and China will also produce its own unique and
outstanding companies. Internet companies do produce great companies.
WiS: Have you been paying attention to companies like Tencent?

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Li Lu: We will pay attention to all these excellent companies, but Mr. Munger, Mr. Buffett and
I have never discussed specific companies in public (laughs).
Looking at China as a big stock analysis looking for investment value of outstanding
companies
WiS: Whether Mr. Dong Baozhen, general manager of Jitai Fund, brings some of his own
thoughts. The first is why the biggest challenge for professional investors as investors is their
animal nature?
Li Lu: Many professional investors have a lot of practical experience, a lot of lessons, and a lot
of real feelings in practice. They also have a deeper and more thorough understanding of
some aspects. Good investors do need their own knowledge and judgment on the ground,
rather than following other people's opinions. For social animals like humans, investment is
somewhat anti-human. It is important that our evidence and logic are right, and whether
others agree with us is not so important. But as a social animal, it is more important to be
able to cluster, and personal views are sometimes less important. So in this sense, excellent
value investors do have some anti-human characteristics.
WiS: Investors must have the ability to cultivate their minds, which is what Mr. Munger said
"the ability to do well." So, does wealth come from purely objective enterprises, but from the
public's emotions and whether the public's emotions cannot be rational and objective, but
can they be rational and objective?
Li Lu: The source of a company's value is still brought by the company itself. The total
discounted free cash flow that can be provided to owners and shareholders in all years of the
company's future existence is the company's true value.
Regarding the judgment of future free cash flow, the benevolent sees the benign and the
wise, and is not specifically determined objectively. Subjectively, because people are affected
by emotions such as greed or fear, they will expand their understanding of the future and
make their judgments extremely extreme. When you are excited and greedy, you will feel
that the future can be infinitely good or infinitely bad. Coupled with the fact that humans are
social animals, they will affect each other, which will make this change go to extremes under
certain special circumstances. When the change goes to extremes and becomes extreme
errors, it will indeed give those with independent thinking. People with ability create some
opportunities, and this opportunity is to make money returning to value.
But wealth can be understood to have two sources-one is the return of value to value, and
the other is the value created by the long-term continuous growth of value itself.
The value itself is not fixed. For example, many domestic professional investors prefer and
understand Moutai. Moutai's ability to generate profits every year is increasing, which
provides greater growth momentum for the company's future free cash flow. Therefore, the
value of Moutai Has been increasing. So in the short term, the source of wealth depends
heavily on the return of your price to value, because what you pay is the price, and what you
get is the value. When the price is particularly lower than the value, the return itself can

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indeed create a certain wealth for you, especially in the short term. But in the long run, the
real source of value is actually the growth of the company's own value.
Let me give you another example. If China is regarded as a large stock, what does China's
wealth look like 40 years ago? Worrying about food and clothing. And what about China's
value 40 years later? You don't have to go to specific calculations to know that it must be a
lot more than 40 years ago. Well, investors who bought large Chinese stocks 40 years ago,
because they bought them at very low prices, the first thing they get is definitely the return
of value. But value itself is a dynamic concept. Value 40 years ago is completely different from
what it is now. If you have been holding large Chinese stocks for 40 years, the source of value
is mainly the value generated by China's economic growth over the past 40 years.
In the long run, the return that investors get from investing in a company will be infinitely
close to the company's own return on capital, which is the return on capital of its own
investment. The company will continuously invest its own money and earned money in new
projects, and its profitability will continue to increase. At the time of the initial purchase, the
price was relatively lower than the value. If it was much lower, in the first few years, your
return rate would be approximately more than the company's return on capital. If the time is
long enough, your return on capital will be infinitely close to the company's own return on
capital.
Let's take China as an example of a large stock. If you bought it at half the value of China 40
years ago, you would have made a lot of money when the value returned, but the difference
between the return value of this price and the wealth of China in 40 years Compared with the
huge value created by growth and China's economic development, it is not so important.
Therefore, in the short term, humanity is useful. But in the long run, the most important thing
is the ability to predict the future. Find really good companies that have excellent long-term,
above-average return on capital. If you invest in such a company and invest at a relatively low
price, you will get very good results in a long time.
WiS: China's capital market particularly reflects high volatility and extremeness. The stock
prices of good companies do not exist at reasonable price most of the time, which is easy to
deal with when prices undervalued, but sometimes greatly overvalued. For example, the
original price-to-earnings ratio of 20 times can sometimes persist at 40 times. In the face of
an excellent, good company with a long-term future, but a significant overvaluation appears,
then what is more appropriate?
Li Lu: Everyone's approach is different. The investment opportunities of a company depend
to a large extent on the opportunity cost. Are there better opportunities to get better returns?
Generally speaking, the higher the price, the lower the expected return, and the lower the
price, the higher the expected return for the same company. The price is too high, it must be
taken into account that the opportunity cost is now also increased, because it may be better
to invest in other companies, and then do some calculations yourself.

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WIS: Compare opportunity costs.
Li Lu: Yes, thinking in terms of opportunity cost will naturally lead to more reasonable
conclusions
Expect to contribute to cultural exchanges between China and the United States based on
investment
WiS: If professional investors want to do better and achieve the desired success, what kind of
spiritual characteristics should asset managers have?
Li Lu: The benevolent sees the benign and the wise sees wisdom. Everyone will have their own
experience and views on the path of practice. As a professional investor, after doing it in the
investment field, they will have different experiences after a few years and have the
opportunity to share with more people. I think that when people live, they need to be
constructive, helpful to others, and not too greedy for their own interests.
In my personal experience, in investing, the most important thing is objective rationality. In
addition, rationality is a trait that investors need to cultivate for life, and it takes precedence
over the study of the fundamentals of a company. As Mr. Munger said, reason is more
important than knowledge and intelligence. The second is to have a deeper understanding of
the honesty of knowledge, that is, English honesty. Knowing, knowing, or not knowing,
investing is to do what you really understand, and to be honest about what you don’t
understand, and what you don’t know enough to predict the future. A knowledgeable and
honest attitude is very important.
WiS: The last question is about the positioning of your personal role. In your Weibo "Li Lu 50
Shu Huai" mentioned that in addition to investment management, you may also take the
responsibility of exchanges and communication between China and the United States. This is
one of your main responsibilities in the second half of your life. Why do you have such
thoughts and responsibilities?
Li Lu: Investment is still the most important part of my life. I hope to have a clean, long-term,
excellent investment transcript. We now have 25 years of investment performance. I hope
that the time can be as long as possible, and 5 years, 10 years, 20 years, and 30 years. Now
the most important work going forward.
In addition, I hope that what I think and learn can contribute to society. My unique personal
experience has made me more familiar with Chinese and American cultures and people. I also
have some unique perspectives. Communicating with people on both sides of the United
States can help. I hope to play a role as a communication bridge for the asset management
industry in China and the United States. I have been doing these tasks over the years. I hope
that I can do more and more in the future. As long as I can help others, I am very happy. In a
broad sense, ifl can make my own contribution to education and cultural exchange, I will also
feel very happy.
WiS: The investment work equivalent to yours should be the breakthrough point for your
Sino-US cultural exchange.

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Li Lu: It can be said that because I am familiar with this industry, it is easier to carry out work.
WiS: Promoting the development of China's value investment is also the media responsibility
of "Weekly in Stocks", and "Weekly in Stocks" is also willing to work with you to promote it.
Li Lu: Thank you very much!

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 ABSTRACT

Talk at the 13th Annual Columbia

China Business Conference on 10th,
April 2021
Li Lu and Bruce
Greenwald
Value Investing in China
Transcript of Li Lu and Bruce Greenwald - Value Investing in
China
Talk at the 13th Annual Columbia China Business Conference on 10th, April
2021

Bruce: Hello, I know this is going to be a rare privilege for everybody. I have known Li Lu for
more than 20 years and not only is he a great investor, but also a great conversationalist. Why
don’t we talk about how your investment philosophy has changed? Value investing is an
evolving field, so please tell us what has changed in your approach after you started 20-25
years ago.

Li Lu: More like 28 now. Time really flies

Bruce: How has it evolved? How have you been influenced by people like Charlie Munger?

Li Lu: I got into this field after hearing Warren Buffet speaking at the first lecture of professor
Greenwald’s class. As a business student, I later took all the courses that professor Greenwald
offered, learned a great deal and made a lot of money. Thank you.

The philosophy is relatively simple and hasn’t changed all that much for me. The practice is
the hard part. Before I got exposed to value investing, my life was set at similar lines. The idea
of buying at a discount, that is worth more is simply intelligent. All forms of intelligent
investing involves some kind of value investing. Your focus on value evolves over time and
different individuals tend to focus on different areas. When I started as a value investor 28
years ago, I didn’t know much about business. I was born and raised in China during the
cultural revolution. There wasn’t much of a private business or open market economy back
then and I had to learn everything. At the beginning I looked for obvious value primarily on
the balance sheet in the classic style of Benjamin Graham. Searching for a cigarette butt, a
statistically cheap business and ignoring what the business really is. That approach served me
well and over time I evolved to understand smaller businesses. I was intensively curious how
business is run and even invested in a dozen startup companies. That experience has taught
me what constitutes a good, bad or mediocre business, which led me to look for great
companies in Asia with an enduring competitive advantage and a long growth trajectory
ahead of them. Instead of the philosophy, the places where we are looking for value evolves
over time as your core competence is growing.

I have been very fortunate to be influenced by the investment giants of Buffet and Munger,
who later became an investor in 2003 and we have been partners since then. He has been a
mentor, investor, business partner and a great friend all those years. For many year up until
the pandemic we had dinner every Tuesday night, so obviously I was greatly influenced by
him. The greatest influence from Charlie however, was really beyond investing. He was more
of a role model and the way he conducts himself in real life. For every profession one should
have role models in life. We find them among the eminent dead, because it is safer. It is risky
to pick a role model that is still alive, because they have the risk of disappointing you. I got
lucky that my role model never failed and instead continues to inspire me , right into his

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current 97th year. His attitude towards life and his ability to keep equanimity in a phase of
turbulence and maintaining that rational composure, commonsense approach to all problems
in both investment and life inspires me. He is probably the most influential person in my life
in that regard.

Bruce: In this concentration of now investing into great businesses. Can you be specific about
what kind of business you look for, what are the characteristics of a great company and what
detailed characteristics do you look for, and how do you put a value on those businesses?

Li Lu: Great businesses are the ones who have an above average return of invested capital,
but that kind of business usually attracts imitators and competitors. Everybody strives for
above average returns on invested capital. Truly exceptional businesses are the ones that can
fend off competitors, who have an enduring competitive advantage and keep the higher than
above average return on capital and have a long runway of continuous growth. Those are the
businesses we’re looking for and they can be found in all industries and in all shapes and
forms. But they’re rare, scarce. To have a business that generates above average returns over
a long period in a compounded fashion is against the natural order of things. Only a small slice
of all businesses and companies belong in that category. If you are lucky enough to find one
of those long-term compounders, all you have to do is to own them for a long period of time.
It helps if you buy them at a time where they are treated at a discount to their intrinsic value,
so if you were wrong, you don’t lose money and if you’re right you get higher returns over
time. If you own them through the ups and downs, your return roughly approximates the
actual business return to the capital we invested in the business itself. Over the long time the
two tend to converge closely. Understanding the study and the nature of that business, it’s
dynamics and competition is of utmost importance as an investor. There isn’t a set of rules
that makes them that way. Every business builds their fortress slightly differently and you
have to be honest with yourself and study them from every possible angle until you are
convinced that they are truly enduring and have a long runway ahead of them. And then you
have to stay invested in them through the ups and downs, thick and thin.

Bruce: Can we talk about those businesses? In limiting competition, you’re really interested
in moat - that is the barrier of entry into the business. If you think about a moat, there are
probably two elements to that. One is economies of scale. How big do you have to get, how
big a market share do you have to capture in order to be viable as a competitor. The global
automobile market is massive, so if you get a one to two percent share, you’re going to be
fine. In other markets like the local distribution of caffeinated soft drinks you need to get to
20 or 25 percent of the market to support the infrastructure needed to compete. The first
thing is economies of scale and the second is how hard it is to get to that market share, which
is all about customer captivity in a contested environment. Suppose you’re going to get to 25
percent share, and we know for caffeinated soft drinks that two tenths of a percent share
changes hands every year in a contested market, to get to 25 percent we’re talking about a
125 year moat. Do you do a calculator like that for the companies you’re looking at? Do you
look at those two elements explicitly?

Li Lu: A little bit of that and more.

Bruce: What’s the more?

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Li Lu: The scale is important, but not everything has a scale economy. Sometimes the scale
becomes a contract point which makes it more difficult to manage. In a scale economy, the
scale does become a competitive advantage, but the dynamics change after a certain scale.
Automobiles are an interesting example, because we know what happens in the different
phases of the industry. The consumer side is also important in a sense that if you have a
consumer addiction for certain products and brand loyalty, that can be an advantage until it
isn’t. Things can change. New products categories come along and people get tired of the old
products. New generation doesn’t like to have the same taste as their parents and
grandparents.The most interesting aspect of businesses is that the only constant is the
constant change. All great businesses change of time and no business can remain that
competitive edge forever, but some can keep it for a long time. If there is a change, it is upon
the management team to reallocate capital towards those businesses that now enjoy a robust
competitive definition. Taking Berkshire as an example, it started out as a lousy textile
business in New England, but Charlie and Warren skillfully took the last bit of the cash flow
and invested it into other businesses and companies on the right side of the trajectory. Over
time some of those businesses began to lose their competitive advantage and they took their
capital and allocated it to new ones. The management capability of allocating that capital
plays a vital role. If you have a culture of the company in an industry that is rapidly changing,
which allows you to stay ahead of your competitors, that can also become an enduring
competitive advantage. As long as the culture endures. What makes a specific business
successful is different and changes over time. That is the most fascinating aspect of the
competitive dynamics and the most fascinating dynamic of being an investor.

Bruce: As of today, how do you do this differently than most other investors? Are there things
that you look at specifically? Are there ways on how you approach companies? When I started
investing with you, and I am honored to say I made a lot of money doing it, what appealed to
me is what you mention in your introduction: Small businesses or small markets are
necessarily markets where you have to get a big share. One firm can dominate and that’s not
something that most investors look at. In what other ways do you do things differently from
most other value investors and investors in general?

Li Lu: Thank you for your continued trust and confidence. Back then we were looking for
smaller companies, because those were the businesses that I feel I could understand. As we
evolved, we began to look for bigger companies we can also understand. The bigger business
comes with a whole set of advantages and problems. While size is one consideration it’s not
the most important and certainly not the determining factor when we’re looking for
businesses. There are big companies that are still growing at a robust pace and are becoming
even more entrenched as they become bigger with long runs of growth. The most recent
phenomenon of the technology platform is the network effect. Some of the companies fit
that characteristics and while they don’t grow forever, they will likely do so for a while.

Bruce: By what other dimensions do you do things differently today than other investors who
are less successful?

Li Lu: I don’t spend my time studying a hundred people doing that. We spend most of our
time studying industries and specific companies. We’re looking for the ones that are already
successful and try to answer what makes them that way and if that success can be continued.

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Sometimes we have answers, but a lot of the time we don’t and we continue to study them
until we have an answer. One thing that is important is intellectual honesty. Knowing what
we really don’t know and what we do. In other words if you claim a circle of competence you
have to understand the edge of it. You have to be very honest with yourself. We insist on
knowing a particular business inside and out, to the point where we are able to predict the
outcome in the next ten years. At least I want to know what the business looks like in 10 years
in the worst case scenario. I want to see whether I can predict that time frame with a high
degree of confidence given all different contingencies. Most of the time we don’’t have an
answer and we keep at it, sometimes for years before we really understand it. After that we
still have to wait for the price to come to our striking zone, and when they don’t it makes our
selection difficult. When we do select and buy, we tend to own those companies for a very
long time. Because we understand them and they are great businesses we buy a lot more as
they go down. So that is the definition of whether we understand them.

Bruce: What about the market today? It seems highly valued. If you look at fixed income, it is
even unprecedented. Does the market today remind you of any historical period you’ve lived
through in good or bad ways and do you have advice on how to navigate it?

Li Lu: We usually don’t study the market too much, except when they are extreme. Today is
one of those more extreme periods and in many ways we are in uncharted territories. The
amount of liquidity that has been printed, the level of interest rates and the slow pace of
growth. All those are quite remarkable. How do you deal with them? We don’t think that
history repeats itself, so every time is slightly different. Instead of guessing the patterns of
history we focus on selecting companies that can live through the tick and thin. Whatever the
environment, business will continue and somebody will do well. We want to invest in
companies that are capable of dealing with those extraordinary set of uncertainties and I
guess we’ll be doing fine.

Bruce: How much is management a part of that and how do you look for management that
has those capabilities?

Li Lu: In most companies management will make a big difference, but in the small set of
experiences management doesn’t matter a lot. The best companies are, where the strength
of the business itself has a dynamic of its own, so that nearly everybody can run it. Those
businesses are rare and you can probably count them on one or two hands. You really have
to look at each specific company and ask the appropriate questions and study them so you
can understand them. You want to understand them enough so you can predict the next ten
years even with ups and downs in the macro environment.

Bruce: In your 24 years running Himalaya, you’ve lived through a number of major financial
crises: The Asia crisis in 1997, the tech bust in 2000, the financial crisis in 2008 and last year
the Covid-19 situation. Are there specific things you learn about management or companies
that you look for in those crises?

Li Lu: As you said we have gone through several of those crises. Each time it was made out to
be the once in a century crisis. It probably was, but it happened in the time frame of every
five to ten years. The financial market boom and bust has been a constant phenomenon since

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the beginning of financial markets several hundred years ago and is driven by human nature.
As long as human nature remains the same, those cycles will continue to happen. Humans as
a product of evolution aren’t run in a very rational way. We are excellent at rationalization,
but we aren’t good at being rational. We are wired by hard coded instincts looking for zero-
sum, fast money and get scared when things go against us. We have the basic sense of greed
and fear, which drives the financial markets up and down. When it comes to money it tends
to evoke the primal part of human nature. That natural tendency becomes extreme and as a
result the financial markets have been characterized by boom and bust. One way to deal with
such an environment, and that is our attitude, is to be on the look-out all the time. People will
always be driven by euphoria and fear. Looking for companies that are capable of leading
through those cycles, companies that are ant-fragile. That way up and down becomes friendly
for us, when our favorite companies go on sale, which allows us to buy more of them. The
hallmark of a good investor is if you can watch your portfolio go down 50% and not be affected
at all. One the other side you need to be equally unaffected when everyone around you is
making fast money and you seem to be left behind. That is part of the temperament that most
people don’t have and why not everybody can succeed at this game of investment. To succeed
one needs a certain temperament and a certain understanding of human nature. Investment
returns will mirror the actual business return and we know that real companies don’t change
hour to hour, day by day or even month to month. It takes years for them to rise and to fall.
You should expect your investment results to come slowly and gradually over a long period
of time. The short-term phenomena should not impact you. If you have those principles both
euphoria and crush can serve you well, which really goes back to Ben Graham’s basic concept
or Mr. Market. In the real game of investment those ups and downs tend to be quite extreme
and testing. Another thing that is testing is that you need to understand the business itself. If
you are driven by anything other than deep understanding you will be tested. The financial
markets seem to be there to catch human weaknesses. If you don’t understand something,
and just pretend to, you will be busted at some point. Only when you truly understand you
will be able to add when the security is down 50 percent or more.

Bruce: One of the things you talked about was the stability of these companies and their
management in the face of a crisis. So crises tell you a lot and one company that recently has
done extremely well is John Deere. If you looked at John Deere in 2000 demand fell by five
percent and their profit margins fell to zero. If you look at what happened in 2013/14 demand
fell by 35 percent and their margins stayed at roughly half of what it was, which is higher than
it had been historically. Clearly that’s a company that has changed in the face of catastrophic
external conditions and has gone from doing quite badly to doing much better. Do you have
examples of that from the companies you’ve invested in where you’ve seen them perform
through a crisis?

Li Lu: I do, but we normally don’t talk about specific companies.

Bruce: But could you share maybe a historical experience of that, so that the students in the
audience have a sense of what to look for?

Li Lu: Bruce, we tried this multiple times in your class. There is a simple logical reason we
don’t do that. Once you achieve a certain notoriety in a certain field, the people tend to really

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copy that. This is not the behavior we want to encourage. Instead of giving people fish, it is
much better to teach them how to fish.

Bruce: OK. Do you prefer to be a generalist or a specialist investor and would one work better
in the Chinese market than the other?

Li Lu: You always want to be a generalist in terms of being a student of business. You need to
have an innate intensive curiosity about the company and all kinds of businesses. It doesn’t
mean you get to the bottom of it, and a lot of the time you won’t. By the time you invest into
the companies you better become a true specialist to the point where you know hopefully
better than anybody in the world including the management team. The management team
tends to be vested in their own biases and maybe doesn’t look at the business as objectively
rational as you do. You want to be a specialist in the company you choose to invest, but a
generalist of business. That way your circle of competence can constantly evolve and enlarge
over time. If I knew as much as when I first started investing, we wouldn’t have gotten the
results we both enjoyed. We continue to expand, to learn and it is fascinating to see how
business evolved in the last few decades and how it will continue to do so. I’m lucky to get
paid in this field to satisfy my curiosity, learning about great people and great enterprises
serving society. I feel grateful everyday doing what I do.

Bruce: Let’s talk about the evolution of the markets. In particular at a 2010 panel at Columbia
Business School, you mentioned that Asia’s role in the global financial systems was becoming
increasingly important. Looking back, how has Asia’s role evolved over the last ten years and
what about China’s role going forward in both the world’s business economy and in the
financial?

Li Lu: It has gone exactly as we predicted. Asia has indeed become more important and in
particular china. In the next few decades I would say that the Chinese market and Asia in
general will become even more significant. The dynamics that are already set in place will
continue to play out in a robust way. The Chinese security market in general and the Asian
economy will become an ever more important component of the global market.

Bruce: Let me give you some data that I don’t think is widely appreciated. The Chinese
numbers are obviously difficult to interpret, at least the official numbers. Whenever you see
that, the data you want to look at is where there is a reliable counter. The trade data is
reliable, partly because every Chinese export has to be an import in another country and
every Chinese import has to be an export from another country. Over the last eight to ten
years China’s trade has grown only about two and a half percent a year, less than one percent
faster than the US trade. What does that say about Chinese growth? It is clearly much slower
than the trade growth prior to 2010. It has been fluctuating but if anything it has been slowing
down. What does that say about China’s future?

Li Lu: It tells you that the characteristics of the Chinese economy has changed fundamentally.
What propelled the Chinese growth up until 10 years ago was international trade. Back in
2010 the net trade, so export-import netted out was roughly about nine percent of GDP. That
means that the Chinese economy was heavily dependent on the global market. As a result
they were growing at a double-digit rate, when the rest of the world’s growth factor was a

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fraction of that. At a certain point once you become the world’s largest trading nation it
becomes harder to grow. Another thing that is happening that after the citizens become
middle-class, their demands change. As you point out roughly around ten years ago the
Chinese economy has slowly evolved into a more consumer-driven one. Last year was a
watershed year, in a sense that the total volume of retail sales for the first time overtook the
US. China was the largest racial market in the whole world at 6 trillion $ compared to the 5.5
trillion of the US. Granted it was a special year, due to the pandemic. However, China is
emerging to become the most dynamic, fastest growing consumer market in the whole world
and that is likely to continue for many decades to come. Wanting to sell to the consumers,
the middle class in China will make China even more attractive to the global economy. The
characteristics of the economy will continue to change and provide interesting, unique
opportunities for global investors.

Bruce: The thing about developed economies is that they’re overwhelmingly service
economies and not good economies. On that dimension it doesn’t look like China is doing
particularly well. The export data one would understand to slow down, but the fact that the
import data has slowed down just as much or more, tells you something about the nature of
domestic growth in China. What about the challenges in the service sector in China?

Li Lu: You’re right that at the current stage the service sector has yet to become as powerful
and dominant as it is in most mature, developed economies in the west, but that’s really an
amazing set of opportunities for the decades ahead of them. It isn’t that much different than
all other developed economies at a comparable stage of the development state at around
10.000$ per capita GDP, which is where China is today. One can see that both consumption
and services are basically the areas that are growing the fastest. Overall trade internationally
is still growing at a robust rate, but not as fast as the domestic side of the economy. That is
why their share of the GDP has gradually begun to shrink. It just tells you the different stage
of the economy and where it is today.

Bruce: Where do you see the unique challenges and opportunities of value investing in China?

Li Lu: China remains one of the best markets if you are a value investor. The market is still
underdeveloped and as a result not representative of the real economy compared to the US.
The traders and investors are also not as mature and there's still a mentality of fast trading
and high turnover. That results in some of the companies going through a faster pace of the
boom and bust circle, which in turn provided opportunities for those who are mature and
patient investors. The service sector or the economy when it comes to financial services is still
yet to be developed. China is right at that stage where the financial service industry is about
to take off in a big way. It also just so happens that the Chinese government is quite keen in
making macroeconomic policies quite conducive for the development of the financial service
industry. They began to open up to the global firms in a way that they have never done before.
All those confluences of factors make the market more attractive today, than it was before.

Bruce: Financial services is the sixth largest service sector after housing, medical care,
education, wholesale and personal services. What about those sectors in China? Do you see
opportunities there?

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Li Lu: Absolutely we do. We see opportunities in virtually every industry as they go through a
robust growing stage, some more than others. Even if the industry is not growing as fast, you
can still find interesting companies. Different people tend to focus on different aspects of the
industries and different aspects of the growth profile. If you are a true good investor you can
find value anywhere, but you are probably more capable of finding values in a dynamically
growing economy such as China. Then there is still an enormous amount of inefficiency in the
security market. The combination of those two make it enticing. Add a whole series of
government reforms and that transition period to become more efficient will offer even more
opportunities. This is a good time for global investors and for US investors as well.

Bruce: As the Chinese financial markets are developing, do you have certain reforms you
would be interested in seeing implemented? Do you have a top development that you would
like to see happen in the Chinese financial markets or even in the Chinese economy?

Li Lu: In a sense that is already happening. For years the Chinese security market was not
representative of China’s economy. This is partially because the IPO process is based on what
they call an approval model. You have to go through approval layers in order to be listed. The
ones that are approved by the government are often not market driven. Compared with other
markets such as the United States, which is more market driven and as a result more
representative of the true economy. As the Chinese economy moves from an export-import
driven one into a more consumer-demand economy, entrepreneurial companies are
increasingly playing a larger role. The financial markets have to reflect that change in
dynamics. The Chinese government is determined to reform this IPO process into one that is
much more similar to the one we can see in the United States. We are probably still early in
that process, but another big one is happening at the same time. More than 80 percent of the
financing is done through the banking sectors, and over time that will transform to direct
financing through market driven dynamics such as fixed income and equity. We see the
overall financial model in China evolve into a more direct one. This will open up the financial
service industry both for domestic and global players. The financial markets will be more
mature in a few decades and more institutional players will come in. The financial market
service will become a lot bigger than it is today, which bodes well for investors who
understand what they are doing in China.

Bruce: In a service industry, the services are overwhelmingly locally produced and concerned.
There are very few global universities,high schools, or hospitals. If you look at the developed
economies like the United States, the firms which tend to be local, tend to be locally financed.
Local banks in the United States are much more profitable than the big global ones. Do you
see a comparable trend developing in China that you can take advantage of?

Li Lu: Yes and No. Chinese regulation for banking is different. There are only about 15 banks
that have the mandate to take deposits on a national basis and the rest of the financial
institutions are only able to do so on a small well-defined local region. As a result the dynamics
of the larger national versus local regional banks and other financial institutions is driven by
regulation in China, compared to the market driven model in the United States. That makes
the comparison of the banks quite different and difficult.

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Bruce: Would somebody investing in a Chinese bank have to be an expert in Chinese
regulation?

Li Lu: Absolutely. If you want to invest you better become a specialist, but if you truly
understand them it can be very profitable to own them over a long period of time.

Bruce: Let’s talk more broadly about new trends in investing. Among the many popular and
rising technological fields such as 5G, Bitcoin and AI - has any of that attracted your interest
as a value investor and why?

Li Lu: If you are an investor you want to find out what influences change in your companies.
If there is one big prominent force, it is the fast acceleration of technological changes and you
need to be aware of those trends. What really started that change was the development of
the integrated circuit 50 years ago. That led to personal computers and the evolution of
communication technologies and the internet. This resulted in the rise of artificial intelligence
and the current data economy as a result. This wave of technological development has
fundamentally altered the business landscape. So whether you invest into companies that are
well insulated from those changes or in companies whose management teams are leading or
enabling those changes, you need to make sure that those changes are on your side. Unless
you are a venture capitalist you don’t need to be a true expert to the point of being an
engineer, but you need to be broadly aware of what is happening and how it impacts the
industries and companies you are invested in. We are still in the middle of that technological
wave. The current form of AI based on neural networks is just the most recent iteration. The
data economy is the news adaptation by industries in response to those new technologies
and we’re going to see more of it.

Bruce: Do you see opportunities to invest in new technologies, do you have an example in
your past where you invested successfully in a new technology?

Li Lu: Back when I was trying to learn about businesses, I invested in a number of startups. I
am fascinated about the technologies and today we have a somewhat smaller exposure to
that. It is not easy to predict the impact due to the pace of change. It does require a different
aptitude and domain expertise. We just had easier opportunities.

Bruce: Many smart people believe that renewable energy is the next big revolution. Since
you’ve done a lot of work on battery technology and BYD, is that something you think about
beyond batteries? What is your outlook for the electrical vehicle industry say in the next five
years or is it overheated now? Where is Tesla going?

Li Lu: The car industry is simultaneously being impacted by four or five big trends. The
electrification, ride-sharing, autonomous driving and the intelligent design. All of those going
on at the same time heated the competition. As a result the industry that lasted 100 years is
being turned upside down. In the process competition is going to become very intense while
still having characteristics of being a scale economy. The survivors or winners need to have a
certain scale in order to come out on top. It is still early to predict who will win, but it is not
early to predict those mega trends are here to stay. In five years there will be far more electric
cars sold than today. European countries have declared a deadline to stop the sale of gasoline-

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powered cars. China will follow that up in due course. Five years from now those trends will
be more prominent than they are today, but as new entrees are still entering it is hard to
predict the winner. What is needed will be the scale and the right strategic focus to do well.

Bruce: Do you have a sense which companies those are?

Li Lu: Well I backed one, so I like my money to speak for itself. We’re not going to be the only
one, there’s going to be a few. It is a gigantic industry.

Bruce: In terms of value investing education, you played a big role in promoting and
advocating value investing. From the books to you underwriting in this class where I went to
Beijing University for a guest lecture. What’s your vision for the kind of education that a new
investor should embrace and where will that education be available?

Li Lu: Thanks for coming to teach at the Beijing University Value Investing class that my
colleagues and I started six years ago and that is still running well. Our original inspiration was
based on your class, which was a continuation of Ben Graham’s class. Ben Graham had among
others Warren Buffet as his student, and I’m your student and there will be many more much
brighter investors coming after us. We’re trying to do our part to pass on those philosophies
and the practical art of value investing to the next generation. When I talk to young students
I see several important things. The first is to always adopt the owner’s mentality. Imagine that
one of your unknown uncle’s died and he handed over 100% ownership of the company to
you. That’s the business you’re going to study. If you think you own 100 percent your
mentality will be different. You want to know everything. A Lot of the things you won’t
understand, but you’re going to continue taking in facts. If you adopt that mentality studying
any business you have started the process to become a real value investor. That’s the first
thing, the second thing is you want to maintain intellectual honesty. Be honest what you
know, what you assume, what you pretend and what you don’t know. One of the things
Charlie talks about is this quote: “I’m never entitled to have a view, until I can find the
smartest people in the world who take the other side of that view and I can argue better for
the opposition than they do. When I can do that, I would be entitled to have a view.” The
same thing applies to investing. Intellectual honesty is a good life philosophy to being with
and it is crucial, vital when it comes to investment. The security market exists to find your
weaknesses, dishonesty, pretension and half-knowledge. If you don’t possess that
fundamental attitude of intellectual honesty you will be destroyed at some point during your
career by the financial market. It was almost designed that way to catch you.

Bruce: It is designed that way. Every time you buy a security, thinking it is going to do well,
somebody else is selling you that security thinking it’s going to do badly and vice versa. One
of you is always wrong. You’re better be sure that you’re the one that’s on the right side of
the transaction.

Li Lu: There is some zero-sum aspect, but not always.

Bruce: It’s a hundred percent zero-sum. The average return to all investors in any asset class
and therefore in all asset classes is the average return to all those assets.

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Li Lu: You are arguing a slightly different view, but I’m never going to argue against my
professor. Let’s just agree we disagree on that one. Another important aspect is that you want
to really devote as much time as possible to studying the history of businesses and the history
of great businessmen in the past. The more companies you study the better your judgement
of good opportunities and fundamental characteristics of the companies will be. All three
things are important. Start with the owner mentality, have a high degree of intellectual
honesty and lastly be a thorough student of the history of businesses. These are the things
that are important when you get into the field of investment or when you want to improve
your game. That is my advice to your students.

Bruce: That is good advice. When you look back over your career, are there things that you
would have done differently or that would have helped you to get to where you are today
more quickly and more easily?

Li Lu: When I look back, I feel extraordinary luck and feel nothing but gratitude. Lucky that I
got into Buffet’s lecture at your class, that I got into business and have a great relationship
with Charlie Munger. I feel fortunate to live in a period of time where both the United States
and China are going through a fundamental economic growth period and provide enormous
opportunities. I look back at my career and have nothing to regret. In terms of transitioning
from the US to China. A lot of people, myself included, went through a period of time to
understand the nature of the Chinese economy. One key learning is the role the Chinese
government plays. If you have been a successful investor in the United States or in the
developed market you tend to have a set of assumptions about the role of the government
and the role of the market participants. If you look at the Chinese market with those
assumptions you will find views that are inconsistent with your own experiences. Partially
because historically the Chinese and the US or other western governments perform different
roles. Investing in China requires a deeper understanding and systematic comparison to get
rid of those biases. The other aspect is to understand the nature of the modern economy with
its ability to generate sustained compounded economic growth. This is where we talk about
the zero-sum versus a win-win type of mentality. For the longest period of time almost all
natural or human affairs are characterized by cycles. We are born, grow and die, energy goes
from hot to cold, order becomes chaos and great businesses lose their edge. That has been
the nature of things, the economy goes through boom and bust. With the beginning of the
industrial revolution we began to see the phenomenon of continued sustained compounded
economic growth. That is when value investing became important and why you can have
phenomenal records such as the one produced by Warren Buffet and a few others. The basic
logic is that over the long term your investment return is likely to approximate the actual
business returns. The fact that you’re capable of generating that long-term result is a
reflection of the changing nature of the economy. What produced that phenomena is the
combination of free market enterprise and the invention of modern science and technology,
which creates a paradigm shift. What happened 40 years ago is that China finally stumbled
onto that magic formula of free market economy, with Chinese characteristics of course,
along with modern science and technology. Any economy that strikes that magic formula has
begun to produce compound economic growth and reforms. But it needs to combine with the
stability of the overall political environment for the market to release that power. Only then
can a sustained investment record be possible in China. Most of the western observers believe
that political democracy has to be a part of the equation, except they forgot that political

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democracy wasn’t there when that phenomenon began to take place in the west. The political
democracy happened later almost as a result, but not because of it. That is another layer to
understand the phenomena of investment opportunities in China.

Bruce: You’ve devoted effort to improve equality and welfare of Asian-Americans. Given the
recent elevated attention on this community, what are you doing or planning to do or think
ought to be done for that community?

Li Lu: Like many people from the Asian-American community, I was an American that is just
utterly dismayed and heartbroken over the last year and a half. That new wave of Anti-Asian
and hate crimes has statistically increased the last few years. The pandemic, the Trump
policies, the US-China tensions and the systematic historical rut. Many people in the Asian-
American community are living in fear today after being such an important part of the
American experience. To the Chinese-American community it feels like after 150 years the
Chinese exclusion act has come back again. I had a different experience when I came to
America. America embraced me with an open warm heart and I had enormous opportunities
by Columbia University and by all the great people I met along the way. I became successfully
way beyond my wildest dreams when I came here as an immigrant. Not a penny, no
connections and I didn’t speak the language. One thing that I always believe is that America
is not defined by geography, race, culture or religion. America is defined by a set of ideas and
ideals. Anyone no matter your race, religion, culture or background, if you sign up for that set
of ideas and ideals can be American and I was one who believed in those and became
successful in America. And I want that to continue. Now if we look at history that experience
was often marked by cruel and malicious experiences especially with African-Americans and
other minorities,but I think that America remains the only country on earth so inspired by a
construct of ideas and ideals. In order for that to continue we need to restrict the worst
instincts in all of us, we need to rise up and fight those instincts. I think the entire Asian-
American and American community has to come together and fight this wave of
discrimination. Along with a number of wonderful colleagues we are co-founding a new
national organization whose mission is to serve Asian-Americans in their pursuit of belonging
and prosperity, free from discrimination, slander or violence. Just 0.2 percent of all
philanthropy in America goes to Asian-American causes and we want to fundamentally
change that. With this new organization we hope we can change that picture. With the center
of the global economy shifting from the Atlantic Ocean to the pacific Ocean, Asia-Americans
who are 20 million strong are going to play an increasingly important role to position America
as the new pacific economic power. People who are fully integrated as the very fabric of
American society can help lead America to better integrate with the rising economic ties in
Asia.

Bruce: That’s terrific and a great note to end on, unfortunately we have run out of time. Thank
you very much for this encyclopedic and enlightening talk.

Li Lu: Thank you for teaching that class 28 years ago or I wouldn’t know what I would do today.

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 PART- 2 Non-Investing

1. Interview by Charlie Rose: Chinese Dissidents (1992)-------------- 106

2. Interview by Charlie Rose: Six years after the massacre at
Tiananmen Square, student protest leader Li Lu describes his
escape as one of China's "most wanted." (1995)---------------------113
3. Interview by Charlie Rose: Tiananmen Square Anniversary--------121
4. Transcript of Li Lu’s Speech at John Jay Award Dinner (2012)-----126
5. Reflections On Reaching Fifty (2016)------------------------------------128
6. Thinking about our times (2017)------------------------------------------130
7. 3 Long Book Reviews---------------------------------------------------------134
8. Organized Quotes-From Letters, Interviews, Essays, Etc------------162
9. Discussion of Modernization (Part-1 & Part-2)-------------------------175
Chinese Dissidents (1992)
Historian Ross Terrill and exiled activist Li Lu discuss human rights in China and the recent arrest there
of Tiananmen Square protester Shen Tong

Charlie Rose: Welcome to the broadcast. Good to see you again. Tonight Marvin Miller and George
Vescey weight the fallout from baseball commissioner Fay Vincent's decision to step down, and a
man Arthur Schlesinger called the quintessential new frontiersman, Richard Goodman, will be here
with a plant to rebuild American democracy. We begin with the latest news on political opposition in
China. Last week Shen Tong, a prominent student dissident was arrested in Bejing. It was his first visit
to China since he fled government persecution for his role in the 1989 Tiananmen Square uprising.
Ross Herald, a research associate of Harvard University's East Asian Research Center and author of
China in Our Time was traveling with Shen Tong. He was expelled from China after the arrest. Also
joining us is Li Lu, another Le of the Tiananmen demonstrations currently in exile. He is studying law
at Columbia University and he is one of 21 people on the most wanted list from the People's Republic
of China. Welcome. Good to have you here. Ross, good to see you.

Ross Herald: Thank you, Charlie.

Charlie Rose: We talked about China, what, some couple several months ago before you went on this
visit. Tell me why Shen Tong decided to go back and your role in accompanying him back.

Ross Herald: Well, Charlie, he told me that he thought his phase of exile had come to an end.
Secondly, he felt the pro-democracy forces in China were at a stage where they were ready to
become a bit more visible. There's been an economic loosening up again this year, and he thought
maybe it's time for a little more politics. He wanted to build a bridge between the community in exile
and those forces within China. I have been his friend in Boston and advised him on his studies and he
took me into his confidence on this plan because it was secret. His first weeks in China were
clandestine. Then I joined him in Bejing on August 26. He was working 20 hours a day. It was exciting.
Maybe he got over-confident. Anyway, he was arrested and then shortly after I was detained after
28 years of visiting that country, for the first time in custody and kicked out.

Charlie Rose: Just to bring the story a sharper focus, you were arrested for what reason? He was
arrested because he'd come back and clearly what he was going to say with respect to the pro-
democracy movement, the statement that you read in part was what got both of you in trouble.
What did they say to you when they arrested you?

Ross Herald: They said, "Mr. Terrill, you have distributed materials that are unacceptable to the
Chinese people." I said, "How do you know whether they're unacceptable or not when you never
hold an election to consult the people?"
Charlie Rose: And they said what?

Ross Herald: Nothing. My sin, Charlie, was to have handled Shen Tong's materials. He was the
problem, not me a foreigner. When he was arrested I felt, this was the middle of the night, I felt I had
to go downstairs and at least explain to the press why Shen Tong wasn't there. Give them his
statement if they didn't already have it. But that was my sin.
Charlie Rose: Did he have any understanding of the risk he was at and, secondly, the risk that he
placed others at because of access people might have to who he was in touch with or names and
addresses that he had within his files?

Ross Herald: Yes, he spoke often in the previous week about the possibility that he would be arrested.
Several times some of his friends advised more caution and he said, "I think if they're going to get

106
me, they'll get me." Particularly the night before, you know -- looking back he might have done things
a bit differently but more cautiously. He asked 11 Chinese news organizations to his press conference
telling them eight hours before the event the time and place. No doubt that's how the secret police
heard of it.

Charlie Rose: Okay. Was that, the press conference, the trip wire?

Ross Herald: Oh, yeah. They didn't want Shen Tong to speak in public in China. I am worried about
the people he made contact with, but I have here his name and address book. Every time he met
someone new he put the address -- The night he was arrested a French man who was in –

Charlie Rose: We all keep these things, don't we?

Ross Herald: -- the French man put it into his pocket and the police didn't see it. So, with a bit of luck,
most of the contacts, the names and the phone numbers are here. But the police did take other –

Charlie Rose: But they got some computer chips. I mean, not chips, but computer discs. What was on
those discs? Do you know?

Ross Herald: I don't know.

Charlie Rose: Was it possible that these were materials that would lead them to other dissidents?

Ross Herald: I think it's more likely to be statements, drafts, the petitions, the questions he was
drawing up for public opinion polls. All the things he was going to do to try and have a normal politics
in China.

Charlie Rose: Yu, tell me about leaving China after Tiananmen Square, what happened to you so we
can bring you full scale into this conversation. Later we'll pull back and look at human rights in China
and the role of the United States and look to the future, but first let me focus on you and your story
to bring you into this conversation as much as you can without (inaudible) or whatever you might.

Li Lu: I was put on the most wanted list and then I was forced into underground and later escaped.

Charlie Rose: How did you escape?

Li Lu: It was a long story. I can't tell much because that's going to really endanger those people who
helped me escape.

Charlie Rose: But you got help to what? Get out of China and go to France?

Li Lu: Yes.

Charlie Rose: By boat to China and then by plane to France.

Li Lu: That's right. Then came to study at Columbia. But I do know the existence of underground
network. The one who helped me escape has been there since the late Cultural Revolution. We're
talking about the late '70s. I do know their rules. It is very, very dangerous. So, I'm really curious to
ask you, you had advised apparently Shen Tong's whole plan. Did he also tell you of his plan about
visiting the people in the underground movement in nine different cities?

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Ross Herald: Well, of course I knew where he was going, but he was doing two separate things. He
was contacting the underground, and then secondly, when he went to Bejing we went around and
met with fairly prominent intellectuals, former university presidents, that kind of -- under his own
name and quite openly. I was involved mainly in the second since I never met the underground
people. He told me all about it, but I was involved in the public meetings.

Li Lu: What do you think was in his mind when he decided to go public, almost public, by bringing
with him a television crew to visit all the people in the underground movement.

Ross Herald: Here we get to the personality of Shen Tong. He's only 24, but he's a person of great
ambition. He's a politician and he's taking the long view.

Li Lu: That's very dangerous. We're talking about the lives of up to 100 people.

Ross Herald: I'm talking about him being public in Bejing.

Li Lu: That's a different story.

Ross Herald: That's the only segment that I was involved in.

Li Lu: (inaudible) tell me you were advising him the whole plan, do you?

Ross Herald: Well, he didn't ask me what to do in relation the underground. But, Charlie, there's two
views here about how change will occur in China. Some people thing because of the economic
progress, somehow or other Communism is going to slip away in the night and China is going to
become one big Shen Jin. That's the capitalist-type economic zone. I don't believe that and I think
Shen Tong doesn't believe it.

Charlie Rose: You don't believe that economic freedom will promote political freedom.

Ross Herald: In the long run, but it won't happen without a political struggle. Now, I've said in my
new book that the Communist dynasty's coming to an end. But let me add one thing. Even more in
China than in the Soviet Union. Democracy won't stand there at the door when it comes to it. There
will have to be uncertainty, protracted period, courage, and there'll have to be suffering. I think Shen
Tong realized that you have to challenge this government. You have to –

Charlie Rose: Let me speak to what I think Li Lu was raising. Here's what I heard you saying. You, who
are on the 21 most wanted list, a member of a brave group of people who were part of the leadership
at Tiananmen Square are genuinely worried that this arrest has endangered an underground
movement in China and you seem to believe that it was foolhardy to go for that reason. You're
questioning how he could have done this notwithstanding his own courage, bravery, ambition.

Li Lu: I certainly understand him how much he wanted to go back to China. I was in Taiwan two weeks
ago and that's the first time I was that close to my hometown. Yes, I can definitely understand and I
believe, I join with Ross in believing that without a political struggle there won't be a democracy. It
won't come naturally. Yes, of course. No doubt about it. There has to be a bridge building up between
the underground group inside China and the exile movement outside China. There's no doubt about
it. But if I were him, I would probably conduct the whole plan differently so that I won't publicly
endanger those people we involved who constantly endangered them.

Charlie Rose: Do you know that he endangered them? Is there any information that you received, or
others had received, (crosstalk) that they had been endangered or arrested?

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Li Lu: Well, actually (inaudible)

Ross Herald: We don't know. There's two ways in which they could be endangered. One, that when
he was in the south he was followed and watched at all time.

Charlie Rose: The two weeks that he traveled, three weeks before –

Ross Herald: He and I and the Frenchman discussed this many nights and we really didn't know. We
didn't know whether they were being followed. They may have been. The second way in which
(crosstalk) he could have been –

Li Lu: I have a solution about the ability of secretive police forces. They have put hundreds of
thousands of people in jail and you know that. They have killed probably millions more. We really
can't underestimate the ability of the secret police..

Ross Herald: I think maybe Shen Tong -- he's say to me, I can't believe I've got this far. I can't believe
I've had three weeks and no one's touched me and no one's watched me. Now he may or may not
have been right about that.

Charlie Rose: Clearly they were watching, don't you think?

Ross Herald: China's a big place. He got into (inaudible) –

Charlie Rose: It's a paranoid leadership.

Ross Herald: He got into (inaudible) that was chosen and sort of a tourist place. The place with the
big mountains like Manhattan skyscrapers. He entered under his own name. Who knows if they
computerized in (inaudible). I don't know. He thinks maybe the people in (inaudible) didn't realize
that he was a counter-revoluntionary. The second way in which he could have endangered them is
by the arrest and what he will tell him. Now, he's in prison, or its equivalent. We can't hear what he's
got to say.

Charlie Rose: He has communicated in some way through his mother or through –

Ross Herald: Two letters to his mother.

Charlie Rose: Who is living where?

Ross Herald: In a house just south of Tiananmen Square.

Charlie Rose: What has he said to her?

Ross Herald: In the second letter he said that he'd been moved. This is only three days after he'd first
been grabbed. He asked for medicine, he's got a stomach problem, and for legal books and for some
clothes, which led her to think that he wasn't on the point of being released.

Charlie Rose: Let me take a break here. What I want to do is talk about a couple of things. One, is the
status of the movement today, the underground movement, in terms of the pro-democracy
movement what's happened. Secondly, to look at the question of human rights in China and the
presidential campaign here in the United States and whether this issue will be discussed. Also, as
many of you know, there was the announced sale of the F16s. In Texas it was announced the sale of

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the F16s to the government of Taiwan, which has gotten the government in Bejing very upset. We'll
talk about all of this when we come back. Stay with us. We are back. Li Lu has written a book called
Moving the Mountain, but I don't think it's available in the United States, is it?

Li Lu: No, it's in England.

Charlie Rose: It's in England and certainly not available in the People's Republic of China.

Li Lu: Well, I heard there are some books.

Ross Herald: Talking about that, one of the paradoxes of me being kicked out last week, is that I went
there partly to talk to my publisher about the eleventh printing of my biography of Mao and about
the publication in Chinese of my book on (inaudible), so the Chinese are reading me in the millions
while the secret police are getting –

Charlie Rose: This is China in Our Time has not been published yet.

Ross Herald: Not yet. It's being translated by the party school in Bejing, so one more paradox.
Charlie Rose: Let me just state, what's happened to the pro-democracy movement and what's
happened to all of those brave young people there? How many of them are in prison? How many
have been executed? How many came to the United States and do all of you believe that you'll have
an opportunity to go back in the aftermath of this arrest?

Li Lu: Well, there all together about 120,000 people who are arrested.

Charlie Rose: One hundred twenty thousand?

Li Lu: Yes, in the first wave of the massacre by the time I was still in China, I was told that figure by a
police authority who was sympathetic to the movement. Then in the past three years there's up to
100,000 people who were released because of the internal pressure and especially international
pressures. In Bejing alone there is all together thousands of political prisoners who were forced to be
released by the Chinese authorities specifically because of the debate in Congress regarding the Most
Favored Nation status.

Charlie Rose: Which was (inaudible).

Li Lu: Yes. Most of those people have lost their jobs. Have been expelled from university from their
working unit and have (inaudible) citizenship, a kind of permit to live in the city. So they're desperate.
Another way that gave them the full reason to continue the (inaudible) underground movement, and
indeed, most of the people do.

Charlie Rose: What do you think would have happened to you if you hadn't fled?

Li Lu: There are two ways. Either I'm in jail at this point, or I'm a part of an underground movement.

Charlie Rose: You would have gone underground, clearly, wouldn't you?

Li Lu: Well, right here, yes.

Charlie Rose: I mean stayed underground there.

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Li Lu: Underground, yes, if I'm not arrested. But here after the massacre three years ago, there's a
unified movement in the United State, in Europe, and all over the people wherever there are Chinese.
I think potentially they're also going to play a very important role in several ways. For one, they're
going to have a better opportunity to make a plan about where the democrats want China to be and
how to get there. Also, there are all together 50 to 60 million Chinese outside China. Most of them
are economically really better off in the past 40 years, especially with talking about Taiwan, Singapore
and Hong Kong. Those are the people who are going to play probably a dominant role in this
transitional period. By being outside, the exile movement also has a terrific opportunity to be able to
unite with those external forces, which eventually going to play a large role in the transitional period.

Charlie Rose: Let me come to - Give me your sense of what you found about the pro-democracy
movement during the time you were there on the this visit before you were thrown out.

Ross Herald: There's tremendously diverse -- Shen Tong would go and visit ex-prisoners and he would
come and say to me, "They're so cautious. They're saying don't rock the boat. The party's got some
good people in it." Then he'd go and visit others who agreed with him completely, disregard the
party. Not everyone thinks the same in China. My own view is that the forces outside cannot be
decisive and at a certain point the Communist Party of China will probably have another big crisis and
ultimately a split. Some of it will stick with Leninism and others will, whatever their words, put their
feet on a road that's essentially social democracy. Then the Li Lu's, the Shen Tong's and the other
pro-democracy people will find allies in a serious political struggle. This is not as unlikely as it sounds
because after all, Deng Xiaoping is 88. The whole nation is waiting for him to pass on.

Charlie Rose: Because he's probably the only member of the leadership that has control over the
military, too, I guess.

Ross Herald: Yes, and he's come up with an ingenious solution to try and save Communism in China.
Leninism plus consumerism. He thinks Gorbachev fell because he didn't produce the economic goods
and he's going to do anything necessary. I mean, he's just -- look at the three visitors he's having this
fall. The Emperor of Japan, the President of South Korea, and Boris Yeltsin. Yeltsin who's standing on
the edges of the Bolshevik Revolution. This Chinese government in its eclecticism is just desperate. I
don't think after Deng dies that the formula of Leninism plus consumerism can keep the Community
Party afloat.

Li Lu: I would agree with you and certainly there is something really serious happening in the political
scene in China. With the first (inaudible) of the 14th party's congress we're going to be seeing a real
transition of power of succession. Not the power from Deng's generation to the next generation
beneath him, but to the third generation in their 50s and 60s who do not have any experience in the
military service or (inaudible) of government structure.

Charlie Rose: Do they care about who wins the American election?

Ross Herald: They do. They prefer Bush.

Charlie Rose: Because it's the bird in hand? It's the devil they know versus the devil they don't know
or what?

Ross Herald: Partly. There's always the tradition abroad, but it's also that the few things Mr. linton
has said about China suggests that he's in the more moralistic camp. That he's –

Charlie Rose: He's more sensitive and sympathetic to human rights arguments?

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Ross Herald: Yeah. But we have to do two things with China. We have to follow our interests and we
want trade with them, we want business, and also I think we want a united China that's an effective
nation. A China in chaos -- Japan and Russia historically reaching to that kind of situation -- we want
a united China, but we also must build for the future. When the Hovels and Walentas of China come
out of their cells, out of exile, and it's tricky to do those two things. Clinton talks as if he wants to just
not deal with them much at all.

Charlie Rose: Because he doesn't spend much attention on this campaign on foreign policy?

Ross Herald: Well, also because he talked about tolerance from Baghdad to Bejing at the convention.
Yes, they want Bush to win. US - China relations –

Charlie Rose: But do you think the selling of the planes to Taiwan sent a message that Bush may be
saying, look you've got nowhere to go and we're going to expect more from you?

Ross Herald: And he's right. The Chinese need us more that we need them. They're selling to us 12
or 13 billion US dollars more than they're buying from –

Charlie Rose: Do you think there's leverage to be exercised, to have an impact on their human rights
policy?

Ross Herald: A bit more than Bush does. I'd like to see him do what he did down in Miami on Cuba
policy. He got up in Miami and said the age of the dictator is over. I'd like to see him in the context
of China policy. Have that vision that we're expecting a different China. You know, Shen Tong might
be a bit impetuous. He might be ahead of his time, but not all that much ahead. China's going to
change.

Charlie Rose: If you had that many Chinese having the kind of political impact that the Cubans have
in Florida, you might have that kind of impact. Let me just raise one last questions. The question of
leverage. What do you think the dissidents want? What do you think the people underground believe
is in their best interest? To have the United States push and push or to have the United States do as
he said, don't rock the boat?

Li Lu: Well, actually, they want the United States to really create an environment where they can
really come to a (inaudible). Come to become visible and legal, and that's exactly the thing Shen Tong
wants. This I think the United States could do.

Charlie Rose: Thank you very much, Li Lu. Ross Terrill, good to see you. Thanks for coming down from
Boston.

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Six years after the massacre at Tiananmen Square, student protest leader Li Lu
describes his escape as one of China's "most wanted."

1995

Charlie Rose: Yesterday marked the sixth anniversary of the massacre at the Tiananmen Square. Li
Liu, 23 years old at the time of the uprising was deputy commander at the student headquarters.
Later in the summer of 1989, he was named as one of the most wanted students by the Chinese
government. He escaped China with the help of smugglers, went to France, and then came to New
York, learned English and is completing graduate degrees in Business and Law at Columbia University.
Ultimately, he would like to return to China and help write a Chinese constitution. Micheal Apted's
recent documentary, Moving the Mountain, is based on his story, and we are very pleased to have
him here. Welcome.

Li Liu: Thank you.

Charlie Rose: It's great to have you. It is. There was an incredible story of you, over the weekend, I
think maybe Saturday's New York Times that told the story. Because it's the anniversary, and I read
a speech that you gave yesterday here in New York that was moving, a story of courage, and in a
sense, having some sense of looking to the future in China, and talking about what one has to
command in terms of doing battle with a dictatorship. Take me back, though, to 6 years ago at
Tiananmen Square, and what you felt, and when you were there, and that moment for you.

Li Liu: It was a moment, I think, the entire generation come of age. They say the generation of the
young people, they really made Tiananmen, because with all this generation, is hard to imagine it
would have a movement that has that kind of impact. This generation of Tiananmen was born in the
darkness of a cultural revolution, and they grew up into the era when China's doors opened to the
west. Because of the comparison, they have long felt they have to make a determination as to which
kind of a life they're going to lead in the future and for their next generation. They're waiting for that
opportunity. I think Tiananmen Square, in a sense, provide the first stage for this young Chinese
generation to really make a choice, their choice, known. Also, I think China, at that time, the entire
nation was ready to hear that voice. When they come up to speak, and they speak loudly enough so
that people can hear, they all join them. That was the time of hope for the entire nation, for this
young generation. It is a dream, but of course, it's also fear. It's really fearful.

Charlie Rose: What was the fear?

Li Liu: Well, the fearful is two weeks after the movement. The movement last for two and a half
months, but two weeks after the movement, Deng Xiaoping ordered to print a harsh editorial calling
the movement as a riot organized by a small group of people as enemies, which in the past meaning
that this is the beginning of a crackdown. People who participated would have to face, one way or
the other, severe persecutions. From the early beginning, we know there's some danger hanging
there, and we know we will be punished, but the same time, every time the government do that, the
movement pushed forward, moving into the next stage, and more people joining in. In a sense, there
was a sense among the people to resist the tyranny they have been so much used to for the past
forty years up until that time. Although people have a fear, there's always a battle of fear with hope
so it was really a confrontation between fear and hope.

Charlie Rose: How did you escape?

Li Liu: Long story. Once you're on the China's most wanted list, your name and pictures began to
appear all over the radio, television, train station and bus station on the street. If there's anything

113
that a dictatorship doing really well is really to control their security forces and the control the
borders especially. I never thought I could escape. Then I was approached while I was hiding by a
group of underground network with people from both inside and outside China, they said they're
organizing an extensive network to rescue people. It was like a fiction when I first heard it because
non of those kind of things ever happened in China's history. One of the people I knew during the
movement also involved so it got some credibility from him. Afterwards, I just have to hand my faith
and life into the hands of people that I don't know then I've been moving here and there, all over the
country through the sea, all kinds of different odd things. A part of the way they're completely
conducted by professional smugglers. They have no sympathy or support or even money.
Nonetheless, it shows to me and I was amazed to discover that how much resistance, how deep it
runs in China and how much support deeply that we got. In the sense, we're not only speaking our
own mind but really was speaking our own mind on behalf of everybody else. In the sense, everybody
share the same mind at 1989.

Charlie Rose: The smugglers took you from Beijing to Hong Kong?

Li Liu: From Beijing to well, part of the way is a smuggler's, part of the ways are conducted by just
owner of boats. It will include high ranking officials in the security forces, in the court or in other
walks of life. All kinds of different people and it's very extensive. I really hope that someday we'll be
able to write about it.

Charlie Rose: You can't talk about it now because you fear that you will open some people up to
retaliation and retribution?

Li Liu: That's right. People have to realize this is just amazing phenomenon.

Charlie Rose: Why did you all end up in France? Was there something about the French end of it?

Li Liu: That's right. I'm glad you asked because while I was in hiding in a little unnamed island, people
who are helping me in Hong Kong are applying in behalf of me and to some other people for political
asylum. They approached 7 countries including the United States. In fact, United States is the first
country to approach but they were turned down. I mean, at that time, I don't know who's conducting
the policy basically they say that we're not going to take political refugees from Tiananmen Square.
France was the only country at that time that accepted us so we all went to France.

Charlie Rose: Then you made your way to New York with 1989, by the end of summer in 1989.

Li Liu: Right.

Charlie Rose: You want to go to Columbia University?

Li Liu: Right.

Charlie Rose: Because of your grandfather.

Li Liu: That's right.

Charlie Rose: A graduate from Columbia University.

Li Liu: That's right.

Charlie Rose: He died in prison.

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Li Liu: Right.

Charlie Rose: During the culture revolution.

Li Liu: Right.

Charlie Rose: He was what, intellectual?

Li Liu: He was intellectual. He was a philosopher. He's a thinker, educator and a social activist. It's
amazing, I never met this person. This person supposedly my grandfather because I was born in 1966,
I was the beginning of the culture revolution. I even didn't lived with my parents for many many years
until the end of culture revolution. Of course, I never learned that I even had a grandparent until I
believe I was 12. All of a sudden, everything about this man just fascinate me. I mean, he's a brilliant
man and he came to this country and he's one of the few people and studied under this philosopher
(Jiang Du), he's a big big name in China and wrote many books and returned in China and become
activist and wrote many books. All of a sudden, he disappeared. Nobody remembered him because
all of his books are banned. He died in June. Everything about him fascinate me. Not only because I
discover I indeed had a grandfather but also what he did and then I begin to read about him.

Charlie Rose: You went to Columbia and got his thesis.

Li Liu: I got his thesis but ever since I read about --

Charlie Rose: Did you take it without Columbian knowledge?

Li Liu: Well, I may have taken it illegally but I kept it illegally. I told them I lost it. I think I would take
better care of it. Hopefully, someday I will return to the school because I love the school. The school
is just the best.

Charlie Rose: When do you think you will go back?

Li Liu: That's a big question. Assuming that (Deng Xiaoping) is going to leave this year, which I think it
is credible in assumption.

Charlie Rose: Assumption is that he will die (crosstalk)

Li Liu: He will die, that's right. There will be period of about 2 years when different fractions are going
to really fight very hard and that fight gradually is going to go public. In that fight, of course the
essential key battle ground is who's going to emerge to reverse the verdict on (inaudible), when and
how. That will be the first key battle ground. The resolution of that issue of course has a lot to do
with when and how and which capacity I would return to China. Regardless the result of that battle,
I think I'll be able to return in a different capacity in a few years. Whether I'll be able to return and
continue to do what I would like to do, that is open question. I just don't know.

Charlie Rose: You were here at Columbia University. You were going to business school?

Li Liu: In law school. As a matter of fact, I haven't graduate from college yet.

Charlie Rose: Okay.

Li Liu: I'm doing 3 together. All joined together.

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Charlie Rose: You somehow believe that change will come through the judiciary?

Li Liu: Well, first of all I think, I mean because of historical Kang incident whatever it is. China start as
a reform for economics and then has some positive impact. The question become, how can you
sustain the current economic reform with so much different problems that really causing crisis? Not
only into this reform but the whole political system. The whole country. I mean, the whole holder of
the country. Take systematic corruption as an example, everybody who has any power in China had
trade that power for money.

Charlie Rose: Everybody who has any power?

Li Liu: That's right.

Charlie Rose: Uses it to achieve financial route.

Li Liu: Sure. Everybody. Almost everybody. (crostalk)

Charlie Rose: Military is corrupt because they have power?

Li Liu: Not only they're corrupt, they're --

Charlie Rose: Because they rule political power.

Li Liu: That's right. They're also using all this monopoly lands and weapons trade. I doubt at this point
the central commander would know how much business his soldier is or his lower level commander
is doing. And how much they're exporting weapons. It's not controlled anymore. It's good in the sense
that it's really breaking the whole system but it's bad because nobody's able to control.

Charlie Rose: Which is good.

Li Liu: Yeah. The point is because of economic reform had to be sustained and they can only sustain
by combining that with political reform. You can't save political reform. It's the world you just cannot
see and you cannot get approve from the party. The only thing that in between will force the
government come to the realization that they have to do some political reform is for rule for law. A
rule for law in the sense that serve as a bridge between economic reform and political reform. It
serve as a bridge to really stabilize the whole process of economic and political development. There'll
be lot of turbulence on the top of the politics but if society continue to function independent from
those political turbulence in Beijing, the only thing you can do is to build a credible society that is
relatively away from politics, protected by law.

Charlie Rose: I want to take a look at our clip here and this is a New York City reunion of Chinese
descendants and they will talk more about the future as well as as your own incredible story. Here it
is. This is from the film, Moving the Mountain.

Video: When the train is approaching Beijing, I was quite anxious. None of us will volunteer ourselves
and go to street. Not the person really imagined what has happened. Even now, coming together
almost 5 years later, we were still sorting for the events of the scream of 1989. Wang Chachua
represent intellectuals at that time. Wang: (foreign language) Wu'er Kaixi is very charismatic so
therefore a lot of people responded to his calls. Chai Ling compared with other student leaders was
more like spiritually. Wang Dan who's still in China took the lead and organized the initial
demonstration from Beijing University to Tiananmen Square. Facing each other is to face ourselves.

116
To see us out together immediately bring us back to the confusion, feels exciting, hopeful, and
ultimately (inaudible).

Charlie Rose: It's incredible to see that because 3 of the people that I've seen there been in this
broadcast. Wang Dan is still, is he in prison? Or is he out? What's his status today?

Li Liu: He was in prison for 4 years and he was released because of the pressure generated by MFM
and he was put back into prison several times and this time, about a week ago, he was detained
again. So far, there's no words about what is happening to him. I wrote a letter before he went to
prison and he said, "Shall I be brought into prison again, this time I'm going to declare a hunger strike
in protest of this treatment." So far we don't hear, I haven't heard any word on his status of hunger
strike. Some really worried about him.

Charlie Rose: What amazes me is to look at the coming of this anniversary and the fear of the Chinese
security forces that something might happen.

Li Liu: Right.

Charlie Rose: Those people that were beginning to speak out, they told them, "If you speak out, we're
going to throw you back in prison. If you say anything." All of a sudden, they continued to. Where is
that courage coming from?

Li Liu: In the past 45 years, the communist party always tell people, "This is what we're going to do,"
either by words or by action but also in the course of those 45 years, people never never stopped
speaking out.

Charlie Rose: Because?

Li Liu: Well, because the need for freedom is innate. They can control every aspect of your life but
they cannot control your mind and that's where it hums the sense of a freedom. That (one) just won't
give up. Also, there's another dimension of this current petitioning movement, started a few weeks
ago, hundreds of China's most prominent intellectuals sent petitions to the government demanding
to release political prisoners and demanding to reverse the June 4's verdict. The reason is all the
Chinese intellectuals felt compelled to speak out at this critical important moment of history which
they believe will determine the future course of China for the coming decades or 2 decades. Because
we're reading, facing ways of free (inaudible) in the post (inaudible) era, continuing oppression, chaos
or peaceful evolution.

Charlie Rose: Much talk about what the Clinton administration and before that, the Bush
administration should do. Especially about in (inaudible) nation. It has been delinked from political
considerations and treated separately. Do you believe that was the appropriate action? Do you
believe that the United States in the end, can have an impact on internal events in China?

Li Liu: Well, first of all, I think it's extremely inappropriate for this President to changes a policy which
you promised during the campaign which he continued in his first era in his administration. Second
of all, it's a wrong policy to delink. Third of all, when he delinked the (two issue) last year, he said that
reason behind it is, "We have a better alternative to pursue the same interest of human rights." Of
course, he did an article and he didn't follow up with his actions.

Charlie Rose: The humanized community has been very good to you (inaudible), in a sense that you
have a courageous life but they have been, in part, welcomed you here in the United States and have
helped you and you met a friend at a human rights community here and they have-

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Li Liu: I'm very grateful (crosstalk).

Charlie Rose: You have said as much. The argument is frequently expressed. You're better to do
business with the Chinese government. You're better to try to maintain whatever economic
relationship you can have. Hopefully with an opening up of the economic channel that will become a
relaxation of political oppression and a limiting of the human rights violations.

Li Liu: Well, there's certainly merit in that argument which I believe. I believe economics is the catalyst
but people have to distinguish between economic relationship and purely making money. People
think they're all the same. They're the same when you have a legal system that really guarantee
justice and of fairness in the business dealings but what is happening now in China is a combination
of on the one hand, a political dictatorship, on the other hand, a vibrant free market or emerging free
market. The combination of those 2 provide ample opportunity for people to trade between money
and the power. Business people in the culture of China, they also know it so they go directly to people
who have power and they want to get as much money as possible in as little time as possible.
Regardless of the consequences to the whole economic system but that's, of course, is only in a
portion of those people. There are also credible peoples, big corporations, who went to China
because they recognized the potential of that market. They have a long-term interest to ensure a
independent, a credible, (inaudible) (traditional) system to ensure that the whole society won't
collapse because if the current oppression continues, (inaudible) later, the whole society collapse or
even when the collapse, democrats took over control. You'll still end up with the situation of (Soviet
Union) which you cannot earn any money. If you're really interested in having China be in your
(inaudible) market, you have to make sure that the market, one, is sustainable, second, is a fair and
a just effort does carry out contract.

Charlie Rose: Characterize the human rights violations taking place in China today.

Li Liu: Well, in-

Charlie Rose: Other than the political prisoners that were part of Tiananmen Square which we all
recognize and other political prisoners which have been held for years because of their protest or
petitions.

Li Liu: Well, first of all, I have to say that because of the economic reform in the past 50 years, there
has been substantial progress in the area of people's economic (inaudible). Listen, now, you're free
to pursue your economic interest but very little has changed in term of a people as a civil and the
political rights. For instance, you still cannot really speak your mind especially when you speak against
the government. There's of course, all of flow of information is still controlled by the government
and that's probably the biggest intrusion of people's life. You cannot speak and therefore, you have
to subject that to whoever happened to be in power. Everybody now in power are so eager to earn
the money. They earn money at the expenses of everybody else, especially ordinary Chinese people
at the bottom of society and therefore, the biggest violation of human rights is that all the people,
majority of the people, (inaudible) people is subject to the arbitrariness of the officials on top of them
who are constantly seeking opportunity to exploit them and without being able to respond. I'll give
you a (new) story. A family of a peasant living in the countryside and all of a sudden find a business
opportunity and to make some money and then the chief in the local area, the party chief came in
and said, "Well, we have this tax. You have to pay." Then, they pay the tax. By the end of that year,
he was subject to 150 different kinds of tax so all the money he earned wiped out. Of course, he's
angry. He want to (sue) this so he went to other places but every time he go, that person happened
to have a connections into other part of the government, higher level and therefore, he was put in a
prison. Charge him as -- It's a completely absurd (name) and he stayed in prison for several years.

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When he came out, his whole family is broke and there's nothing he can do. Today, he still can't do
anything. That is the most severe human rights violation. This guy doesn't have a political view about
it.

Charlie Rose: What about your family that's still there?

Li Liu: Well, my family-

Charlie Rose: You're still on the 21 Most Wanted List.

Li Liu: That's right. Of course, my father is not allowed to travel anywhere anymore. He used to have
a program he conducted with a European country and the United States. Of course he can't do it
anymore but he was also one of China's top scientists and therefore, there's still (valors) to be used
so he continued his current job and probably about to retire next year. We see relatively little
harassment this time but he paid his in culture revolution being a prison of labor in a coal mining area
for many, many years. Approximately 8 or 9 years. I have to talk to him because I remember at that
time, I didn't live with them at that time. I was living with various adoptive families but he was in the
coal mining area for that many years during the entire duration of culture revolution.

Charlie Rose: There's been no real -- After the (inaudible) revolution, because of your activities at
Tiananmen Square --

Li Liu: Relatively little.

Charlie Rose: Relatively little.

Li Liu: Relatively little. Of course-

Charlie Rose: (crosstalk).

Li Liu: Whenever the party (inaudible) would be to summoned to talk whatever they know.

Charlie Rose: Let me take another look at this. Let me come right back to this because I want to finish
up here. Moving the mountain again, here's another clip. Reminiscing about Tiananmen Square,
Sunday was the 6th anniversary.

Video: (Inaudible) with anybody but there was a Chinese scene for (inaudible). The person may not
be killed by you but they might be killed because your action, because your -- I always feel in such (a
way) there might be many people dying, hurt because my action, because the mistake I have made.

Charlie Rose: If you had all to do over, what would you do different?

Li Liu: That's a hard question. That question really stick with me for the past 6 years and probably for
the rest of my life. It's difficult and I can't really come toward a conclusion one way or the other. First
of all, it's hard. Of course, at that time I was 23. Most of us were young at that time and there must
be lots of mistakes made but we're also dealing with probably the most complex situation there. We
were accidentally chosen to be the leader (inaudible) bearer the responsibility of the fate of a nation
in a sense. It was 1.2 billion people and if you want to put yourself in that position, that role 6 years
later, you have to also think that on behalf of the future of that nation, what will you do differently.
It's difficult and I don't know whether I can come to any sort of firm conclusion 6 years later as to
what it would do differently given all of their circumstances of 1989 because it's just too complex.

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Charlie Rose: Thank you for joining us.

Li Liu: Thank you very much for having me.

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Tiananmen Square Anniversary

1996

Charlie Rose: There's a film that you should see on PBS. It will air on Tuesday, June 4th, at 9:00 P.M.
It is called The Gate of Heavenly Peace. Seven years ago on that day, June 4th, the incidents, the
massacre, the face-off at Tiananmen Square. The film is produced by CARMA HINTON. She joins us
now for a consideration of the film and the events. Also here LI LU. He was a Tiananmen Square
organizer, and Nicholas Platt, president of the Asia Society. We'll show you some clips from this film,
but we really want to get an inside look at what they found, what the film-makers found, and a
discussion of other people in reaction to what they say and the perspectives presented. Welcome to
the broadcast--

Carma Hinton: Thank you.

Charlie Rose: --one and all. Tell me about making of the film and what's different about it and-- and
what you saw that you think is important to bring to the world's attention.

Carma Hinton: Well, I felt that the reporting, at the time, from Tiananmen, however hard the
reporters worked, was somewhat limited because of the-- well, the-- the high-pressure situation, the-
- you never really-- never easy to go beyond the surface when there's a situation like that, especially-
-

Charlie Rose: It's instant journalism.

Carma Hinton: Instant journalism and the insatiable appetite of T.V. for-- for the-- for action, for
drama, for the sound bite. And I thought that the voices-- there were many different voices during
that movement, both within the students and on the government side, and I think we didn't hear
quite enough of them. And I think our film try to provide a platform or widen the debate and widen
the perspective of this event.

Charlie Rose: Do we come away with a different impression of those who were there at Tiananmen?

Carma Hinton: Somewhat of a different impression, depending on what impression you--

Charlie Rose: Yeah, of course it does, but I--

Carma Hinton: --got to begin with. Right.

Charlie Rose: Well, they were heroic to most of us.

Carma Hinton: Oh, yes. They're still heroic in our film. However, the heroism is also accompanied by
many other aspects of inviting of the inability, while some of the students were protesting the
government's lack of tolerance, showed intolerance in their own ranks of differences of opinion, the
protesting against the government's lack of any democratic procedures, while failing to practice
much of any kind of democratic procedures within their own ranks, and so on. And these are, I think,
only human. They're in no way take away the heroism or the idealism, but it's a fuller picture. It's a
shades of gray added to a picture we felt was more or less painted in black and white in the past.

Charlie Rose: Was there anything that you wanted to do that you couldn't do? I mean, obviously,
your access to some--

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Carma Hinton: Oh--

Charlie Rose: --Chinese officials--

Carma Hinton: Oh, a lot--

Charlie Rose: --was clearly restricted, but--

Carma Hinton: Right. Well, yeah, we couldn't-- we couldn't interview any of the Chinese--

Charlie Rose: Right.

Carma Hinton: --present-day Chinese government officials. We couldn't get all the footage we
wanted. Not only could we not get footage directly from China, from the government surveillance
camera footage, we-- we had a hard time getting some footage from the Western media, not only
because of licensing-- the costs of-- money, but also from the lack of organization on their part to
search for footage. There's also policies where what was not aired at the time are not allowed to be
sold to-- to us, either, so there are interviews which we thought was important that we couldn't use,
and so on.

Charlie Rose: You've seen the film.

Li Lu: Yes, I did.

Charlie Rose: You were there.

Li Lu: Yeah.

Charlie Rose: What do you think?

Li Lu: Well, I thought it was a fine film. I mean, I was especially pleased to see another film about this
great event. I suppose this-- there should be more, really, attention given to this event, which-- which
has continued shaping the future and the changes in China now. But of course, it doesn't mean that
I-- that I agree completely with some of the--

Charlie Rose: What don't you agree with?

Li Lu: --point of view that-- well, there is an implication-- I mean, people left the screening room with-
- will have that impression that somehow there is a division among the students and there are
radicals, there are rationals. The radicals deliberately, intentionally provoked the government to the
point that they have to use force, as for-- I mean, the motivation for the students to do so is therefore
their personal glorification. And having been there, I just don't recall anybody with-- who would have
that kind of a feelings with events of that serious-- that serious nature. It doesn't mean that people
don't have different views at the time, but I really doubt there is anybody that I knew at the time who
really deliberately tried to use people's life as a hostage to bargain with the Chinese government for
their own personal glorification. This is just too much. I mean, we're just a little bit over 20s and most
of us really motivated by the ideal-- idealism, by the longings for a different life, for different future.
And most of us, I have to say, really put our lives at risk to do what we did. And if the movement is--
is only-- the political movement is all about tactics, it would never have reached that many people.
There were 20 million people involved in 150 different cities. It would never move that many people,
indeed, in the whole world. It spread all over to Europe and the Soviet Union afterwards. So I think
the movement, by and large, is a moral movement, is a spiritual movement. It is really beyond politics.

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Carma Hinton: Well, I tend to disagree with--

Charlie Rose: I'll come back to you Nick, in just a second. (crosstalk) I know you have some ideas here,
but I'm going to let--

Carma Hinton: Right. I would argue that it is-- it is both a spiritual movement, as well as a political
movement. I wouldn't say it's only one and not the other. That's why I feel our film is expanding the
understanding of the movement because it is not just one-dimensional. It is not just the idealism.
There was a lot going on. And so while I don't know if you got the impression from the film that-- that
the film doesn't actually say, that the students had a strategy well-planned, well-orchestrated to
provoke the government. That was not what the film said. However, there's plenty of sentiment at
the time, not only expressed on camera, but as well as expressed at the time by other reporting, that
people wanted to see bloodshed, that-- that-- ''Let's have a hunger strike'' and if some bloodshed
was caused by that, that's good for China. There's no lacking of that kind of statement, which means
that I don't see the student movement as a monolithic whole. Neither do I see the government as a
monolithic whole. And by trying to show the various dimensions of the movement and by humanizing
it, in the sense where there are human weakness and human failings, I feel that the film is trying to
distinguish this movement and an approach to the history of this movement from a communist
version of history, which always is glorifying oneself, not looking critically at one's own goals and
one's own motivation and say nothing but, you know, ''As far as my own history, I'm glorious, correct
and great.''

Charlie Rose: Before you come back, let me get Nick in. What-- so you've seen it. Amb.

Nicholas Platt: Yeah. This-- this film has the ring of truth. I mean, I-- I spent a lifetime trying to figure
out what was going on in China. I wasn't--

Charlie Rose: Yeah. Amb.

Nicholas Platt: --in China, nor was I in America at the time that it happened. I happened to be
ambassador to the Philippines at the time. And I've always been really anxious to find out what--
what was happening at the time and this film takes you through, step by step, and it lets the various
characters speak for themselves. And it does impart a sense of confusion both on the government's
part and on the students' part, which is very, very real. And often, in these big, historical situations,
where you have confrontations that-- in which people are very emotional and the confusion leads to
tragedy and that, of course, is what happens. But I think, from the point of view of someone who's
trying to figure out what happened, to see this film is to really add to your knowledge. People come
out not as black-and-white figures, but as complicated figures. Some of the students are very
emotional. Some of the government figures are very inept. They are making efforts to deal with each
other, but they never quite meet.

Charlie Rose: It is not-- let me just come back to your point, though, because it is an interesting point,
regardless of any movement. I mean, you can go to Gandhi. You can go to Martin-- Dr. Martin Luther
King's Civil Rights-led movement. Politics, strategy, tactics, gamesmanship were all part of it, without
detracting from the nobility of the cause or the idealism of the participants.

Lu Li: Sure. But there's only an extent to which that strategy can go. To say there is politics and
disagreement among the student leadership at that time would be a true and an accurate statement.
But to say that the students deliberately try to provoke the government to a point they open fire and
are somehow partially responsible for the massacre I think has crossed the line. And that's what I feel
with regard to the film's treatment, particularly to Chai Ling. It took something out of context and it

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paint her in a picture as if she was trying to put the people on Tiananmen Square and let them die
and she will run away. People would have come out with that impression, which is completely--
(crosstalk)

Charlie Rose: Is that the impression you think they should have about Chai Ling?

Carma Hinton: I don't think so. I don't think the film gives that at all. The film doesn't narrate it in that
way. The film took long, long stretches of her interview, given on May 28th, talking about her own
participation, the history of her own participation and making statements about-- at a state of total
exhaustion and total sort of exasperation and-- and somewhat of a sense of despair at the situation,
made statements that rang very true and corroborated by other statements I've heard and found in
written documents, as well as in your-- you people's own descriptions that's published, you know,
from your 1991 conference in-- in Paris. So I think we gave long stretches. We took very-- because
some of her statements were-- were rather shocking to people who are unfamiliar with the situation,
that we took great care to give her long, long, long takes. We probably edited other people way down
into you know, two or three sentences, maybe, to express their ideas. With her we try to give her
long stretches of-- of continuous talk so as not to take her out of context.

Charlie Rose: All right. Tell me a little bit about the reaction to this, since I raised this point. What's
been going on for you?

Carma Hinton: Well, I guess--

Charlie Rose: The Chinese government, clearly, is--

Carma Hinton: Oh, well-- well, it wasn't that clear from the beginning, when-- before the film was
finished, some parts of it, what might be in the film was reported, what might be in the film quoted
by the film footage taken at the time, let's put it that way, not the narration or the interpretation of
the film. And then we got-- even though I expected a lot of controversy because to try to tell a story
of that magnitude and that complexity, I would expect a lot of disagreements, a lot of debate. But I
didn't expect the kind of language that I read throughout primary school and high school, written by
the Communist Party, when I grew up, which would be denouncing any kind of differences of opinion
as a-- I practically was seen as part of a Chinese Communist Party plot to discredit the Democracy
Movement. And many people chose to comment and write and attack the film without having seen
it and they felt it was totally appropriate to attack it in that way, without having seen it, just from the
little bits and pieces of report about what might be there.

Charlie Rose: But here is-- let me just do another clip. This shows LI PENG addressing an emergency
meeting. Citizen protesters in Tiananmen confront Chinese soldiers, shaming them. Here it is.

Li Peng: (subtitles) We must end this situation immediately. Otherwise, the fate and future of our
People's Republic, for which numerous martyrs have shed their blood, will be in grave danger!

Narrator: Even as LI PENG spoke on the evening of May 19th, army units were moving towards the
city. The hunger strike headquarters, having heard earlier that martial law was to be declared, had
already called off the hunger strike and begun a mass sit-in. Street merchants got on their
motorcycles. Calling themselves ''the flying tigers,'' they sped to the square to report on troop
movements. Convoys were blocked by crowds of protesters and their supporters. 1st

Protester: (to soldiers in truck) (subtitles) Officers and soldiers of the People's Liberation Army, I
appeal to your conscience and courage. Be a true people's army. Do not become the tool of a small
handful! Do not end up as the shame of our nation! 2nd (subtitles) Brother soldiers, do you know?

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Do you know? Do you know anything about what we're doing? Brother soldiers, you're supposed to
be defenders of the people, defenders of students! You must not attack them! Don't you know? You
cannot do this!

Charlie Rose: Well, that's certainly one recommendation I can make to you. You should certainly see
this on PBS on June 4th at 9:00 P.M. and take a look at it for an understanding and at least a more
complete picture than you have seen. You may quarrel with it from your perspective as to certain
aspects of it, but it offers an opportunity to see something you haven't seen before. Let me come to
this last point: the legacy of those days today. What are they? Amb.

Nicholas Platt: In China, and I was just there a couple of weeks ago, people don't talk about it in the
open. Privately, you can engage in discussion and, for them, the lines are blurring, too. For them it
was all black and white and now the people who were in favor of the government crackdown think,
and they say this very privately, that the government should have had other ways of moving crowds.
They had no-- nothing between baton charges and live bullets, whereas in a lot of other Asian
countries, there are all kinds of techniques that are used to move crowds without killing people. Then
there are people on the other side of the fence who were very much pro-student who felt that if the
thing had gone on indefinitely that the country would have come apart.

Charlie Rose: Is the spirit of Tiananmen alive today?

Lu Li: Absolutely, in the sense that--

Charlie Rose: Is it a force today?

Lu Li: I think it is a force in the making and probably we're going to see that in the future. I think the
most important legacy of Tiananmen Square is you got a new generation of Chinese, generation that
are different from (unintelligible), generation that are different from any other previous generations,
who deliberately abandoned communism as ideology, warmly embrace a new spirit of independence,
free and democratic. That generation after June 4th have not given up, have not shown sign of
weakness. They continue to dominate social changes. In the future, you're going to continue to see
again and again that generation shaping the future of China. And I just have full confidence that in
hands of that generation, China will emerge into a great country.

Charlie Rose: Thank you.

Carma Hinton: Thank you.

Charlie Rose: I look forward to seeing-- (crosstalk)

Carma Hinton: Thank you.

Charlie Rose: Thank you. Thank you, Lu. We'll be right back

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Transcript of Li Lu’s Speech at John Jay Award Dinner – March 7, 2012

Thank you! Thank you, Columbia, for this enormous honor! I want to start by thanking all of
my professors who made my life at Columbia possible. Some of them are here; Ruth
Levenson, Jonathan Cole, Jack Greenberg, Lance Liebman, Meyer Feldberg, Kathryn Yatrakis,
and many others. Thank you, and thank you for being here tonight, too.
Being here tonight surrounded by my old friends from twenty years ago, really is a throw-
back in time. My good friend, Mary Daly, is here. And literally she was one of the first
Americans that I became friends with 23 years ago. When I first escaped from Tiananmen
Square, and everybody was asking me all these deep, philosophical questions like, “What’s
the democratic prospect in China.” Mary patiently waited for everyone to quiet down then
asked me: “Do you have a place to stay? Do you have any other clothes you can change into?”
And of course the answer to both questions was “No.” So basically, for my first six months in
America, I literally stayed in Mary’s living room, and she was sharing a townhouse with twelve
other individuals, with a common living room. So every night I had to patiently wait for
everyone else to go to their own room. I can still remember sitting there, wearing a white T-
shirt, waiting. And when everybody else went to their rooms, I finally was able to sleep. But I
was staring into the ceiling. Instead of sleeping, I was wondering what the future might bring.
How can I ever make a living in this strange new country without knowing anybody, without
a word of English?
Now fast forward twenty two years. That white T-shirt has turned into a white tuxedo shirt,
with a black tie and all. It was quite an unbelievable journey! If I have to account for the
biggest reason for that transformation,
If I have to name three reasons, they would be Columbia, Columbia, Columbia! It was really
at Columbia, that I found a home. And mostly I have to say it was through the core curriculum.
Through the core curriculum, for the very first time, I was able to trace the roadmap of the
founding blocks of the western civilization. For the first time, after reading a hundred or so
great classics that define our civilization, I was able to understand why people think the way
they think, why the institutions are built the way they are built, how things function here. For
the first time. I felt that this is not a strange place. Most of all, I felt that I belonged here.
What I also discovered, there is a commonality between America and China. They both define
themselves as civilization states, instead of nation states that are defined by geography. To
be an American is to really subscribe to a set of ideas and ideals, which is very similar to China.
This is really when I realized, after the core curriculum, that I am as American as many other
Americans, except everybody else came a little bit earlier than I did. All of a sudden, I was sort
of transformed from a “Stateless Alien,” which was exactly how my document classified me,
a “Stateless Alien,” to a member of society. For the first time, I find a sense of belonging and
renewed enthusiasm that I could make it here.
So, I have to say, when I heard Jim telling me that Columbia College is about to permanently
endow core curriculum, I was elated. Future generations of Columbia students must be able

126
to enjoy what we all believe is at the core of education. To be educated without an
understanding of those hundred or so great classics, I don’t know how to call them educated.
So thanks, Andy Barth-- I took your advice. I brought my seven year old Francesca and my nine
year old Julia here so they will remember clearly tonight, the best university in the best city.
Don’t you dare settle for anything lesser! And you will be able to get as well educated through
the core curriculum as all of us who went through it and understood it. And, well, their mom
is even here. When you can convince your ex-wife to fly all the way from Los Angeles, to
attend the award dinner here, I guess that I haven’t screwed up everything. So thank you very
much for being here.
Thank you all! Thank you, Columbia! Long live the Core! Long live Columbia College!

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Reflections On Reaching Fifty

April 2016

I was born in April of 1966, on the eve of the Cultural Revolution. Soon after, my parents and
grandparents all lost personal freedom simply for being intellectuals. So I spent most of my
childhood rotating between adopted families of peasants and coalminers. From that
“promising” start, looking back, I’m amazed as to the long journey that I have taken to bring
me here today in America.

I could never image that life would turn out this way. It takes countless bridges, roads, means
of transportation, and years of effort to travel this far. The countless people in my life — kind-
hearted strangers, well-wishers, mentors, partners, friends — are my bridges, roads,
transportations for getting here. Without your help, friendship, and constant encouragement,
I simply couldn’t travel this far. So on my fiftieth birthday, my heart is filled with gratitude to
all of you, all of my friends, here and elsewhere. From the bottom of my heart — thank you
thank you and thank you!!!

If I have anything to do with that journey, it is simply that I took it. Woody Allen is right, 90%
of success is to show up. At various stages in my life, I could have stopped, or took the long
rest. For some reason, my heart told me otherwise. I just kept going. Half of the time, I wasn’t
sure where I was heading. The other half I was probably taking the wrong turns. No matter.

But I was on high alert to correct mistakes along the way. I was careful not to be influenced
by emotions that I know are poisonous and counter-productive to the journey I want to take;
things like envy, resentment, hatred, jealousy, greed and self-pity. I certainly wasn’t born with
immunity to this side of human nature. In fact, my early life experiences may require me to
work even harder than others to guard against these human vulnerabilities. And when I did
fall for their prey, or when I took a wrong turn, I was fortunate to be able to correct them
quickly. Socrates was right, unexamined life is not worth living, certainly not living well. Every
once in a while, I would sit down alone to figure out where I might be wrong. Sometimes,
what is wrong today is what was right in the past. As circumstances change, so should we. In
my experience, every five to ten years or so, I had to change so much of myself that at times
it felt like almost a reinvention. I’ve been blessed with the faculties of rationality that help me
to form the habit of self-examination. And when I fail in self-examination, I’m even more
blessed to have some strong friends who can point out my blind spots. I would have been lost
in life’s various mazes if I had not gotten that help.

So through the tumbling and zig-zags, I kept going while at all time insisting on sitting in the
driver’s seat. It is my life and my journey after all.

And now that I have made it through the first half, it is time to examine again for the second
half.

According to Confucius, at fifty, one should know his purpose in life mandated by Heaven
above. In other words, what your life was meant to be. Having been very close to fatality a

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few times in my life, forgive me if I say I actually believe in Confucius’s dictate. Having done
relatively well in additions in life, I’m slowly learning the art of subtraction and focus.

I will fail in a lot of professions. For example, I won’t be good at ballet or basketball for that
matter. My temperament and experiences prepared me well for a career in investment. I was
extremely lucky to be introduced into the field by the greatest investor who ever lived when
I accidentally stepped into a lecture by Warren Buffett at Columbia nearly 25 years ago. And
it was even more magical 13 years ago when Charlie Munger became my investment partner,
mentor and life-long friend. To this day, I don’t know to what I would attribute this extreme
fortune. It is something even the wildest imagination or the best fiction could not conjure.

Now that I have compiled a record of my own for over twenty years, still enjoy the game even
better than when I started, I think I will simply continue. I’m curious to see how long I can
follow the great record set by my teachers, Warren and Charlie, that is by now well over fifty
years. Not for the size of asset under management, not for the fees, just keep a score card
the way a golfer would after each round and after a life-long career. So value investing is likely
a life-long pursuit for me.

Having lived my life so far nearly evenly divided between the US and China, I’ve come to learn
something unique about the two countries, cultures and myself. For years, I struggled to fit
my own identity into both, often with poor results. It is as if the two cultures ran in different
parts of my body — constantly fighting each other for supremacy. But I have learned
tremendously in the process. In my 40’s, the two cultures finally came to peace with one other
inside me, and I have come to identify myself as both 100% Chinese and 100% American
simultaneously. And better still 1+1 is greater than 2. Through the culture lenses of both, I
now see a few things neither Chinese nor Americans can see easily. That gives me a unique
perspective of looking at both countries, and therefore able to tell one’s story better to the
other, and then some more. Indeed, I think 1+1=11 in this case. Therefore, I feel it is both a
duty and a pleasure to do so for the country and people that I love most. So this will be
another thing I will focus on the second half of my life.

I have three lovely children. They are beautiful, talented and kind-hearted. I’m most proud of
them. I love them so much that I will never want to burden them with a large amount of
inherited wealth. Instead, I’d love to have my girls join Eva and me in giving responsibly to
make the world a better place. In particularly, we want to focus on things I have some
knowledge of and care deeply about — to make US and China understand each other better
and to make quality education more available to deserved young people.

Lastly, reaching 50 probably makes me closer to the end than to the beginning. Regarding
age, my favorite quote comes from Norman Lear. At 94 he is still active in so many different
things, collecting fans who are in their 80’s, 60’s and all the way down to the 20’s. I once ask
him how old does he think of himself. Without missing a beat, he said, “I’m always the same
age as the people I talk to.” Now, that is a cool answer! Ever since, I’ve been paying close
attention to who I am talking to ;-) Now that I’ve officially crossed the half time line, I really
need to make more young friends as my new teachers so that I can stay fresh.

So my friends, may we all grow wiser with age and younger at heart always.

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Thinking about our times
March 2017
In the past week or two, a series of big events have taken place quickly. On the surface, these
events seem to be random. But when they are linked together, I have to stop and stop to
think about the era we are in.
Feb 22, the National Aeronautics and Space Administration (NASA) discovered a new solar
system this solar system is only 40 light years away from us, and there are 7 terrestrial planets,
so there may be life on these planets. A few days after the Feb 27, Andy Herron Musk (Elon
Musk) announced that, in 2018 SpaceX will carry two paying customers of the Dragon II
spacecraft sent to the moon orbit. This will be the first time that a manned spacecraft will
return to the moon after the end of the Apollo program 1972.
A few days after the March 1", the World Meteorological Organization (WMO) confirmed that
Antarctic temperatures hit a new record high: 63.5 degrees Fahrenheit (17.5 degrees C)!
Ninety percent of the fresh water on Earth exists in the Arctic as a glacier, and if these glaciers
melt, it could raise the sea level by 200 feet. On the same day, scientists discovered miniature
fossils in ancient Canadian rocks. This discovery has pushed the origins of life on Earth to a
much longer 3.77 billion to 4.28 billion years ago, that is to say, the Earth did not take long
after it was formed 4.5 billion years ago, and it has produced life under the conditions of hell!
We go back to the earth, March 3" China began the annual day two sessions. Period, the
Chinese government promised again to in 2017 so that in 1000 million people out of poverty,
and in 2020 the total elimination of poverty. If this goal is achieved, it will be the first initiative
in China's 5,000-year history- knowing that nearly one-fifth of the Earth's population lives on
this land in China. On the same day, the National Academy of Medical Sciences launched a
major challenge to human aging and longevity, with a $25 million bonus to catalyze scientific
research that benefits human health and longevity.
As if it were a mere arrangement, let me better understand these events. Last Tuesday I was
invited to a dinner party hosted by the Berggruen Institute. I was with Yuval Harari discussing
his new work, A Brief History of the Future. On Thursday night, my conversation with an old
friend Juan Enriquez at dinner gave me a lot of inspiration. Juan is one of the most important
thinkers of our time, with "Self-Evolution: How Unnatural Choices Affect Life on Earth." Then,
on Friday night, I was honoured to attend the launching dinner of the National Academy of
Medical Sciences "Human Longevity Challenge" Project. The dinner was held at the 95 -year-
old Hollywood legend Norman Lear House. (And is there a more suitable venue for this?)
Other guests present include entrepreneur leaders, venture capitalists, Nobel laureates,
musicians, thinkers and artists from across the country. All these encounters are helping me
to think better about understanding our time.
Since 1900, the global average life expectancy has more than doubled to around 70 years (the
average life expectancy in developed countries is about 10 years longer). In other words, over
the course of more than a hundred years, the lifespan of human beings has grown more than
in the past 100,000 years. This is an amazing achievement of modern civilization! Today,

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however, in the post-industrial era, about 9 % of the world's population still lives below the
poverty line. Most people live in developing countries and cannot fully enjoy the well-being
of modern life. This situation does not exist because human beings as a whole do not produce
enough food to feed everyone, nor because the wealth created by human beings is not
enough for everyone to share. The reason is uneven distribution of wealth.
In the past 40 years, China's rapid economic development has lifted hundreds of millions of
people out of the poverty line. Equally important, China's practice has paved the way for a
new economic development for other countries, especially African countries and India.
However, rapid industrialization around the world has also led to unintended consequences,
one of which is that it may warm the planet to a level that is no longer suitable for human
survival. It has long been believed that the chief culprit of global warming is carbon dioxide
emissions. However, recent research suggests that biogas (methane) may be 10 times more
powerful than carbon dioxide in blocking the sun's light in the ozone layer. Most of the earth's
methane is stored in the snow and ice of Siberia in a frozen biogas state. The continued
warming of the Earth may eventually lead to the release of methane into the ozone layer,
further accelerating global warming. According to the latest estimates of some of the
industry's leading climate scientists, the rapid rise in sea level is likely to be something that
has been going on for decades, not centuries that were estimated before.
In the United States, the development of artificial intelligence and bio-engineering has made
humanity a new future world no longer an illusion: in this future world, humans are no longer
willing to give the first thing of "evolution" to random selection. Instead, we intend to evolve
ourselves into a higher intelligent creature, extending our lives to immortality, and then
deploying a body that can adapt to different planets and even interstellar life. At the launch
dinner of the "National Longevity Challenge" project mentioned by the National Academy of
Medical Sciences, a well-known entrepreneur declared: "Death is just a choice!" Sounds like
science fiction? Actually not. Given the rapid development of artificial intelligence and
bioengineering technology, we will soon reach and surpass the "singularity." Some of us will
split a new species from the Homo sapiens, and I am here to name it "XYZ Man" (or Human
Deus named by Professor Harari)- this world is no longer unimaginable. But is this opportunity
for evolution fair to all human beings? When the Earth is no longer suitable for human
survival, and interstellar travel is also possible, will we have enough time for the physical flesh
to fly to other planets? Will "XYZ people" be kind to those sapiens who are less advanced than
theirs?
Throughout history, we can't help but worry about our hearts. Homo sapiens has never been
kind to the Neanderthals (Neanderthal), Homo erectus (Homo Erectus), or any other species.
Since the emergence of Homo sapiens, most other species have been unsafe, except those
cats and dogs that have been chosen by humans to evolve together.
The past records of Homo sapiens treating each other are equally horrifying. In the long
history of mankind, we have left the stigma of exploitation, slavery, murder, slaughter, and
even ethnic cleansing. All "crimes against humanity" are actually committed by human beings
themselves. Undoubtedly, the situation has improved, especially after the Second World War.

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But our progress is far from enough to lift everyone out of poverty or to enjoy the fruits of
modern life for all. Professor Harari believes that Sapiens has developed a unique ability to
create "story" in response to various challenges. The so-called "story" is the concept that does
not exist in real life, but will strongly influence our thinking. In my opinion, at least four
important "story" have shaped our civilization so far: the government (which includes the
concept of nationality and ethnicity), religion (including culture, belief), science and
technology, and free market economy. The first two are the products of agricultural
civilization, and the latter two are produced after the beginning of modernization.
Can these four "stories" help to meet the challenges we face in today's world?
Indeed, effective global governments are very useful for eradicating poverty, tackling climate
change, promoting economic development, and the many new challenges that new
technologies bring to humanity. To form a global government, we must learn from the existing
national governments. Among them, the experience of China and the United States is
particularly valuable. For most of history, China's population has accounted for about one-
fifth of the world's population. In the practice of more than 2,000 years, the Chinese
government has accumulated countless governance experiences and lessons for a large
number of people. The United States represents another of humanity's most successful
practices: how to bring people from different cultures, religions, ethnic backgrounds and
history into the same form of government.
In terms of culture, today's Europeans are trying to live with new concepts ("story"). These
concepts don't focus on how to achieve more and get more, but focus on how to be happy
with what we have achieved and to be more sympathetic to the suffering of others. If fulfilling
your desires is "success", then what is the desire for what you have achieved, is it not
“happiness"? Now that we are in an era of affluent economy, we are already very different
from the shortage economy in the past agricultural civilization era, and we need a new
identity. These practices led by Europeans are crucial to how to create a common Identity for
all human beings.
The free market economy is the greatest invention of prosperity and progress in human
history. From Europe to the Americas, to Asia and Africa, wherever a free market economy
system is adopted, human potential will be released in an unprecedented way. I firmly believe
that many years later, this will still be the most important engine for eradicating poverty and
achieving human co-prosperity.
Combined with the free market economy system, modern science and technology have
created the affluent society we live in today, and have achieved a great leap from agricultural
civilization characterized by a shortage of economy.
Science and technology have created countless miracles in the past, and today they are still
moving forward with acceleration. Take the processing chip in the I-phone we use today as
an example. Only 30 years ago, it was necessary to manufacture chips with the same
processing power, which cost S 75 million! Today, Moore's Law is still valid and will continue
for the foreseeable future. It provides unlimited possibilities for the development of artificial
intelligence and even for the creation of a new silicon-based life. However, we know very little

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about our ancient carbon-based life. We only know that it is the result of nearly 4 billion years
of evolution. All new discoveries about the human body and brain only make us more fearful
of the power of natural selection. In comparison, our history of successfully manipulating
silicon wafers has only been 40 years. Are we really more confident about the future evolved
in a self-selected way? We must know that our physical body today is the result of nature's 4
billion years of uninterrupted patching
Technology-induced anxiety has never been new. But in the past, technological advances have
never threatened humans' position at the top of the food chain. Instead, technology has been
helping people stabilize this position. Throughout history, these technological advances have
always benefited a few people from the beginning, but will eventually benefit everyone.
However, the emergence of "XYZ people" will be completely different, especially when these
technologies are in the hands of a few people who are unaware of the degree of change. The
real danger always exists in unknown unknowns.
Today, the speed of technological development seems to have far exceeded the ability of
humans to cope. Today, technology and the market economy have become globalized, and
politics has not yet been globalized. Therefore, there has not been any power that can truly
regulate human "self-creation". It seems that the only thing we can do is to look forward to
the self… a formation of an all-human alliance that may come from accelerated climate
change, nuclear terrorism, or dangerous new species that we have created ourselves. The
alliance formed at this time may be timely, or it may be too late.
Yesterday, while I was caught in these meditations, our family had a small milestone event:
My 13 month-old daughter Bella learned to walk by herself! When I was not happy to cheer,
Bella's mother responded by setting up a high fence around the pool that day. Yes, in this era
of hope and crisis coexistence, anxiety and surprise, what reason do we have to buy an
insurance?
Broadly speaking, the United States has voluntarily fulfilled the role of "world police" since
the Second World War and has become the main insurer of world peace. As the map of the
future world slowly unfolds, today we especially need such a peaceful environment.
Of course, there is no insurance to deal with unknown unknowns. We know little about the
future of mankind, just as I am about Bella's future. But even if humans will die in the distant
future, we still have the right to sigh "What a wonderful journey!"
At the same time, we can safely predict one thing, that is, the 21st century is not destined to
be dull, and not for the next few centuries

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2014 Book Review - Science of happily ever after happiness

December 2014

In the United States, 50% of all marriages end in divorce, 14% involve a "barely-there"
relationship, and only 33% are happy. There isn't specific data on marital happiness in China, but
there is evidence that the divorce rate is quickly rising. In modern society, marriage is supposedly
mostly based on love, so why is it so difficult to be happy? This seemingly contradictory
phenomenon makes me wonder: Can science help explain why? And more importantly, is there
a scientific way to help people find a partner who can bring about a happy marriage?

The core of the book "The Science of Happily Ever After" is as revealed in the title: Using science
to create a secret recipe for a happy marriage. In 2014, there were a lot of good books in the
English world, but I chose this specific book for the annual book review because I think that finding
the right partner is the most important factor to a happy life. An unfortunate marriage can almost
offset all other successes. However, when it comes to marriage, although all cultures have
accumulated enough ancient wisdom, modern people are often in a state of confusion, and there
are very few people who have mastered the secrets of marriage and wisdom. Most of us, including
myself, have experienced marriage crises or have failed marriages. People are eager to have the
wisdom to run a marriage, but they have never really found a scientific and reliable method.
Recent developments in physiology, psychology, and biochemistry have provided many new
perspectives and tools for people to understand this issue. This book not only uses a scientific
approach (the first I've seen) that attempts to explain why most modern marriages are unhappy,
but also provides concrete steps to a happy marriage.

The book is divided into three parts. The first part explains why most modern marriages are not
happy from the perspective of human evolution and psychology. The second part focuses on what
kind of partner is most likely to produce a stable happy marriage. In reality, according to the
statistical law, when people choose a partner, they can only make decisions based on three
conditions. How to choose the three most predictable conditions for a happy and stable marriage
is the core of this book. The last part of the book provides a practical guide for readers to achieve
a happy marriage.

The first part of the book explains why there are few happy marriages, and unfortunate marriages
are mostly. Throughout human history, the family as an organizational form has existed for at
least 5,000 years, with the core goal of a traditional family being to have children and continue
the family line. People need to see the birth of the third generation with their own eyes, only to
feel the completion of the succession of the ancestors, which requires people to live to about 40
years old. Until the modern industrial revolution, the basic life expectancy of human beings was
less than 40 years old. So before the industrial revolution, people could feel the possibility that
the succession of ancestors was basically at the critical value, so the basis of marriage was very
reliable. After the Industrial Revolution, life expectancy has increased dramatically, almost
doubling from less than 40 to over 77. The foundation of traditional marriage has also undergone
fundamental changes, because almost everyone can live to the age of being able to hold

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grandchildren. The survival rate of babies is also now over 99%. Beginning in the middle of the
19th century, with the romantic era in Europe as the boundary, the purpose of marriage in the
developed countries has changed radically. Marriage based on romantic love has become the
main purpose of modern marriage, and it is no longer the succession of generations.

At this time, new problems started arising. Since modem marriages are based on love, most of
the couples are married in the situation of loving each other before marriage, and the final result
is counterproductive. Why love? Can a modem marriage based on love not provide lasting
happiness?
Clinical studies have shown that people's mutual love is reduced by 3% per year after marriage,
and the sexual attraction between husband and wife decreases at an annual rate of 8%. This
decline is progressive over the years, leading to t degrees of mutual and so-called "'seven-year
itch" - By the seventh year, sexual attraction between husband and wife have dropped nearly
50%. While some marriages can survive without the basics of mutual and sexual attraction, many
fail. These data are the result of clinical research, and to understand why there is such a result, it
is necessary to trace back to the conditions that people usually refer to when choosing a marriage
partner. From a statistical point of view, although men and women can have countless
imaginations about future partners, in fact, generally no more than three conditions can be
chosen. Usually people value aspects such as appearance, ability, personality, etc., with countless
kinds of smaller conditions under each major item. However, despite these innumerable
conditions, people can in fact only choose three. This is because any condition is distributed from
0 to 100% in the crowd. If you expect the three conditions of the partner to be average, that is, in
the 50" percentile of the population, then 50%50% 50%% = 12.5, meaning of 100 people, only 13
meet your conditions. If you want your partner to be in the top 30% of each condition, then only
3/100 are eligible. If you want him/her to be in the top 20%, then only 1/100 is eligible. The higher
your expectations, the less eligible partners you have. The law of statistics shows that at the end
of the day, when we choose a partner, we can really only refer to three aspects, making which
three you choose very important.

What kinds of conditions do people usually choose? Generally speaking, when people fall in love,
they will have a special feeling, both physically and psychologically. From the subconscious point
of view, when most people create "feelings" toward another person, they are usually looking at
appearance and wealth. At least two conditions are related to these two aspects. The Chinese are
only able to replace the "financial" with talent, and talent is the resource and ability. The
appearance is not only a requirement for women, but also for men. That is to say, when almost
everyone starts to "feel something" about another person, it is usually because of appearance
and wealth, and this is actually because people are formed in the long process of evolution.

First of all, what does "facial beauty" really mean? Generally speaking, facial beauty is dependent
on three characteristics, especially the beauty of sexual attraction: 1) Symmetry. How
symmetrical are the left and right sides of the face? 2) What size are the main sensory organs on
the face? 3) Are there prominent facial features like a man's strong jawline, a woman's sexy lips,
etc the first one is symmetry the left and right sides of the face are very symmetrical; the second
is the size of the main organs on the face, the five senses Correction; the third is that there are
some more prominent features on the face, such as a man's strong chin, women's sexy lips and

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so on. People use these characteristics as beauty and are related to the evolutionary process of
human beings. The symmetry of the face usually indicates that at least people do not have a large
disease; the facial features are moderately sized and average, showing no genetic disease and
strong immune function. Especially the special features of the face, often caused by the release
of large amounts of hormones during puberty, and today's scientific knowledge tells us that the
large amount of hormones produced during puberty actually hurts the human immune system,
and if Surviving in this situation proves that this person's immune system is stronger than ordinary
people. Therefore, the special characteristics that are formed during the adolescence due to the
massive release of hormones usually become the characteristics of beauty: for example, the
broad shoulders of the boys, the inverted triangle, the prominent chest of the female, the
proportion of the waist and the hip 0.7, etc. Strong survivability. The amount of resources is more
obvious. When the average life expectancy is 40 years old and the whole fertility environment is
very poor, if you want to live to be able to pass on to the family and witness the birth of
grandchildren, of course, you hope that the partner you find has the most resources to pass on. .
Therefore, the so-called beauty is the characteristic that the body can be passed down from
generation to generation, and the wealth and wealth are the resources that can guarantee
survival and succession. Not only that, but our subconscious also has a tendency to raise the
"useful" characteristics to a moral height. Therefore, we also think that "beauty" is "good", and
"cai" and "finance" are also common.

It seems that our sense of love is not the result of rational judgment in a big sense, but the
conditioned reflex that human physiology and psychology formed during the long evolutionary
process. This conditioned reflex and the doctor tapped on the knee. There is not much difference
in the reaction of the calf. The inseparability between men and women is in fact a basic
manifestation of the reaction of physical and psychological conditions.

Before the industrial society, this kind of conditioning was a reliable guarantee for inheritance,
survival and birth, but is it still the case in modern society? Obviously, the appearance is actually
useless, because now the average life expectancy of people is 77 years old, and the survival rate
of infants is more than 99%, so the appearance of the appearance has almost no effect on
whether it can be passed down. Does wealth have an impact on marriage? Scientific research
shows that wealth below the poverty line does affect marriage happiness, above the poverty line,
the increase in wealth does increase the happiness of marriage, but it stops after increasing to a
certain extent. In the poverty line American family of four in 2012 was 23,000 dollars, and clinical
studies have found a family of four in revenue to 75,000 after the new increase wealth does not
produce virtually no impact on marital happiness and personal well-being. That is to say, for most
families, when wealth reaches a certain level and reaches a well-off society, it will no longer have
a positive impact on marriage. But because our body has undergone a long process of evolution,
and psychology is also subject to the influence of conditioned reflexes formed during the
evolution process, so although modem people advertised the romantic love as the basis of
marriage, when we were led by love, we entered the marriage. At the time, it is often found that
our decision is no different from the ancients. Most people still find some people who make their
own hearts and minds in the crowd because of their appearance and wealth. Then they develop
further in this small group of people. Once they have started to communicate with each other,
they have not yet had time to think rationally. In the stage of obsession, I have already invested

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too much feelings, fell into the feeling of love, and decided to get married. From this point of
view, among the three conditions that people can choose, most people waste at least two of them
(face and wealth) and do not use them to choose conditions that can make the marriage happy.

In this sense, we should not be surprised that there are so few happy marriages. We should be
glad that at least one third of the people can produce a relatively happy marriage in the case of
three conditions and two wastes.

Since appearance and wealth are not necessary conditions for a happy marriage, the next
question is how can we use the three conditions scientifically to find a partner who can bring a
lasting happy marriage? In appearance, ability, and personality, clinical studies have found that
certain characteristics of personality can be more crucial to the happiness of future marriages.
Character (personal trait) here refers to the people of those features is not easy to change, people
in adulthood character is actually very stable, a lot oriented almost unchanged: such as
personality, with people mode, processing difficulties contradictory attitudes Etc. And some of
these aspects have the greatest impact on the happiness of married life in the future. Here author
of marriage based on clinical research, pointed out that the three largest association of aspects:
one refers to the person's personality (Personality trait) is a person with others to establish
emotional attachment type (attachment style), there is a lover The main mode of behaviour in
the interaction, some characteristics (relationship mark) expressed during the interaction.

First look at the personality characteristics. A large part of personality stems from heredity, and
part of it comes from the environment in which children and adolescents grow up, and the
acquired experiences.

Once adulthood, these characteristics are not easy to change, so the so-called Jiangshan easy to
change the nature is difficult to move. The book is generally more popular authors used the
method to divide the five basic personality character: open (Openness), extraversion
(extroversion)/ introversion (Introversion). Responsible Heart (conscientiousness)/
agreeableness (agreeableness) there is a degree of nervousness (neuroticism), (such as
nervousness, excitement, sentimentality, and emotional excitement). Under the five
characteristics, there are about 35 categories of personality, but in these personality traits, clinical
studies have shown that the degree of neuroticism has the greatest correlation with marital well-
being the degree of neuroticism directly affects the degree of stability of relationships between
lovers. Neurotic responses to the emotional fluctuations of a person. All people have neuroticism,
but to varying degrees. Studies have shown that highly neurotic partners are more likely to
divorce and are often directly linked to unfortunate marriages. Another personality is the s0-
called "hunting type personality" novelty-seeking, openness, weak sense of responsibility, such
people are more likely to be hunted, attracted by new things, poor self-control ability, easy to
addicted to alcohol and drugs, and easy to be in love Derailed, because often bored and impatient
in marriage.

So what kind of personality is most helpful for the happiness of marriage? Clinical studies have
shown that long-term stability of marriage is the most reliable predictor index of the degree of
positive reaction between lovers, which in turn directly from the agreeableness (character of

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agreeableness). That is to say, in the personality characteristics, people who are not too curious,
relatıvely easy-gong, and less nervous are prone to have a stable marriage.

The second aspect is the way in which people link emotional bonds with others-
Attachment. People are very special animals. Because their minds are particularly large, they must
give birth before they are fully mature, otherwise they will not be able to leave their mother's
body. In this way, the New-born baby has no self-care ability, and it takes a long time to be able
to grow and mature and survive after high-intensity care. A baby who has no ability to choose can
only respond passively to the adult who cares for him. Therefore, the caregivers' care methods
and the way they connect with the baby will have an important impact on their lives.

In general, the type of attachment in infancy formation there are three modes: one is secure
attachment patterns (secure attachment), forming a very safe mode of care between the infant
and his care givers. The other is the avoidance association style, because the caregiver often
ignores the baby and cannot rely on it, so the baby is forced to form a very independent type of
attachment, and in order to protect himself, choose to avoid establishing a very close relationship
with others. This evasive style in Adulthood can also be a way to build emotional connections with
others. The third way is anxious attachment style, which is also an unsafe attachment type. The
baby feels anxious to the caregiver, so the relationship with the caregiver is near and far, and the
emotional connection with other people after adulthood is also the same. Accompanied by a high
neuroticism. Among the three emotional bond-connected people, it is easier for a safe person to
establish a stable relationship after adulthood, and the relationship is less dramatic. With a safe
connection, it is easier to communicate with your partner's feelings, less misunderstanding, less
fighting, easier communication, and marriage is of course more stable. Interestingly, people
generally choose people with the same style as their partners. For example, anxiety type and
anxiety type together, avoidance type and avoidance type may be because it is easier to
understand each other. When the baby initially establishes an emotional bond with the mother
or the caregiver, the mind is still immature, does not have independent thinking ability, and has
no ability to test whether the attachment mode is rational. Therefore, the attachment mode is
based on the way adults treat themselves, based on survival. The passive response to demand. It
is often difficult to voluntarily carry out a deeper self-test after adulthood, so these behaviours
are like conditioned reflexes, which are preserved as basic behavioural methods, which in turn
affects the way people interact with each other Despite this, it is worth mentioning that the clinic
also shows that about 11% of the population can get rid of childhood styles in adulthood, such as
from childhood non-safety to adulthood safety.

We discussed personality traits and emotional connections, but in fact, the most direct
way to predict the behaviour of a partner is the behavioural pattern exhibited by lovers during
the current interaction. Everyone is not perfect, so it is not easy to make a complete and correct
judgment. It is necessary to distinguish which are innocuous sections and which are the more
serious issues that really affect the stability of long-term marriage. In addition, lovers are usually
in a phase of mutual obsession when they are in love, so it is difficult to make a complete rational
judgment. Of course, you can try to be objective and rational. In addition, it is a good way to help
your relatives and friends to observe as a bystander.

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 Generally speaking, the events experienced by two people's feelings are always positive
and negative. Assuming that there is a book of feelings, then a good thing is done between lovers,
and one point is deducted when doing a bad thing. Clinical studies have shown that good feelings
need to maintain a 5:1 ratio of positive feelings. The reason why we need such a high positive
ratio is of course related to the expectations of two people. When two people walk together, the
expectation is that life is getting better. If the emotional bank is getting bigger and bigger, the
marriage will be more and more happy, but as long as the state is maintained at 5:1, the average
marriage can be maintained. In real life, it is not easy to maintain a 5:1 state, because the love of
the relationship is reduced by 3%% at the beginning of the relationship, the attractiveness of sex
is reduced by 8% every year, and the details that are incompatible With each other in life are
constantly Accumulation, long-term emotional bank from the initial large surplus, gradually
became a negative asset, and finally declared bankruptcy.

When two people get along with each other before marriage, the most important factor in
determining the future happiness is how the partner reacts when something goes wrong. If a
partner likes to complain, condemn the other party, like to go online, raise the small friction to
the character problem, and hope that the other party makes a change for himself, so that the
negative accumulation will rise at a high speed, because anyone wants to change himself. It is not
an easy task. Once the process of rising conflicts between partners to the way psychologists speak
of "ultimatum - give up" (Demand- Withdrawal) of this model - namely, the ultimatum to ask to
change their way, the other way completely uncooperative When the protest came, the
relationship between the two people was very dangerous. It is not practical to expect each other
to change for themselves, and it will not bring positive accumulation to the relationship, and the
use of overnight means usually leads to the other party completely giving up.

So what kind of ways to get along with each other can make your partner happy forever?
The behaviour that can accumulate emotional bank scores most is called capitalization, which
means that when one party shares joy, the other party's reaction is quite positive. Everyone needs
to affirm their experience. If this kind of affirmation comes from a loving partner, and both sides
have enough confidence to be sure that the reaction of the other party is true, the two sides will
form a very positive virtuous circle. Studies have shown that usually about 70%% of the life
experience between husband and wife, that is to say, almost every day has the opportunity to
deposit into the emotional bank through the accumulation of positive response, over time, there
will be a large surplus in the emotional bank. A Virtuous circle of positive feedback is actually the
best prediction for a stable marriage.

In summary, since the industrial society, the purpose of marriage has undergone
fundamental changes from the earliest ancestor to the romantic marriage based on love. But
people are like many other animals. Some organs have lost their functions, but they have been
preserved during the long evolutionary process, such as wisdom teeth. Therefore, the conditional
reflection of people's appearance and wealth is actually the same as the psychological wisdom
tooth. When people choose their spouses, there are only three conditions to choose from. In fact,
most people continue to waste two of them in three conditions (face and wealth). However,
studies show that in appearance, ability, character, personality the characteristics are most
influential and predictive to the old man, which is the root cause of the vast majority of modem

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marriages are not happy. Although all people are passionate when they are married, they hope
to grow old. Based on this conclusion, the book lists three choices that help to conclude a stable
and happy marriage. On the one hand, personality, on the one hand, emotional connection, and
on the other, the behavioural pattern in the current relationship. Choosing easy-going, pleasant,
and singular partners with low neuroticism, they establish a relationship with people in a safe
mode, and it is most likely to promote a stable and happy marriage. As far as the mode of getting
along, in the current relationship, do not complain about each other, encounter more things from
their own reasons, do not have the idea of changing the character of the other party, do not ask
for overnight requirements, and partners who actively participate in solving problems are more
likely to get happiness. In addition, the most important thing in getting a happy marriage is that
when the partner shares a pleasant experience, the other party can respond with the same
enthusiasm and form a virtuous circle.

In the process of reading this book, I keep thinking of Tolstoy's famous saying: happy
marriages are similar, and unfortunate marriages have their own misfortunes.

According to the prescriptions prescribed in this book, using scientific methods can
maximize the probability of obtaining a stable and happy marriage, but the partners who meet
these conditions in the population are, after all, a minority. Does this mean that the rest of the
people are not likely to get a happy marriage? I have not answered this question in the book. I
personally have some thoughts on this aspect.

First of all, understanding science has great advantages over not understanding science.
When we understand more and more people's psychology, we can actually change our own
nature tor some purposes. Although the nature is difficult to move, it does not mean that it is
completely impossible. Many people can actually change. For example, the way to establish
emotional bonds with others shows that 11% of people can change from insecurity to safety in
adulthood, and many aspects of personality can be changed. Someone once asked how a wise
man I respect can find a good companion. The wise man's answer is "Let yourself be worthy of
him or her, because it's obvious that a good partner is not a fool."

Secondly, in many ways, people can continue to improve, and the real happy couple in the
crowd may always be a minority, but I believe that many people can use the scientific knowledge
in the book to make marriages happier than the original. The main purpose of marriage is to hope
that 1+1 is not less than 1, and those unfortunate marriages are generally 1+1 less than I, and
everyone returns to I through divorce. If 1+1 is greater than 2 in marriage, the possibility is
relatively small, but the possibility of being greater than 1 is still relatively large. After all, people
are social animals, and it is better to get along with others than to be alone. Marriage can achieve
1+l greater than I is the basic requirement, avoid 1+1 less than 1, many marriages can be done. If
you encounter a partner who can make 1+1 greater than 2, thank God and cherish it.

Maslow (Maslow) on five levels of human needs in the theory of love as the second high-
level pursuit of energy released in love does make people into higher energy level (elevated state
of Mind), at this level Religion, art, strong interest, love, etc. have similar effects on people. Being

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in a high-energy state is beneficial to many aspects of human life. Not everyone is an artist, but
everyone knows the beauty

Of love. However, the damage caused by the breakdown of love and marriage is equally
obvious. People's pursuit of love is eternal. No matter how many people's personality
orientations, no matter how many failed experiences, the desire and pursuit of love is always one
of the themes of human history. The framework provided by this book will be true to all people.
Helped.

Of course, this book is a narrative style, or a logical connection between chapters, but it still
leaves a lot of regrets, but it is still a ground breaking work in this field, which will help most
people, I also hope Can be translated quickly in the Chinese world, so recommend this book as
my annual book review.

Finally, I hope that you are still looking for a happy single, divorced, or hope to improve your
happiness is marriage, friends will happier in 2015!

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2017 Book Review and Insights
December 2017
In 2017, a number of good books were published in both Chinese and English. Two books were
selected here as my annual book review recommendations. A) The first is a Robert Wright's "Why
Buddhism is true" (Why Buddhism IS True), subtitled "offerings on repair and awareness of
science and philosophy” (at The Science and Philosophy of Meditation and Enlightenment).
Robert Wright is a professor of evolutionary psychology at Princeton University. T have read
Robert Wright's other books before, the most famous of which is The Moral Animal, in addition
to The Evolution of God and Nonzero. He is an author I like very much. In my opinion, he is still a
philosopher, more specifically a moral philosopher. His book The Moral Animal has a great
influence on me, and this is one of the reasons why I attach great importance to his book "Why
Buddhism is Real" this year.
Let me introduce you to the origin of this book. The author is a professor of evolutionary
psychology, and evolutionary psychology studies how natural selection designs the human brain.
Our brains are the result of hundreds of millions of years of natural selection, and natural
selection of this design often mislead (mislead), even slavery (enslave) us, let us see the world
and the self, limited in shackles - and This is also a source of many human suffering. But most of
us can't do anything about it, because the choice and evolution of nature is not our own choice
of human beings. The innate "animality" profoundly affects human beings. Even if you understand
these issues, you can't immediately bring us a solution.
In 2003, Robert Wright for the first time took part in the silence of deep mindfulness repair trip
(Silent Mindful Meditation Retreat). This practice of meditation has become increasingly popular
in the United States and the Western world in the past two or three decades. This trip opened
the systematic study of the Buddhist scriptures and the practice and practice of meditation in the
following decade, and in the process with modem psychology, evolutionary psychology, and
modernity. The brain sciences confirm each other. This book is the result of the author's more
than ten years of research and practice. What does the title of this book mean? The statement
that "Buddha is true" does not include the religious content of Buddhism. It refers to the most
basic insight and understanding of Sakyamuni's human condition. In the context of little modern
scientific knowledge 2,500 years ago, Sakyamuni made a deep insight into the fundamental state
of human nature through meditation, and a series of propositions based on this insight, and
modern science's understanding of the human brain, The understanding of evolutionary
psychology is completely verifiable. Therefore, the moral proposition and spiritual pursuit put
forward by Buddhism thousands of years ago are not out of thin air, but based on the insight into
human nature consistent with modern science. It is not outdated and has profound meaning to
modern people. This is the main theme of this book.
The first half of the book mainly explains the observation, understanding and insight of the basic
state of the human brain in Buddhism, indicating the source of human suffering and the way of
relief, and confirming these and the basic cognition of modern science on the human brain. The
latter part focuses on the significance of these insights to people's moral and spiritual pursuits.

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First of all, about human cognition. The human brain is the result of billions of years of biological
evolution and Darwinian natural selection. The purpose of this design is not to make people
"happier", but to make people "productive” and more able to survive and multiply. But in modern
times, when people's needs change, they conflict with this design of the brain.
Let's review the minimal history of life development: about 4 billion years ago, there were some
of the most primitive materials that could replicate information, which were slowly surrounded
by a cell to form a simple single-celled creature. Later gradually evolved more complex biological
tissues composed of multiple cells. These biological tissues have further developed brains with
strong computing power, and some brain-like species have developed highly social species. One
of the most intelligent, the most social of a species is 20 million years ago, the birth of the "Homo
sapiens" (Homo Sapiens, that is, our own). The evolution before this was almost always done in a
natural way. After the birth of Homo sapiens, the second revolutionary evolutionary way of
evolution, the evolution of culture, was opened. The difference between cultural evolution and
biological evolution is that it is carried out not only through individual genes, but more
importantly through cultural inheritance within the group, which is an "unnatural selection." So
after the emergence of Homo sapiens, the speed of evolution has greatly increased and
developed so rapidly that today, 200,000 years later, as a primate branch of the "third gorilla",
we actually controlled the whole earth. Today, 6 to 7 billion people around the world have
become a global whole through economic and technological links. If we look forward from today's
dimension, because of the emergence of the Internet and artificial intelligence, our species seems
to be forming a collective brain, and each individual is evolving into a neuron in this collective
brain. This is the minimal history of the past 4 billion years of life on earth. The most interesting
thing in this minimal history 1s that after the emergence of Homo sapiens, we have another
evolutionary way in addition to natural selection-the cultural evolution process that is passed
down through individuals and collectives. However, human cultural evolution is also carried out
through the human brain, which is the product of Darwin's natural selection design, so the two
have congenital contradictions.
I imagine that 2,500 years ago, Sakyamuni might have discovered meditation in the most
accidental circumstances, and found that through the practice of meditation, people can observe,
understand, and ultimately conquer human biological consciousness. In other words, meditation
can make the brain as a part of human beings transcend the animal's own animal limitations, to
understand the whole of human beings, and to understand the society and the universe related
to human beings. This discovery was great both at the time and now. In the book, Professor
Wright provides scientific evidence for this discovery with a large number of modern and
contemporary brain sciences, experiments and knowledge of evolutionary psychology. The most
important point here is self-awareness.
The brain of natural selection design allows us to always be in an unsatisfied state. Only if we are
not satisfied can we make more production. But this state of dissatisfaction is difficult to be
compatible with people's pursuit of cultural evolution, such as the pursuit of "happiness" and
"meaning." This is the source of permanent dissatisfaction, the source of pain, and the
contradiction between "animality", "humanity" and "divineness"
Another important issue related to this is human self-awareness and self-control. Rational people
always want to be able to completely control their own, do their own CEO, but modern science

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tells us that this is actually an illusion (Illusion). When we use rational thinking, we are actually in
a "rational". Rationality is actually rationalization. According to modern science's understanding
of the brain, the brain is actually i modular system. There are different solutions for different
environments. The way to start these different modules is through feelings/emotions. So when
we think that we are thinking rationally, we actually think through emotions, which means that
people are fundamentally emotional animals. Starting these feelings are different living
conditions and different environments. The core of these feelings is "measuring everything else
with self as the core and self-interest as the core." This kind of thinking will inevitably divide the
enemy and the zero, and in the process of cultural evolution, it will bring endless suffering to
ourselves and others. These are very specific in Buddhism, and modern science further confirms
why human thinking is designed in such a way that the core is that the brain is the machine of
natural choice design. As a large species of natural design, people, our brains have hundreds of
millions of years of evolutionary history and are very developed. At the same time, people's social
attributes are also very developed. After the emergence of Homo sapiens, we opened up cultural
evolution and slowly began to have fundamental contradictions with our own biological
evolution. We are pursuing more than desire, enjoyment, and passage. We are more eager for a
lasting peace and lasting happiness. We begin to pursue responsibility for others and the
collective. We have more pursuits of morality and meaning, and pure creatures. There is a
fundamental contradiction in the self.
Regarding the cultural evolution of human beings, I have systematically combed it in the "Sixteen
Modernizations" written in 2014 (for details, please refer to Li Lu_ "Li Lu Tan Modernization
Series" on the California Sina blog). I divided the history of civilization evolution into three main
stages: the first stage was that humans left Africa 50,000 years ago and spread all over the world,
the second stage was the emergence of agricultural civilization about 10,000 years ago; the third
stage was A technological civilization dominated by modern technology that emerged hundreds
of years ago. The great leap of these three civilizations has opened up a great distance from the
way the animal ancestors lived, making us truly the masters of the earth and other animals.
In order to adapt to the rise of civilization, from the spiritual level, human cognition has also made
two big leap. The first leap occurred around 2,500 years ago, which is the " axis of the Axis", from
Greek philosophers, to the Hebrew prophets in the Middle East, to the Chinese people, to
Sakyamuni in India. Invariably began a collective reflection on the humanity and divinity of human
beings, the meaning of human existence, and the norms of morality, reflecting on the living
conditions of individuals and groups; reflecting on the relationship between man and nature;
reflecting on the structure of society and survival. The norms of meaning and morality propose a
series of answers with different details but similar directions. These reflections have had a
profound impact on all mankind both at the time and now.
The second leap occurred around 500 years ago. The emergence of modern science has produced
many reliable, reproducible and predictable knowledge of the objective world and human beings
with relatively reliable and empirical methods. This revolution and the subsequent technological
revolution have elevated human cognition to an unprecedented stage. This cognitive revolution
also raised fundamental challenges and questions about many conclusions and authorities in the
first Axis era. For example, the destruction of the one-dollar religion is particularly significant. The
basic hypothesis about God in the monastic religion has not only not been scientifically proven,

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but many of the specific teachings of the church have even been scientifically falsified. In contrast,
many of the insights in Buddhism are constantly being confirmed by modern science. Therefore,
more and more modern people have seen the possibility of reshaping the moral system and
meaning of people in Buddhism.
The results of human collective evolution are very embarrassing, but because culture cannot be
genetically inherited, individuals in this process of collective evolution have been difficult to
establish direct links with the achievements of the overall civilization, but through long-term
education. But even the long education is only known at the end, so modern people often have
the feeling of being dragged forward by the huge historical flood, like a small screw that can't
control itself. Marx defined this feeling human "alienation (Alienation)." The philosophy of
"staying in life" established in the Axial Age has been gradually destroyed in modern science, so
our pursuit of "meaning" in modern society has not been settled. In the process of globalization
today, with the emergence and development of artificial intelligence, our "hard" ability to build
civilization is more and more powerful, but the "soft" understanding of the connotation and
meaning of civilization does not match. This is why the scientific nature of Buddhism is especially
meaningful to modern people, and why I think Professor Wright's book is particularly meaningful.
This book confirms some basic insights in Buddhism in a scientific way, and to some extent opens
the scientific and modernization of Buddhism.
So how does scientific Buddhistism help modern people in "alienation'"? The book also mentions
a very interesting example of human self-control. The human brain is made up of various modules
that were built little by little during the long evolution of hundreds of millions of years. The human
brain reacts differently to different conditions and environments. It is the human feelings that
activates these modules. These feelings, like the human muscles, can be continuously
strengthened or weakened. This strengthening and weakening is mainly carried out through a
reward-punishment system. Most of the time, the human brain is in an "autopilot” state, and our
response to things is not much different from conditioning. The natural selection of the brain is
so interesting. The so-called thought is actually thinking that one self is thinking about oneself. In
the final analysis, our behaviour is controlled by emotions, and it is not transferred by our true
will. How can a person become his true master? Buddhism provides an important practical
method, namely, meditation. In the process of meditation, people can consciously cut off the
transmission mechanism from "feeling" to "thinking module" to "action'" by strengthening or
weakening the reward and punishment mechanism, that is, redesigning the brain designed by
natural selection. Again, this is the real difference between cultural evolution and natural
evolution. On the one hand, cultural evolution can be achieved through learning, and on the other
hand, through meditation, the evolutionary mode can be changed in a generation. In practice
today, institutions that correct various types of addictive behaviours (alcohol, drugs, sex, etc.)
have used a lot of meditation and psychological counselling methods designed according to the
principles of meditation, which have proved to be effective.
In the past few decades, more and more scholars and intellectuals in the West have begun to
believe in Buddhism. Most of these people were formerly religious believers. Robert Wright
himself was a Christian believer, and other Jewish believers. Therefore, Tibetan Buddhism has a
lofty status in the West today. It is precisely because of scientific evidence that Buddhism is more
likely to shape the foundation of morality for modern civilization. The first and second great leap

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in human cognition point to some eternal ideas, namely truth, goodness and beauty. The earliest
insights into Buddhism, as evidenced by modern science, point to the truth about the basic living
conditions of human beings. The moral claims put forward on the basis of this truth are more
likely to form a reliable moral foundation of modern society, that is, good. With the truth and
goodness, we will have a new understanding of the beauty of the world. This is why this book has
special significance for modern people.
In a broad sense, human beings are the product of natural evolution and cultural evolution. I guess
there are about seven or eight points of animality, two points of humanity, and half of the divine
nature. The significance of cultural evolution is to highlight humanity, expand divinity and limit
animal nature According to my observation, the greatest institutional innovation in the evolution
of human culture is the result of unifying and reconciling these three characteristics. For example,
the Chinese imperial examination system and the modem free market economic system are the
same. A modern market economy, for example, it is the use of the characteristics of the animal
in human never satisfied, combined with the continuous development of science and technology,
providing the possibility of unlimited economic growth, maximize natural selection in humans,
"productive ("productive " side. On the basis of our insight into this mechanism, the distribution
system created has more ethical and humanistic colours. The same is true of the imperial
examination system, which makes use of people's unsatisfied pursuit of power, creates equality
of opportunity for everyone, distributes power fairly by knowledge, and satisfies the common
interests of all in society as much as possible.
In addition, I would like to mention the other two books related to this book. Although I have not
entered my "book review of the year" list, they are also two very good books this year, and they
are somewhat related to Buddhism. One is Yuval Harari's new works this year's "A Brief History
of the future" Yuval himself is a pious practice practitioner. During my conversation with him, I
noticed that one of his entourage was his master of meditation, and he was one of the core
members of his side. He has a long history of meditation practice, and each meditation is a month
of silent meditation. He told me that this practice of meditation is of great help to his thinking and
writing. His "A Brief History of the Future" and "A Brief History of Humanity" all describe the
history of cultural evolution from the perspective of human beings as a species. From this new
perspective, these two books are interesting to read. Buddhism, especially the scientific
Buddhism, played a very important role in his thinking
The second book is the Principle of Ray Dalio, founder of Bridgewater Fund. This book is mainly
to record some of the effective basic rules that he formed during the establishment of the Bridge
Fund in the past 40 years, and share it with readers. Ray Dalio also has more than 40 years of
practice history of meditation, and in the interviews he sees meditation as the biggest driver of
his commercial success. This book can basically be seen as an example of the application of
scientific Buddhism to macro investment and asset management companies. His principles are
full of insights into the fundamental understanding of human nature in scientific Buddhism.
B) This year, we recommend the second book is written by a professor at Tsinghua University, the
text "the great Chinese industrial revolution." As we all know, the changes brought about by the
industrial revolution are unparalleled, but its distribution is very uneven, so far only in the United
Kingdom, Western Europe, the United States and a few Asian countries. There is a world of
difference between the countries that have achieved the industrial revolution and those that have

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not achieved the industrial revolution. Why have some countries achieved the industrial
revolution and some countries have not achieved it? How to detonate the industrial revolution in
a poor and backward country?
Since the Opium War, China has experienced at least four attempts to detonate the industrial
revolution. The first was the Westernization Movement, the second was the Revolution of 1911,
the third was the series of industrialization movements including the Great Leap Forward, and
the fourth was the reform and opening up initiated by Deng Xiaoping. The first three failed, and
the last time it unexpectedly detonated a large-scale industrial revolution that lasted for forty
years (just four decades next year) and achieved great success. This huge success naturally caused
widespread concern and doubt. How can we ignite the industrial revolution in a poor and
backward country? Why is China's attempt to the fourth industrial revolution so successful? Is
China's future success and rise unstoppable? What implications does China's success have for
other countries? Answering these questions is the core of the book.
The most fundamental reason for the difficulty in interpreting these problems is that we have so
far not had a consensus on the success of the industrial revolution in other countries and why the
industrial revolution first occurred in the UK. Because it is still impossible to truly interpret these
successful cases, the interpretation of the new case is even more powerless and scarce. The
various theories available are not sufficient to explain the history that has occurred, and it is even
more impossible to predict the future. Today, whether in the West or China, the success of the
Chinese industrial revolution, there are still a variety of misreading doubts (Confusion), not sure
about the rise of China's future. The significance of this book is that it reinterprets the real reason
for the detonation of the British industrial revolution from a historical perspective, and then uses
the British history to compare the attempts of the Chinese industrial revolution to explain why
the industrial revolution that is taking place in China has actually Success and the future is
unstoppable. This is the most unique insight and contribution of this book.
In the history of the British Industrial Revolution, this book puts forward the most important
concept of "original rural industrialization", that is, the marketization of British rural handicrafts
before the industrial revolution. In the UK, this process lasted about a hundred or two years. This
period began after the discovery of the New World, and the British established a colony in North
America, forming a very prosperous trans-Pacific trade circle (that is, the "Atlantic economy" I
mentioned in the "Sixteenth Modernization'".) The Atlantic economy truly organizes the surplus
labour in rural England to form a small-scale, hand-worked workshop with a cross-global trading
system organized in the form of free market. This kind of organization solves the most
fundamental limitation of the era of agricultural civilization, that is, the Malthusian population
trap. In the era of agricultural civilization, when land had more output, people began to produce
more people. When the total amount of land did not increase, these populations soon exceeded
the limits of land output. In the end, I have to use a variety of arises and disasters to fill this trap.
This is a cycle of recurring. In Europe, because of the discovery of the New World, the new
population began to have a new career under the premise of maintaining food output, and the
original industry plus trade was completely linked to the New World. The size of the New World
is very large, larger than the United Kingdom plus the European continent, plus the British
colonies include India, North America, and Africa and so on. So the surplus labour is organized in

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a trade and business way. In addition, the British government at the time was also a typical
mercantilist government, which was a business-oriented organization of the entire society.
Inspired by the original industrial trade, the further development of technology is like a spark. The
core characteristics of the industrial revolution are large-scale, high-efficiency, collectivized
production, division of labour, and cooperation, which rapidly reduce the cost of industrial
products, which in turn greatly stimulates consumption, responds to each other, promotes each
other, and finally forms a huge and rapid A virtuous circle. In the UK, the product that triggers this
huge virtuous cycle is textiles, because textiles have the greatest consumer demand elasticity.
The United Kingdom was able to achieve large- scale production of textiles because the British
had formed a cross-global common market through colonialism, slavery and mercantilism. Cotton
was picked from slave laboreries in the southern United States and cotton fields in India. Because
of the invention of Jenny textile machines and steam engines, large-scale rapid production in the
UK was achieved, the cost was reduced on a large scale, and a large- scale unified market was
formed in the country. This market extended. To North America and all its colonies include India.
The government and businessmen combine to manage the globally unified market, while the
domestic population is organized on a large scale to enter the factory and provide a steady stream
of labour. The income earned by the factory can be returned to the development, upgrade and
sales of the product, which ignited the first industrial revolution. After the first industrial
revolution was rapidly spread around the world, through colonialism and mercantilism, British
industry established a huge market around the world, and soon there was a demand for the
second industrial revolution. The second industrial revolution was actually born to produce the
machines, means of transport, infrastructure, and power needed for the first industrial
revolution. These needs have ignited various industrial revolutions, including chemical, machine
building, ocean sailing, trains, petrochemical resource utilization, and so on. Various technologies
have formed a self-driven mechanism that has evolved into today's information revolution. This
is the course of the British industrial revolution. Common market. Cotton was picked from slave
laboreries in the southern United States and cotton fields in India. Because of the invention of
Jenny textile machines and steam engines, large-scale rapid production in the UK was achieved,
the cost was reduced on a large scale, and a large-scale unified market was formed in the country.
This market extended. To North America and all its colonies include India. The government and
businessmen combine to manage the globally unified market, while the domestic population is
organized on a large scale to enter the factory and provide a steady stream of labour. The income
earned by the factory can be returned to the development, upgrade and sales of the product,
which ignited the first industrial revolution. After the first industrial revolution was rapidly spread
around the world, through colonialism and mercantilism, British industry established a huge
market around the world, and soon there was a demand for the second industrial revolution. The
second industrial revolution was actually born to produce the machines, means of transport,
infrastructure, and power needed for the first industrial revolution. These needs have ignited
various industrial revolutions, including chemical, machine building, ocean sailing, trains,
petrochemical resource utilization, and so on. Various technologies have formed a self-driven
mechanism that has evolved into today's information revolution. This is the course of the British
industrial revolution.
Then, looking back at China, Professor Wen Yi's most insightful place is that he contrasts China's
reform of township enterprises in the early days of reform and opening up with the original rural

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industrialization that lasted for hundreds of years in the UK. After 1949, the Communist Party has
been trying to organize the Chinese countryside. The success of the Chinese revolution relies
mainly on the power of organizing the countryside, so Mao has always hoped to truly organize
the industrial roots in the countryside. But Mao's attempt failed because he organized the
farmers, but he did not believe in the market mechanism. In the 70 reform and opening end of
the decade, China actually has 150 more than one million township enterprises, but they are not
organized in a way to market, their mode of production or the planned economy, with the way
the bill is supplied. The direct consequence of this approach is the so-called shortage economy-
inefficient production is far from meeting social needs. In the first decade of Deng Xiaoping's
reform era (1978-1988), the core driving force of the reform was the large-scale development of
township enterprises under the market mechanism. This development actually corresponds to
the process of the development of the British primitive rural industry. In this process, the number
of township enterprises has grown from 1.5 million to nearly 20 million. China has thus formed a
huge and unified domestic free market. Light industry, hand-workshop-style township enterprises
have rapidly risen because they have met the huge demand generated by the shortage economy,
and they have formed a vast number of market-based mechanisms. Market. The national market
mechanism not only guarantees food production, but also organizes the surplus labour in rural
areas in a market-like manner.
China's next step is exactly the same as the British industrial revolution. From reform to opening
up China has begun to fully participate in the operation of the global economy. The first product
that allowed China's industry to take off is the same as the UK, and it is also a textile. China also
quickly carried out the first industrial revolution on textiles. On the basis of already having a
national unified market, a large number of rural surplus populations have entered the industrial
sector, and the Chinese government, like the British government, is a heavy-duty government,
doing everything possible to expand domestic and international markets, and to technology from
abroad. Introduction, the establishment of industry in the country. The products sold not only
achieve full domestic coverage, but also spread throughout the global market. Therefore, in the
second decade of reform and opening up, China achieved its first industrial revolution. The result
is the same. In a short period of time, China has become the world's largest textile exporter
because of its Size, and has become the world's largest textile exporter, and has since been the
world's largest textile manufacturing, consumer and exporter. After the emergence of the textile
revolution, it also led to the spontaneous demand for the development of the first industrial
revolution represented by textiles, namely, the demand for machinery, the demand for
transportation infrastructure, the demand for basic power, heavy chemicals, coal, and electricity.
Based on the above needs, the second industrial revolution began. Because of these two
industrial revolutions, the Chinese economy began to enter a spontaneous, cyclical, and self-
reinforcing growth process. Just like Britain and the United States, once this process began, it
could not be stopped, thus opening up a 40- year high-speed, Compound growth economic
miracle. Therefore, China has the basic economic characteristics of a technologically advanced
country: sustained and compound growth.
Based on this, the author also answered several related questions. For example, why did China's
first three industrial revolutions practice not succeed? The Westernization Movement of the Qing
Dynasty was basically a top-down reform practice, lacking social grassroots organizations.
Industrial projects were decisions made by the government to make a head, and did not form a

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real market mechanism. In the era of the Revolution of 1911, farmers were not really organized;
in the Mao era, farmers were organized and could enter the industrial field, but Mao did not
believe in the power of the market. Until Deng Xiaoping's reform and opening up, the rural surplus
labour force was not only organized, but also organized in a market way, forming a unified market
mechanism throughout the country, with tens of millions and hundreds of millions of labourers,
participating in domestic and international markets. In competition. This is his comparison of four
attempts at the Chinese industrial revolution. Another related question is why the earliest
industrial revolution did not occur in the Netherlands, did it happen in China and India? Before
modem times, the Chinese and Indian governments basically did not re-invest in the market and
did not value the market. The Dutch government is very heavy-duty, but there has never been a
textile industry foundation. Its expertise in fisheries and trade has no large consumption elasticity
and scale effect, and it is not enough to detonate the industrial revolution. The industrial
revolution must have a demand elasticity. Products to ignite, large-scale production can bring
large-scale cost reduction.
But no matter what kind of products are used to detonate the industry, the most fundamental
premise of the industrial revolution is that there is a market large enough. Regarding the free
market, he proposed another insightful view. The free market is actually neither free nor free, but
a very expensive public goods. It must have a strong mercantilist government to make great
efforts and great costs. Go to construction. On this basis, he also criticized the most basic
interpretation of the industrial revolution in the West today, namely the "Washington
Consensus". He believes that the formation of modern industry must have the guarantee of free
market mechanism, non-government intervention, democracy and the rule of law. Predatory
corruption system and so on. These consensuses, in his view, are contrary to the historical
practice of the United Kingdom and are a cause and effect inversion. These are the results of the
development of the post-industrial society in the West, not the cause. Interpreting China
according to this theory is the main reason why the West has repeatedly predicted the mistakes
of China.
Professor Wen Yi reanalysed the history of the West to analyse the reasons for the success of the
Chinese industrial revolution, and predicted that China's continued economic development is
unstoppable in the future. He also believes that the Chinese experience is equally applicable to
other developing countries that wish to detonate the industrial revolution. . In this sense, the
book has original insights and extraordinary meaning.
Next year is the 40th anniversary of China's reform and opening up. The achievements of China's
economic development are amazing, but there are widespread controversies about its causes and
future development both in China and in the world. In recent years, more and more Chinese and
foreign scholars have begun to work in this field. From my shallow and non-professional
perspective, Yang Xiaokai, Lin Yifu, Zhou Qiren, Xu Xiaonian, Shi Zhengfu, Wen Yi and other Mr.
Zhu have rich and creative contributions. It is worth studying seriously. But this topic is too big,
and the impact on the world is too far-reaching, so there is still a long way to go in all aspects of
interpretation.
Today's Western academic research on this issue is also in its infancy. Historically, Columbia
University has been an academic centre for Western studies of Chinese culture and history.
Fortunately, at the board of directors in early December this year, with the unanimous promotion

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of the principal and all members of the board of directors, Columbia is preparing to set up the
"China Institute of Contemporary Economics” in the near future. It plans to start with field case
studies and record China's nearly forty years. A series of changes in companies, villages,
prefectures, cities, provinces, industries, etc., have left a loyal academic case record for China's
great changes, and on this basis to do more in-depth academic research. (By the way, there is a
chapter in Professor Wen Yi's book that specifically describes the economic development history
of Yonglian Village in Sunan, which is very instructive.)
Taking this opportunity, scholars who are interested in China and the West are welcome to join
the Columbia University China Economic Research Institute in various ways. Interested friends
can contact the school directly, or with me or the board of directors who are equally enthusiastic
about promoting this matter, Mr. Li Xiaojia.
3. Finally, I would like to share with you some of the feelings of 2017, which are also related to
the issues discussed in these two books. I am investing in this year, which is exactly the 25th year.
The Himalayan Investment Fund I founded and managed just finished the first 20th anniversary
in 2017. The investment industry is a prediction for an uncertain future. For real understanding
and pursuit, rational thinking and decision-making are the core connotations of my work.
Therefore, in the investment practice of more than 20 years, I can more deeply understand the
congenital defects of human cognition. The brain itself designed by natural selection has
fundamental contradictions and limitations for understanding the cultural evolutionary reality.
Much of our cognitive problems are due to the fact that the brain is a machine chosen by nature,
and the reality we understand is the product of cultural evolution. The fundamental contradiction
between the two has caused us to be unclear about the world and to see the ambiguity of the
problem, which in turn led us to a series of wrong decisions. In the investment arena, wrong
decisions often lead to catastrophic consequences. For this reason, I have a feeling of empathy
for the importance of rational thinking and the degree of difficulty in gaining wisdom.
Taking China's view as an example, what is happening in China is a grand historical movement. It
is not only a continuation of the modern five-hundred-year history, especially the history of the
modern industrial revolution in the West, but also in line with its own 5,000-year history. The
complexity is not something that any individual can easily understand with one's own strength.
In the middle of it, each of us is actually like a blind man. Moreover, because each of us is an
emotional experience animal, the parts we touch are different, the conclusions we touch, and the
degree of confidence in these conclusions are different. Coupled with the ups and downs of
China's turbulent history in the past 100 years, it will naturally leave a strong emotional inclination
for every observer. Putting together the touch impressions of each of our individual "scorpions"
should lead to a more objective view of the elephant. But because each of us strongly adheres to
our partial impressions because of our personal feelings, we cannot look at the overall situation
without jumping out of personal experience. In my case, I have always been able to feel that my
early experiences and experiences of youth have strongly influenced my observation and
understanding of China, rejected the perspective of others, and sometimes even reached the
realm of painting. In reality, I have observed that only a few people can break through the barriers
of personal experience and think objectively and rationally.

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The same is true for Chinese observers in the West. For complex things that are not understood,
people tend to apply ideology and historical experience, and just as Western ideology and
historical experience are different from China, it is difficult to truly see the reality of China. .
Naturally designed brains, although in most cases cannot adapt to the results of cultural
evolution, but natural selection also leaves us room for improvement. 2500 years ago, Sakyamuni
discovered the meditation, and Confucius discovered rational thinking. These great discoveries,
both in the past and the present, give us confidence in the future. Mr. Munger believes that
acquiring wisdom is the moral responsibility of human beings. I am deeply impressed by this. Take
my personal experience as an example. If you can't constantly correct your mistakes, keep
learning and progress, you will never go to today. In the past 25 years, my investment has gone
from being a "smoke but" approach to investing in great companies, from investing in North
America to focusing on Asia and China. Today, I manage the fund's assets from the initial few
million to nearly l0 billion US dollars now, and the income has increased by more than 50 times.
This is the compound growth of knowledge and thinking that really drives the compound growth
of investment returns. Only when the growth rate of thinking exceeds the growth rate of funds,
investment funds will be safe and effective. I hope that my personal experience and efforts in this
area can also be used by friends who are committed to improving their thinking, especially young
friends. If so, I will be very pleased.

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2019 Annual Book Review
November 2019
This year, I want to recommend Gu Chaoming's The Great Recession Era: The Other Half of
Macroeconomics and the Fate of Globalization.
This book discusses the biggest problems in the world today. 1) Monetary Policy. The major
economic entities of today, such as Japan, the United States, Europe, and China are all issuing
currencies on a massive scale. The mass issuance of base currencies has already reached
astronomical heights, resulting in all-time low interest rates, issued for zero percent interest
and even negative interest rates in parts of Europe, a phenomenon that has never happened
in the history of the world. At the same time, the additional issuance of currencies has failed
to make a significant impact on economic growth. Outside of the US, the developed countries"
economies have barely grown, if at all. Another consequence of these types of situations has
been an increase in each country's debt levels, and an ever-increasing Debt-to- GDP ratio. At
the same time, all asset prices, from stocks to bonds, and even real estate, are at all-time
highs. For how long can this abnormal currency phenomenon last? How will it all end? When
it ends, how will global asset prices be affected? No one can answer these questions, yet
basically everyone's wealth is dependent on the answers.
2) Globalization. The past few decades of globalization has paved the way for countries at
different stages of development to have intertwined destinies, but global trade and global
capital flows are dictated by individual countries' respective monetary and fiscal policies.
Thus, globalization and global capital flows have resulted in considerable conflicts and
increasingly tense relationships between China and the developed countries, as they each
fight to implement their own economic policies. For example, we are currently witnessing an
escalating China-US trade conflict, as well as return, and intensifying, of instability and street
politics all over the world, from Hong Kong to Paris to Chile. At the same time, within these
countries, people are gravitating towards either the far-right or the far-left, resulting in a
shrinking centre and an increasingly uncertain world. Under these circumstances, no one can
predict what the future of global trade and capital flows will look like.
3) In this type of international environment, what kind of macroeconomic and fiscal policies
should each country try to implement? How should the policies of countries at different
stages of development differ?
These questions would be a great academia achievement, whereas answering all three at the
same time is likely impossible. In his book, Gu Chaoming brings forth a thought-provoking
perspective alongside a complete theoretical framework of fundamental concepts and
internal logic, Even though this framework cannot give us definitive answers, it can give us
some very important explanations and inspiration. Regardless of whether you agree with his
theories, it is definitely thought-provoking and worth your attention.
Now I will talk a little about the author, Gu Chaoming. He is the Chief Economist of the
Nomura Research Institute, where over the past 30 years he has been able to significantly
influence the policies of the Japanese Government. The first time I heard of him was around

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10 years ago, at one of YPOs international conferences in Japan. He gave a keynote speech
explaining what at the time Japan called the "lost decade" (Of course, by now it would be the
"lost 20 (or even 30) years"). Gu explained the aftermath of the burst of the Japanese bubble,
which included economic phenomena such as zero economic growth, excessive currency
issuance, zero percent interest rates, large-scale government deficits, and high debt levels.
The West believes that these economic phenomena were caused by Japan's inadequate
macroeconomic policies. However, for the first time, Gu provided a completely different, yet
even more convincing, perspective of what happened. He proposes a novel concept
developed by himself -balance sheet recession. He attributes Japan's economic recession at
the time to the economic recession caused by the rapid expansion of the private sector
(businesses and households) balance sheet following the burst of the asset bubble. In the
balance sheet recession, he puts forth one of the most unique perspectives, one where the
fundamental goal of the private sector is no longer profit maximization, but liability
minimization. So at this time, no matter how much currency is issued, the first thing the
private sector and individuals do when they get money is not to invest and expand, but to pay
off their debts. Due to the sharp declines in asset prices at the time, the private sector and
households were put in a state of technical bankruptcy where they were forced to fix their
balance sheets by either paying off debts, or continue saving. In this case, it is inevitable that
the economy will massively contract. This is the same type of economic contraction that
happened in the US during the 1930s, where once the economy starts to contract, it turns
into an accelerating downward-spiral. During the Great Depression of the 1930s, the entire
US economy shrunk by 46%.
The Japanese government decided to adopt the method of large-scale currency issuance.
They borrowed extensively to invest in infrastructure, which swallowed up residents' savings.
Through this technique, Japan has kept its economy afloat, albeit at the same level, for more
than a decade. Although their economy has not grown, it has avoided a recession. In Gu's
view, this was the only "good" option Japan had for macroeconomic policy. Not only has this
policy prevented Japan's economy from ever experiencing a massive 46% contraction like the
Great Depression US, it has also given the private sector sufficient time to slowly repair its
balance sheet. To this day, Japan's private sector and households have started to return to
normal. Of course, this came at the steep price of a now badly-damaged government balance
sheet, and highest debt of any country in the world. However, he believes that when
compared to the other options, this was the best one. At the time, this was the most unique
perspective on Japan I had ever heard. Since then, T have carefully observed the Japanese
economy, and to some extent confirmed his theories.
The West had always been critical of Japan's policies. Only after the 2008-2009 Great
Recession, did the West change their attitude. Because after the Great Recession, the entire
Western world was suddenly thrown into a situation very similar to what Japan faced in the
late 1980s. At the time, the main assets of the West began to depreciate sharply, and the
entire private sector fell into technical bankruptcy, making the situations very similar. When
this happened, all of the major Western countries, by coincidence, adopted policies involving
large-scale currency issuances. At the time, the main event influencing the western Central
Banks was the Great Depression of the 1930s. When summarizing Depression-Era policies,

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influenced by the works of Milton Friedman, the economics community concluded that
monetary policy had fundamental flaws. 2008 Federal Reserve Chairman Ben Bernanke was
a strong supporter of this view. He even believed that, in extreme cases, money should be
dropped en masse from helicopters. Thus, in response to the Great Recession, western
countries started handing out money through large-scale currency issuances. However,
contrary to expectations, this policy did not bring about a rapid recovery and economic
growth. The private sector saved the newly-issued money and used it to pay off debt, resulting
in continued weak economic growth. While the US had experienced a small amount of
growth, the European countries were basically still at zero percent growth.
In response to this, the government's first instinct was to again increase currency issuances.
For this reason, Central Banks in various countries invented quantitative easing (QE).
Traditionally, Central Banks are supposed to regulate the money supply by adjusting reserves
(the most important part of the base currency). After implementing QE, the Fed's excess
reserve reached 12.5x the standard reserve. After that, the major western central banks
followed suit and adopted QE policies, whereby the
Corresponding multiples reached 9.6x in Europe, 15.3x in the UK, 30.5x in Switzerland, and
32.5x in Japan! That is to say, under normal economic conditions, if the private sector could
effectively utilize these new funds, inflation could reach the same multiple (ie US inflation
would be 1250 %). In other words, if this money was invested, either asset prices would
immediately rise several times (and back to bubble levels), or it would strongly stimulate GDP
growth.
However, the reality is that the economy is still growing only slightly, with only a portion of
asset prices gradually increasing. The biggest consequence of QE has been the close to zero
percent interest rates (negative rates in Europe) that have caused a Sl5T deficit. This shakes
the fundamental assumptions of the entire capitalist market mechanism, yet does not bring
about the expected economic growth. At the time, Europe began looking more and more like
Japan, and everyone started rethinking their views on Japanese policy. Gu's summary of Japan
and its fiscal policies have renewed my interest in major western countries.
Gu used a relatively simple framework to explain these phenomena. According to the savings
and invest behaviours of an economy, that economy will always be in one of the following
four situations, as shown in the following table:
Borrow/Investor Saver

Case 1: Normal Economic Growth Yes Yes

Case 2: General Economic Crisis Yes No
Case 3: 90s-Era Japan No Yes
Case 4: Depression and Recession Era US No No

Under normal circumstances, an economy should have both savers and borrowers/investors.
In this situation, the economy is in a state of relatively positive growth. But once a general
economic crisis arrives, savers run out of money, but there are still borrowers/investors
alongside investment opportunities. In this scenario, the central bank and its role as the last

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money provider is very important. This is the very important lesson of the Great Depression
Era: the central bank must be the lender of last resort as well as relax monetary policy. It can
provide funding, and then lend to the private sector.
However, no one expects there to ever be a shortage of borrowers/investors. This makes up
the "other half of economics" that is traditionally overlooked and rarely studied. When there
is a shortage of borrowers/investors, what will happen to the economy? For example, in Japan
there are a plethora of savers, but for the past few decades there have been no real incentives
for the private sector to borrow and invest. What kinds of policies should be implemented in
this scenario? During the Great Recession, the West was in Case 4, where there were neither
savers nor borrowers. When the crisis hit, there were already no savers. With no savings and
large scale asset depreciation, the private sector was in a state of technical bankruptcy. At the
same time, there were practically no investment opportunities in Europe. After several
rounds of QE, although the base currency had been issued on a large scale, no one was willing
to invest given the lack of opportunities. After receiving money, the people immediately
returned the money to the banks, which led to negative interest rates. This has never
happened before.
The basic contribution of Gu's basic research framework are with the third and fourth cases:
the phenomena which happens in the case of an absence of borrowers. For example, Japan
is an example of Case 3, where people save but no one borrows. In this scenario, Gu believes
that the government must bear the responsibility of being the ultimate borrower, and make
direct investments through fiscal policy. If they don't, the private sector will not be willing to
borrow, and the economy will shrink. Once the economy shrinks, it will result in an
accelerating downward-spiral. This kind of acceleration can cut an economy by half, with mass
unemployment and disastrous social consequences. We know that Hitler rose to power in the
1930s, and the Japanese military resurgence was directly linked to the Great Depression at
the time.
The fourth scenario is exactly what happened in 2008-2009, where there were neither savers
nor borrowers. In this scenario, the government should have acted as both the ultimate
funder and the ultimate borrower. During that time, on one hand, the US issued currency
through the central bank. On another hand, the Department of the Treasury passed the TARP
bill, which directly injected capital into all systemically important commercial and investment
banks, which stabilized the economy by simultaneously solving for the lack of savings and the
lack of investors. To this day, Western Europe is likely still in Case 3, and maybe even in Case
4. There are no savers and no borrowers, and because of the restrictions of the Eurozone,
Europe can only use monetary policy. Additionally, Euro contracts limit the use of fiscal
policies, especially in Southern Europe, to expand domestic demand. These restrictions could
have disastrous consequences in the future.
Gu uses the above framework to analyze the unique economic phenomena the world is facing
today (Cases 3 and 4), and puts forth some views on the economic policies enacted by the
Developed Countries

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Then, he considers the following question: Why did asset bubbles occur in both Western
Europe and the US? Additionally, after the bubble burst, why haven't they been able to find
a way to accelerate growth (aside from the US, which has managed to restart growing, albeit
slowly)? To answer this question, Gu proposes what I believe is a second major insight from
this book. This second insight is particularly meaningful for today's China. He proposes that
there are three different stages of economic development in the context of globalized trade.
First, let's introduce an important concept in development economics -the Lewis turning
point. In the early days of urban industrialization, surplus rural labourers are absorbed into
urban industries. However past a certain point, with the development of industry to a certain
scale, the surplus rural labour force will change into a shortage, and the economy will enter a
state of full employment. This point is what's referred to as the Lewis turning point. It was
first observed in the 1950s by the British Economist William Arthur Lewis. The first stage was
the urban industrialization process before the Lewis Turning Point. The second stage is after
the Lewis turning point has been passed, and society has entered a stage of interactive growth
in terms of savings, investment, and consumption (this is referred to as the golden age). The
third stage, a unique stage proposed by Gu, is one under the background of globalization.
After an economy has matured and become an advanced economy, it will enter this third
stage: a state of being chased. Why does this happen? Because in this era, once domestic
production costs pass a certain level, it is more advantageous to invest in developing
countries. In the early days, the advantages of investing overseas were not clear, as there
were a number of cultural and institutional obstacles. However, when domestic production
costs rise above a certain level, and some basic capabilities for overseas investment are
established, overseas investment proves to be far more effective than domestic investment.
At this time, domestic investment will stop, and domestic wages will begin to stagnate.
In the first stage, during the early industrialization of cities and towns pre-Lewis turning point,
capitalists have absolute control. Labourers have essentially zero pricing power and zero
bargaining power, as there is a large amount of people from the countryside looking for work.
Naturally, companies will exploit this surplus of workers.
In the second stage is after the Lewis turning point has passed, when an economy has entered
the mature stage of economic development. At this time, enterprises must increase output
by investing in production equipment, increased wages, improved working environments, etc.
During this second stage, because the labour surplus is turning in a shortage, economic
development will lead to rising wage levels, which in turn will lead to higher consumption
levels. At the same time, savings levels and investments levels will also rise, as will
enterprises" profits. When combined, these will result in a positive upward spiral. At this
stage, almost everyone in society can enjoy the fruits of economic development. It is also at
this stage that a middle-class consumer society can be formed. Even people with sub-par
educations and below-average wages will be able to enjoy life as the standard of living
increases. As such, this is called the golden age.
At the third stage, society begins to divide. In terms of labour, only highly technical skills
(those dealing with science, technology, finance) will be valued, and only workers in these
fields will continue on the positive upward spiral, whereas those with lower education levels

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and those with traditional manufacturing jobs will gradually receive lower and lower wages.
In this stage, the inequality gap will widen, and continue to widen. The domestic economy
and domestic investment opportunities will both begin to decline, with the best investment
opportunities overseas. GDP growth will be driven by and depend on continuous
technological innovation. If the country's capability in this area is strong (such as the US), GDP
will continue to grow, albeit slowly; if the country's capability in this area is weak and the
speed of innovation slow (ie Europe and Japan), then GDP growth will stagnate, and all
investment opportunities will be transferred overseas or to non-intuitive sectors.
Gu believes that Western society entered the third stage in the 1970s, when it was chased by
Japan and the Four Asian Tigers. Around a decade later, in the 1980s, China entered the
international economic markets, and Japan entered Stage Three. After catching up, domestic
growth and investment opportunities sharply decline, and economic growth occurs in areas
prone to bubble formation. This is the case in Japan, the US, and Western Europe, where
capital has continually flooded the real estate, stock, bond, and derivative markets, leading
to multiple bubbles and their subsequent bursts. After a bubble bursts, domestic economic
growth opportunities are limited and small. 1This equates trouble, as the private sector must
repair its balance sheet and search for investment opportunities that no longer exist. The end
result? Economic behaviour that no longer seeks to maximize profits, but to minimize debt.
Due to this shift, many traditional economic theories are no longer applicable.
Gu points out that at different stages of economic development, government’s'
macroeconomic policies will have different functions, and thus employ different policies.
When it comes to China, this is the most significant and enlightening perspective. In the early
industrialization process, economic growth depended on capital formation, manufacturing,
exports, etc. At this time, the government's fiscal policy will play a large role. The government
can concentrate limited resources and invest in infrastructure, resources, export-related
services, etc. that will help the emerging country quickly industrialize. Almost all of the
countries at this stage have adopted active government support policies. Entering the second
stage, the main drivers of economic growth are wages and consumption. When society
becomes fully employed, so long as wages increase in one sector, wages will inevitably
increase in all sectors. Increasing wages leads to increased consumption and increased
savings. Companies will use these savings to increase their investment in equipment in a bid
to increase production and thereby increase profit growth, which itself will in turn give the
companies the capabilities to pay higher wages and attract more better employees. This cycle
will iteratively repeat, resulting in a positive upward spiral as growth catches up. This type of
growth is dependent on domestic growth. At this time, the key drivers are the investment and
consumption behaviours of entrepreneurs, individuals, and families leading the markets.
These are the people not only capable of understanding the rapidly changing business
environment, but best positioned to take advantage of the opportunities that uncover. At this
point, monetary policy is more important that fiscal policy, because fiscal policy and private
investment both come from limited savings. A poor fiscal policy will cause conflicts with the
private sector, and lead to a competition for resources and opportunities. Fiscal policy will
return to importance in the third stage, the stage of being chased. A deteriorating domestic
investment environment with decreasing investment opportunities coupled with higher

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overseas returns has resulted in a private sector reluctant to invest domestically -even despite
the large amount of savings in the country. At this time, the government must come forward,
such as Japan's did, and make large-scale social investments and invest in infrastructure, basic
education, scientific research, etc. Although the profits may not be high, doing this make up
for the insufficient domestic private sector investment, excess savings, and insufficient
consumption. Government investment would also protect social employment and maintain a
level of GDP that not only ensures the economy does not fall into an accelerating downward
spiral, but also is actually more suitable tor economic development at this stage. Whereas in
the previous stage monetary policy was effective and fiscal policy not important, at this stage
it is fiscal policy that is effective, and monetary policy that falls short.
The discussion on the use of macroeconomic policies is very meaningful to China's current
development. Although different experts have different opinions, it is mostly widely accepted
that China recently passed the Lewis turning point and is entering the maturing stage of
economic development. In the past decade, we have seen the acceleration of wage,
consumption, savings, and investment levels. However, because the government's inertia is
strong, when the economic development stage changes, there will be a lag effect in the
formulation and implementation of policy, as the government seeks to continue using the
strategies that made them successful in the previous stage. This dislocation between
macroeconomic policy and stage of economic development happens in all countries and all
stages. For example, the West today employs the relatively effective monetary policies of the
golden age, even though results show that these policies are not actually effective. Many
western countries, especially Europe and Japan, have oversupplied currencies, zero percent,
even negative, interest rates, low inflation, extremely slow economic growth, and drastically
higher debt levels. Similarly, as the Chinese economy has passed the Lewis turning point and
entered the maturing stage, the government is still fixated on the fiscal policy of the first
stage. Over the past few years we have seen a number of economic reform measures.
Although the intentions are good, to adjust the stock problems brought about by the previous
stage of economic industrialization and large scale manufacturing development, the actual
implementation has resulted in the large-scale withdrawal and closure of private enterprises,
bankruptcies. Objectively, to some extent, the phenomenon of national advancement and
retreat has harmed the confidence of private entrepreneurs, and caused a certain degree of
turmoil and insufficient consumer confidence. This has in turn prevented China from reaching
its full potential in terms of economic growth possible during this period.
Today, China's net exports contribute negatively to GDP growth while consumption
contributes 70-80%. Private consumption is particularly important, and will be fundamental
driving force of China's future economic growth. In the golden age, the key drivers are the
entrepreneurs and individual consumers. The focal, and starting, point of policies should be
on the enhancement of entrepreneur confidence, the establishment of relatively clean, fair,
and standardized market rules, and the reduction of government power over economic
operations, centralization, taxes, and burdens. From the experiences of developed countries
in the golden age, we can clearly see that monetary policy is extremely important during this
period.

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In stage 1, China's main financial policy system was an indirect one, an almost compulsory
large-scale savings one where the government controlled banking system introduced capital
into manufacturing, infrastructure, and national strategic industries such as exports. This
policy was responsible for China's successful and rapid industrialization. In stage 2, a major
goal should be to gradually liberate the entire system from the above methods, and shift from
indirect finance to direct finance, so that entrepreneurs and individual consumers can take
on the role of ultimate borrower. We have seen some loosening in these areas over the past
few years. For example, with the help of fintech, we have seen the development of consumer
credit. Of course, over the long, whether or not real estate mortgage loans can be improved,
and whether or not we can unlock the potential of secondary re-mortgage loans, are both
issues worth studying. The most important macroeconomic policy tools at this stage are
increasing access to capital for direct finance, speeding up the registration system, enhancing
the stock market's ability to finance private enterprises, and establishing bond and equity
markets. On the flip side, the country's biggest macroeconomic policy challenge will be
shifting to a role supporting and serving, rather than guiding, the economy.
Over the past few years, although some of the macroeconomic policies have been created
with good intentions, due to implementation challenges, the final results have not been
satisfactory. Big picture, this provides another perspective and lesson for studying and
observing the economic characteristics of stage 2. In stage 2, the golden age, some policies
may be more effective if they are adjusted through market spontaneity. Conversely, man-
made adjustments may also fuel growth. These are the most pressing issues China is currently
facing.
Currently, Japan, Western Europe, and the US are in the third stage, whereas China is still in
the second stage. While that may be the case, China's future growth potential is tremendous.
China has a GDP/capita of $10,000 USD, which gives them a cost advantage over developed
Western countries. At the same time, other emerging developing countries (such as India)
have not yet formed a systematic competitive advantage. China will likely be in this golden
age of opportunity for many years to come. Today, although China's GDP/capita is roughly
$10,000 USD, it has over 100MM people with a GDP/capita of $20,000 USD, mostly
distributed along the South-eastern coastal cities. In fact, China's leap from GDP/capita of
$10,000 USD to $20,000 USD will not require stage of the art technology. It simply needs to
bring up the living standards of the inland cities to the level of the South-eastern coastal cities.
This "neighbourhood effect" will be the key driver of consumption growth. This is the
consumer mind-set of "I want what other people have," such as television, internet, and
lifestyle goods. By spreading the lifestyle of the 100MM people living in the south eastern
coast to the >IB people living inland, China will increase its GDP/capita to $20,000 USD. Over
the next few years, China's wages, savings, investment, and consumption levels will continue
to catch up to the West in an upward spiral. During this upward spiral of mutual promotion,
investment opportunities will remain abundant and excellent. If China can learn from the
monetary policies of the Western countries during their respective golden ages, make some
adjustments to the relationship between government and market, it will be able to unleash
its full economic growth potential. On the other hand, if the West, especially Western Europe,
can learn from Japan's and China's fiscal policies, and allow the government to assume the

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role of ultimate borrower and invest in infrastructure, basic education, scientific research,
they will be able to sustain economic growth during the third stage as they are chased.
Adopting different policy approaches and tools at different stages of economic development
is also a great contribution to economics itself. Economics is not Physics. There are no axioms
and no theorems. Economists must study the constantly changing economic phenomena in
reality, and implement the most relevant policies suitable for that period. So from this
standpoint, this book's theoretical framework is a breakthrough in itself, and very informative
case study
Of course, the three questions this book seeks to solve are the biggest problems in the world
today, so they are unlikely to have perfect answers. The author has a deep understanding of
Japanese history, and uses it as a starting point for many examples in the book. But whether
Japan's experiences are actually applicable to European countries and the US remains to be
seen. QE, oversupply of currency, zero and negative interest rates, high asset prices, the
widening inequality gap, and the rise of populist politics these international phenomena,
mainly seen in developed countries, still continue to plague policy makers and ordinary
people of all countries for a long time to come. China is still in the golden age of development,
post-Lewis turning point. It has the luxury of learning from the developed Western countries
and Japan that have already surpassed this stage and entered Stage 3. They have left behind
a wealth of information, and a significant amount of reference material for Stage 2, especially
in terms of monetary policy. As long as policy makers can recognize their current stage and
make appropriate adjustments, it is possible to unleash to the fullest potential the huge
economic growth potential during the golden age stage of development. China's future is very
bright.

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 Organized Quotes-From Letters, Interviews, Essays, Etc.
Learning
"Poor Charlie's Almanack is by far the most comprehensive publication that captures the
essence of Charlie's philosophy. When the first edition was published in 2005, I treated the
book as a treasure and read it cover to cover multiple times. Each time I read it, I learned
something new."
"In the age of the modern civilization, the value created by the division of labor and by
exchange is further increased because human knowledge can be accumulated. Compared to
goods and services, human knowledge is easier to accumulate. Exchanges of ideas often result
in a 1+1>4 equation. When different ideas are exchanged, the parties not only retain their
own ideas, they also obtain the ideas of others. Moreover, sparks can fly during exchanges,
creating entirely new ideas. When ideas are having sex with each other, they become very
productive."
"Tremendous insight is built from intense curiosity and study for your whole life."
"I learn and l'm curious about all businesses. That's why when opportunities come, within a
few seconds you can smell it. How can you develop that smel1? The only way to really do that
is just reading page after page."
"Most of your time being a value investor is as an academic, a researcher, a journalist actually,
to have insatiable curiosity and try and figure out how just about everything works. Because
in investing the more you know the better off you are."
"You have to be naturally interested and curious about everything-any kind of businesses,
politics, science, technology, humanities, history, poetry, literature, everything really effects
your business. It will help you. And then occasionally you will find a few insights out of those
studies that will give you tremendous opportunities that other people couldn't think of."
"Start by learning from the best- listening, studying and reading."
"The game of investment is really continuous learning."
"As I look at the past fifteen years, I'm amazed at how much I have learned and how far along
I've come. I'd have remained an investing ape without continuous learning."
"You've got to learn everything. I started with physics and mathematics and I got into
economics, history, law and politics. I like everything and that's what you need. You might
need models from biology."
"I feel very lucky that in the last twenty years I could study value investing under the tutelage
of the great masters, and to learn and practice under their watch."
I always view this job as investigative journalism"
"This year, I stumbled into two such great titles: Matt Ridley's The Rational Optimist' & lan
Morris's Why the West Rules- for Now'. Even for a self-professed bookworm like me, this is

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rare. They both touched on the two key movers for the future: innovation & China. Both books
have influenced the way I think about the future and I enthusiastically recommend them to
those who are interested in these subjects. From time to time, I have shared books that I find
particularly insightful. I have talked about Guns Germs & Steel' The Rational Optimist' and
Why the West Rules-for Now'. For this year, my book recommendation is The Social Conquest
of Earth' by EO Wilson."
"To be honest, it is still too early for me to assess the entire value of Mungerisms, because
every time talk to Charlie and reread his lectures, I learn something new."
"Like millions of Warren Buffett and Charlie Munger admirers around the world, the teachings
of these two teachers and Berkshire Hathaway's amazing performance have shaped my
investment career.... I found all the books written about Buffett, including his annual letters
to Berkshire shareholders and articles about him. I also learned that Charlie Munger was
Buffett's decades-long partner. I spent nearly two years studying them."
"Finding an edge really only comes from a right frame of mind and years of continuous study."
Value Investing
"In the last few decades, as far as I know, there has been every kind of investment style. And
as far as I can observe and speak to with statistics, there has only been one style which has
reliably and safely brought investors exceptional long-term returns: value investing. Every era
has value investors who can produce good, long term results. Today, Buffett has a 57-year
track record. Others have twenty or thirty year records. Without exception, these people are
all value investors."
"There are few people that switch in between or get it [value investing] gradually. They either
get it right away of they don't get it at all. I never really tried anything else. The first time I
heard it, it just made Sense; and IT heard it from the best."
"When we look at the US trading records for the long-term, we cannot find successful long-
term investments that are based on short-term-oriented theories and strategies. The great
long-term investments have all been made by value investors."
"Being a value investor means you look at the downside before looking at the upside. Before
becoming an investor, you need to look at how you can fail in this game. There are all sorts of
ways you can fail."
"Stocks aren't just little pieces of paper that you buy and sell. Each one is in fact a certificate
bestowing fractional ownership of a company.
"Understand the role of the market. Stocks represent fractional ownership of businesses, but
are also tradable securities which can be bought and sold at any time. In this market, there is
always someone quoting a price. How should we understand this phenomenon? Value
investors believe the market is only there to serve you.

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"Investing is inherently about predicting the future. But predictions can never reach 100%
accuracy, they can only fall between 0 and something approach 100%. So when we make a
judgement, we need to leave a large buffer. This is called the margin of safety."
"Through unremitting hard work over a long period, investors can build up their own circle of
competence. This can give them a deeper understanding than others of a company or an
industry, and allow them to make better judgments of future performance. Your unique
strength lies within this circle."
Stocks as Business Ownership
"Stocks aren't just little pieces of paper that you buy and sell. Each one is in fact a certificate
bestowing fractional ownership of a company."
"You have to think of yourself as an owner of a business, rather than an owner of a piece of
paper. You own a small piece so therefore you really don't control the business. So it's almost
self-defence to demand a large margin of safety because whatever value you perceive may
not be there because you can't control it.
“We view ourselves primarily as owners of businesses, and typically hold our positions for a
very long time with very low turnover. Thus, the operating results and valuation
characteristics of "HCI Holding Co' is a very close proximate to that of the actual fund
portfolio"
Mr. Market
"What is the point of the market? As far as market participants are concerned, it is to discover
the weakness of human nature. If there are things that you don't understand, or if you have
any kind of psychological or physiological weakness, there will be a situation in the market
which exposes you. Anyone who's been in the market before will understand exactly what I'm
talking about."
"As long as we remain human, we will always have ups and downs in the marketplace."
"Market price is the price the stock is currently trading at. It is determined by supply and
demand of sellers at a point in time and may have no relationship with private market or
intrinsic value.”
“The market exists to expose the human weaknesses of its participants. Your lack of
understanding, as well as psychological or physiological frailties, will be laid bare in the
market."
"Most people behave more or less as Graham recommended in markets where the assets are
not easily traded, such as houses, farms, mines or privately held cos. However as soon these
are chopped into small pieces & can be traded freely, participants behave in the opposite way
"In investing, much as in life, one does not need to check temperatures everyday but one
should be aware of seasonal fluctuations and be on high alert for possible climate change."

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“Technological advances, the expansion of markets & tradable products, rapid dissemination
of information have not made the markets any more efficient. If at all, it has probably made
it more short- term orientated, thus more incapable of rational thinking”
Margin of Safety
"If you buy stock with a sufficient margin of safety, the probability is with you."
"Use an appropriate margin of safety to manage risk. This way, you will not lose too much
when you are wrong, and you will make much more when you are right. This way you can let
your portfolio generate higher than market returns with less risk, in a sustainable and stable
way. There are plenty of things I don't know but they don't factor into the purchase because
I am using a huge margin of safety. Buyıng a dollar at 50 cents. So if things turn against you,
you will be okay.
"Borrowing a euphemism from advertising, I know at the beginning of any time period that
50% of all my predictions will not pan out; 1 just don't know which S0%... This is why in
selecting securities we always demand a large discount in valuation and employ a moderate
amount of diversification in order to give us ample margin of safety."
Circle of Competence
"If you stray outside of your circle of competence, or if your circle has no boundaries, or if you
don't know your boundaries- there will be some moment when the market takes you to the
cleaners a
“In his fifty years of practice, Buffett added one more principle; through unremitting hard
work over a long period, investors can build up their own circle of competence. This can give
them a deeper understanding than others of a company or industry, and allow them to make
better judgements of future performance. Your unique strength lies within this circle”
"The true insights a person can get in life is still very limited, so correct decision-making must
necessarily be confined to your "circle of competence." A "competence" that has no defined
borders cannot be called a true competence. How do you define your own circle of
competence? Charlie [Munger] said, if I want to hold a view, if I cannot refute or disprove this
view better than the smartest, most capable, most qualified person on Earth, then I'm not
worthy of holding that view."
Intellectual Honesty
"The more honest you are intellectually, the more prosperous you tend to be. I have never
met intellectually arrogant people who can successfully practice the game of investment"
"Investing is about intellectual honesty. You want to know what you know. You want to know,
mostly, what you don't know"
"If you do this simply for the purpose of making money, it is almost impossible to achieve
extraordinary long-term performance."

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"Have the highest degree of fiduciary duty and imagine that every dollar you take from a client
is coming from your own middle-class parents who are entrusting their life savings to you"
"I put all of my investment capital into my funds. So it's a true partnership""
"Investing is about predicting the future, and the future is inherently unpredictable.
Therefore, the only way you can do better is to assess all the facts and truly know what you
know and know what you don't know. That's your probability edge. Nothing is 100%, but if
you always swing when you have an overwhelming better edge, then over time, you will do
very well"
Compounding
"We focus effort on rare long-term compounders. We wait patiently for prices to fall into our
comfort zone, then buy aggressively & hold for the long term. You can do this in any market,
but it's much more profitable in markets where u have an enduring edge & fewer wise
competitors"
"2017 marked the twentieth anniversary of our fund. From our humble beginnings, we now
manage more than $9 billion dollars with the gross investment return since inception now
being above 50 times."
"One bonus about this profession is you get better over time. Most professions, as you get
older, you get out of the game. Take the example of competitive sports. If you are a figure
skater or gymnast, after your teenage years you are out of the game. With investing, if you
are doing it the right way, you get better over time. Your knowledge accumulates
exponentially. When I look back at everything I have done, I would have done it all slightly
differently, but that is because I am better at it today. So if you approach it in a fundamentally
sound way, as you mature, you become better and better. That process and progression is
like compounding money. In fact, you can compound knowledge faster than money. If you
truly love this game, I would suggest that you don't take short cuts. It might take longer but
it is more rewarding"
"We focus effort on the rare long-term high compounders."
"Our way of doing things has worked well for us for the first 20 years. However, it won't work
too well if we stop learning as the game gets harder to play. If we can, we must compound
our knowledge and competence as fast as our assets grow."
"Here is the result: 1 US dollar in stocks, after discounting for inflation, experienced an
appreciation of million times the original value over the past 200 years! Its value today would
be 1.03MM US dollars. Even the remainder of this number is bigger than the return on every
other class of assets. What are the reasons behind such an astonishing performance? The
answer lies in the power of compounding. The average annualized rate of return for stocks,
discounting inflation, is only 6.7%. No wonder Einstein called compound interest the eighth
wonder of the world"
Management

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"Even if you meet with management, you may not learn something. Obviously, actions speak
louder. You want to see what they have done. Everything being equal, the more you know
about management, the more honest and upfront they are, the more motive they have, the
better the situation is and the deeper the discount."
"Management always has a big influence on your success, no matter how good or how bad
the business is itself. Management is always part of the equation of making the company
successful, so the quality of management always matters."
"Our opinion of a management team rarely remains unchanged after our ownership - it either
gets progressively better or worse. Over the long term, the character and quality of a
management team will have a major impact on the success of our investment in its company,
and this is particularly true among seemingly similar companies in the same industry."
On Munger
"Charlie [Munger) constantly collects and researches the notable failures in each and every
type of people, business, government, and academia, and arranges the causes of failures into
a decision-making checklist for making the right decisions. Because of this, he has avoided
major mistakes in his decision making in his life and in his career. The importance of this on
the performance of Buffett and Berkshire Hathaway over the past 50 years cannot be
emphasized enough."
"When Charlie [Munger) thinks about things, he starts by inverting. To understand how to be
happy in life, Charlie will study how to make life miserable; to examine how business become
big and strong Charlie first studies how businesses decline and die; most people care more
about how to succeed in the stock market, Charlie is most concerned about why most have
failed in the stock market. His way of thinking comes from the saying in the farmer's
philosophy: I want to know is where l'm going to die, so I will never go there."
Long/Short
"A short cannot be a fundamentally long-term position. In the long game, the upside is
unlimited
Your downside is 100%. In shorting it is opposite. Shorting is also essentially borrowing, so
you need money and time on your side. If time is not on your side, you can be right but lose
all your money. The best kind of short usually has some kind of fraud. In those situations,
management is determined to keep the fraud. Look at Bernie Madoff, 20 years’ time. You
cannot afford to borrow money for 20 years. So shorting is a short term game. When those
positions go against you, there is huge leverage that can utterly crush you."
"Three things about shorting make it a miserable business. On the long side, you have 100%
downside but unlimited upside. On the short side, you have 100% upside and unlimited down-
side. I do not like that math. Second, the best short has some element of fraud. However, a
fraud can be perpetrated for a long time. Of course you borrow to short, so they could really
just wear you down. That's why I could be 100% right and bankrupt at the same time. But,
you know what, you go bankrupt first! Lastly, it’s Crews up your mind. Shorts just grab your

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mind and take away from the concentrated effort that is required to do proper long investing.
So, those are the three reasons why I just stay away from shorting. It was a mistake on my
part. I shorted for a couple of years. I don't discard people who are really doing well at shorting
it's just not me. If I want to add a fourth reason, it is that the economy overall has been really
growing at a compounding rate for 200-300 years, ever since the modern science technology
era. So, naturally, the economic trend favours long positions rather than short.
Macro
"I don't ever want to profit from a bubble. Soros does that, that is just not my game. I don't
profess any ability to understand how long a crowd will buy into a bubble. I invest in things
that appear to be compelling values that continues."
"The best way for any nation to build up its own strengths is to abandon all its tariff barriers"
"Regardless of macroeconomic conditions, our strategy is to own exceptional companies at
prices deeply discounted from value. We think this will work very well for our investors long
term. I believe such a strategy will probably work better if there is a lot of turmoil."
"Christopher Davis's grandfather used to say that you make the most money out of a bear
market financial panic - you just don't know it at the time. It's always the case."
"In order to understand stock performance in the past 200 years, and the next 20 years, we
must be able to understand and explain the basic trajectory of human civilization. Otherwise,
it will be hard for us to remain rational when a stock market crash occurs. We will think the
world is coming to an end whenever we encounter a crisis similar to that of 2008 and 2009.
Predicting the future lies at the heart of investing."
"When we examine the past 200 years, we see a continuous upward trajectory [in US GDP]If
we take a year as the unit of measurement, GDP grew almost every year. This is real, long-
term, cumulative and compounding growth... The economic pattern of sustained, long-term
compounding growth is a modem phenomenon, which had never previously occurred in the
recorded human history of the past 16,000 years.
Fundamental
"My checklist is…. Is it cheap? Is it a good business? Who is running it? What did I miss? I go
through all the checklist. When I go to ‘what did I miss?’ it is hugely important to understand
psychology and human cognition."
"You need to get into the frame of mind of thinking about what really makes one business
more successful than others. What is their advantage, why are they making more money, and
some doing just less. Why is it? The only way you can find that is studying the ones that are
already established."
It goes back to understanding the business. Once you have that understanding you can extend
it to understanding an industry. A certain industry might have characteristics that make it
different than others. In certain industries you might have better prospects than others. Find
the best of the players in the industry and the worst players. And see how they perform over

168
time. And if the worst players perform reasonably well relative to the great players that tells
you something about the characteristics about the industry. That is not always the case but it
is often the case. Certain industries are better than others. So if you can understand a business
inside out you can then eventually extend that to understanding an industry. If you can get
that insight, it is enormously beneficial. If you can then concentrate that on a business with
superior economics in an industry with superior economics with good management and you
get them at the right price the chances are that you can stay for a very long time."
"A company's intrinsic value is primarily derived from the earning power of its operations. It
is also contributed to by non-operating assets, net of liabilities. Corporate governance plays
an important role as well, because it determines how much of a firm's value can be claimed
by minority shareholders. The same goes for the general political and legal environment in
which the firm operates. Enhancement of a firm's intrinsic value can come from
improvements in its earning power, resulting from its strengthening competitive position,
new business innovation, better use of its operating and non-operating assets, improvements
in its corporate governance as it relates to minority shareholders and the macro
environment."
"All our top holdings are powerful companies, often the undisputed leaders in their industry.
They all have long histories of successes. They have enjoyed many years of growth through
good & bad times & in all likelihood will continue to grow for many more years to come"
"Our major holding companies all have unique business strengths that enable them to shine
during good and particularly tough times. They are anti-fragile. In our view, their competitive
advantages are sustainable for the foreseeable future."
"Most of the time, users in this industry don't know anything about its products, and how to
discern their quality. This sets the investment industry apart from almost all others."
"In our hunt for good investments, we scrutinize the basic aspects of a company; the character
of its industry, the competitive position it has or will soon have in that industry, the quality of
its management and corporate culture, the price you pay to acquire its shares... & the larger
mostly external factors influencing the environment of the company. Ideally you want to find
companies that are leaders in growing industries with super-managers & hard-working honest
workforces & whose shares are available at price substantially below intrinsic value (which is
also growing at a very nice clip)"
"We usually own stocks in large established businesses with some defensible competitive
edge, which we bought at prices so advantageous that we had little chance of permanent
capital loss."
"Making predictions about the future is also very difficult. Investing is the ability to predict
the future. You really need to understand a company and its industry and assess their outlook
for the next five or ten years. It isn't easy. Before investing, we need to know at a minimum
what a company will look like in ten years and how it will behave in a downturn. Otherwise,
how can you judge that the value of this company won't decline'? To know what a company's

169
future cash flows are worth today, we must know approximately what those cash flows will
be in ten or twenty years."
"Every company in today's age is a technology company somehow, but the technology may
not be cutting edge, and may not play an important role in the success or failure of the overall
business. Successful technology companies are the ones that are capable of reinventing
themselves and dealing with change."
Portfolio Management
"I don't have a preconceived notion about allocation. I let the opportunity dictate where I end
up."
"Nothing makes the job of a portfolio manager easier & happier than owning a basket of
companies with untapped pricing power at discounted prices. If he is patient, he needs no
other virtue."
"My goal as your portfolio manager is to populate our portfolio with companies possessing
'winner DNA' in great businesses of favourable industries and that we can purchase at a
substantial discount to their intrinsic value."
"As I have stated here before, I view my job here as first and foremost to preserve our
partners' collective purchasing power and then to expand that power at a satisfactory rate."
"For our portfolio, I select only securities whose businesses are entrenched, predictable &
whose intrinsic values are most likely to appreciate over time. This way, time is on our side -
no matter how long the waiting period, we are likely to come out very well in the end"
"Overall, I believe our portfolio companies not only have the staying power to get through
this period of economic difficulty, they're likely to do very well in spite of it. Thus, the loss our
fund sustained last year is probably temporary & quotational" Li in 08 (08-42%09 +206%)
"I know of no better hedge against an uncertain world than owning a well-selected basket of
common stocks in high quality businesses at deeply discounted prices (under normal
circumstances) and ignoring the unknowable and the uncontrollable, which is exactly what
we do."
"To different degrees, our companies all possess characteristics of what economist Nassim
Taleb termed *anti fragile, meaning they tend to benefit from chaos and disorder."
"Just as I don't expect the best companies to show their excellence every quarter (or
whenever they report operating results), I don't expect our investment results to be any
smoother. In fact, our investment approach almost necessitates a very bumpy ride. Nearly all
great investors who I admire achieved high long-term returns through bumpy rides. There
surely will be times, even extended periods that we underperform our markets and may have
negative results. But just as I expect our portfolio companies to do very well over time, I
expect our investment results to approximate their operating results over time."
"In my view, the biggest investment risk is not the volatility of prices, but whether you will
suffer a permanent loss of capital.

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"As a bottom up investor, our investments over the long haul will largely mirror the
performance of the underlying companies we invest in."
Idea Generation
"The first thing I always check is the new low lists, lowest book, lowest P/E etc. That attracts
me more than the new high list"
"Till this day, the vast majority of individual investors and institutional investors still follow
investment philosophies that are based on "bad theories." For example, they believe in the
efficient market hypothesis, and therefore believe that the volatility of stock prices is
equivalent to real risk, and they place a strong emphasis on volatility when they judge your
performance. In my view, the biggest investment risk is not the volatility of prices, but
whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices
not risk, but it is an opportunity. Where else do you look for cheap stocks?"
"Ideas come to me from all sources, principally from reading and talking. I don't discriminate
how they come, as long as they are good ideas. You can recognize good ideas by reading a
great deal and also by studying a lot of companies and constantly learning from intelligent
people- hopefully more intelligent than you, especially in their field. I try to read as much as I
can."
Time Horizons
"In the short term, there will always be winners and losers. But in the long term, there are
very few Winners."
"Short term results often benefit from luck and have no connection with skill. For example,
take a short period, not even one or two years long. At any time, even one or two weeks,
there will always be some rock stars. But in the long term, there are very few winners. One,
two, or three year track records, even three to five years, or even five to ten year track records
-are seldom any use for predicting future results. If someone tells me they've had good
results, say over five or ten years, if I can't see their actual investment results, I still won't be
able to judge if it's down to luck or skill -this is one of the core problems judging value
investing-is it luck or skill? The market can deliver 14% CAGR's over consecutive periods ofI5
years. In those times you don't have to be a genius; it’s enough to just be there. But there are
other times when returns are negative. Having a good track record in those years is not the
same. So it’s very hard to judge performance without seeing the context. But if someone can
produce outstanding results over fifteen years or more, we can probably say they're
something exception. It's safe to say there's more skill than luck over that time."
"The most profitable kind of investing is long-term investing."
"Most businesses are subject to change if you stay with them long enough. There's not a single
business that I know of that will never change:"
The Game of Investing
"The game of investment is really continuous learning."

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"The art of investment is the discipline of inaction in the absence of a good opportunity, but
aggressive action when one is identified."
"It's not easy and it's not precise or science at all
"Part of the game of investing is to come into your own. You must find some way that perfectly
fits your personality."
"I am more interested in my nature, in win-win situations."
"The only way to gain an edge is through long and hard work:"
"We have a few basic principles to guide us in doing the right thing. We try to treat our
investors in such a way that if our positions were switched, I'd be delighted to take the other
side. We treat a stock position as a piece of the business involved… We focus effort on rare
long-term compounders. We wait patiently for prices to fall into our comfort zone, then we
buy aggressively & hold for the long term. You can do this in any market, but it’s much more
profitable in markets which you have an enduring edge & fewer wise competitors... We try to
buy stocks only at a price that affords a margin of safety. We use market volatility as a useful
tool, not an instructor. We patiently build up core expertise that allows us to evaluate the
long-term prospects of the businesses we are interested in"
"I believe there are four basic competencies a good investor must constantly improve. They
are: 1) the ability to understand competitive dynamics far into the future for particular
businesses and industries because nothing impacts outcomes more than competition. 2) The
ability to read through accounting reports and footnotes to develop an educated sense of the
company, its culture and businesses. 3) Understanding the people who run the company. 4)
A habit of constant learning in the hope of occasionally finding some insights and skills to
make one more trusted and admired by interesting people who can provide opportunities."
"I started out looking for cheap securities... Over time, I really fell in love with strong
businesses. I morphed into finding strong businesses at bargain prices. I still have a streak in
me that favours finding really cheap securities -I just can't help it. But over time, I've become
more attracted to looking for great businesses that are inherently superior, more competitive,
easier to predict, and with strong management teams."
Common Sense
"Common sense is the least common commodity"
"If you make a mistake, sell as fast as you can."
"You cannot live life without making a mistake. Every time I make a mistake, I learn
something."
"We should see the world the way it is, which is the same as seeking truth from facts."
"In making investments, I have always believed that you must act with discipline whenever
you see something you truly like."
"To this day, failure to act when I should have remains the most costly mistake of my care."

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 (an English translation of the original work in Chinese)

a Discussion of Modernization

Li Lu
July 2014, Pasadena, California, USA

1
Table of Contents
Chapter 1 Old Problems and the New History ....................................................3
Chapter 2 The Trajectory of Human Civilization ...............................................9
Chapter 3 Evolution of Human Civilization from 1.0, 2.0, to 3.0, and the First
Great Leap of Human Civilization .....................................................................16
Chapter 4 The Birth of Agricultural Civilization ..............................................25
Chapter 5 Agricultural Civilization’s Hard Ceiling and the Three Attempts to
Reached It ...........................................................................................................32
Chapter 6 Agricultural Civilization’s Revolution of Thought and Institutional
Innovations ..........................................................................................................41
Chapter 7 The Discovery of the American Continent and its Epochal Impact .50
Chapter 8 The Birth of The Modern Age ..........................................................57
Chapter 9 Could China have been the birthplace of modernization? ...............64
Chapter 10 The Spread of Modernization and Competing Paths to
Modernization .....................................................................................................73
Chapter 11 The Nature of Modernization and Its Iron Law .............................80
Chapter 12 China in the coming decades – Economics ....................................87
Chapter 13 China in the coming decades - Culture..........................................93
Chapter 14 A Forecast for China in the Coming Decades - Politics...............103
Chapter 15 East-West Relations in the Age of Civilization 3.0......................111
Chapter 16 Humnity’s Common Destiny ........................................................117

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 Chapter 1 Old Problems and the New History

Introduction: Why was there such a vast disparity between China and the West in
the modern era? How could China overcome this disparity? What would China
look like after it has caught up, and could it recapture its past glory? Today, by
using new historiography, together with economics, biology and other natural
sciences as well as studies of China’s historical traditions, we can place China’s
modernization within the context of the entire course of evolving human
civilization, which lasted tens of thousands of years. We can thereby come to an
unprecedentedly deep understanding of, and provide answers to, these three major
questions of concern to modern Chinese. In addition, we can make relatively
reliable predictions about China’s future based on this understanding.

Amidst the anguish of their backwardness and of the beating they took
during the 1840 Opium War, most Chinese people began to contemplate
these three questions: Why was there such a vast disparity between
China and the West? How could China overcome this disparity? What
would China look like after it had caught up, and could it recapture its
past glory? To this day, these three questions continue to bedevil the
minds of the Chinese people, and they have been constantly explored by
elites from various circles.
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Beginning around the same time approximately 250 years ago, Western
elites, who had moved ahead during the same historical period, began to
ponder the causes behind this new world situation. The West was
already far ahead of other regions in the world, and over the next 200 or
more years, the advantages of this lead resulted in the rapid formation of
the West’s global dominance. Why was the West able to rule the world?
Can such rule continue?
While these issues of East and West appear to invoke opposite emotional
responses to different group of people, they are in fact two sides of the
same matter. The waning of the East and the dominance of the West
during the past 200 or more years has consistently been a core concern
for world elites from various walks of life both in China and the West.
All sorts of theories and doctrines have emerged on this subject, but to
this day a consensus has yet to be achieved. Existing theories seem
limited both in their ability to explain history and to predict the future.
Their greatest commonality is the relatively short historical interval they
look at: some go back a hundred years, others at most a thousand years.
This field of historical vision is still too narrow. The statement of Li
Hongzhang (one of the most important Chinese politician, general and
diplomat of the late Qing dynasty) in 1840 that China was facing
“changes unseen in three thousand years” was indeed a profound insight
about history. Yet until the modern age, people studied history primarily
through written records. Writing has existed in the West for 5,500 years
and in China for 3,300 or more years. Written historical records cover
less than one percent of mankind’s entire evolutionary history, which is
clearly insufficient for tracing and interpreting the entire course of
human evolution. Moreover, traditional historiography itself has biases
and limitations. Merely relying on the perspectives offered by written
histories will not allow us to fully answer the above questions.
Fortunately, traditional historiography has been fundamentally
transformed over the past several decades, as a series of breakthroughs
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in scientific disciplines have provided completely new tools which
enable us to understand a much longer span of history.
Radio carbon dating was officially discovered in 1949. This technology
allows us to use the half-life of carbon isotopes to date an object with
relatively high accuracy. Combined with genetics, this new technology
has made possible a quantum leap forward in studying the history of the
era before the appearance of written languages. Ever since, relics which
have been continuously unearthed all around the world have become
archeological evidence even more important than written records.
Since the 1950s, the discovery of DNA’s structure led to a period of
rapid development in biology which hastened the births of disciplines
such as molecular biology, genetic biology, and evolutionary biology.
The integration of these with other disciplines allowed scientists to have,
for the first time, a relatively comprehensive understanding of human
evolutionary history itself. In 2012, biologist E.O. Wilson formally
suggested a complete theory of human origins, which he published in his
work The Social Conquest of Earth. This was one of the greatest
developments in the study of human evolution since Darwin.
In 1919, the Serbian geophysicist Milutin Milankovitch proposed
Milankovitch cycles. This theory was finally verified in the 1970s, and it
was mathematically proven that the centrifugal force related to the
earth’s angle of rotational axis and its precession influenced the distance
between the earth and the sun. This creates long-term major cycles in the
earth’s atmosphere, each lasting approximately 100,000 years. This
theory helped people to understand for the first time the cause and
timing of the ice age, as well as to predict when future ice ages would
occur within a major cycle. In 2004, scientists drilled a two mile deep
hole at the South Pole, and from the ice sheet formed by snow
accumulated over many years they collected climate data from the past
740,000 years, as well as data on the impact of human activity on the

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atmosphere during this period. These data also recovered some of the
traces left by human activities in the atmosphere over the past tens of
millennia.
In 1987, scientists led by American geneticist Rebecca Cann came to a
conclusion that astounded people at the time: all females share a
common ancestor who lived in Africa. She was called the African Eve,
and was born approximately 200,000 years ago. This conclusion has
since been continuously verified by various studies, but the time during
which Eve appeared has been pushed forward to approximately 150,000
years ago. Soon thereafter, scientists also discovered the African Adam,
the ancestor of all males. This major discovery proved that all present-
day humans originated from the same ancestors. In any large groups,
human traits such as intelligence, diligence, creativity, and altruistic
tendencies show extremely similar distributions. This conclusion posed a
huge challenge to traditional views and shattered any theories which
took racial or cultural differences as the basis to explain the superiority
of either the West or East.

It was the major developments in various disciplines which laid the

groundwork for the appearance of the new historiography. The new
historiography is a methodology which constructs a new
interdisciplinary interpretation of humankind’s long history by utilizing
cutting edge scientific developments in various fields. Its great
breakthrough is its ability to study much earlier periods in history
without the limitation of only using written records.
Biologist and geographer Jared Diamond might be called the first person
to use the new historiography. In his 1997 publication Guns, Germs, and
Steel, he was the first to point out the decisive impact of geographical
location on human historical development by tracing the origins of
agriculture. Not only did his research look back over the past 10,000
years of human history, but it also for the first time fully, powerfully and
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accurately explained why Europe thoroughly conquered the Americas in
the sixteenth century. Just as the discovery of the New World and the
conquest of the Americas had epochal significance in the course of
human history, so too were Diamond’s discoveries and this book a major
breakthrough in the field of historiography.
Another practitioner of the new historiography is archeologist, classicist,
historian, and Stanford professor Ian Morris, who used existing scientific
tools to depict the basic evolutionary trajectory of human civilization
over the past tens of thousands of years. He discovered the patterns of
human development, used these to explain the disparity between East
and West in the modern era, and predicted the future of human society.
Morris provided the best answers to these questions in his 2010 work
Why the West Rules for Now, and its 2013 companion work The
Measure of Civilization. By using Morris’s method of quantitatively
measuring the basic trajectory of civilization, and adding to this more
economics, biology, and other natural sciences as well as studies of
China’s historical traditions, we can place the issues of China’s
modernization into the context of the tens of thousands of years of the
entire history of the evolution of human civilization. By doing so, we
can gain an unprecedentedly deeper understanding of the three major
questions of concern to the Chinese people in the modern age mentioned
at the beginning of this chapter, we can better provide answers to them,
and based on this understanding, we can make relatively reliable
predictions about China’s future.
I, the author, was born in China in the 1960s and have over twenty years
of life experience both in China and the United States. My interest in
issues of China’s modernization started at a young age and has lasted for
more than thirty years. My work in investments over the past twenty-odd
years has added an occupational need to predict China’s future, and
during this time, I have been able to accumulate some knowledge and
ideas. This series of “Discussions of Modernization” is a record of my
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musings over the past thirty some years, and I hope they will inspire
others to come up with even greater ideas on the topic. This series will
start by primarily looking at the results of Jared Diamond and Ian
Morris’ studies and integrating them with some of my personal views
and interpretations. Next, from a Chinese perspective, I will analyze
quantitative charts complied by Professor Morris’s team covering some
16,000 years of human evolutionary history, describe the major stages of
human development, and point out the rules of this development with a
focus on the genesis of modernization. Then I will focus on the nature of
modernization and China’s path to modernization, and predict the future
of China. The contents of this section will consist predominantly of my
own humble opinions. Finally, I will touch on the impact of China’s
modernization on the West and explore the common future of the human
race.

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 Chapter 2 The Trajectory of Human Civilization

Introduction: The West had a continuous lead over the East from roughly 14,000
BC to 500 AD. Then, around 540s, the East overtook the West and maintained its
superiority until approximately 1770s, thus holding a lead over the West for more
than 1,200 years. However, not only did the West catch up with the East after 1800
AD, it also entered into a period of rapid development and widened the gap
between West and East until the West ruled the entire world. The social
development index of the East also started to rise in the twentieth century. Today,
while it is still far behind the West, there are already signs that the East is capable
of pulling even. This is the trajectory of human civilization in the East and West
over the past 16,000 years.

Practitioner of the new historiography and Stanford University Professor

Ian Morris proposes a quantitative method for measuring the long
trajectory of human civilization. Morris refers to his quantitative method
as his Social Development Index, which is a measure of a society’s
ability to get things done. A society is made up of people, who like
animals must consume energy. According to the Law of Conservation of
Energy, a society must first have the ability to capture and use energy in
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order to get things done. Therefore, the most important index for
measuring the degree of social development is the ability to capture
energy and use it. Morris divides the ability of a society to capture and
expend energy into four traits: energy capture per person, social
organization, information technology, and war-making capacity. Energy
capture refers mainly to the ability of each member of a society to
capture sufficient food, fuel and raw materials on a daily basis. Social
organization is defined as the population of the largest permanent
dwelling unit in a society; over a fairly long period this would be the
population of the largest city, since the larger the population, the greater
the need for social organization. Information technology is one of the
most critical types of energy consumption for man. Every day, members
of a social organization must exchange, store and remember various
types of information, so such information technology is one of the most
important ways in which people use energy. It goes without saying that
warfare is an important source of human energy consumption. While
these four traits do not constitute all of human activity, they are the most
representative forms of human energy capture and consumption. More
critical is the fact that these four measures can be compared across
societies, and they can be longitudinally compared over long periods of
time as well. Because the entire history of human evolution is in fact the
history of energy capture and energy use, social organizing, the
formation of population centers, the exchanging of information and war-
making are also the most important activities of human society.
In considering his quantitative method, Morris chose to use the way how
indices were composed and computed. He took 14,000 BC as the
starting point and 2000 AD as the end point for the time period to be
covered. A total score was assigned to each of the four aspects, with the
score for the year 2000 AD set at 1000, evenly divided among the four.
With the year 2000 AD representing the highest level of development in
the West, the highest possible score for each social development index is
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250. For example, in 2000 AD, the average daily per capita energy
capture in the United States, the most developed region in the West, was
approximately 228,000 Kcal. That same year, the average daily per
capita energy capture in Japan, the most developed region in the East,
was approximately 104,000 Kcal. Based on this ratio, if the United
States had a score of 250, Japan’s score would be 114. This method is
used for all subsequent calculations as well.
The farther back we reach into time, the more difficult it is to obtain
such data. However, in the early periods of human history, the rate of
increase for these four indicators was very slow. Furthermore, in
comparison to 2000 AD, the scores for social organization, information
technology and war mobilization abilities were close to zero for a very
long period in the early development of humans. Therefore, the indicator
for measuring social development in earlier periods is in fact the ability
to capture and expend energy. The intervals for taking measurements
can be widened for earlier periods. For example, data is collected for
every 1000 years for the period from 14,000 BC to 4000 BC, as there
was little score variation for this period. Data is collected for every 500
years for the period from 4000 BC to 2500 BC because more data was
available then. For the period from 2500 BC to 1500 BC, data is
collected for every 250 years, and for every 100 years for the period
from 1500 BC to 2000 AD. In the modern age, scientists are fully able
to precisely collect data for each year or even each month. However, in
order to estimate data relatively accurately for this entire 16,000 year
period, we must supplement it with achievements in archeology,
meteorology, physics and biology from the past several decades.
Morris defines the objects of his measurements as follows: the two
westernmost and easternmost major cores of human civilization which
appeared in Eurasia after 9600 BC, a time during which agricultural
civilization was forming, and the various cores of civilization which
succeeded these two. Because the major cores of Eastern and Western
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civilization also varied at different historical stages in history, he
chooses the most advanced regions of East and West of their time. For
example, in the West, it began with the Hilly Flanks near the Euphrates
and Tigris river basins and the Jordan River. Subsequently, the Western
core shifted to Mesopotamia, Syria, Egypt, the Mediterranean, and
Rome. It then moved to the Balkans, and thence to the Mediterranean,
Southern Europe, Western Europe, and finally to the United States. The
center of eastern civilization originated in the basin of the Yellow River
and advanced into the alluvial plain between the Yellow and Yangzi
Rivers. It then moved to the Yangzi River basin. In the twentieth century,
it shifted to the southeastern coastal areas of China and to Japan, and
was represented by Japan around 2000 AD. Because these four social
development indices are highly applicable to both East and West, the
same data can be used to measure long periods of human history.
It is worth noting that much of the data for prehistoric records has to be
estimated. Therefore, archeological discoveries are an important source
of information. Archeology is a new academic discipline. Stratigraphy,
an approach now widely employed, was not utilized until 1870. After
1950, scientists began to use carbon dating, which led to substantial
rapid advancements in archeology. Since the 1970s, people have
gradually acquired systematic knowledge about prehistoric records.

Through great efforts, Morris and his team plotted a series of charts
using the social development indices. These charts can help us gain an
intuitive understanding of the historical trajectory of human social
development in the East and West.

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 Figure 1: Human Social Development Indices for the East and West
(14,000 BC－2000 AD)
Source: Ian Morris, Social Development（2010）

First, from Figure 1 we can see that until approximately 3000, BC there
was almost no discernible difference in development between the West
and East. Although there are some changes in the curves of both sides
after this point, these only occur very slowly. However, after 1800, there
is a fundamental change in the entire chart, as the trajectory of social
development shows explosive growth. Next, without affecting the
validity of his data, Morris performs a logarithmic function on the
previous charts. The results are shown in Figure 2, which allows us to
more clearly compare East and West.

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Figure 2: Linear Logarithmic Model for Social Development Indices of
the East and West (14000 BC－2000 AD)
Source: Ian Morris, Social Development (2010)

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Figure 3: Social Development Indices for the East and West (1600 BC－
1900 AD)
Source: Ian Morris, Why the West Rules – For Now (2011) P168

Let us now look at this chart which covers the period from 1600 BC to
1900 AD. This is a period for which there are relatively clear written
records and with which people are relatively familiar. Combining this
chart with figures 2 and 3, we can see that the West was ahead of the
East all the way from approximately 14000 BC to 500 AD. Then, in
approximately 540s AD, the East began to catch up with the West and
maintained its edge until approximately 1770s AD. During these 1,200
years, the East was ahead of the West. However, from 1800 AD on, the
West not only caught up with the East, it was also first to enter a period
of ultra-rapid development which widened the East-West disparity into
Western global dominance. The social development index of the East
also started to rise very rapidly in the twentieth century, and while it is
still far behind the West at present, there are already signs that the East
can catch up with the West. This is the trajectory of human civilization
in the East and West over 16,000 years.
The subsequent chapters in this series will focus on explaining the
causes behind the trajectory of human civilization, the differences and
similarities in the development of Eastern and Western civilizations, the
reasons for the explosive development of society after 1800 AD, and a
comparison between East and West. I will then go on to explain why the
West was able to rule the world in the modern era and why China was
backward in this era. Only with such a fundamental understanding of
history’s broad patterns and their causes can we answer the question of
how China can catch up with the West, sum up the features of China’s
modernization and anticipate the future of both East and West.

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Chapter 3 The Evolution of Human Civilization from 1.0, 2.0
to 3.0, and the First Great Leap forward of Human
Civilization

Introduction: Based on differences in the methods of production of human beings

in different time of history, I have divided the development of human society into
three stages: hunter-gatherer civilization, or Civilization 1.0; agriculture (farming
and animal domestication) civilization, or Civilization 2.0; and the science and
technology civilization following the industrial revolution, or Civilization 3.0.

Over the course of dozens of millennia from 60,000 BC to 12,000 BC, humans
ventured out of Africa and eventually occupied lands all the way to the southern tip
of South America. Without knowing anything about their destination or the future,
generations of humans showed stubborn determination in crossing glaciers and
oceans, advancing at a speed of one mile per year into every corner of the earth.
At this time mankind’s primary tools were stoneware, and the main mode of
transportation was man’s two legs. They were hunters and gathers, organized in
very small bands. Even today, I’m still in awe and inspired when I think of the long
journeys our ancestors undertook.

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Ian Morris’s Social Development Index charts clearly show a continuous
trend of rising in the trajectory of evolution of human civilization, while
variations in curve amplitudes indicate different rates of rise during
different periods. Society keeps developing amid constant fluctuations in
the curves, and there are different patterns of fluctuation in each phase of
history. We can see that human social development always maintained
an upward trend, but different phases had different paces and each had
its own distinctive features. Therefore, I believe that in order to better
understand the course of evolution of human civilization, it is necessary
to divide it into different stages and analyze each of them separately.

Here I define civilization as the sum total of achievements produced by

people in the course of their own survival and development, using their
own resources and the resources of their environment. The intent is to
measure how far people have moved from their closest animal ancestors.
It is easy to confuse Civilization with the separate concept of Culture,
which refers to the distinct ways of living, habits and beliefs of people
living in different places, which were formed over ages. Culture can be
used to distinguish various groups of people from different regions,
whereas Civilization can be used to describe what is universal to human
development and what distinguishes human from their animal ancestors.
In the long flow of human history, industrial civilization marked the
beginning of a new stage, as did the arrival of agricultural civilization.
Prior to the emergence of agricultural Civilization, mankind’s primary
means of production was hunting and gathering. In this essay, I have
broadly divided the development of human society into three stages,
based on the different means of production used in each: hunter-gatherer
civilization, or Civilization 1.0; agriculture (farming and animal
domestication) civilization, or Civilization 2.0; and the scientific and
technological civilization pioneered by the industrial revolution, or
Civilization 3.0.

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It would be a misunderstanding to think that there was little change in
mankind’s ability to capture and use energy throughout the period of
Civilization 1.0. In fact, there was a great leap forward some 70,000
years ago, not in the way of how human captured and consumed energy
but where they did so.
To understand the unique characteristics of humans, we must first
understand the environment in which they lived. To our best knowledge
today, the Earth has a history of 4.5 billion years, but living creatures
only have one of 1.5 billion years and Homo sapiens only have one of
150,000 years. The natural environment has a crucial impact on all
living creatures; and in particular, climate is the one with the greatest
impact.
Approximately 50 million or more years ago the earth’s climate
underwent a profound transformation. Continental drift during this
period caused most continents to move into the Northern Hemisphere
while the Southern Hemisphere was essentially covered by oceans.
Another change occurred 14 million years ago when the volcanic
activity which formed continental shelves basically ceased, accompanied
by a decrease in the Earth’s temperature. This resulted in year-round
snow cover at the South Pole, In contrast, because there was no
continental shelf at the North Pole, snow there melted relatively easily,
and it was not until 2.75 million years ago that a year-round snow cover
was formed there. Within this greater context, Milankovitch cycles
began to exert a cyclical influence on the Earth’s climate. The Earth
does not revolve around the sun in a perfect circle. Rather, its path is
often elliptical due to the gravitational pull of other planets. In addition,
the rotational course is often tilted, and there is precession in its
rotational axis as well. Because of the impact of these three factors, the
Earth’s climate experienced three major cycles of every 26,000, 41,000
and 96,000 years. These cycles created variations in the amount of solar

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thermal energy reaching the Earth and produced glacial and interglacial
periods in the climate.
There have been forty to fifty ice ages in the course of history of the
Earth, with the two most severe occurring 190,000 years ago and 90,000
years ago. These periods played a decisive role in the origin and early
development of humans. During the most severe ice age, Arctic Ocean
glaciers alone covered the northern regions of Europe, Asia, and the
American continent. Most of the planet’s surface water was absorbed
into glaciers and the Earth became extremely dry, with sea levels 300
feet lower than at present. Furthermore, sunlight was refracted back into
the atmosphere, thus lowering air temperatures. As the number of plants
and animals declined, greenhouse effect-producing carbon dioxide
decreased as well, and temperatures dropped event further. Homo
sapiens, the ancestor of modern humans, appeared approximately
150,000 years ago. The harsh climate of this period meant Homo sapiens
could only live in extremely limited areas of Africa near the equator.
The vast majority of geneticists and archeologists believe that at one
point the total human population dropped to approximately 20,000, and
there was no sign that humans would later conquer the Earth. This was
the darkest period in human history.
However, approximately 70,000 years ago, human fortunes changed for
the better when the Milankovitch cycle was reversed. Eastern and
Southern Africa started to become warmer and moister, providing
humans with better natural conditions for hunting and gathering. The
increase in food sources was accompanied by a rapid population
increase. It was at this time that humans, as a unique specie, began to
display true superiority.
As soon as humans appeared, they demonstrated considerable
differences from other animals, and even from the anthropoids who were
most closely related to them. This distinction was not fully manifested
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before the climate started to warm, but once the climate created
favorable conditions, humans began to display their great advantages.
Compared to other animals, the most unique trait of humans is their
enormous brain size and exceptional ability to calculate. Although the
brain accounts for only 2% of human body weight, it uses 20% of her
total energy. If humans could be born only after their brain had
completely matured, their mothers would be utterly unable to give birth.
This problem was solved by human babies being born prior to the
maturation of their brains. In this regard they are different from all other
mammals. Cattle, horses, sheep, lions, and tigers all can independently
stand, grow, survive, and even hunt for food soon after birth. However,
newborn humans are still far from maturity and from being able to
survive independently. They require a number of years of growth before
they can stand, walk, and talk, and before their brains fully mature. This
is why the infant mortality rate is high for humans, yet after maturity
their advantages become considerable. After the climate became
favorable to living creatures, human superiority became particularly
evident. This superiority was fully demonstrated in the first major leap
of human civilization when humans ventured out of Africa.

As a result of both climatic change and the impact of their living

environment, our ancestors traveled out of Africa and left behind their
familiar habitat to face new and completely different ones, thus opening
up new possibilities for our collective survival and development. This
major advancement in civilization demonstrated the unique initiative and
intelligence of humans as opposed to other animals. Starting in 60,000
BC, humans departed Africa from Somalia and went to Arabia and
Eurasia. They then traveled from northern Africa to Europe, from
Eurasia to eastern Asia, from southern Asia to Australia, from Eurasia to
North America via Alaska, and from North America to South America.

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 Figure 4: Times and Path Out of Africa-His Footsteps and the Times at
Which Man Arrived in Various Areas
Source: Ian Morris, Why the West Rules – For Now (2011) P168

Figure 4 provides a general overview of the path of human migration

during this period. In approximately 40,000 to 50,000 years, humans had
essentially spread across the entire globe. As the climate continued to
warm, more vegetation and animals started appearing in a greater
number of areas, thus providing humans, who relied on hunting and
gathering for existence, with the ability to survive in various regions
around the world. Although Nature provided the same conditions to all
types of living things, not all creatures had the strong initiative of
humans, which allowed them to overcome so many hardships and move
to all parts of the globe. Even today this journey is stunning and almost
unthinkable. Try to imagine our human forebears of this period crossing
glaciers and oceans and, without any understanding of the future or of
their destinations, taking over the entire globe with dogged
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determination, one generation after another. Over the course of tens of
millennia from the period between 60,000 BC and 12,000 BC, people
ventured out of Africa and ultimately all the way to the southern tip of
South America, spreading across the entire globe at an average speed of
one mile per year. At this time mankind’s primary tools were stoneware,
and the main mode of transportation was man’s two legs. Agriculture
and animal domestication did not even exist during this period. Humans
could not rely on animals for their livelihood, nor did they possess any
other tools. They had to rely on hunting and gathering along the way,
and also by organizing into very small bands as they ventured ahead.
Even today, I’m still in awe and inspired when I think of the long
journeys our ancestors undertook to get us where we are.
The problem of whether Homo sapiens, which ventured out of Africa,
was the ancestor of (modern) human beings was a contentious issue in
academia until it was ultimately solved in the 1990s. In 1987, a team led
by geneticist Rebecca Cann was the first to come to a groundbreaking
conclusion. Through a global study of mitochondrial DNA which is only
found in females and which can only be passed on by females, Cann
came to the following conclusions: first, there is greater human genetic
variation in Africa than in any other region; second, all human genetic
variations in other regions of the world are derived from variations
found in Africa; and third, the earliest mitochondrial DNA found by
scientists originated in Africa. These three discoveries led to an
inescapable conclusion: (everyone around) the entire world shares a
common female ancestor who resided in Africa and is referred to as the
“African Eve.” Many subsequent studies have confirmed Cann’s
discoveries to varying degrees, except they have moved forward the time
of Eve’s appearance to approximately 150,000 BC. In the 1990s, by
examining Y chromosomes which can only be passed down through the
DNA of males, other geneticists came to an almost identical conclusion:
namely, the common ancestor of all human males also lived in Africa,
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and is referred to as the “African Adam.” Therefore, by the 1990s the
controversy over whether Homo sapiens was the ancestor of (modern)
humans was settled. All people today share a common ancestor, the
Homo sapiens which ventured out of Africa and left its progeny all over
the world. All other ape-men and anthropoids became virtually extinct
within several tens of thousands of years after humans ventured out of
Africa.
After leaving Africa, humans left traces of their civilization all along
their journey. Among the most famous is the Altamira cave painting
from 18,500 years ago. The level of artistry of this cave painting is
astounding. It is so richly creative that after viewing it, Picasso lamented
“after Altamira, all is decadence.” He felt that after this wall painting, all
works were a step backwards.

Figure 5: Altamira Cave Painting

Source: Wikipedia Page for Altamira Cave

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All the archeological discoveries along the routes taken by humans as
they spread across the globe attest to their creativity and wisdom. This is
the case with paintings and the styles of stone implements as well as
with women’s ornaments. Although the earliest humans only hunted and
gathered and did not seem very different from other anthropoids, they
displayed great drive and creativity. No other animals, not even the other
anthropoids crossed glaciers and oceans and occupied every corner of
the globe within a short period of tens of millennia as humans did. Nor
did they leave behind their imagination and creativity everywhere they
went. This determination, drive, search for meaning and expression
through art was absent in all other anthropoids. The strong initiative and
superb intelligence of humans shown from this time on made Homo
Sapiens destined to be different from all other species ~ that had come
before.

While their way of living did not change drastically after going all over
the world from Africa , the number of humans rose rapidly from the
earliest population of approximately 20,000. More important was the
distribution of this population throughout the entire globe. Humans were
already prepared to take advantage of the new opportunities for
development presented to living creatures when the global climate
started to change. Therefore, this journey out of Africa allowed human
civilization to make its first great leap and greatly reduced the possibility
of extinction. Genetic diversity and adaptability increased greatly, and
humans began to search all over the globe for the living conditions most
conducive to development. By the time such conditions appeared in
some regions of the globe, the ability of humans to take advantage of
them was already fully formed, and a solid foundation for great new
advances of civilization had been laid.

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 Chapter 4 The Birth of Agricultural Civilization

Introduction: There was a great disparity in the extent to which farming and
animal domestication appeared in various regions throughout the globe, and this
was primarily because the regions in which wild strains of domesticable plants and
animals were found were not widespread and even less evenly dispersed. The
world’s two most advanced civilizations of today developed from the two most
fortunate regions most suitable for agriculture, one in the Southwest Asian and
Middle Eastern regions, and the other in the Yangzi and Yellow River basins of
China. The concept of East and West also emerged during this period. Agricultural
civilization spread either through colonization by advanced civilization, or by
peoples living in areas with less developed civilization learning new production
methods through imitation. Regardless of how it spreads, a new civilization would
ultimately reach all areas around the world, and the way of living of different
human races gradually grew more alike.

The last ice age of the Earth ended in approximately 20,000 BC. Sea
levels started to rise as melting glaciers flowed into the ocean. They
continued to melt until 14,000 BC. By approximately 12,700 BC,
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atmospheric temperatures rose back to within a few degrees of modern
day temperatures. This temperature was particularly suited to the
survival of plants and animals. The number and variety of animal and
plant species increased rapidly on the planet. For our ancestors, who
hunted and gathered for their living, there was also naturally a great
increase in the number of food sources. From 18,000 to 10,000 BC the
Earth’s total human population increased from less than 500,000 to more
than ten times. We may say that from this time on, humans started to
inherit the Earth and receive the gifts it bestowed on them.
While the warming climate was a great gift to humanity, the blessings
enjoyed by people living in different geographical locations varied. The
most fortunate lived in the “lucky latitudes” located in the regions from
20° north to 35° north in Eurasia, and between 15° north and 20° south
in the Americas. After 12,700 BC, various wild grains started appearing
in both eastern and western Eurasia. These grains possessed very large
kernels. Therefore, for each calorie spent on gathering these grains,
humans who ate them obtained a return fifty times greater. Due to this
abundance of food, the size of human communities started to expand and
cores of civilization gradually formed. Soon it was at the Hilly Flanks,
the most advanced region of the “lucky latitudes” which was located on
an arched foothill between the Tigris and Euphrates River basins and the
Jordan River, where the second great leap of human civilization first
took place.
Today we may surmise that this great advance in civilization may have
been due to the food-gathering experiences of women. While picking
fruit they thought about whether or not harvests would become more
predictable if they planted the wild fruit in fertile ground. Archeologists
have increasingly found more evidence proving that humans started to
grow plants during this period, and they gained a greater understanding
of an array of agricultural activities including selecting and hybridizing
species of superior quality, using fertilizers, and weeding. This signified
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the emergence of modern agriculture, as the crops produced by these
activities were no longer the primitive wild variety, but had a type of
interdependent relationship with humans. A similar process led to the
emergence of animal domestication, as animals were gradually tamed
for human purposes. Humans first reared wild animals in captivity. They
then bred the animals, selectively mating those of superior quality and
artificially feeding newborns. This continued until these domesticated
animals could no longer survive independently in the wild and had to
become interdependent with people.
There was a great disparity in the extent to which farming and animal
domestication appeared in various regions throughout the globe, and this
was primarily because of vast differences in geographical environments
and natural resources. Biologist, geographer and historian Jared
Diamond first discovered the decisive role geography played in
agricultural civilization. He pointed out that there are approximately
200,000 unique plant species in the entire world. Only almost 2000 of
them are edible, and approximately only one or two hundred of these can
be domesticated. Today, half of human energy capture comes from grain,
primarily wheat, corn, rice, barley and sorghum. However, the original
wild strains of these grains were not broadly spread throughout the globe,
and were even less evenly distributed. In nature there are a total of 56
edible wild plants with large kernels and high nutritional value. There
were 32 strains in the Hilly Flanks of Southwest Asia, six around East
Asia and China, five in Central America, four in Sub-Saharan Africa,
four in North America, two each in Australia and South America, and
only one in all of Western Europe. Therefore, the probability of
agriculture emerging in the Hilly Flanks far exceeded that of other
regions.

The situations were similar for animal domestication: there are 148
species of mammals which weigh more than 100 pounds. By 1900, only
14 species had been domesticated, and seven of these were (originally)
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wild species native to Southwest Asia. Today the five most important
domesticated animals in the world are: sheep, goats, cattle, pigs and
horses. With the exception of horses, all of the original strains of these
animals were found in Southeast Asia, five of them in East Asia, and
only one in South America. None of these species were found in North
America, Australia, or Sub-Saharan Africa. Even though there are many
animals in Africa, the overwhelming majority of them, such as lions,
giraffes and others, are not domesticable. Thus, in terms of the
distribution of agricultural resources, the Hilly Flanks area was the most
fortunate region, followed by the Yangzi and Yellow River basins in
China. While the latter were not as fortunate as the former, they still had
the second best natural resources in the world. Conditions in other
regions of the world were far inferior to these two.
In reality, the very emergence and dissemination of agricultural
civilization was very closely connected with natural resources.
Agriculture started to emerge in the Hilly Flanks region in
approximately 9,600 BC, and it appeared in China in 7,500 BC.
Agriculture basically did not appear in Australia, and it also developed
much later in the Americas. An indigenous plant from the Americas
called teosinte was corn’s wild ancestor. Dozens of generations of
genetic mutations were necessary for the breeding of teosinte into corn.
There were also no domesticable native animals in the Americas, so
natural conditions for the beginnings of agricultural civilization on the
continent were extremely scarce. Another factor which caused
agricultural development to lag behind in the Americas was the
continent’s geographical isolation. Human ancestors first crossed a land
bridge from Eurasia to the American continent in 15,000 BC. Yet by
12,000 BC, the American and Eurasian continents were separated by an
ocean, making it impossible for agricultural civilizations which emerged
in Eurasia to spread to the Americas. Therefore, natural conditions for
the development of agricultural civilization were very poor on the entire
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American continent, and it also could not interact with other regions
which had achieved agricultural civilization. In Western Europe natural
conditions were likewise very poor. However, because traffic between it
and the Middle East was relatively unobstructed, agriculture had spread
to all of Western Europe by approximately 4000 BC. In Asia, agriculture
originated in China in 7500 BC and was disseminated in all directions. It
was introduced into present-day Southeast Asia and then spread to
Korea and Japan in 1500 BC, basically covering all of (East) Asia.
Competition arose when agricultural populations entered a region where
hunting and gathering was still the means of production. Agriculture was
itself an advance in civilization. The energy capture and use of
agriculture societies, as well as their ability to organize, far exceeded
that of civilization 1.0. Once these two disparate civilizations clashed, it
was inevitable that the advanced civilization would subjugate the more
backward one. One manner in which civilization was spread was
colonization by the more advanced culture, while another was the
imitation and learning of new methods of production by people living in
regions with more backward civilizations. Regardless of the manner of
dissemination, new civilizations ultimately spread all around the world,
and the lives of different peoples gradually grew more alike. The
ancestors of about 20-25% modern Europeans came from the regions of
Southwest Asia or the Middle East where agricultural civilization first
appeared. No similar specific calculations have been done for Asia, but I
believe that regardless of whether we use ethnographic surveys of Asian
peoples or whether through direct observation, the ratio of those
descended from Chinese ancestors would be similar.

Although the great majority of human traits are alike, the patterns and
rates of development during the great advance of civilization 2.0 differed
between regions because of variations in their natural conditions and
whether they had the opportunity to interact with this new civilization.
On the one hand, geographic location determines the natural conditions
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of a region; on the other hand, it also determines whether it has
opportunities to interact with advanced civilizations, and it therefore
creates disparities in development between various places.
The greatest civilizations of our age descended from the two most
fortunate centers: one in Southwest Asia and the Middle East, and the
other in the Yangzi and Yellow River basins of China. The concept of
East and West also emerged during this period, and geographical
location had become extremely important ever since the appearance of
agricultural civilization. The course of development for all regions
which could interact with others was extremely similar. The manner,
rate and path of development, as well as the rate at which civilization
was disseminated, were very alike whether in the Hilly Flanks, China, or
Europe. For example, the sequence in which certain phenomena
appeared among different groups of people, such as planting, seed
breeding, the emergence of large villages, the raising of livestock, the
restructuring of ways of living and family organizations, ancestor
worship, the emergence of pottery, and the formation of religious
ceremonies, was extremely similar. While different living habits and
cultures appeared in different regions, in terms of the development of
civilization itself, given enough time, advanced civilizations were
always ultimately disseminated to every possible location through
colonization, imitation or assimilation. Therefore, by approximately
1500 BC all of Asia, the Middle East, the Mediterranean region of
northern Africa and Europe had already entered the era of civilization
2.0. Due to inherently inadequate natural resources and geographical
isolation, Americas and Australia didn’t independently develop
agriculture. They were basically still in civilization 1.0. While limited
forms of animal domestication emerged in Sub-Saharan Africa, farming
could not develop because of the constraints of geographical conditions.
Agricultural civilization’s origins, genesis, development and
dissemination were all intimately linked to a region’s geographical
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location. Both the initial natural conditions and the ease with which a
region could interact with other centers of civilization determined the
timing and extent of the development of agricultural culture there.
Africa’s geographical conditions near the equator allowed for the birth
of the human race to occur there, and global warming enabled
civilization 1.0 to develop in almost every region of the world. However,
once civilization 2.0 arrived, the geographical conditions which favored
civilization 1.0 were no longer necessarily advantageous, and even
became unfavorable in many places. The conditions which had been
favorable for the development of civilization 1.0 in Africa and the
Americas became the greatest barriers to civilization 2.0. Civilization
2.0 naturally developed more rapidly in places with comparatively good
conditions for agriculture, such as the Middle East and Southwest Asia.
They had a great advantage from being in the forefront for 2000 years.
However, this advantage was not permanent. Both China and Europe
slowly caught up later with the formerly more advanced Middle East,
demonstrating that while people act similarly in large groups, geography
is responsible for differences in the rates and sequencing of development.
Human nature played an important role throughout history. Morris refers
to part of this nature in his Morris Theorem: “Change is caused by lazy,
greedy, frightened people looking for easier, more profitable, and safer
ways to do things. And they rarely know what they are doing.” However,
humans also displayed a great capacity for learning and initiative. As
soon as natural conditions presented them with an opportunity, they
quickly transformed natural resources and conditions into an enormous
driving force for their own survival and development.

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 Chapter 5 Agricultural Civilization’s Hard Ceiling and the
Three Attempts to Reached It

Introduction: Photosynthesis placed an ever-present upper limit on social

development in agricultural civilizations. Prior to the arrival of the Industrial
Revolution, the trajectory of social development in agricultural civilization always
adhered to a cyclical pattern in which agricultural development rose, reached the
ceiling, and declined. Societies would reach an apex after every period of
development, and once this insurmountable ceiling had been reached, decline was
unavoidable. They fell back, rose again, reached the ceiling, and went into decline
once more in this repeating cycle. Over the last several thousand years, there was
not only a constant tension between the production of the pie (wealth creation) and
how it was divided (wealth distribution), but this tension also became increasingly
severe.

The development of agricultural civilization led to sharp population

growth. A long period of population increase began in approximately
10,000 BC, and more land was continuously put under cultivation. Yield
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per unit of farmland also increased as a result of ceaseless improvement
in agricultural technologies. Centralized irrigation techniques first
appeared in the Mesopotamian plains of the Middle East in
approximately 5000 BC. Hereafter, a series of advanced agricultural
technologies such as deep plow, crop rotation, seed selection, seed
breeding, fallow, improvements on farm implements, and use of
livestock were employed in both the East and West. At the same time,
iron farm implements, water wheels, windmills and other farming tools
also emerged. People improved their organizational abilities in order to
make better use of these new technologies. They created cities, states,
and even larger empires. Population movement and predatory wars arose
between city states and nations. Human exposure to animals and
migration led to the dissemination of germs and plagues and gave rise to
new wars. At the same time, population movements and new
geographical discoveries also promoted trade and the social division of
labor. Large empires were able to build stable unified markets, and
advanced technologies could be disseminated more rapidly over large
territories. Countries which were first to develop organizational
capacities, establish institutions and innovate technologies gained
greater advantages and challenged the existing centers of civilization,
turning the latter’s geographical advantages into disadvantages,
supplanting them and becoming the new centers of civilization. The
entire agricultural civilization 2.0 advanced and developed by constantly
taking two steps forward and one step back.
Prior to the arrival of the industrial revolution, the trajectory of social
development in agricultural civilization always adhered to a cyclical
pattern in which it rose, reached the ceiling, and declined. Societies
would reach an apex after a period of development, and once this
insurmountable ceiling had been reached, decline was unavoidable.
They fell back, rose again, reached the ceiling, and went into decline
once more in this repeating cycle.
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 Figure 6: Human Social Development Indices for East and West (2000
BC－1800 AD)
Source: Ian Morris, Social Development (2010)
At the heart of the matter is the fact that agricultural civilization has an
upper limit to its social development because of a bottleneck resulting
from inherent inadequacies. Agricultural crops are produced by
photosynthesis. Animals must also consume plants, and the ratio of
calories produced by animals vs the plants they consume is ten to one.
The energy which photosynthesis can ultimately produce is bound by
upper limits imposed by land area and yield per unit of land. Given that
there are upper limits to both of these, natural resources will of course
also have upper limits. Moreover, humans still could not control their
population during this period. An important way that humans used new
energy was having more children, so limited natural resources combined
with almost unlimited population growth meant that population growth
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would ultimately have to be absorbed and constrained by catastrophes.
Beginning around 10,000 BC, this basic bottleneck was a problem which
all of agricultural society was never able to solve. In examining the
entire history of civilization 2.0, particularly the past several millennia,
we find that not only was there constant tension between producing the
pie (wealth creation) and dividing it (wealth distribution), but this
tension grew increasingly severe.
In general, humans faced five types of disaster in the age of agricultural
civilization: famines, wars caused by population movements, epidemics,
climate change, and the failure of governments. Harvests are subject to
weather, and climate changes both large and small will directly impact
crop production. Small changes can lead to crop failures and cause
localized famines, while major long-term changes can lead to systemic
crop reductions in certain regions. These will inevitably lead to large-
scale migration, which in turn will cause power struggles and war.
Because their livestock consumed large quantities of plants, nomadic
peoples were even more affected by changes in the climate. In addition,
they were highly mobile and therefore more inclined toward plundering
and war-making. For several millennia, the primary cause of war was the
struggle between nomadic peoples and farming populations, and a main
source of migration was movement between agricultural populations.
Another direct result of nomadic movements on farming populations
was the dissemination of germs and viruses and the ensuing large-scale
epidemics. This was one of the major causes of population reductions in
history.
In order to meet these challenges, people in the Eastern and Western
centers of civilization began to strengthen their organizational capacities.
This led to the emergence of cities, states and empires. On one hand,
these innovations in social organization created peaceful environments
and spurred trade and the dissemination of technologies within countries.
Common markets were created, thus promoting social development. On
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the other hand, the disparity between advanced and underdeveloped
regions also became a major cause of war, the plundering of resources,
and conquest. Climate changes often revealed the advantages of certain
regions and caused centers of civilization to shift. However, the
development of new centers would, at the same time, bring about a new
round of challenges, which led to further shifting. Geographical
advantages and disadvantages were in constant flux, and society as a
whole advanced by taking two steps forward and one step back each
time.
In examining the course of history, we find that in approximately 1300
BC, Western social development arrived at one of its intermittent
pinnacles, as the social development index increased to a level six times
greater than at the outset of agricultural civilization in the West, and it
was also four times greater in the East. However, the West’s centers of
civilization then experienced region-wide destruction for the first time.
When several of the five disasters appear simultaneously, civilization
within a civilized area will be destroyed. This collapse caused Western
development to revert to its level of 600 years ago in the ensuing two
centuries. Meanwhile, the East continued to advance during this period.
This was the first time that the disparity between the two great Eastern
and Western centers of civilization began to narrow, and their
subsequent development was astonishingly similar.
During this period, nomadic peoples from the north started to invade the
two major centers of civilization in Eurasia. The nomads of this era were
active along the great “steppe highway”, a long band of steppes from
Northeast China and Mongolia in the east to Hungary in the west,
stretching in a long line across the Eurasian continent. For several
thousand years, they continued to be the principal common enemy of
agricultural civilizations in both East and West. The warfare and
struggles between civilized agricultural states and nomadic peoples

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never ceased, but Europe and Asia also became interconnected because
of nomadic activities along the great “steppe highway”.
Despite facing challenges, agricultural civilization reached its apogee at
least three times, and it continued to innovate as it responded to the
threats. Institutional innovation in the era of agricultural civilization first
involved the process of countries with rudimentary management
evolving into ones with more advanced governance, and this was mostly
completed between approximately 1000 and 200 BC. The West
transitioned from rudimentary states to advanced governmental systems
such as Cyrus’ Persian Empire and Darius’s Persian Achaemenid
Empire. Next came the city states of Greece, and then the Roman
Empire which aggregated all of these and represented the most advanced
Western government system. Because it was located along the
Mediterranean Sea, the Roman Empire had extremely convenient access
to maritime routes. Thus, a vast trade empire which straddled Europe
and Asia took shape within its boundaries. Natural resources were
optimally allocated and for the first time, and social development
reached its peak in an agricultural civilization. During the period from
approximately 200 BC until the first century AD, Rome entered its
zenith. At this point the social development index was ten times greater
than at the beginning of agricultural civilization. During the same period
in the East, after the rudimentary governments of the Xia, Shang and
Zhou states and the transitional attempts at advanced government of the
Spring-and-Autumn and Warring State periods, advanced and
centralized political governance first appeared during the Qin and Han
dynasties, and a large trans-regional empire also emerged. Although
social development during the Qin and Han was still slightly behind that
of Rome, it was still the most advanced in the East.

After agricultural civilization had reached its apogee for the first time,
the five major challenges appeared at almost the same time in both East
and West. In particular, due to the barbarian invasions of nomadic
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peoples together with the failure of these regions’ governments and the
spread of epidemics, the two great empires of the West and East fell in
succession after reaching their heights. As a result, all civilized regions
underwent devastating decline, which lasted more than a thousand years
in the West and almost 400 years in the East. After 400 years, the golden
age of the Tang and Song Dynasties emerged in the East. This allowed
the eastern empire of the Song dynasty to reach, for the second time, the
apex of agricultural civilization. The Song Dynasty equaled and even
surpassed the accomplishments of the Roman Empire. However, after
reaching this peak, the Song was once more defeated by Mongolian
horsemen and nomads. The political power of the nomads, together with
the spread of epidemics, caused the Song Dynasty’s effort to reach the
heights to eventually fail. Mongol armies swept across all of Eurasia and
conquered virtually all the countries which were centers of civilization,
from China all the way to Hungary, Russia and the Middle East. They
also brought epidemics to every corner of the world. While this conquest
laid waste to all of the Song Dynasty’s accomplishments in the East, it
also spread the advanced civilization of the Song to Western Europe,
which was relatively undeveloped during this period. At that time, when
the Song Dynasty had reached the zenith of its civilization, it produced
approximately over one hundred thousand tons of cast iron annually. It
was not until 1700 that all of Europe combined achieved this figure.
China’s most important technological innovations of the time such as
cast iron, gun powder, the compass, the spinning wheel, the windmill,
the water wheel and farming techniques were all disseminated to Europe.
Another outcome of the Mongolian conquest resulted from what it did
not do. After its campaign reached Hungary, the Mongolian conquest
came to an abrupt halt. It did not reach any part of Western Europe, so
its destruction did not extend to this region, yet the technologies (of the
East) were disseminated there. This provided an excellent setting for the
next explosive advance of civilization in Western Europe. At this time
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Europe was in a state of feudal warfare. Several attempts at unifying the
region after the Roman Empire had all failed. European governments
consisted of hundreds of feudal states of varying sizes, and for over a
thousand years, there had been endless wars between these kingdoms
and the Papacy, and with each other. Therefore, after Chinese firearms
arrived, they were rapidly developed into guns and cannons. These guns
and cannons were in turn disseminated back to the East. Several hundred
years later and with the assistance of guns and cannons, the shared
efforts of Russia and the Qing Dynasty in the East and West completely
brought to heel the nomads who had wreaked havoc for several
millennia in lands populated by farmers. By around the seventeenth
century, the great “steppe highway” was completely cut off after China
and Russia signed the Treaty of Nerchinsk in 1689. The majority of this
route was apportioned to Russia and a considerable section to China.
China’s territory had also expanded from the original Yangzi and
Yellow River basins into the northeast as well as Mongolia, Xinjiang
and Tibet, thus opening a new land frontier for China from this time on.
This also provided land resources for renewed social development,
although the yields from these lands could not compare with those from
the Yangzi and Yellow River basins.
During the same period in the West, Western Europe, which the
Mongolians had spared, started to display a great new vibrancy from the
15th century on, and the Renaissance emerged in Florence and Venice.
Because of the introduction of Chinese technologies, all of Western
Europe experienced a new round of social development. The
introduction of these new technologies, coupled with Marco Polo’s
praise for China, gave rise to both the West’s first real bout of China
fever and to efforts to seek the wealth of the Orient. These provided the
essential driving force for the next great maritime voyages. From 1500
on, Western European society began to gradually develop. By the
seventeenth and eighteenth centuries, both the East and West once again
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started to push against the upper limits achievable by agricultural
civilization. However, this time the West and East encountered
completely different challenges and opportunities. As a result, their
fortunes for the next several centuries would diverge greatly, and an
entirely new path for human destiny was on the horizon.

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Chapter 6 Agricultural Civilization’s Revolution of Thought
and Institutional Innovations

Introduction: The great thinkers of the Axial Age appeared on the scene at almost
the same time in every one of the world’s centers of civilization in Eurasia. Their
ideas were startlingly similar, as they pondered questions concerning the pain of
the common man after the destruction of civilization, the struggles of those on the
periphery, and the groan of the underclass. The most important legacy of Axial
Age thinking was the establishment of sophisticated governments and systems of
governance. In China, Axial Age thought resulted in the creation of the greatest
political institutions in its history and the birth of Keju, the imperial examination
system, which also helped China take the lead over the West for the next one
thousand or more years. Another distinctive feature of the Axial Age was its
diversity of thought. In particular, modern science ultimately developed gradually
out of its rational branch. This revolution of ideas laid the intellectual groundwork
for human development over the next several thousand years and continues to
impact future generations to the present day.

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The iron law of agricultural civilization is its hard ceilings of social
development. Each instance in which civilization reached its high point
was followed by decline and destruction. This tested the peoples of these
periods and brought them suffering and misery. However, suffering can
often become the source of ideas and a revolution of ideas.
After World War II, as the German philosopher Karl Theodor Jaspers
(23 February 1883 – 26 February 1969 ) contemplated the disaster
brought upon Germany and the world, he pointed out empathetically that
every human disaster has resulted in a revolution of ideas. He was the
first to note an axial revolution of ideas in approximately the fifth
century BC, which he referred to as the Axial Age. In China in East Asia,
Confucius started to spread his teachings, while thinkers from many
schools contended with one another at the same time. In the Middle East,
the cradle of Western civilization, the prophets recorded their thoughts
on the world and on God in the Old Testament and Bible. In India,
Siddhartha Gautama gave up his affluent life as a prince to live amongst
beggars in order to experience suffering with them, and preached about
how to extricate oneself from suffering. The meanings of the individual,
society and the state were comprehensively examined by Socrates, Plato,
and Aristotle in Greece.
This revolution of ideas laid the enduring intellectual groundwork for
human development over the next several thousand years, and continued
to impact future generations to the present day. The thinkers of the Axial
Age appeared on the scene at almost the same time, and came from
every one of the world’s civilization centers of Eurasia. In addition, the
direction of their thought was startlingly similar. What all these thinkers
had in common was that they were at the fringes of the civilizations of
their time. They all pondered questions concerning the pain of the
common man after the destruction of civilization, the struggles of those
on the periphery, and the groan of the underclass. Confucius from the
Kingdom of Lu, Kapilavastu’s Siddhartha Gautama, Athen’s Socrates
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and the wandering prophets of Israel all took the underprivileged and the
ordinary people as their starting point and the object of their concern.
What they all opposed was rulers and evil governments which were
corrupt and barbaric, and which duped their citizens. Thus their ideas
were extremely revolutionary, yet none of them were revolutionaries
themselves. Rather, their mission was primarily to explore the ultimate
questions about humans, society and the state: What is the significance
of humans? Why does government exist? What is good government?
What is a good society? They also sought the meaning of life and sought
to rise above their own lives and personal interests. For example,
Confucius spoke of ren (virtue), Siddhartha Gautama referred to Nirvana,
the Old Testament talked of God, and Socrates and other Greek
philosophers discussed contemplation. They all sought the rise of spirit
and meaning of life for humans in this world. At the same time, these
thinkers all stated the golden rule for how people should treat one
another. For example, Confucius stated “do not do to others what you
would not have them do to you.” The Bible tells us to “do unto others as
you would have them do unto you,” and Siddhartha Gautama asserted
that all creatures in this world must have compassion for one another.
Based on this core belief, the good societies they described were based
on this type of interpersonal relationship. Effective governments also
had to be people-centered, as Confucius and Mencius said: “The people
are the most important; the state is next; the sovereign is the least
important.” Even so, these thinkers were not particularly successful in
the eras in which they lived, nor were they widely accepted. Socrates
was put to death in democratic Athens; Confucius wandered from place
to place and his views were not accepted during his lifetime; the
Israelites lost their homeland and wandered around the world for
thousands of years; Siddhartha Gautama did not have any real influence
while he was alive. However, the rich content and enduring power of
their ideas transcended their own lives and continue to nourish people’s
souls to this day.
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The ideas of the first Axial Age were embodied in the first attempt of
agricultural civilization to reach its greatest heights. Failure after this
first attempt occurred at almost the same time in both West and East,
and they immediately entered into a dark age which lasted centuries or
even over a thousand years. The suffering felt during this period brought
about the second wave of Axial Age thought. After undergoing
simplification, Buddhism spread widely across China and almost
became the state religion; in the West, Christianity became the state
religion of the Roman Empire and spread rapidly throughout the West;
Islam emerged amongst the desert nomads of the Arabian Peninsula.

Islam is an extremely unique phenomenon. This is the only religion

created by nomads and it was a cultural leap forward brought about by
nomads themselves. Islam’s founder, Mohammed, was an illiterate who
married a much older widow. He ran a small business and had never
achieved anything notable, nor were there any signs indicating his
extraordinary future. However, when he was 40 years old, he began to
dream of the Angel Gabriel delivering messages to him. Initially,
Mohammed was unable to understand his dreams no matter how he tried.
Only with the encouragement of his wife did he start to believe that he
had been chosen to be the voice through which God would speak. He
became a prophet and started to share with others what the angel had
told him in his dreams. The words he preached were richly poetic and
extremely persuasive, and he quickly attracted a huge group of believers.
Subsequently, in the mere twenty or thirty years remaining in his life,
Mohammed organized a small tribe of nomads eking out living on the
periphery in the desert and conquered the entire Middle East, Egypt, and
the Mediterranean Sea. He and those who came after him established the
world’s third greatest religion and founded a Muslim empire. In
contemporary Chinese slang, this was a good example of Diaosi Nixi, or
a counterattack by the underdog. Because middle eastern nomadic
culture started to develop relatively late, Islam under the rule of
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Mohammed and his successors demonstrated ample respect, tolerance,
and humility in learning from peoples with more mature cultures. Greek
civilization and Roman cultures, Judaism and sometime even
Christianity were all more or less tolerated during the Muslim era, and
were disseminated to East Asia via the great “steppe highway” (the long
band of steppes from Hungary to Mongolia). Indian spices as well as
Chinese porcelains and silk were also transported along this route, which
formed the so-called Silk Road and linked up trade between the East and
West.
The second wave of the Axial Age emphasized the comforting of the
soul, and was manifested almost entirely as religion. Buddhism,
Christianity and Islam all emphasized the liberation of the afterlife,
comfort from the sufferings of this world and spiritual solace. The two
waves of the Axial Age both appeared in the course of humanity’s
progression from rudimentary forms of government to advanced ones,
and they laid the ideological foundations for the more sophisticated
forms of government which were established later. Advanced
government systems were represented by the Roman Empire in the West
and initiated by the Han Dynasty in China.

The most important legacy of Axial Age thinking was the establishment
of sophisticated governments and political systems. In China, Axial Age
thought resulted in the creation of the greatest political sytem in her
history -- the birth of Keju, the imperial examination system, which was
the greatest innovation of political system in the era of agricultural
civilization 2.0 and the second greatest one in the entirety of human
history in my opinion.
In confronting the challenges faced by agricultural civilization, all
empires required peaceful development and trade. It was only by
division of labor through trade that resources could be optimally
allocated for farming and handicraft industries in different regions. In
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particular, the optimal allocation of resources was especially important
because agricultural civilization was limited by its natural hard ceiling
and finite resources. Therefore, the larger and more populous the
country and the more diverse its territory, the greater its ability to cope
with challenges. So it was inevitable that governments would shift from
rudimentary ones to more advanced ones.

However, after their formation, all advanced governments had to solve

the problem of how to govern effectively. The traditional mode of
government was based on consanguinity. Blood relations with those who
conquered a country became the most fundamental basis for the
distribution of power. However, consanguinity was no guarantee of
ability, and it was particularly unable to ensure the capability of a
government after several generations. Therefore, such governments
could not be sustained. Well-administered governments require the rule
of elites and the appointment of the wise. However, the problem with
appointing the wise is that there is no guarantee of their loyalty or of
government stability. In particular, if capable military men also have
political power, they will naturally threaten the peace of the regime itself.
In confronting the five major challenges of agricultural civilization,
people had to form great empires, and how to effectively administer
such large empires was always a difficult problem until China invented
Keju system based on Axial Age ideas.
In Keju system, candidates of government officials were assessed based
on their learning abilities, levels of knowledge and administrative
abilities. Everyone was given an opportunity in a fair, transparent and
open manner, and participation was not limited by family background or
bloodlines. Outstanding and capable persons were selected from all
levels of society and allotted political power based on their examination
results. Furthermore, the use of Keju system created a unified official
ideology which ensured that all who passed the examination were loyal
to the government. This system for assessing and selecting officials
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guaranteed that those chosen would be fully capable, could serve the
people, and would be loyal to the government. The management of
military officials by civil servants ensured that the government would
not be challenged. Intellectually and ideologically, scholar-bureaucrats
were loyal to both the imperial political system and to the Confucian
moral code. They served both the commoners and the imperial
authorities, while realizing their ideals and ambitions, supporting their
families and building legacies for their descendants. This was a near-
perfect attempt to create an institution. It originated in the efforts during
the Western and Eastern Han dynasties to select wise officials through
recommendations. After several centuries of practice, it was officially
established as an institution during the Sui dynasty. The Keju system
thereafter provided the strongest guarantee of stability for the
administration of China’s vast empire over the next one to two millennia.
It also provided the foundation for China to rise again after 400 years of
post-Han war and decay, and made it possible for the East to have
entirely different fortunes from that of the West after the Han Dynasty
and Roman Empire both went into decline. For the roughly 1200 years
from 500 to around 1770 AD, China was more advanced than the West,
and the innovation of Keju system was one of the most important factors
which propelled China into the lead. The establishment of this institution
allowed China to basically solve the problems of administering a vast
empire and ensure a lasting peaceful environment. China was also able
to create large trade markets, promote the exchanges of technologies and
their broad applications, and develop its culture. In addition, it was
capable of dealing with famines, epidemics and foreign invasions. This
enabled China to be more advanced than almost any other country for
the next thousand or more years. Even British Empire duirng the era of
industrial civilization borrowed from the Chinese civil service system in
creating its own civil service bureaucracy. Today, the United States
military, all governments which have adopted a civil service system, and

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non-governmental organizations, have all been influenced by China’s
Keju system to some extent.
While Keju system largely solved the problems faced by China’s
imperial government, its central shortcoming was the selection of the
emperor, who was the supreme leader. The civil service system was
essentially invented to perpetuate imperial rule, but imperial succession
was still based on consanguinity. If the emperor was extremely capable,
the full potential of the empire’s power could be realized. This was
repeatedly proven during the reigns of emperors Wendi, Jingdi, and
Wudi of the Han Dynasty, Taizong of the Tang Dynasty, and Taizu of
the Song Dynasty. However, blood ties are no guarantee of competency
and cannot ensure that the throne will not be handed down to an
incapable heir. Hence there was no way to prevent the emergence of
weak or inept emperors. When such rulers were in power, infighting and
corruption would inevitably arise within the government. The instability
of imperial succession affected the rise and fall of dynasties. However,
every dynasty hence retained the basic political institution of Keju
system regardless of its innovations in administrative details. The impact
of Keju system on Chinese politics began in the Han and Tang Dynasties
and continues to the present day.
Another significant legacy of the Axial Age’s revolution of ideas was its
diversity of doctrines. In China, a hundred schools contended, each with
their own ideas; in Greece, Aristotle concerned himself with an
extremely diverse range of issues, including science, metaphysics, law,
government, logic and oratory. The emergence of diversity in thought,
and its rational branch in particular, pointed out another important
direction for thinking. Ideas were not merely for the creation of fair
societies and government and a means of spiritual solace. Beginning
with the Greek notion of “knowledge for sake of knowledge itself,”
ideas themselves became an objective of human pursuit. Modern science
gradually developed out of advancements in human thought, and
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humans thereafter truly started to rule the world. This rational branch of
thought pointed out a different and extraordinary direction for human
development.

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Chapter 7 The Discovery of the American Continent and its
Epochal Impact

Introduction: Only a few generations after Columbus’s arrival in the Americas,

75% of the indigenous population had been wiped out by germs. Influenced by the
involvement of England and the new immigrant nations it established, the Trans-
Atlantic economy became a unique and unprecedented type of economy. It was
completely under the control of free merchants and capitalists, and formed a
global free market economy with the support and protection of limited government.
The publication of Isaac Newton’s Mathematical Principles of Natural Philosophy
in 1687 ignited a modern scientific revolution and brought Europeans a new world
view. It also marked the beginning of an entirely new era. Together, the new
Trans-Atlantic free market economy and the scientific revolution provided the
basic conditions for the birth of the modern age.

Geographical location was always the weak spot of Western Europe

during the era of agricultural civilization. While the center of the West
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had already shifted from the Middle East to the Mediterranean and
southern Europe, northwestern Europe was still a backward region. In
addition, it was extremely far from the wealth of China and India.
Fifteenth century Europeans were full of longing to see the paradise-like
China described in Marco Polo’s works, and they hoped to establish
trade routes to India and China. At that time, trade between the West and
East was mainly conducted via a land route which passed through the
Middle East. The Middle East was then already under Muslim
occupation, and this passage was very treacherous because of warfare
between Christians and Muslims. Only a few scattered European
merchants were able to conduct trade, such as the Venetian merchants
who primarily dealt in spices from India. The West began the great
maritime age in order to discover sea routes to India and China. Vasco
da Gama of Portugal was first to establish a route when he rounded
Africa’s Cape of Good Hope. Next, Columbus set sail hoping to find a
direct route to Asia via the Atlantic Ocean, and accidentally discovered
an entirely new continent. He mistakenly believed he had arrived in
India and referred to the native population as Indians. However, not only
did this discovery alter the course of European history, it also
completely altered the entire trajectory of human history as well.
Humans first set foot on the American continent around 15,000 years
ago. The ancestors of humans who ventured out of Africa at that time
crossed the Siberian land bridge and directly made their way on foot to
the Americas. However, in 12,000 BC the ice age came to an end, the
earth’s climate started to warm, sea levels rose and the land bridge
ceased to exist. Thus for the next ten thousand or more years, the entire
American continent was isolated by the Pacific and Atlantic Oceans and
connections with other civilizations were completely severed. While its
own climate conditions were very favorable, there were hardly any wild
plants and animals suitable for farming and animal domestication, so the
natural resources required for agriculture were extremely scarce. There
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were only four types of plants suitable for farming and no wild animals
suitable for animal husbandry. Corn, which had the highest yield among
native plants, was difficult to breed, requiring over ten generations of
breeding to domesticate. Therefore natural conditions were extremely
unfavorable for the development of agricultural civilization. The
Americas got off to a slower start than all other regions, crop growing
was extremely slow to develop and animal domestication never
developed at all. The level of development of social organization was
therefore also very low.
When Europeans arrived on the American continent, there were only
two relatively large governments in today’s Mexico and South America,
and both were relatively rudimentary. The comparative advantages of
the European invaders were evident. Due to many years of continuous
warfare in Europe, its people already possessed abundant battle
experience and a great capacity to organize for war. Technologically,
they also had cast iron, guns and cannons. Therefore, resistance by the
indigenous populations was doomed to fail. However, the most lethal
weapon the Europeans brought was not their cast iron, guns or cannons,
nor was it their skills in warfare. Rather, it was the germs and viruses
that they and their livestock carried. Over the past several thousand
years, humans had gradually gained the upper hand in their battle with
germs. However, these diseases took a tragic toll. The Black Death
killed one third of Europe’s population in one instance, and other
illnesses such as smallpox also led to the deaths of almost 10% of the
population during the Middle Ages. While the survivors had developed
antibodies, these germs and viruses did not die out, and they continued
to coexist with humans and livestock. They were not a threat to the
Europeans who had already been tested by them and carried antibodies.
However, the indigenous peoples of North America had never been
exposed to these germs and had absolutely no immunity. Only a few

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generations after Columbus’s arrival in the Americas, 75% of the
indigenous population had been wiped out by germs.
The American continent originally only had a sparse population and
poorly developed governments. After the arrival of Europeans, the
governments were utterly destroyed and the indigenous populations
almost completely eradicated by germs. In the early part of the sixteenth
century, the Europeans found they had become the heirs to a brand new
continent, and they were also pleasantly surprised to find that this
continent possessed extremely favorable natural conditions suited for
planting crops and raising livestock. Furthermore, this new continent had
a land area almost nine times greater than that of Western Europe, as
well as abundant natural resources such as large quantities of silver and
other minerals. This new continent completely changed the economic
situation in Europe. Spain alone shipped back 50 tons of silver from
South America between the sixteenth and eighteenth centuries. The
discovery of the Americas solved Europe’s bottleneck of land shortage
in one fell swoop by providing new possibilities for population
movement. In particular, the Americas quickly became a better outlet for
those who had been persecuted in their own countries, as well as those
marginalized unfortunates who did not enjoy any inheritance rights.
Moreover, the Americas possessed fertile land which was suited for
planting any type of crop. The Europeans took a small number of luxury
items to Africa and exchanged them for slaves. These slaves were made
to grow sugarcane, cotton and timber in the Americas. These agricultural
products would then be shipped to Europe, and new industrial products
would be sent back to the Americas. This process created a vast Trans-
Atlantic trading ring which caused the European economy to quickly
become dynamic after the sixteenth century, and created the conditions
which allowed it to break out of the economic bottleneck of agricultural
civilization.

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Different European nations had different attitudes towards their colonies
in the Americas. The early colonial powers of Spain and Portugal did not
regard commerce as important, and their authoritarian monarchies
merely treated their country’s merchants as their own ATM. Therefore,
the new continent became an opportunity for plundering and obtaining
silver for these monarchies. Spain’s royal family stipulated that any
person who conquered any part of the Americas would only need to turn
over 20% of his gains to the monarchy. Silver collected by the royal
family was mainly spent on the centuries of continual European warfare.
However, during the same period, several countries in northwest Europe
started to take a different approach to the new Trans-Atlantic economy.
The most representative of these were Holland and England.
England had been a weak monarchy ever since the time of the Magna
Carta. Subsequent Parliaments continued to take away more power from
the royal court. After the fifteenth century, any citizen with a certain
amount of property could vote for members of the House of Commons,
which therefore gradually came to represent the interests of successful
merchants. In the seventeenth century, after a series of internal struggles
between the House of Commons and the king, the modern parliamentary
system was initially established. Through a bloodless coup in 1688, a
Dutch prince became the nominal monarch and signed the Bill of Rights.
This marked the establishment of the first limited government of
constitutional monarchy in human history, and the emergence of the first
mercantilist constitutional nation. The main powers in this government
rested with the House of Commons and represented the interests of
merchants. The propertied classes could send their own members to
Parliament, making seventeenth century England a mercantilist society.
At this time, England’s mode of operation in North America was
completely different from those of Spain and Portugal in South America.
Its fundamental goal was to create a nation of immigrants who would
represent the interests of merchants and protect private property, and the
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ultimate aim of those who immigrated to the New World was also
primarily the pursuit of wealth and religious freedom. Influenced by the
participation of England and the immigrant nations it established, the
Trans-Atlantic economy became a unique and unprecedented economy.
It was a transatlantic global free market economy formed completely
under the control of free merchants and capitalists, with the support and
protection of limited government.
The discovery of American continent and formation of the Trans-
Atlantic economy raised a series of new questions for European
intellectuals. As a result of the arrival of the maritime age and the
discovery of the New World, this era began to face some very
fundamental technical issues. Matters involving geography, geology,
biology, marine technology and astronomy, as well as problems about
the origins of government and the nature of economics were all areas
which posed a series of new questions. European intellectuals of this
time attempted to get to the roots of these problems, and they hoped to
understand the world through a mechanical perspective. If we were to
say that people had sought answers from the saints of the past during the
Renaissance one or two hundred years ago, then during the
Enlightenment Movement of this era they were no longer satisfied with
the existing body of knowledge. They strongly needed new scholarship
and a new world view to explain the new problems posed by the new
continent, and they needed knowledge which was based on observation
and experimentation, which could be repeatedly verified and predicted,
and which was more reliable. It was this strong social needs of the era
that led Isaac Newton to its greatest discoveries contained in
Mathematical Principles of Natural Philosophy published in 1687. This
book ignited a modern scientific revolution and provided Europeans
with an entirely new world view, and also ushered in an entirely new age.
Newton saw the world as a predictable clock-like mechanism, a world
which was controlled by principles and natural laws. With such a world
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view, people started to use a similarly rational and scientific approach to
think critically about economics, politics, the humanities, religion,
culture and society -- virtually all areas of human civilization – and they
sought to discover its underlying rules. This gave rise to the
enlightenment movement which lasted for over a hundred years.
Together, the new Trans-Atlantic free market economy and the scientific
revolution provided the foundation for the birth of the modern age.

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 Chapter 8 The Birth of The Modern Age

Introduction: In 1776, Adam Smith published The Wealth of Nations in England,

the founding fathers of the USA published the Declaration of Independence, and
James Watt announced the invention of the world’s first steam engine in
Birmingham. The simultaneity of these three events marked 1776 a watershed year
in human civilization. In the ensuing years, human civilization again leapt forward
into a new stage.

It is human nature to seek equality of outcomes but to settle for equality of

opportunities. The pursuit of equal outcomes causes any progress made in human
civilization to ultimately spread and reach every corner of the world. Societies
which provide their members with equal opportunities will eventually end up with
prosperity, progress and lasting peace. Free market economy is the greatest
innovation of social institution. Coupled with modern science and technology, they
lead human race to reach a whole new stage of civilization.

A recurring phenomenon throughout the course of human history is the

occurrence of a watershed year during which a series of major historic
events takes place. 1776 was one such year. Three seemingly unrelated
events took place in different parts of the world: the publication in
England of The Wealth of Nations by Adam Smith, the publication of the
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Declaration of Independence by the US founding fathers, and the
invention of world’s first steam engine by James Watt in Birmingham.
Together, these three events made 1776 a watershed year in human
history, and our civilization subsequently leapt forward into a new stage.
The central thesis of The Wealth of Nations is the nature of the Trans-
Atlantic economy. At the time, after over a hundred years since the
inception of this economic system, Adam Smith sought to examine
whether an economy completely free from any government control
could be successful. This economic form was unprecedented. Had it not
been for the original anarchic state of the American continent, if
England did not have such a unique history, and if the English merchant
class had not so quickly risen to become important members of society
because of the Atlantic economy, the English parliament could not have
become such a dominating force in politics during the 18th century. In
essence, this new Trans- Atlantic economy, encompassing England, the
Netherlands and North America, is a free trade economy which was
almost entirely dominated by private capital and where the role of
government was limited. Adam Smith was a moral philosopher at heart
who examined issues in moral terms, and particularly in terms of social
benefits. He therefore looked at the “invisible hand” of the free market
from the perspective of social well-being. He attempted to show that
people acting solely out of self-interest, without any lofty motives, could,
through free competition, make more products at lower costs, allocate
society’s resources more efficiently and thereby increase society’s
welfare as a whole. This process acted like an invisible hand which
guided society to become more rational. The antithesis of this invisible
hand was the visible hand of government. Facts showed that a society’s
economy could yield the best results without government intervention.
He therefore came to the conclusion that the appropriate role for
government was to adopt a non-interventionist, laissez-faire approach.
The main functions of government were to protect private property, to
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ensure free competition, to fight against monopolies, to maintain order
and peace in a free market and to promote international free trade.
David Ricardo, who followed in Adam Smith’s footsteps, further
described the benefits of free trade based on the social division of labor.
In the course of free trade and the social division of labor, Ricardo
demonstrates that even if one party in the exchange enjoys advantages in
all areas, the division of labor and exchange is still beneficial to both
sides. This is a profound insight which explains why trade can bring
prosperity and create wealth, and why the larger the market, the greater
the wealth that can result from trade.

The Atlantic economy had already existed for over a hundred years by
the time Adam Smith published his theory, yet there was still no
consensus on how government should handle such an economy, and
particularly on the future direction of this economic system.
Mercantilism, which basically viewed foreign trade as a zero-sum game
and advocated high tariffs and trade barriers, was still the most
influential school of thought on the European continent. However, Adam
Smith’s theories had a lasting impact on Britain and the US. The role of
government in these two countries, and particularly their attitudes
toward colonies, were very different from the rest of the colonialist
powers. Britain and the US began to promote free trade and free markets
globally. This policy had a far-reaching impact on the development and
spread of modern Science and technology based Civilization (or
Civilization 3.0) around the world, and it ultimately lead to the present
day globalization.
Other political economists of this era explained the creation of value in
terms of labor. Among them, the most influential was Karl Marx. He
believed that human labor was the ultimate creator of all value, yet the
fruits of labor were unfairly exploited by capitalists. He predicted that
such exploitation would eventually lead to economic crises under
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capitalism and cause the world to enter a new state, namely communism.
Yet before the ink was dry on Das Kapital, the wages of Trans-Atlantic
economy workers in Britain, other European countries, the US and
virtually all capitalist countries in the world began a sustained rise for a
century or two. Capitalism, as predicted by Adam Smith, ultimately
benefited almost everyone, capitalists, laborers, owners of production
resources and consumers alike.
America’s independence in 1776 offered mankind a unique opportunity
to establish an entirely new form of government, one based on the
Enlightenment era’s scientific understanding of society, nature,
humanity and economics. The American founding fathers were deeply
influenced by the Enlightenment movement, so the economic principles
of this new government were strongly influenced by Adam Smith, while
its political principles were deeply influenced by John Locke. What
America established in 1776 was a constitutional and limited
government, one whose fundamental goal was to protect property rights,
and whose legitimacy came from empowerment by the people.
Sovereignty rested with the people and the government was very small.
It had very limited objectives, tools and mandates, and it existed solely
to expand and maintain order in the free market, to protect business
interests and private property, and to safeguard the individual liberties
and freedoms of its citizenry. For instance, the first federal government
administration under (George) Washington had only several dozen
public servants and four departments. The head of each department was
actually the President’s chief secretary in that department; hence, in
American English, the ‘secretary’ of each department meant the
‘minister’. We should be thankful that a government with such
principles was able to implement them in such a vast country, thereby
ensuring that the new Trans-Atlantic economy could become the
foundation for the future development of human civilization.

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To a certain extent, the publication of The Wealth of Nations and
American independence changed the course of human history, but a
third event - the invention of the steam engine - had an even greater
impact on human history. This invention allowed, for the first time,
almost lossless conversion between thermal and kinetic energy. Isaac
Newton had already proved that under ideal conditions, energy could
change between all forms under the law of conservation of energy.
However, before James Watt invented his steam engine, conversion
efficiency had never exceeded 1%. The steam engine greatly improved
that efficiency. Fossil fuels had already been discovered at that time.
These were a gift of the earth which had been accumulated over several
hundred million years, and containing an almost infinite amount of
energy. The steam engine could take these energy-rich fossil resources
and almost perfectly convert them into power with the greatest
efficiency known to man. Henceforth, the amount of power that man can
generate through man made tools would no longer be limited to several
times that of human muscles, the way it had been for thousands of years
up until then. Now using fossils and steam engine, the amount of power
we can generate increased several hundred-fold. In a short span of times,
it would become several thousand-fold, even infinitely. This gave people
unprecedented control over mechanical devices. The industrial
revolution now officially began with this energy revolution.
Science and technology (S%T) created a virtuous cycle, each
influencing and promoting the other and giving people unprecedented
control over nature within a short period of time. And when coupled
with the Trans-Atlantic free market economy, together they unleashed
an unprecedented force in wealth creation. Constantly improving
technology makes products cost ever lower, which in turn creates ever
greater demand that enlarges the overall economy that ultimately
benefits every member. A consumer society was born.

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The combination of modern S&T and a modern free market economy
created the greatest innovation of institution in human history. This
innovation allowed nearly everyone in a society to realize their own
potential and obtain the material wealth they deserved. It is interesting
to contrast this with Keju system invented in China, the previously
greatest innovation in human institution. The imperial examination
system was able to distribute political power according to one’s intellect
and managerial competency relatively efficiently. However, for most
people, the pursuit of material wealth is far more important. And
political elites too would frequently use their political power for
personal economic gains. Thus the Keju system was both inadequate and
prone to corruption. In contrast, a free market economy backed by
modern technology offers true equality of opportunity to everyone and
thus unleashed the potential for each person to obtain the economic
benefit he deserves. I believe it is human nature to seek equality of
outcomes but settle for equality of opportunity. Achieving equality of
outcomes will always remain a dream for human that can never be
realized, yet never abandoned. But people does settle for equality of
opportunity. Therefore, any human institution that creates equality of
opportunity is by definition a hugely beneficial one.
It is in the nature of people to pursue equality of outcomes while
accepting equality of opportunities. The pursuit of equal outcomes
causes any advancement in human civilization to eventually spread to
every corner of the world; any society which establishes a system
providing equal opportunities will prosper, progress and achieve long,
lasting peace.

To date, the second greatest human institutional innovation has been the
imperial examination system, through which political power was
distributed in accordance to one’s knowledge and capability. The
greatest institutional innovation however, is the free market economy

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built on modern S&T. This innovation allowed the human race to finally
enter into a brand new stage of civilization.

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 Chapter 9 Could China have been the birthplace of
modernization?

Introduction: As they study modern Chinese history, many Chinese people often
cannot help but wondering why China was not the birthplace of modernization,
and they try to find a persuasive answer. However, as I see it, these questions are
false premises. All geographic and historic reasons make Western Europe the most
likely birthplace for Civilization 3.0, and the chances of China being the birthplace
of modern Civilization 3.0 were very slim.

Looking back at China’s history of the past few centuries, people often
lament: why was modernization not born in China? This question has
not only caused anguish among the Chinese intelligentsia, it has also
baffled many foreign observers who are familiar with Chinese history.
Joseph Needham (9 December 1900 – 24 March 1995), a British
scientist and historian at Cambridge University, devoted his life to
studying the history of science and civilization in China. Ha had a deep
understanding of the advances in Chinese science and technology and
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therefore raised the famous “Needham Grand Question” -- why had
modern science and technology not developed first in China?
The history of modern Western civilization started from the Renaissance.
Today, a man of many talents was called a “Renaissance Man.” One
such Renaissance man can also be found in Chinese history. His
achievements in the various fields of physics, mathematics, geography,
geology, astronomy, medicine, chemistry, agronomy and meteorology
were world-class in their time. His most important scientific
achievements were his discovery of the magnetic inclination of the earth
and his invention of the most advanced compass in history, which
provided the most precise guidance for the great era of navigation that
followed. He was not only one of the greatest scientists of his era, but
also an engineer, inventor and statesman. The sluice gates system of
irrigation canals which he invented is still in use today. He turned more
than a hundred square kilometers of swampland into fertile farmland. He
drew maps of the entire country, and was the first to apply the concept of
water erosion to correctly explain the formation of the peaks of the
Yandang Mountains. He described fossil fuels and even discovered
petroleum and predicted its future economic importance. He served as
head of the Bureau of Astronomy and revised the calendar; he
participated in nationwide economic reforms and served as finance
minister; he was also an outstanding diplomat. He was no less a
Renaissance man than Leonardo da Vinci or Benjamin Franklin (of the
United States). He lived in China, some 500 years before the Italian
Renaissance – he was Shen Kuo (1031–1095) of the Song Dynasty (960-
1279), and the period he lived in happened to be the Chinese
Renaissance Era.
During the Song Dynasty of Shen Kuo’s lifetime, the scholar-bureaucrat
class began to reject the passive, escapist mentality of Buddhism. They
felt that the meaning of life rested in actions of the here and now, and
that true scholar-bureaucrats should strive to be “concerned about the
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affairs of state before others, and enjoy comfort after others.” This
period produced many outstanding writers, scientists, social activists and
reformers. S&T progressed by leaps and bounds, and three out of the
four great Chinese inventions were made during the Song Dynasty:
printing, gunpowder and the compass. The production of cast iron in this
period was so great that it was not until 1700, some 700 years later, that
it was surpassed by the total cast iron production of all of Europe.
Textile looms had already begun to be powered by wind mills and
hydro-energy, and people already understood the movements of
mechanical pistons and their power, causing Joseph Needham to always
wonder why the steam engine was not invented in China. It was
conceivable that modern science could emerge then, and it would be
most likely in China. Yet even as the great era of navigation began with
a flourish after the Renaissance in the West, the neo-confucianism of the
early Song period turned, after one to two hundred years, into the branch
known as the Song-Ming School of Li (School of Reason). This caused
China to enter a conservative era where thoughts were shackled. Foot-
binding of women began to be practiced, and the Keju examinations no
longer included astronomy, history, geography and economics as they
did during the administration of Chancellor Wang Anshi (December 8,
1021 – May 21, 1086, a Chinese economist, statesman, chancellor and
poet of the Song Dynasty). Instead, they focused only on studies of the
classics. To this day, those reading the Chinese history of this period
can’t help but lament the unfortunate turn in the course of history.
At the same time that thoughts began to be shackled, social development
during the Song Dynasty continued. The population reached 100 million
for the first time, while the capital, with a population that had reached 1
million, already surpassed Rome at its most glorious. This continued
during the Ming Dynasty (1368-1644). Zhu Yuanzhang, the first
emperor of the Ming Dynasty, built the world’s largest navy in order to
deal with his chief political rival. Zheng He (1371–1433 or 1435, a
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Muslim court eunuch, mariner, explorer, diplomat, and fleet admiral
during China's early Ming dynasty) led seven naval expeditions to the
“western oceans” (the South China Sea and the Indian Ocean.) He
commanded over 240 vessels and over 27,400 sailors. By comparison,
Columbus only had a total of 30 vessels and 1,940 crew members during
his four voyages, and Zheng He preceded Columbus by 70 years. If the
technology of Shen Kuo’s era was inadequate for crossing the 6000 mile
wide Atlantic Ocean, then by the time of Zheng He it was good enough
to allow a fleet to sail to any place in the world. So why did Zheng He
not discover the Americas? At least he might have established a Trans-
Pacific economic circle including Southeast Asia, the Pacific Ocean and
the western coast of the Indian Ocean, similar to the Atlantic economic
circle. Yet the historic fact was that in 1492, the same year that
Columbus discovered the New World, the Ming Dynasty instituted a ban
on maritime trade and adopted an isolationist policy. Records of Zheng
He’s expeditions were destroyed.
The China of the Ming Dynasty again lost the chance to start
modernizing, but could the Qing Dynasty (1636-1912) seize the
opportunity? Foreign missionaries had already been slowly introducing
Western science and technology to China since the late Ming Dynasty.
Emperor Kangxi (1654-1722) himself spent years learning the most
advanced mathematics from missionaries, and he even established the
Imperial Academy of Science modeled on the French Académie des
Sciences. But in the end, Kangxi came to the conclusion that though the
West was stronger in certain areas of mathematics, the basic principles
of mathematics originated in the Book of Dao (Dao De Jing), so what
foreigners knew was only a part of what Chinese knew. Gujin Tushu
Jicheng (also known as Imperial Encyclopedia), a book commissioned
by the Emperor, was a compilation of over 800,000 pages and
constituted the greatest encyclopedia in the world. This shows the
confidence Kangxi placed in Chinese scholarship.
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By the reign of Emperor Qianlong (1736-1795), the New World had
been discovered and the Trans-Atlantic Economy had taken shape.
Could China have participated in the Trans-Atlantic Economy at that
time and acquired the most advanced S&T? History indeed had
presented China with such an opportunity. In 1793, Lord George
Macartney, a cousin of King George III of Britain who harbored Marco
Polo-esque fantasies about this ancient Oriental empire, led a mission
which entered China from Guangzhou. After traveling for a year, he
arrived in Beijing and had an audience with Emperor Qianlong.
Macartney brought with him 19 varieties of gifts, 590 items in all,
including the most advanced astronomical and geographical instruments,
guns, models of carriages and ships, and glass lenses. This meeting
could have allowed China to finally participate in the booming and
dynamic Atlantic economy. Yet Qianlong, in his own letter of reply to
King George III, once again closed the door of opportunity: “Swaying
the wide world, I have but one aim in view, namely, to maintain a
perfect governance and to fulfill the duties of the State: strange and
costly objects do not interest me. If I have commanded that the tribute
offerings sent by you, O King, are to be accepted, this was solely in
consideration for the spirit which prompted you to dispatch them from
afar. Our dynasty's majestic virtue has penetrated unto every country
under Heaven, and Kings of all nations have offered their costly tribute
by land and sea. As your Ambassador can see for himself, we possess all
things. I set no value on objects strange or ingenious, and have no use
for your country's manufactures. This then is my answer to your request
to appoint a representative at my Court, a request contrary to our
dynastic usage, which would only result in inconvenience to yourself. I
have expounded my wishes in detail and have commanded your tribute
Envoys to leave in peace on their homeward journey. It behoves you, O
King, to respect my sentiments and to display even greater devotion and
loyalty in future, so that, by perpetual submission to our Throne, you
may secure peace and prosperity for your country hereafter. Besides
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making gifts (of which I enclose an inventory) to each member of your
Mission, I confer upon you, O King, valuable presents in excess of the
number usually bestowed on such occasions, including silks and curios-a
list of which is likewise enclosed. Do you reverently receive them and
take note of my tender goodwill towards you! By special imperial
mandate.” As for the opportunity described above, he decreed: “This is
incompatible with our dynastic institutions and is absolutely
unworkable.” (E. Backhouse and J. O. P. Bland, Annals and Memoirs of
the Court of Peking (Boston: Houghton Mifflin, 1914), pp. 322331)
After his journey, Lord Macartney also came to his own conclusions
about the Qing court: “The government, as it stands, is properly the
tyranny of a handful of Tartars over more than 3 hundred millions of
Chinese. Since a little before the conquest of China by Mongol Tartars,
the Chinese had reached their pitch of civilization; but not having
improved or having rather gone back, at least, for these hundred and
fifty years part, whilst we have been rising in arts and sciences, they are
actually becoming semi barbarous people in comparison with the present
nations of Europe.”
As they study modern Chinese history, many Chinese people often
cannot help but wondering why China was not the birthplace of
modernization, and they try to find an explanation that they can accept.
However, as I see it, these are false premises. The fact is that modern
S&T Civilization 3.0 could not have been born in China. As stated
earlier, the most fundamental reason for the birth of S&T Civilization
3.0 was the formation of the Trans-Atlantic Economy, and its most
prominent feature was a free market economy which developed almost
in the absence of government control. This economic system was
completely different from all previous economic systems of any
civilizations or any countries because private capital played a crucial
role in this system, and because the role of government was limited to
the protection of private property and the smooth function of the free
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market. The formation of such an economic system in the 17th century
on the periphery of the Atlantic Ocean was almost coincidental. On the
American side of the Atlantic, the indigenous population had been
decimated. The new immigrants who left their homelands in search of
new opportunities were attracted by the tremendous business potential
presented by the new continent, so of course they rapidly threw
themselves into commercial activities. On the European side of the
Atlantic, the traditional powers of kings were weakest in Great Britain,
and out of that political system emerged a government representing the
interests of merchants – this would have been totally inconceivable in
China. Following the establishment of the Chinese empire during the
Han Dynasty (202 BCE), the institutional innovations of the Sui Dynasty
(581-619) with the establishment of Keju system for scholar-bureaucrats,
imperial rule in China had become the most advanced and most stable
political system in the world. This system had not changed much for
more than 2000 years. To this very day, it is inconceivable to have a
(Chinese) government which has no political goals of its own and which
does not engage in economic activities.
By comparison, the government on the American continent faced neither
serious internal problems nor external threats. The Atlantic and Pacific
Oceans essentially kept out foreign enemies while domestically, the
indigenous population had largely been decimated by germs. This made
it possible for government to assume no major responsibilities other than
the protection of the private property and to maintain domestic peace, at
least for the first half of American history. In contrast, the Chinese
government had to constantly deal with invasions from nomadic peoples
throughout its history. Whenever it ran into fiscal difficulties, it turned
the business class into its ATM. Business activities existed to serve the
government and its goals, which was the opposite of the model of the
Trans-Atlantic Economy.

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Without the discovery of the New World, there would be no Trans-
Atlantic Economy. Without an understanding of what powers a
mechanized world, the Enlightenment Movement’s criticism of old ideas
and embrace of new ones would not have emerged. Without this way of
thinking, a demand for science would have been unlikely. Without the
development of a market economy, the appearance of professional
scientists and technical inventors who could meet the needs of economic
development would have been difficult. Without modern science and
technology, the Industrial Revolution would have been hardly
conceivable. Without the occurrence and spread of the Industrial
Revolution, it would be hard to imagine that the Trans-Atlantic
Economy could have so quickly grown into a force which could rule the
world.
During this period, China had neither a free market economy nor
modern S&T. The most important factor was that in the absence of a
free market system, the government had no choice but to play a
dominant role. The West had originally hoped to find a route to China
when it accidentally discovered the New World. In contrast, China, as
the most advanced civilization of before the modern era, had not the
slightest motivation to explore the world. Moreover, the Pacific Ocean is
twice the size of the Atlantic Ocean. Its currents cause the distances
required to navigate the Pacific to be almost double the point to point
distances, thus making it more challenging to navigate. In sum, China
had neither the motivation nor the necessary technology to search all
over the world for a place richer than it was. Geographically, Western
Europe was best situated to first discover the American continent. Such
a discovery made the formation of the Trans-Atlantic Economy more
likely. Only with the Trans-Atlantic Economy was there a need for
modern S&T. Only with such a need could modern S&T emerge, and
only with the combination of modern S&T and the Trans-Atlantic
Economy could modern civilization be forged. Britain and USA became
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the birthplaces of modern civilization because they benefited from
historical circumstances. Their governments were limited governments
which served the merchant class, whereas ever since the Han Dynasty,
such a government simply could have existed in China.
All these geographic and historical factors made Western Europe the
most likely birthplace of Civilization 3.0, while the likelihood of this
happening in China was very slim. This is similar to the birth of
Civilization 2.0. More flora and fauna that could be used in agriculture
existed in the natural environment of the Tigris–Euphrates basin; hence
Civilization 2.0 was most likely to be born in this region. Thus while
China’s lost opportunities for modernization have caused innumerable
anguish along modern Chinese intellectuals, this in itself is a false
premise.

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 Chapter 10 The Spread of Modernization and Competing
Paths to Modernization

Introduction: Since the beginning of the 19th century, almost all the nations of the
world have been either actively engaged in the process of modernization, or have
been swept up in it by force. In the 20th century, this has evolved into a contest
between paths to modernization which has triggered two world wars and a cold
war between East and West. For over a hundred years since 1840’s Opium War,
China has been doubly impacted by wars and inept governments. It was not until
the late 1970s that it entered into an modernizing era by embracing both market
economy and modern Science & Technology.

A review of 19th century world history shows a constant common thread

tying together the fates of all the nations in the world. This thread is
precisely the theme of the century, that is, all nations were either
actively engaged in modernization or being swept up by it. At the center,
the modernization process dominated by Britain entered a period of
rapid development. In less than 100 years since James Watt invented the
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first steam engine, the power generated by a steam engine could already
exceed the physical strength of 40,000 workers, and even then it did not
seem to have reached its upper limit. The enormous power of the
combination of steam engines and coal began to directly or indirectly
start revolutions in many other sectors. This began with textiles,
followed by iron and steel, shipping, railways, and then radios,
telegraphs and telephones. By the end of the 19th and the beginning of
the 20th century, Germany and the USA began to lead a second
Industrial Revolution. This started with the combination of the internal
combustion engine and petroleum, which was followed by the
appearance of automobiles and airplanes. Since then, fossil fuels have
become the main source of power, and people, goods and information
have been able to move non-stop across the world. Automobiles,
airplanes, ships, railways, telephones, telegraphs, wireless
communications and radios have suddenly made the whole world much
smaller. With the flow of people, goods and information around the
globe, markets have followed goods all over the world, and the entire
world has become one big marketplace. Throughout the 19th century
and influenced by Adam Smith and David Ricardo, governments led by
Britain adopted foreign policies which promoted free trade. They opened
up new markets throughout the world, broke down national and regional
trade barriers, integrated resources globally and, for the first time,
established a global market system dominated by Britain. Backed by
gold, the pound sterling stated to become a global base currency, and
other countries nations pegged their currencies to gold and to the pound,
thus creating a global financial system. For Britain, the USA and
Western Europe, which were located at the center of S&T civilization,
the 19th century was truly a golden era.
However, the 19th century was an entirely different story for the nations
and peoples at the periphery of modern civilization. As with the spread
of agricultural civilization, the way S&T civilization spread was either
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through colonization of less developed regions by more developed ones,
emulation of developed regions by less developed ones, or some
combination of the two. This process brought both progress and calamity
to those living in the less developed regions. The American Indians of
North America and the aborigines of Australia were almost decimated
by germs brought by the European colonialists. Africa (except Ethiopia),
India and South America were totally colonized, while China became a
semi-colonial nation. Of the centers of the original agriculture
civilization’s Eastern core, only Japan chose to modernize on its own. It
started to industrialize in the late 19th century and by doing so, Japan
escaped the fate of being colonized just in time. As for those peripheral
nations which had not been incorporated into the centers of modern
civilization by industrialization, the improvements to life brought by the
modernization process were far outweighed by suffering, and they were
forced willy-nilly to become part of the global economy. For instance, in
1876 and from 1896 to 1902, the Indian monsoons weakened suddenly.
What would have been only crop losses due to severe weather patterns
worsened by inflated grain prices and fast spread of diseases by railways
with calamitous consequences. As a result, about 50 million people in
India, China and Africa died from famine and epidemics.
There are two particularly distinct characteristics of the spread of
modern civilization. The first is that the higher the levels of social
development and culture of an agricultural civilization, the faster its pace
of industrialization. The second is that the totally colonized regions
developed more slowly than uncolonized or semi-colonized regions.
Take Japan for example. It already had a high level of social
development and had not been colonized; hence, it was first to
industrialize. China originally had a very high level of social
development, but it was semi-colonized and therefore had a slower pace
of industrialization than Japan. As for India and sub-Saharan Africa,

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their rates of industrialization were even slower, and they are just getting
started now.
The East could not have been the birthplace of Civilization 3.0 because
of its geographic location. However, this does not mean that Civilization
3.0 cannot be spread to and replicated in Asia. At these critical historic
junctures, different leaders of these countries made different choices,
bringing about drastically different outcomes. The clear contrast
between Japan and China is the best example for illustrating this stark
difference.
With the Meiji Restoration (1868-1912), Japan embarked on a
movement to completely westernize. It comprehensively studied and
learned from the West in culture, economics, technology, science and
politics. On the one hand, Japan maintained stable and peaceful relations
with the West, while on the other hand, it mobilized all its social
resources to engage in wide-ranging industrialization. This was the
second time in Japanese history when it so comprehensively emulated
the experiences of an advanced country. The first was the total
sinicization movement which took place during China’s Tang Dynasty
(618-907).

After the First Opium War, China lost almost two decades as it put down
the Taiping Rebellion (1850-1864). 20 million people lost their lives and
the imperial coffers were almost emptied during this time. The
subsequent Self-Strengthening Movement (or Westernization Movement)
stumbled badly due to bad leadership. Empress Dowager Cixi (1835-
1908), for example, believed the rumor that members of the Boxer
Movement (1899-1901) possessed invincibility against swords and guns.
And worse, she encouraged them to challenge the Western powers,
which directly led to an invasion by the Eight-Nation Alliance. Also, to
protect its former vassal states of Vietnam and Korea, China went into
war with two world powers, France and Japan, despite the fact that
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China was only in the beginning stage of industrialization. These two
wars utterly destroyed the fledgling Chinese navy. Moreover, at the most
crucial time when China was at war with foreign powers, Empress
Dowager Cixi misappropriated military funds to build the Summer
Palace in celebration of her birthday.
During the Meiji Restoration which began in 1868 and lasted 30-plus
years, Japan completed its initial industrialization. In 1889, it completed
constitutional reforms. In 1895, after less than 30 years of
industrialization, it defeated the Qing army, and again in 1905 it
defeated Russia, one of the Western powers. Japan accomplished the
entire process of industrialization in less than 40 years while China,
during this most critical period (1861-1908) of modernization, was
under the inept rule of Empress Dowager Cixi. Although it was HMS
Nemesis, a British ironclad warship which forced open China’s doors in
1840 and forced it to open its eyes to the arrival of Civilization 3.0, the
true “nemesis” of China’s modernization efforts was Japan. Post-
industrialized Japan believed it can unify all the former centers of
Eastern civilization and use this as a base to counterbalance the West. It
therefore initiated all-out wars of colonization until its defeat in World
War II in 1945. From 1895 until the end of WWII in 1945, China was
either threatened by Japan or at war with Japan. China lost almost a
century, from 1861 to 1945, first to incompetent rulers and then to
Japanese invasion. It was not until 1949 when China had the opportunity
to become master of its own fate again.
If the 19th century was one of modernizing or being forced to modernize,
then the 20th century was one of a contest between paths to
modernization. This contest began with failures at the original centers of
modernization. At the end of the 1920s, because of the collapse of the
stock markets and a subsequent series of failed government financial and
fiscal policies, the centrally positioned United States entered into a Great
Depression which lasted for many years and saw unemployment reach
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25%. This Great Depression quickly spilled over to the rest of the world
through globalized trade, finance and economics. For the first time since
Adam Smith’s publication of The Wealth of Nations and the worldwide
expansion of the Trans-Atlantic Economy, the invisible hand seemed to
have lost its magic. The newly elected US president Franklin D.
Roosevelt (1882 –1945) unveiled a series of new policies called the New
Deal in an attempt to remedy the malfunctioning free market. The
British economist John Maynard Keynes (1883-1946) gave a
comprehensive theoretical description of the visible hand, namely the
role of government policy in a free market economy. At the same time, a
different voice challenging the Trans-Atlantic Economy was raised in
some countries located at the center of Civilization 3.0. Germany and
Japan both began to consider the visible rather than the invisible hand as
better able to resolve the crisis at hand. Some successors of (Karl) Marx
went even further, arguing that the invisible hand was invisible because
it was nonexistent. Thus, whether it was the planned economy of the
Soviet Union or the state capitalism of Germany and Japan, now we had
a different path towards modernization. The contest between these two
models ultimately resulted in the largest and deadliest world war in
human history. All nations either at the center or on the peripheral of the
modern civilization were drawn into this war, and none were spared.

Victory in WWII and the subsequent Cold War allowed the Anglo-
American economic model to achieve complete victory. After the
disintegration of the Soviet Union, countries from the former Soviet
Union and Eastern Europe began to enter the global market. China has
also fully embraced the market economy after the early 1990s. For the
first time, the free market economic model swept across the globe
unimpeded. Another outcome of WWII and the Cold War was the
growing replication of the Anglo-American political model of
constitutional democracy in Western Europe, Eastern Asia, Eastern
Europe, South America, and even India.
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Ever since 1840’s Opium War, China has been doubly burdened by wars
and incompetent governments. It was not until the late 1970s that it
entered into an era of having both a market economy and S&T
development. In the 30 years since, China’s GDP has increased over a
hundred-fold. It has industrialized and modernized at an unprecedented
pace. Although today there is still a gap between China and the most
advanced nations, China has already shown promises to be able to fully
catch up with the West one day.

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 Chapter 11 The Nature of Modernization and Its Iron Law

Introduction: A pattern of compounding economic growth over a long span of time

began to develop that seemed to have no ends. Since the beginning of Industrial
Revolution, this phenomena has lasted for several hundred years with seemingly
no end. This was unprecedented in human history. Such a state of affairs is the
state of Science &Technology Civilization 3.0, or what is more commonly known
as modernization.

A freely competitive market is a mechanism which is constantly self-evolving, self-

advancing, and self-perfecting. The injection of modern S&T into this process
gives it greater speed. Thus, when there are competing markets exist, the largest
one will eventually become the only one. If any individual, society, enterprise, or
nation is removed from this single market, it will start to steadily fall behind and
will ultimately be forced to join in. The best way for any nation to build up its own
strength is to abandon all its tariff barriers and join the largest international free
market system in the world. The best way to fall behind is to close itself off from
other countries. Such is the Iron Law of Civilization 3.0.

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David Ricardo, the British political economist, discovered that the
division and exchange of labor could create greater value. He used an
exchange between two individuals engaged in two separate activities to
illustrate this. One individual may be more capable in both activities
than the other, but if he concentrates on the activity in which he is even
more capable and allows the second person to do what he is relatively
better at, then the value they create after a mutual exchange will be
greater (than if each had done both tasks alone). His rule shows that
social divisions of labor and social exchanges create surplus benefits,
and gives a fundamental explanation of why trade has been an important
source of wealth creation since time immemorial. He used the formula
1+1>2 to illustrate this concept. It is not difficult to infer from this that
that the greater the number of people engaged in exchanges, the larger
the size of the market place, the greater the surplus values will be
created. Hence, a free market itself follows the principle of economies of
scale.
In the age of modern Civilization 3.0, the value created by the division
of labor and by exchange is further increased because human knowledge
can be accumulated. Compare to goods and services, human knowledge
is easier to accumulate. Exchanges of ideas often result in a 1+1>4
equation. When different ideas are exchanged, the parties not only retain
their own ideas, they also obtain the ideas of others. Moreover, sparks
can fly during exchanges, creating entirely new ideas. When ideas are
having sex with each other, they become very productive.
One of the salient feature of Civilization 3.0 is the seamless integration
of S&T knowledge and products. Knowledge is inherently cumulative,
so that when modern S&T is combined with free markets, increases in
efficiency, wealth creation more or less follows the scale of 1+1>4.
There are almost no limits to the explosive growth of knowledge. In the
past century or more, human knowledge doubled roughly every 10 years.
Because of the almost infinitely explosive growth of knowledge, the
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latest advances in S&T can provide almost endless new products at costs
which can be almost endlessly lowered. Together with the insatiable
human demand, this creates a ceaselessly expanding modern economy.
Through free market mechanisms, modern S&T causes product varieties
to increase endlessly and costs to be lowered endlessly. Together with
unlimited human needs, the result is the birth of modern S&T
Civilization 3.0. A pattern of compounding economic growth over a
long span of time began to develop that seemed to have no ends. This
was unprecedented in human history. The entire economy entered a state
of sustainable and compounding growth. Such a state is the state of S&T
Civilization 3.0, or what is more commonly known as modernization.
Society encourages the discovery, study and spread of scientific
knowledge while encouraging constant innovation in technology; and
modern S%T can be seamlessly integrated into the free market economic
system; and an economy guided by S&T can therefore grow on a
compound and sustainable basis -- this is the nature of modernization,
and this is what we call a modernized society and modernized country.

The economic theories of Adam Smith and David Ricardo explained

how divisions of labor and exchanges apply not only within nations, but
also applicable to exchanges across national borders. It is not hard to
infer from this why markets themselves enjoy great economies of scale:
the more market participants and the more exchanges they make, the
greater the surplus value created, the more optimal the market allocates
resources, the more efficient, wealthy and successful the market
becomes, and the better it can then produce and support ever more
cutting edge S&T. A freely competitive market is a mechanism which is
constantly self-evolving, self-advancing, and self-perfecting. The
injection of modern S&T into this process gives it greater speed.

Thus, when there are competing markets exist, the largest one will
eventually become the only surviving one. If any individual, society,
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enterprise, or nation is removed from this single market, it will start to
steadily fall behind and will ultimately be forced to join in. The best way
for any nation to build up its own strength is to abandon all its tariff
barriers and join the largest international free market system in the world.
The best way to fall behind is to close itself off from other countries.
Such is the Iron Law of Civilization 3.0.

The contest between paths of development in 20th century provides a

vivid illustration of this Law. At one point, the market of the Soviet
Union and Warsaw Pact was very large, but because it was not a free
market mechanism, its efficiency was much lower than that of the US
and of the Common Market which was established in postwar Europe.
Within the short span of 30 years, the entire Soviet system fell farther
and farther behind the mainstream global markets. It ultimately lost the
Cold War and was forced to join the larger global market. Another
example was China, which in the Mao era adopted policies of self-
reliance and isolationism. It finally joined the global market in the open
door era after humiliation economic failures. Other good negative
examples are the economic performances of countries like Iran,
Myanmar and Cuba, after they were subjected to international economic
sanctions and forced out of the international common market.
Let us also contemplate that suppose Germany had won WWII and
established another European economic system dominated by state
capitalism. I doubt it would have fared much better due to the absence
of a free market mechanism despite its otherwise large size. It would
therefore have been difficult for S&T to seamlessly integrate with the
market, and there would not have been the process of constant self-
improvement found in the American and British markets. With the
passage of time, the final outcome might have been similar to that of the
Soviet Union and Warsaw Pact.

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Once the earliest free market was formed in Britain, the Atlantic
periphery, and between Britain and the US, it displayed a strong
tendency of continually self-improving and self-evolving. Its efficiency
steadily increased and its scale steadily expanded. Once it developed
into the largest free market, other nations had in fact no alternative but to
join it. All other independently formed market systems were ultimately
less efficient, and they fell behind with the passage of time so that in the
end, they either deliberately chose to or forced into choosing to join in
the largest market. By the time this process played out through the early
1990s, the Cold War had ended, the Soviet bloc had disintegrated and
joined the international free economy, and China had also fully entered
the international markets. At this point a single, unified international free
market system was formed around the world, a process known today as
globalization. It was a predictable outcome, an inexorable result of the
iron law of Civilization 3.0. After globalization, the markets for goods,
services, S&T and finance will be further integrated, expanded and
deepened all over the world, making the price for leaving this market
ever higher.
Herein lies an interesting question: the economies of scale resulting from
market exchanges were also present in agrarian Civilization 2.0, so why
did that era not produce such extreme globalization? The primary reason
was that in Civilization 2.0, there was still no modern S&T, product
variety was extremely limited and so was room for cost reduction. When
there was trade, particularly private sector trade not subject to
government regulation, wealth would increase, and so would division of
labor. However, such increases were not unlimited. Once factors of
production such as land and money reached certain levels of
concentration and a further social division of labor was required, some
social turmoil and instability would appear. Governments would then
often intervene in the name of maintaining social stability and heeding
public opinion. For example, in an attempt to spread the wealth and
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achieve social stability, China often used various forms of state
monopolies to compete with the private sector. This not only filled the
public coffers, but also allowed the officials in charge of these
operations to line their own pockets, thus killing 3 birds with one stone.
Chinese history is replete with examples of such measures.
Because there is an inherent ceiling for the amount of energy conversion
made possible by photosynthesis, Agrarian Civilization 2.0 was unable
to overcome the five major challenges as discussed in previous chapters.
The most effective way to address the five major challenges was still to
establish a strong government, so regulation of the private economy by a
strong government was almost inevitable. In China, for instance, over
the past few millennia the private economy was often caught in cycles of
“freedom-prosperity-regulation-decay-re-liberalization” because of
government controls. The interests and wealth of merchants would also
change unpredictably along with the visible hand of the government, so
that trusting to luck has become part of the coerced collective memory
of the business class. This psyche has permeated Chinese culture so
much that to this day, in all the casinos of the world one can always find
disproportionate number of Chinese exercising their faith in luck. Along
the same lines, from the government perspective, economic intervention
by the Chinese government has become a traditional part of its functions.
Even today, the direct control of economic activities by the Chinese
government is nearly a reflexive choice resulting from thousands of
years of history.
So where is China now in terms of its modernization process? Here we
define that when the coupling of constantly-advancing S&T and a free
market causes an entire economy to enter a stage of sustainable,
compound growth, such a society will have arrived the modern era of
Civilization 3.0. The market economy in China today has already taken
embryonic form, but is not yet completely free. Both the visible and
invisible hands are still at work, and often at odds with each other.
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Modern S&T is already widely studied and widespread, but
innovativeness is still wanting. A seamless integration between S&T and
the economy has not yet been fully achieved. Although economic
growth has been sustained for more than 3 decades, it has not yet
reached a state of automatically sustainable compound growth. It is
obvious that China is not yet a fully modernized state but it already has
the embryonic forms of modernization. We can therefore say that China
today has moved beyond Civilization 2.5 and is evolving towards
Civilization 3.0.

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 Chapter 12 China in the coming decades – Economics

Introduction：The most important transformation of China’s economy in the

coming decades will be moving from a government-dominated market economy to
a mostly free market economy where the government plays only a supporting role.
Domestic consumption and services will account for the bulk of its GDP. During
this transition, it will still be possible for China to sustain growth for a long period
at a rate higher than the global average until it has roughly reached the level of
developed countries.

China, a nation with deep roots, has a history of great success, and its
ruling party exerts strong leadership. Therefore, what will most likely
happen in the coming decades is often what China most needs to happen.
Based on this understanding and assumption, I would like to share my
predictions about China’s future from economic, cultural and social
perspectives.
China’s economic growth over the past 35 years has been almost
unprecedented for its scale, duration and speed. During this period,

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foreign trade and direct investment have been the two main engines
driving economic growth. At the outset of China’s reforms, on the one
hand it had a large pool of inexpensive and highly disciplined labor, and
at the same time, it had a ruling party with exceptional ability to execute,
and which had assembled a group of highly talented people. After
reforms and opening up began, what had been weaknesses in the past
became great strengths as China sought to catch up. The government
used its exceptional ability to execute to formulate a series of policies on
issues ranging from foreign exchange and capital to land and labor.
These policies made possible to integrate hundreds of millions cheap
Chinese labor into the global economy and ultimately turned China into
the “factory of the world.” Foreign trade therefore became one of
China’s greatest economic drivers. Even though intellectual property,
design and the consumption of products all resided in foreign countries,
China still enjoyed unique advantages in the intermediate processing
stages. During this period, Chinese government played a dominant role
in formulating and implementing this growth strategy, with the market
forces playing a secondary role. In other words, market behaviors were
guided by a visible hand. This was particularly evident in the two
engines of economic growth, foreign trade and investment. For instance,
for the Chinese-style urbanization, local governments often played the
role of a master real estate developer.
Why could such a hybrid economic system achieve such great success?
First of all, Chinese foreign trade is in fact just a part of the international
trade operating on essentially free market principles. China only
participated in part of this larger cycle, and it was possible for the visible
hand to dominate this small part. After all, designing and marketing
iPhones is very different from manufacturing them. Secondly,
circumstances are also different when an economy is catching up from
behind. Once leaders have already paved the way, and directions and
goals are clear, the catchers simply need to follow the original path or
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take some shortcuts when possible. During this stage, the visible hand of
government can even push the process of economy development faster.
However, this model of development has its limits once it passed the
initial stage of development. Though no one knows with any certainty
where these limits lie. What we do know is that once China surpasses
US as the world’s largest exporting country, its foreign trade will
obviously no longer be able sustain a double digit growth rate, or any
rate substantially higher than the global average. Likewise, once
investment approaches 50% of GDP and investment wastes such as
“ghost towns” began to appear across the country, the investment-driven
GDP growth will also encounter a bottleneck. Over the long term, truly
sustainable long-term growth of a large economy like China’s can only
be coming from domestic consumption. There, entrepreneurs will have
decisive advantage over government in inducing consumption. And
since the domestic consumption market will no longer have the benefits
of international free markets mechanism the way foreign trades are,
fundamental adjustments will have to be made between government and
markets, between the visible and invisible hands.
The chief role of free markets in S&T Civilization 3.0 is to most
effectively allocate resources through creative destruction, and this is
contrary to -the basic function of a government. A government is by
nature a bureaucratic leviathan which requires consensus building and
coordination across different levels in order to move forward. A
government needs predictable targets and acts constructively through
budgeting and planning. When a government is leading economic
development to catch up from behind, it had clear goals and path
forward, therefor it is able to marshal powerful social forces push
forward more forcefully. For example, a government is more capable of
long term infrastructure building (highways, high-speed railroads,
airports, ports, etc.), or in helping to build traditional industries such as
coal, oil and chemical products. Modern economies cannot develop
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without infrastructure and traditional manufacturing industries – this has
been the path taken by every successfully modernized country. When a
backward nation begins to catch up, a capable government can
accelerate this process as this is still within the basic function of
government.
Yet once a country has caught up to a certain degree, to continue to lead
the economy, the government will have no choice but to anticipate
future competitive conditions. There, in the face of rapidly changing
market competitive environment and the constant need to pick winners
and losers, the advantages of the market over government becomes
obvious. In a freely competitive market without any external
interference, countless individuals driven by capitalistic interests are
willing to take risks and accept failure. Those who are ultimately
successful can only be those most needed by the market, and thus
receiving the most resources from the society. This process, while messy,
guarantees efficient allocation of resources. But if this process had to be
done by government, it would be like making bricks without straw, as it
would be contrary to the basic functions and features of government.
Eastman Kodak, for example, was at one time among the greatest
companies in history. It invented the technologies of photography and
video camera, and was once one of the most valuable companies in the
US, yet it no longer exists. Likewise, Xerox invented photocopying and
owned many patents in a wide variety of fields (some of which have
been keys to Apple’s success), but its glory days are long gone and it is
barely scraping by as a small company. Again, AT&T was the inventor
of the telephone, one of the greatest inventions in human history, and its
subsidiary Bell Labs was once the cradle of the world’s communication
technologies as well as the place with the highest concentration of Nobel
laureates. Still, Bell Labs eventually disappeared and its equipment
business also no longer exists. AT&T was bought out by other
companies and only its name survives. There are profound
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contradictions between such forces of creative destruction and the basic
role of government. It would be hard to imagine that a government
would have chosen to completely destroy AT&T while making Apple, a
computer company on the verge of bankruptcy, the winner with the
largest market capitalization in the world. In China, this would be
comparable to the government allowing China Mobile and China
Telecom to go bankrupt simultaneously, while choosing Stone
Technology Corporation (a marginal computer maker most active in the
1980s) to become the largest telecommunication company in China.
When a government chooses the future direction of the economy, the
most likely result will be that the economy gets into a rut, or the wrong
choices are made, or both. This is why economic models which deviated
from the free market economy over the long term all eventually failed.
The most important transformation of China’s economy in the coming
decades will be moving from a government-dominated market economy
to a mostly free market economy where the government plays only a
supporting role. Domestic consumption and services will account for the
bulk of its GDP. Economic resources will become accessible to
everyone. Financial, energy and land resources will no longer be skewed
toward foreign trade and SOEs (state-owned enterprises); rather, they
will become accessible to everyone through market mechanisms and
circulate throughout the entire country at fair prices. The special
operating privileges of SOEs will be abolished and free competition
between them and private companies will gradually take place.
Ownership and management of SOEs will also be gradually separated.
Private capital will be mixed into SOEs, and their management will be
entirely market-driven. Large part of state-ownership of SOEs will
gradually be added to the country’s social security system to buffer a
social safety net. As the social security system is gradually refined,
private savings will also flow effectively into the real economy through
financial intermediaries such as gradually matured securities markets
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and banks. Hence, a virtuous cycle of capital, enterprises and
consumption will be formed. The distinction between urban and rural
citizens will be eliminated so that all citizens enjoy equal rights.
Urbanization will continue to take place rapidly, and the government
will gradually relinquish the central role it played in the early stages of
economic development. In the mid to long term, the government will
gradually transition away from being a star player in the economy and
focus instead on drawing up the rules of the game and serving as an
impartial referee. Its economic management powers will be exercised
primarily through a negative list rather than a positive list.

During its transition from a government-guided market economy to a

government-supported fully free market economy, it will still be
possible for China to sustain growth for a long period at a rate higher
than the global average until it has roughly reached the level of
developed countries.

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 Chapter 13 China in the coming decades - Culture

Introduction: China’s future culture will most likely develop as a renaissance of

traditional culture accompanied by its modern transformation.

China’s future culture will most likely develop as a renaissance of

traditional culture accompanied by its modern transformation.
First, China has no choice but to restore traditional culture to its
legitimate position. Any culture is shaped by time and place. People
from different places have different histories, religious beliefs, lifestyles
and customs living habits, which collectively makes people feel “at
home.” This is culture. Culture penetrates deeply. Culture is faith. And it
takes thousands of years to form, and it cannot be changed quickly. For
some 60,000 years before the Age of Discovery and the emergence of
modern transportation methods, human beings lived in isolated

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geographic locations. The cultures, fundamental beliefs, living habits
and lifestyles formed over such a long period are very difficult to change.
Thus it is truly a peculiar phenomenon that the Chinese people would
abandonment their traditional culture and embrace a non-mainstream
western culture in modern times, and it can only be understood through
its own unique modern history. However, under today’s peaceful
circumstances, just as Chinese cuisine suits Chinese appetites, Chinese
people really have no choice but to return to their traditional culture.
They will need to re-establish their “Chineseness” as the first ingredient
necessary for China’s cultural renaissance. The modern reform of the
Chinese writing system has made it very difficult for today’s Chinese to
read traditional classic tests, thus creating a fault line between people
and their traditional culture. With their rising economic levels, people
are pursuing ever-greater cultural and spiritual needs. It is very likely
that a Chinese-style cultural renaissance will take place, one which
allows today’s Chinese to rediscover the best of Chinese culture and
their long cultural heritage, and which renews their understanding of
why Chinese culture has provided complete spiritual nourishment for
generation upon generation of Chinese over the past two to three
thousand years. On an individual level, the best of Chinese culture lay in
how it shaped the characters of “Confucian Madeirans” by deliberate
and constant self-cultivation. On a societal level, China’s cultural
renaissance has to provide its people and society with a common set of
morals and ethics to abide by, as well as beliefs and faith with which to
console the soul. Without such a foundation, no society can sustain long
term prosperity, progress and peace.

Secondly, in order to keep pace with S&T Civilization, traditional

culture itself must modernize by evolving. During its course of
modernization, the culture of the western world also underwent the
Renaissance, religious Reformation and the Enlightenment. These
process allowed cotemporary Western culture to become an organic
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component of (S&T) Civilization 3.0. Many concepts in traditional
Chinese culture, such as industriousness and an emphasis on education
and family, are not only suited to (Agricultural) Civilization 2.0, they
can also shine brightly in the age of S&T Civilization. With the
economic success stories of the countries in the East Asian Confucian
cultural sphere, these traditional values are once again attracting
attention. However, (S&T) Civilization 3.0 also poses some new
problems and challenges for traditional culture, which must be
reexamined and further developed. Culture renaissance and evolution is
a prolonged and difficult process, one that can take place only with
rational thinking (reasoning) and scientific methods, and can only bear
fruits after a long-term, sustained efforts.
Rational thinking (reasoning) and the scientific method are notable
characteristics of a S&T civilization society, particularly when it comes
to cultural and social issues. Scientific and technological innovations
require freedom of thought, and the unshackling of thought will
inevitably cause people to use rational thinking to critically consider and
examine all the established assumptions of traditional society. They will
rely on facts and logic rather than authorities and dogmas. This process
began in the Enlightenment movement in the West during the 17th and
18th centuries. One of its core drivers came from the unprecedented
confidence in rationality and the scientific method resulting from the
modern scientific revolution exemplified by Sir Isaac Newton.
Meanwhile, Europe was at the time confronting a series of epochal
changes brought about by the Trans-Atlantic economy and colonialism,
and the traditional conceptual resources of the Axial Age were utterly
inadequate for meeting these new challenges. The Enlightenment
movement in Europe was an attempt to use rational thinking to
reexamine and reconsider all the issues of life, society, politics, religion,
philosophy, arts and the humanities. This “brain storm” nominally lasted
for a century, but in a certain sense, it has never actually ended because
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from that time on, rationality, the scientific method and the free
marketplace of ideas have become the norm in S&T civilization.
Progress in the natural sciences has continued to deepen the impact of
rational thinking and the scientific method on the humanities and society.
As knowledge based on commonly accepted facts and logic accumulates,
social consensus will continue to grow. During the two or three centuries
of modernization in the West, efforts to modernize culture never ceased,
and this was how society developed the strong spiritual underpinnings
which enabled it to absorb the psychological trauma caused by dramatic
social and economic changes.

From the Yuan Dynasty (1271-1368) on, the Keju system focused on the
teachings of the school of reason (“Li”). The Commentaries on the Four
Books (four authoritative books of Confucianism in China written before
300 BC) By Zhu Xi (1130 – 1200, a Song dynasty Confucian scholar
who was the leading figure of the School of Principle and the most
influential rationalist Neo-Confucian in China) became the official
ideology and was the only subject content of the Keju exams. During the
Qing Dynasty (1636-1911), the “eight-legged essay” (Baguwen, a style
of essay writing that had to be mastered to pass the Keju examinations
during the Ming and Qing dynasties) was also set as the format for the
exams, greatly narrowing room for (new) ideas and to a certain extent
stifled the thinking of scholars. Although Confucian studies had
continued to develop during the Ming (1368-1644) and Qing dynasties,
it lacked the vigor, inventiveness and breadth it once had during the
Tang (618-907) and Song (960-1279) dynasties. A brief enlightenment
movement appeared in China after 1840. However, under domestic and
foreign pressures and the threat of regime collapse, the "enlightenment"
soon gave way to “nation-saving”. The cultural enlightenment was also
limited to criticizing traditions and there was little time for cultural
rebuilding. In fact, even today the situation in China has not
fundamentally improved; rational and scientific thinking are still not in
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the mainstream of discourse of social issues. Today, scholars might
manage to be objective and professional in their own narrow disciplines,
but when it comes to social and humanistic issues in the public domain,
there is much less rational thinking. Because there are no commonly
accepted facts and logic and no basis for consensus, arguments between
different viewpoints seem to be on parallel tracks, never converging.
Various strange new ideas float through society like duckweed blown
about by the wind, creating volatility in people’s minds. This situation
has created many problems. Of these, the most damaging to society is
the inability to cumulate knowledge effectively. Without the long term
buildup of social and cultural knowledge and without a mechanism of
free market of ideas, it is almost impossible to create wisdom on which a
society can rely, and in turn to create a social consensus for people to
abide by and to maintain peace and order.
China, in its course of modernization, will likely follow the path of the
West. It will also have to lay a new spiritual cornerstone on which the
society can renew itself. This journey will be a long and arduous one
requiring hard work, patience and persistence. An enlightenment
movement in China does not simply mean translating and introducing
western classics to its society. It certainly does not mean a wholesale
rejection of Chinese traditional culture. Rather, it should begin by taking
stock and arriving at an objective understanding of the current state; in
other words, by accepting the fact that we may not have all the answers.
A modern version of the "adjustment of national cultural heritage" (an
initiative taken by Hu Shi in 1919) may be called for to rediscover the
radiance and brilliance of Chinese tradition. Only by standing on the
solid foundation of that tradition can China critically embrace foreign
cultures, and gradually and slowly build social consensus. Rational
thinking and the scientific method will remain the only effective way to
build credible consensus in the social and cultural sectors.
Now I would like to offer a concrete example.
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Traditional Chinese culture described five cardinal relationships between
people: ruler & subject, father & son, husband & wife, friends, elders
and juniors. Culturally, each relationship is governed by its own moral
code: closeness/filial piety between father and son, loyalty between ruler
and subject, separation of roles between husband and wife, order
between elders and juniors, and trust between friends. These five
cardinal relationships basically apply to people who know each other, so
Chinese culture is a culture of personal relationships among
acquaintance. It has a complete set of rules governing relationships
between people familiar with each other and observed by all, but there
are no rules regarding strangers. In traditional society, there were few
opportunities to interact with strangers, and therefore no need to
establish such codes of conduct. The five cardinal relationships were
sufficient for an agrarian society, but in the age of Civilization 3.0, in the
age of free market economies, many interpersonal relationship are
between strangers, so this has created a host of problems for modern
society.

In a society of personal relationships, relationships are more important

than laws, and this poses great challenges to social order. Also, the time
spent on interpersonal relationships is a waste of social resources. Even
more detrimental is the lack of a moral code to govern conduct between
strangers. This is a major reason for the lack of trust in business dealings,
and trust is precisely the lubricant of a free market economy. If one can
deceive strangers without any sense of guilt, then a “good” person who
observes all the principles of the five cardinal relationships could still
become an evildoer in the business world. The loss of trust has a
destructive impact not only on the business environment, but also on the
development of science and technology. The latter is a process of
continual buildup and gradual progress which needs broad-based and
long-term cooperation among lots of people. Without a foundation of
trust, it is very hard to establish such a trust-based cooperative system.
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China today still lags far behind the world’s advanced levels in its
research both in S&T and in the humanities. This is also a key reason
why lack of trust has become a major drag on the course of China's
modernization. It is easier than ever to see the damage it has done to
China's society and its interpersonal relationships.
An important aspect of a cultural renaissance is the reestablishment of a
value system that is based on tradition but suited to modern civilization.
Hence, Chinese culture must propose a 6th cardinal relationship to
define and govern relationships between strangers. The moral and
ethical principles of this relationship should rebuild the foundations of a
trust-based society and be organically integrated with the traditional five
cardinal relationships.
So how should a righteous, trustworthy, loving and respectful person
treat a complete stranger? I feel the best answer is with honesty. Honesty
does not mean telling all that is truthful, but it definitely means telling
no lies and not deliberately misleading others, to say nothing of
deliberately deceiving others. The opposite of honesty is deceit. It is
possible to have honesty as a moral basis between strangers, and this
would also yield many benefits. When there is honesty, it is easier to
build trust between strangers. With a foundation of mutual trust,
exchanges become easier, which in turn create surplus value. With
honesty comes trust, which causes the relationship to approach the level
of that between friends, to become one of the traditional five cardinal
relationships, and to become part of one’s personal relationships. The
web of relationships is immediately enhanced and gains in value. If there
is a commercial exchange, value is added twice. It is not hard to have
honesty between strangers, and once this is achieved, there will be a
multiplier effect. One positive example of this multiplier effect can be
found in today’s social network economy, as exemplified by Facebook
and WeChat. Also when society accepts honesty as the code of conduct
between strangers, the multiplier effect will also magnify the losses
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caused by dishonest behavior. For example, if A and C are strangers in a
world without rules on honesty, they will deceive one another. Later,
through an introduction by mutual friend B, A and C can become friends.
When the two look back and talk about their prior deceptions, they can
simply laugh it off and forgive each other because they were strangers at
the time. But once honesty is accepted by society as a code of conduct
between strangers, even with an introduction by mutual friend B, A and
C would feel very embarrassed upon meeting again. They would be
unable to become friends because of their mutual distrust. Even worse,
they might exclude each other from their respective relationship
networks, causing multiple losses. In today’s society, examples of this
negative multiplier effect can be found in the public condemnation of
and damage actions against counterfeit products and disreputable
merchants.
Because the 6th cardinal relationship of honesty has a multiplier effect
on rewards and penalties, if China’s society and its government strongly
promote this concept, it may well become one of the core concepts of
Chinese culture. This would enable honesty to accelerate the pace at
which China enters into the age of Civilization 3.0 and better integrate
with international social and business norms.
In Western societies, Christianity established a code of conduct between
strangers, but this lacks the multiplier effect of personal networks. One
can imagine that once the 6th cardinal relationship’s moral principle of
honesty between strangers is established in China and woven into the
relationship networks of the 5 traditional cardinal relationships, it will
provide even greater impetus to the development of a S&T economy.
Another example in the course of modernization of Chinese culture is
the role of the individual. The family was the basic unit in traditional
Chinese society, and cultivation of the individual emphasized sacrifice
and dedication to the greater good. The imperial examination system
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also caused most intellectuals to focus their attention on the very narrow
area covered by the examinations. In the age of S&T civilization, the
ability to innovate has become the most important ingredient for success.
Innovation is an extension of individuality. Thus, future (Chinese)
culture will place greater emphasis on individualism, have greater
respect for differences between people and encourage personal growth,
thereby accelerating innovation.
Moreover, the modernization of Chinese culture will require further
linguistic convergence with English.
In the era of Civilization 3.0, the global spread of economic activities
and knowledge and the exchanges between people from countries
around the world will require a common language. As in the free market,
language enjoys economies of scale, and the first to be used by many
will become the language of all. At present, English is such a common
and open system. Like the Microsoft OS or Android, everyone uses the
same system to write apps. Today, almost all important innovative ideas
first appear in English, whether they are in natural sciences, social
sciences, commerce, culture or the arts. English is no longer the
exclusive province of the USA and Great Britain. It has long since
become the common language of world business and of professionals in
creative fields. Chinese and other languages probably will not have a
chance of becoming the common language. Therefore, the
modernization of culture will include the embrace of the English
language. This will allow the latest knowledge to be immediately and
seamlessly integrated into the Chinese language, and enable the latter to
gradually transition from a user to a creator of new knowledge.
To sum up, the renaissance and evolution of China's culture will take
place against the backdrop of S&T Civilization. Through rational
thinking and the scientific method, there will be “adjustments of the
national heritage” in traditional culture. It will continue to evolve and
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develop, and over a long period of sustained buildup, a social consensus
will be gradually established. This will also provide the Chinese people
and Chinese society with a moral code which all will abide by, as well as
common beliefs and faith to console the soul. With such a foundation,
China will be able to stay in the forefront of advances in the global S&T
civilization and gradually make the contributions to the world that a
country with one-fifth of the world's population ought to.

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 Chapter 14 A Forecast for China in the Coming Decades -
Politics

Introduction: In spite of its weaknesses, the Keju system was still the greatest
institutional innovation of Civilization 2.0. It was one of the most fundamental
reasons why China was a country able to maintain a relatively stable society with
a large population and vast land area over its long history. Chinese politics today
are still influenced by the Keju system, and the importance of credentials is a
concept deeply rooted in the minds of the Chinese people. However, the Keju
system was unable to solve the problems of how those with supreme power were
selected and their legitimacy. As the product of Agricultural Civilization 2.0, it was
somewhat inadequate for meeting the special challenges posed to governments by
Civilization 3.0. Constitutional democracy on the other hand, was born during
Civilization 3.0 and offers valuable experiences which address the weak points of
the Keju system. Therefore, the most likely development in China's future political
evolution will be an organic integration of the two major innovations of
institutions of the east and west, that is, the Keju system with constitutional
democracy.

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Politically, one of the great institutional innovations which emerged
during the course of modernization in the west was constitutional
democracy. Conceptually, this system originated in the Enlightenment
doctrine that the power of the ruler is delegated by the people, that is, the
power of a government comes from the consent and empowerment by its
citizenry. This was an expansion of Axial Age concept that emphasizing
people over rulers.
A constitutional government means a restricted government, one where
the constitution limits government power. On the one hand, no
individual rights are above the constitution, but at the same time,
individual rights and liberties are safeguarded by the constitution from
arbitrary government interference. A democracy under a constitution is
a system in which citizens participate in the election of the government
and in the institutions which allocate political powers. In terms of
political progress and evolution, the emergence of a constitutional
democracy coincided with the arrival of Civilization 3.0, reflecting the
rise in the social position of the business class and the changing role of
government in the economy and in society. New free market economic
forces began to enter into government, gradually changing its role from
one of controlling and excessively interfering with economic activities to
one of supporting them, of protecting the property rights of its citizens,
and of providing and securing room for the freedom of ideas and speech
required for technological innovation.
Constitutional democracy is a gradual process. In the most successful
constitutional democracies in history, a constitution preceded democracy,
and property rights and economic freedom preceded voting rights and
political freedoms. Take, for example, Great Britain -- the earliest and
most successful constitutional democracy. By 1830, Great Britain had
already entered the age of Civilization 3.0. Constitutional rule had been
in place for over a century and its citizens enjoyed ample freedoms. Yet
at this time British voters could only vote for members of the House of
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Commons, and those eligible to vote accounted for less than 2% of the
total population. Although it was accepted that the rulers' powers came
were given by the people, the evolution of people’s powers was a very
gradual process. Political power was initially shared by kings with their
feudal lords. Later, the propertied classes gained voting privileges.
Within the propertied classes, major landowners were the first to have
voting rights. This was subsequently extended to medium and small
property owners, then to white males, women and people of color.
Finally, anyone who had reached the age of adulthood could vote. From
the experiences of Great Britain and the USA, we can see a direct link
between citizens’ level of political participation and their level of
economic development, and the higher the level of economic
development, the greater the rate of participation. Equality of voting
rights also started with equality of eligibility and was then gradually
extended. It was only after Western societies had reached a certain level
of social development, when almost everyone had become a member of
the middle class and received a basic education, that there was finally
universal suffrage “one man, one vote” and everyone had the right to
elect and be elected. This process did not truly become a reality until the
late 1940s, after the end of WWII.
When the distribution of social and political power is determined by
election outcomes, everyone has a chance. There is openness,
transparency and equality of opportunity, so this system has an inherent
legitimacy, and is also relatively fair and sustainably viable.
The greatest contribution made by constitutional democracy to Great
Britain and the USA was to move the two societies steadily and
gradually into civilization 3.0. The government basically did not
interfere with market activities and promoted free trade internationally;
citizens enjoyed ample freedoms and protection of their property rights;
their democratic rights to participate in politics increased along with
their incomes and were gradually and slowly opened up. The British and
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American free market economies coupled with their constitutional
democratic systems gave rise to equal economic and political
opportunities, shaped the Western model of Civilization 3.0, and created
the most effective and largest free market system of the day. Because of
Civilization 3.0’s iron law regarding economies of scale, this market
ultimately became the large globalized international market of today.

However, constitutional democracy has its own share of shortcomings.

Under fully democratic circumstances, the politics of public opinion are
better at representing small group and short term interests, but are often
at odds with the overall and long term interests of society as a whole.
The corrupting effect of money in the election process only exacerbates
the problem. When conflicts cannot be resolved, they can almost
paralyze long term policies which safeguard overall public interests (as
is the case with the current U.S. Congress.) Winston Churchill’s famous
saying that "democracy is the worst form of government except all the
others that have been tried” is not merely a humorous remark.
Let us now look at China's Keju system. One of its features is that it was
a system for qualifying people to enjoy political power. Through open,
transparent, and fair examinations and a competitive assessment
mechanism, anyone could become qualified to enjoy some political
privileges. By evaluating candidates for their abilities to learn and
govern and thereby selecting the most outstanding ones, the government
could appoint people based on their abilities and place the most capable
talents in the most important positions. Everyone had an equal
opportunity to enter government service, and the government in turn
could select a large number of the politically gifted from among the
populace, thereby giving it exceptional vision and ability to execute.
This great institutional innovation allowed China to surpass the West for
over a thousand years. Today it still has robust vitality. Many of the
successful civil service systems and professional armies the world over,

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including those in China, have to some degree or other been impacted in
some aspects by the Keju system.
This system likewise has its weaknesses. First, it was only limited to
(selecting) bureaucrats. It was subordinated to imperial power, and
imperial power was a hereditary system, not a merit-based one. There is
no necessary link between lineage and ability, and as a result, throughout
its history all politics in China was limited by the abilities of its
emperors/empresses. The differences between wise and incompetent
rulers were enormous. One can only wring one’s hands when examining
the contrast between the 50 year reign of the Express Dowager Cixi and
contemporary (developments in) Meiji Japan and the West. Moreover,
because politics was often the only avenue for talented commoners to
advance themselves in an agricultural civilization, officials had even
stronger motivation to translate their political privileges into economic
benefits, and corruption became an incurable flaw of such a system.

In spite of these weaknesses, the Keju system was still the greatest
institutional innovation of Civilization 2.0. It was one of the most
fundamental reasons why China was a country able to maintain a
relatively stable society with a large population and vast land area over
its long history. Chinese politics today are still influenced by the Keju
system, and the (importance of) credentials is a concept deeply rooted in
the minds of the Chinese people.
The Keju system was unable to solve the problems of how those with
supreme power were selected and their legitimacy. At the same time, it
was confronted by the challenges of an Agricultural Civilization 2.0 and
somewhat inadequate for meeting the special challenges posed to
governments by Civilization 3.0. Constitutional democracy was born
during Civilization 3.0 and offers valuable experiences which address
the weak points of the Keju system. Therefore, the most likely
development in China's future political evolution will be an organic
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integration of the two major innovations of institutions of the east and
west, that is, the Keju system with constitutional democracy.
A S&T-based economy 3.0 needs a government which will protect
private property rights, provide the free space necessary for scientific
and technological innovation, and minimize its direct economic
intervention. To this end, the judiciary must gradually become
independent, so that laws can both constrain the executive power of the
government and protect individual rights and freedoms; instruments of
the state such as the military must be subject to constitutional limits. A
constitutional government can then be gradually established on this
foundation.
At the same time, political participation should be gradually opened up
to the citizenry, but compared with the West, the mode of participation
should be more suited to Chinese history and cultural traditions. For
example, the government should acquire legitimacy through elections,
but people must first have credentials in order to elect and be elected.
The higher the position, the more stringent the credential requirements
and the smaller the number of those eligible to elect and be elected, and
so on progressively, level by level. For instance, at the village or
neighborhood level, there would be one-person-one-vote for adults and
self-government. To become a civil servant, candidates would have to
pass rigorous examinations. High offices would have even higher
requirements for education, previous achievements, integrity and
popular support. Credentials should be commensurate with positions. By
the time we get to the highest state leaders, they would have to be
selected from a very small pool of the most highly qualified candidates.
This would be a type of credentials-based election: that is, the best
people would be selected using a hybrid method involving examinations,
evaluations, and limited elections. In practice, it would mean that the
degree of political participation by citizens would approximate their
level of economic development. Judging from historical experience, the
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enthusiasm of citizens for political participation is directly correlated to
their level of economic development. When an economy is at a low level
of development, growth is the foremost demand. Environmental
protection and personal safety become more important when an
economy reaches a medium level of development (as in mainland China
today.) When it becomes highly developed, the demand for political
participation reaches its apex (as in Hong Kong and Taiwan today.)
In order to attract the best and brightest and provide equal opportunities
to all citizens, the ruling party, as China's only modern political party,
must be opened up to the entire society, and, through examinations,
assessments and fair competition, it must give everyone who has the
ability an opportunity to participate in the allocation of power within the
party. At the appropriate time, it should bring the compensation of high-
level officials in line with that of their counterparts in the private sector,
develop an index for corresponding relationships and promote clean
government through the combination of high salaries (for civil servants)
and strict laws of punishments. At the same time, government powers
should be greatly reduced, particularly in the economic sector.
Management powers should gradually transition from a positive list to a
negative list. Upon such a foundation, zero tolerance for corruption
should be enforced. To keep corruption as limited as possible, a multi-
pronged approach should be used, including measures such as very strict
laws, merciless party discipline, media scrutiny and whistleblowing by
concerned citizens.
Having completed such a series of reforms, China will have created
channels for economic and political upward mobility that are open to all
and with equal opportunities for all. Many people will engage in free
market economic activities, competition will be fair and winners and
losers will be determined by their abilities. At the same time, many
public-spirited and talented people will go into government. Through
credential-based examinations, the best people will be appointed and
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these elites will govern the country subject to the limits of the
constitution.
Pursuing equality of outcomes but accepting equality of opportunities is
human nature. Any society that can offer equal opportunities will be able
to develop sustainably and achieve long lasting peace and prosperity.
Ever since the Opium War of 1840, China has mostly been blighted by
wars and incompetent governments. It was not until the late 1970s that
changes in the domestic and international environments gave China, for
the first time, an internal and external environment where it could focus
on modernization. In the ensuing 30-plus years, it has achieved
unprecedented results. As China moves from Civilization 2.5 to
Civilization 3.0, it will naturally encounter the various challenges
discussed earlier. However, in the 170 years since 1840, China has
never been in a better position. In the coming few decades, it will
confront challenges, solve problems and ultimately evolve into
Civilization 3.0, thereby achieving the complete modernization of the
most populous country in the world.

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Chapter 15 East-West Relations in the Age of Civilization 3.0

Introduction: Because of common interests, the Iron Law of Civilization 3.0, the
common challenges facing all humankind and the lessons of history, the
differences, conflicts and misunderstandings between East and West are more
likely to be localized, transitory, manageable, and not prolonged. Over the next
several decades, mutual trust, cooperation, common interests and co-development
will still be this century’s mainstream.

First, I’d like to discuss some of the fundamental hard constraints on

east-west relations in the age of Civilization 3.0. No government, nation
or leader can avoid these constraints.
The first constraint is the Iron Law of Civilization 3.0. Once a robust
international market has been formed, no nation will be able to leave it.
Any nation that does so will fall behind, and the longer it stays away, the
more quickly it will fall behind, until it is finally forced to rejoin. This is
the first constraint.

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The second constraint is due to the fact that in the age of nuclear
weapons, major powers all possess nuclear strike capabilities that can
destroy each other many times over, and in the process destroy all the
living things on earth. Thus in this era relations between the great
powers are guided by the principle of mutually assured destruction
(MAD). Under such a mechanism, an all-out war with no bottom line is
unlikely between major national powers.
The third constraint comes from the unique challenges posed by the age
of Civilization 3.0 to the entire human race. These can only be addressed
through international cooperation, particularly cooperation between
major powers. One example is global climate change caused by the
greenhouse effect from carbon dioxide, which directly threatens the
existence of all people. Without a joint response from all countries, and
especially without the active participation of China and the US, any
response will basically be ineffective. The same is true in dealing with
terrorist extremists with suicidal tendencies, especially those
organizations and individuals with weapons of mass destruction (nuclear,
chemical, or biological weapons). Likewise, the globalized economy of
today requires globalized collaborative management. Particularly during
crises such as the financial crisis of 2008-2009, international cooperation,
especially cooperation between economic superpowers, is absolutely
essential. Looking farther ahead, a fundamental need of long term
human survival will be to relieve Civilization 3.0 from its total
dependence on fossil fuels, reserving fossil fuels for the agricultural
fertilizers which only they can provide. This will also require the joint
efforts of all countries.

East-west relations today have been developing under these three major
constraints. Because of these hard constraints, it is very unlikely that all
out, protracted war will break out between major powers. No nation is
willing to leave the international market, and major powers will
endeavor to safeguard the current system to serve their own interests.
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They will also deepen cooperation in areas of common interests for their
own sakes and for the sake of all nations.
However, peace and cooperation do not mean the absence of
competition. Unlike the case of struggles between traditional countries,
land and population will no longer be the primary objects of contention.
Of course the fight over fossil fuel resources will remain an exception
for a relatively long period. Today, competition between countries
mainly takes place in the economic arena. The most important
competitions are often invisible, and they are over the levels of science
and technology, the attractiveness of institutions, market capacities and
educational levels. The most successful countries will be the ones that
can maximize the potential of their citizens and attract the most talented
people from around the world. But where there is competition there will
be winners and losers, and there will be conflicts.
Objectively speaking, there are still many uncertainties in east-west
relations today. The rise of China still produces a profound uneasiness in
the West, and both East and West continue to harbor mutual distrust.
Under certain conditions, such uneasiness and suspicions can deteriorate
into hostility, conflict and confrontation.

Because China was subjugated by the West for more than a hundred
years in its recent history, China’s deeply rooted mistrust of the West is
entirely understandable. To those in the West, there are many reasons
why east-west relations are filled with uncertainties. At first glance,
these reasons include that of cultures and psychologies. Chinese and
Westerners belong to different races with different cultures, histories and
customs. China’s population is several times larger than that of the West.
Thus, at a time when China’s economic and international status and
influence are relatively rising, and when the US and the West are
relatively declining, the sense of unease (about China’s rising) and
denial (of China’s rising) in the West is entirely predictable. When
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China’s overall economic output surpasses that of the US to become the
largest in the world, this psychological reaction will become even
stronger. At a deeper level, the unease of the West stems even more
from differences in political and economic institutions and value systems.
Today, China’s economy is still, to a large extent, state capitalism, with
the visible hand still in a dominant position. Politically, it has a one-
party system where citizens still do not enjoy adequate freedoms. Given
these circumstances, the West will easily assume the worst and associate
today’s China with pre-WWII Japan and Germany. The intertwining of
these two reasons deepens the mistrust between East and West.

Psychologically speaking, the sense of fear in the West is understandable.

Nevertheless, the worst case scenario basically cannot happen because
no man ever steps into the same river twice and history can hardly repeat.
Today we already know what happened to Japan and Germany, and we
already know that given the iron law of Civilization 3.0, China cannot
leave the international market for too long. Even if Japan and Germany
had emerged from WWII victorious, they would still eventuallyfail
economically, just as the former USSR did. Besides, China has tried the
path of isolationism and self-reliance before. It is very clear that this
path is unworkable, and given the intelligence of the Chinese, they will
certainly not go back onto this path again. More importantly, China’s
current economic and political systems are transitional ones. In the
coming decades, China will more likely implement a fully free market
economy and develop a political system with Chinese characteristics,
one which combines Keju with constitutional democracy. Once China
has accomplished this modernization in economics, politics and culture,
much of its experience can be also useful to Western societies as well.
Against this backdrop, from a long-term historical perspective, unease,
suspicions, misunderstandings, even hostility and conflicts are transitory.
If, during China’s transition to modernization, Chinese and Western
leaders are rational and wise in managing their conflicts, and if they
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maintain East-West relations on a basis of cooperation and mutual
benefit, then after the reforms are successful in the next few decades, the
relationship will naturally grow closer, and mutual trust and cooperation
will be strengthened.
From China’s vantage point, the next few decades will be the best period
for comprehensive modernization. Its greatest national interest should lie
in an effort to create an optimal international environment. China’s
foreign policy should focus on maintaining the international free market
economic order, maintaining world peace, avoiding direct conflicts with
other countries, particularly major economies, and actively participating
in international cooperation to address the common challenges facing all
humankind. Compared to obtaining the best possible international
environment for modernization, any gains from international conflicts
will pale into insignificance.
To maximize China’s national interest, Sino-American relations will be
of the utmost importance. China and the United States not only share
many common interests, they also face many common challenges, and
they have strong complementarity in their economies and many other
areas. Because science and technology are the foremost economic
drivers of Civilization 3.0, the leading status of the US in the global
economy will remain unchanged for many years to come. Although
China may eventually have the world’s largest economic output, the U.S.
will still lead in GDP per capita and S&T development. China’s
manufacturing capability and market depth all complement those of the
US. Sino-American relations are the cornerstone for the maintenance of
regional peace and for the promotion of sustained global economic
development. Also, at the appropriate time, China should engage in
more direct dialogues with the peoples of the world. It should use
language common to all countries to articulate the current and future
directions of its reforms, its goals and its vision for post-modernization
China, thereby gradually enhancing understanding and dispelling
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misunderstandings. As China grows, it can also begin to assume more
responsibilities on global issues and maintain the existing global
economic order.
Because of common interests, the Iron Law of Civilization 3.0, the
common challenges facing all humankind and the lessons of history, the
differences, conflicts and misunderstandings between East and West are
more likely to be localized, transitory, manageable, and not prolonged.
Over the next several decades, mutual trust, cooperation, common
interests and co-development will still be this century’s mainstream.

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 Chapter 16 Humanity’s Common Destiny

Introduction: Over the past 60,000 to 70,000 years, the human race has faced
countless threats and experienced countless changes. What has not changed has
been the great creativity and enterprising spirit humans have displayed in the
course of dealing with challenges. This powerful force has always been the
dynamite behind the development of human civilization.

The most fundamental driver of Civilization 3.0 is the organic

integration of limitless S&T development and endlessly growing human
needs. However, these S&T advances often lead us in some unexpected
directions.

For instance, people attach great importance to the way they look and
they love to follow the latest fashion trends. These desires have caused
cosmetic surgery to develop to the point where people have increasingly
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greater choices regarding their physical appearance. Future
developments in science and technology will turn differences between
people into personal preferences and choices. Take skin color, for
example. Some may prefer a fair skin, some a brown skin, and some a
black skin – these can become personal choices. External appearances
and even gender can be freely selected. Because of the integration of
S&T development and the markets, as long as people have a demand for
something, it will happen.
There will also be changes in other cultural differences. In the past
60,000 years since humans first ventured out of Africa, culture spread to
all regions of the world, and it is the sum total of unique beliefs and
lifestyles which developed in order to adapt to local geography. Culture
is what distinguishes people from different regions, but in the future,
these distinctions will become choices and preferences pursued by
individuals.

In the future, language will be almost instantaneously translatable. This

will allow people from all over the world to communicate with each
other in their own languages through the use of simultaneous translation
technology. However, in terms of linguistic development, language itself
also has economies of scale. English has already become the largest
open system in the world. As was the case with Microsoft Windows in
the past and Android today, the most numerous applications are those
with English as the common platform, and the most creative people are
all using English. Therefore, while creative collaborations will still have
to use a common language, this language will become increasingly easy
to learn and it will become increasingly easy to translate into other
languages. The same is true of foods – living habits can change. For
example, many Asians still suffer from lactose intolerance, but this will
soon be changed by science and technology, and anyone will be able to
enjoy all different types of foods.

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The purpose of all these examples is to show how the basic differences
which distinguished people from one another for tens of thousands of
years will eventually become personal choices rather than historical
carryovers. Thus the foundations of traditional states such as nationality,
culture and religion will be shaken, and these existing foundations will
slowly disappear. As for religion, all of its highly specific predictions
will gradually be proven wrong by science, but its basic significance will
remain. The ultimate questions which religion must answer are those of
a fundamental world view: where do humans come from? what is their
inherent nature? what is the raison d’être of human existence? where do
people go after they die? Science will provide increasingly good answers
to these, and may even one day take the place of religion in answering
them. However, another function of religion is to provide spiritual
comfort, soothe suffering and pain, give meaning to life, and fill people
with faith and hope in the future. In this role, religion, traditional art,
faith and philosophy will all gradually converge, and the experiences
shared by people through art, religion, philosophy, love and empathy
will grow increasingly powerful. The commonality in all religions which
will survive is empathy between people, particularly compassion. A
universal religion will take shape based on such a foundation, and the
arts will increasingly become the source of spiritual sustenance common
to all humanity.
At the same time, the Iron Law of Civilization 3.0 will create a single
global common market, and as a result, it will be necessary to manage
the challenges of a common global economy. The state institutions
which originally developed during Civilization 2.0 will become
inadequate because the foundations of these states will have disappeared,
so a new global state is not only a possibility, but a necessity. A global
government will manage a common global economic market and jointly
coordinate financial and fiscal policies (with member nations). Such a
global government will be better able to deal with the challenges
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confronting all humanity, be they nuclear weapons, biological terrorism,
global climate change or the complete depletion of fossil fuel resources.
Climate changes will become more extreme, the greenhouse effects of
anthropogenic carbon dioxide well become more obvious, and this will
have an enormous impact on all people, all countries and all regions.
Milankovitch cycles will continue to exist for a long time to come, and
may even become stronger due to human activities. We now have
climate data for the last 700,000 years and understand that changes in
climate can be very large over long periods of time. Only a global
government can deal with this.

Another long term challenge involves resources. The Industrial

Revolution started with the combination of coal and steam engines,
followed by the combination of the internal combustion engine and
petroleum, and that of fossil fuels and electrical power. All of today’s
civilization is based on a foundation of electricity. We could say that all
of Civilization 3.0 is based on the use of fossil fuels, and the reason why
S&T 3.0 is so powerful is because fossil fuels have a much higher
energy conversion rate than photosynthesis. Fossil fuels were also
originally formed through photosynthesis, but they were stored
underground for hundreds millions of years as organic debris and
underwent chemical reactions. Their very high energy density per unit is
a result of millions or even hundreds of millions of years of
accumulation and concentration. They are a precious legacy given to
humanity by the earth after being stored up for hundreds of millions of
years. However, despite the abundance of this legacy, it is still finite and
will surely one day be exhausted by our current wasteful use. This might
take a few centuries or it might take over a thousand years, but it will
definitely be used up. So what will be the future energy sources?
Agriculture must rely on chemical fertilizers based on fossil fuels, so
how will the human race feed itself? This is a daunting challenge
confronting all of humanity.
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S&T will strengthen the sense of common identity between people and
dissolve those differences between them which form the basis for the
existence of traditional nation-states. The global common market of
Civilization 3.0 will also deepen our common interests, and the
challenges shared by all humanity will have to be dealt with jointly.
Hence a global government will be the inevitable result. In fact,
throughout history people have already done many useful experiments in
this regard. For instance, through the conquest, colonization and
assimilation of over a hundred ethnic groups, the Chinese people were
ultimately formed in early China. The U.S. successfully became a multi-
ethnic, multicultural melting pot over the past several centuries.
Likewise, after centuries of internecine warfare, Europe finally
transitioned from a common market toward a common government.
These are all very successful experiences. The international
organizations which developed after WWII are all models of successful
cooperation between countries, whether they be the UN, the World Bank,
the IMF, the WTO or the G20. Therefore, in the coming decades or the
coming century, a movement toward global government is entirely to be
expected.

Over the longer term, another daunting challenge that will confront the
human race will be the capacity of the earth to accommodate humans.
Since the discovery of silicon-based computing 50 years ago, its
processing speed has doubled every 18 months. At this rate, within a few
decades the intelligent computing power of silicon-based materials will
be comparable or even superior to that of a human brain. Then human
brains will, for the first time, become compatible with mechanical ones,
or perhaps people will be able to store all the contents, memories and
DNA of their brains in computers, thereby extending the lifespan of their
own brains. Of course the human brain is not only a carbon-based
organic supercomputer -- it is also an organic transmitter of signals, and
we currently know very little about this aspect. However, we have
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already achieved compatibility of mechanical device with other human
organs and will continue to get better at doing so. For example, bionics
allows signals to be transmitted through the bloodstream, enabling
prostheses to move like natural limbs. Scientifically developed
mechanical force can increase muscle power by endless multiples. If the
processing speed of mechanical brains becomes comparable to or even
greater than that of human brains, and if we better understand the
organic chemistry of the human brain, then mechanical brains may
become extensions of human brains. It will then be highly likely that
brains can be repaired or replaced without losing their identities. In other
words, mechanical brains will be able to replace carbon-based brains.
The most fundamental difference between silicon and carbon, between
inorganic and organic, is lifespan. Organic brains have limited lifespans,
whereas inorganic ones have much longer lifespans. Human lifespans
will therefore also undergo some changes and acquire some new
meanings. If humans and machines become one, or if the ability of
people to repair their organs allows their lifespans to be extended
indefinitely – at least in a certain sense of “life” – then sooner or later
the human population will grow beyond the carrying capacity of the
earth. From a population of twenty thousand over a hundred thousand
years ago, the human population has grown to 7 billion today, which is
already an enormous change. We can imagine that if life expectancy can
be infinitely increased, then within hundreds or thousands of years, the
earth’s capacity will at some point reach a state of saturation. At that
time, people will have to leave the earth to seek living space on other
planets, just as they left Africa some 60,000 years ago.

Over the past 60,000 to 70,000 years, the human race has faced
countless threats and experienced countless changes. What has not
changed has been the great creativity and enterprising spirit humans
have displayed in the course of dealing with challenges. This powerful
force has always been the dynamite behind the development of human
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civilization. It is true of course that humans still have their primal
instincts. As (Ian) Morris says, history is indeed created “by lazy, greedy,
frightened people looking for easier, more profitable, and safer ways to
do things.” All animals are like this, but we differ from all other animals
because of the extraordinary tools we use. The powerful creativity and
spirit of enterprise unleashed by human brains and the extraordinary
spiritual power expressed through art allowed us to embark on a very
long journey from the time of our earliest ancestors in Africa. In the
course of over a hundred thousand years, we have completely conquered
the earth, and in the not too distant future, we may go beyond earth
toward the vast universe in search of a new home. The future is still
worth looking forward to.
(The End)

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 Original work in Chinese by Li Lu

Translated by Ling Lau, Adam McVier and June Mei

Special thanks to Eva Zhao and Jing Chang for proofreading the
English edition

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 Discussions About Modernization - A series by Li Lu
Part Two: A look at the Future of Sino-US Relations from the Historic Lens of
Human Civilization

December 13, 2018

1. Introduction

Tensions between the United States and China have been building since President Trump
took office, escalating into a trade war before our eyes. How will this trade war end, and
where will China end up? Lost in the fog of confusion created by the relentless 24-hour news
cycle, we often find ourselves unable to explain the present, or see the future with any clarity.

This essay argues that an understanding of the true nature of Sino-US relations today requires
a much longer-term view. We must start from the historical context of the evolution of
human civilization to really understand world events today. We must examine the following
sets of questions – How did China’s unique political system and culture develop, and how was
that process different from what happened in the West? How did modernization emerge in
the West, and spread across the globe? How was the present global order shaped, what role
has the United States played in that process, and how does the United States influence and
dominate other nations? What hard powers does the United States have at its disposal, and
how much decision-making power does the United States have in the context of current
global order, specifically in the economic arena? How has China achieved such
unprecedented growth under this current global order in the past four decades, and what
problems must China confront now? Given the pressure she is now facing from the United
States, what options does China have going forward, and what pitfalls must she avoid? What
kind of relationship with the United States is best for her to maximize her own interests, and
help her achieve modernization in the end? Only when we answer these questions
systematically, can we clearly examine China's future.

2. A Very Brief History of Human Civilization

Homo sapiens, the last major species to appear on Earth, first emerged on the African
savannas near the equator some 100,000 to 200,000 years ago. Homo sapiens is not only a
social animal, but also an individualistic one with a highly developed brain. There is no other
species on earth that is simultaneously both highly social and highly individualistic. It was
exactly the unique combination of these traits that allowed human beings to set themselves
apart from the other primates who came before them and create civilizations of
unprecedented sophistication within such a short span of time. It is in this context that I

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define civilization as the difference between human beings and their hominid ancestors. The
history of human civilization is both the economic history of energy capture and use, and the
political history of social organization. The interplay between economics and politics has
given us complex civilizations that are uniquely human.

In “Li Lu on Discussion of Modernization” (2014), I divided the history of human civilization

into three stages of advancement: the Hunter-gatherer Civilization, or Civilization 1.0; the
Agrarian Civilization, or Civilization 2.0; and the Modern Science and Technology Civilization
(Modern Sci-tech Civilization) or Civilization 3.0. This article will focus on the evolution of
socio-political institutions during the great leap from an Agrarian civilization to a Modern
Sci-tech Civilization. The analysis will inform our understanding of the current Sino-US
conflicts.

In the days of Agrarian Civilization, both farming and animal domestication required favorable
natural conditions, and that explains why most civilizations were born on the Eurasian plate.
This plate is divided into east and west by the Himalayas (the Roof of the World) and a
boundless tundra. Throughout the agrarian era, these two parts of human civilization
developed independently, with little to no direct contact (except for brief contact during the
13th century rule of the Mongol Empire). Therefore, we have always referred to them as
Western Civilization and Eastern Civilization.

Around the start of the Common Era (CE), two powerful empires emerged almost
simultaneously – the Roman Empire in the West and the Han Dynasty in the East. Both of
these empires had large populations, vast territories, and well-developed transportation
networks connecting all corners of their empires. Both reached the pinnacle of Agrarian
Civilization.

The Roman Empire and the Han Dynasty both fell after about 400 years of being founded.
Both regions descended into periods of conflict and war. In the East, after a tumultuous
period of about 300 years, the various states in China were unified and imperial rule of old
was largely restored. During the dynasties of Sui, Tang, and Song Dynasties, Chinese
civilization reached new heights. Having been passed down for 2,000 years, the Chinese
imperial was considered a wonder during the days of the agrarian age. In the West, though,
after the demise of the Roman Empire, the region did not see the rise of another unifying
empire. Though the Muslim empire emerged at one point and amassed a consideration
amount of land, it was never the brilliant civilization the Roman Empire was, and it never had
the population, technology, and social structure either. This marked the first major point of
divergence for the two civilizations’ developmental trajectories.

Then, after emerging from 1,000 years of the Middle Ages, Europe, which was home to the
northern barbarians during the Roman Empire, saw the rise of several very dynamic nation
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 states. These vibrant states discovered the American continent during the Age of Discovery,
each appearing on the scene with a burst of energy. They experienced the Age of Discovery,
the Renaissance, the Enlightenment, the Protestant Reformation, the Scientific Revolution,
the Industrial Revolution, various colonial wars and many other changes. These European
states became the most dynamic centers of activity on the world stage. They were also the
first ones to usher in the new era of human civilization. I call this Civilization 3.0 – the Modern
Science and Technology Civilization. This is the second major point of divergence between
the East and the West. The emergence of Modern Sci-tech Civilization brought the population
centers of both sides together for the first time. By this time, the East and the West were no
longer independent of each other. They became very connected, and worked together to
create a new world order – one that has had profound impact on all of mankind till the
present day.

3. Institutional Innovations in China during Agrarian Civilization

Both instances of East-West divergence took place against the complex backdrop of new
economic realities and evolving socio-political structures. It is important to note that, in
Agrarian Civilization, photosynthesis was the primary source of energy. So, land was the
most valuable resource, and the main source of conflict in the Agrarian Civilization. For this
very reason, Agrarian Civilization was never able to solve this inherent problem: when there
was more land, the population grew; when the population reached a certain point, the land
was no longer able to support the large population; and finally social development would
stagnate and fall into the Malthusian Trap. Eventually, population levels came back down
because of various "natural and man-made disasters”. Agrarian Civilization was an era of
economic scarcity, with frequent land grabs at the center of most conflicts. Winning such
conflicts relied on a combination of the right geographic location and political organization,
as well as the ability to mobilize the society at large.

The geographic environment in which the Chinese civilization developed includes the
Himalayas to the west, frigid grassland to the north, and oceans to the east and south. On
this land, two mighty rivers, the Yangtze and the Yellow Rivers, flow from west to east,
forming vast, fertile, alluvial plains suitable for agriculture. Together with their tributaries,
the two rivers form a well-developed, accessible transportation network (waterways are a
cheap mode of transportation). Given such favorable conditions, a government would need
only to amass a critical amount of economic power, and it would be able to extend its power
throughout its territory by means of a cheap transportation network. But the rise of a
powerful nation also requires institutional innovation for its domestic political organization.

In the 5,000 years of Chinese history, the first 3,000 years were the most consequential, as
breakthroughs in political innovation laid a solid foundation for stability in the next 2,000
years. The greatest of them were the reforms of Chinese statesman and philosopher Shang
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Yang (商鞅, 390-338 B.C) which took place during the reign of Duke Xiao of Qin (秦孝公). At
the core of his reforms was the introduction of a system of meritocracy to replace family ties
as a means of allocating political power. Human beings are descended from animals, so it is
not surprising that the earliest social relationships were simply based on blood relationship.
Even though individuals were rewarded for their successes on the battlefield, the spoils of
victory were still distributed along bloodlines before Shang Yang came along. Merit could be
passed down just like wealth. The heroes of the battlefield would be knighted with land, and
aristocrats and monarchs would also grant land to their blood relatives. That was basically
how power and economic resources were distributed in the feudal era – east and west alike
– until such a system was utterly disrupted and turned on its head by Shang Yang. He
instituted a meritocracy and stipulated that merit could not be passed down to the next
generation. The only power that could be inherited was imperial power. Under the new
policies, wealth could be inherited, but political power could not. His reforms were truly
revolutionary. They upended the feudal system and allowed the rise of Qin from a small
marginal state to an empire that eventually unified China. Shang Yang’s policies came to
motivate everyone from all over the state of Qin. It grew very strong and defeated the other
states. After unifying China, the Qin Dynasty instituted the same system across all its
territories. Then came the Han Dynasty and its “Election System” (举孝廉制, a system based
on the virtues of filial piety), which reinforced the system of meritocracy. This system was
the precursor to Keju system (科举制, Imperial Examination System), which was fully
instituted soon after the Sui Dynasty ended. The Keju system tested candidates for official
government posts by assessing their ability to handle public affairs, but as well as their grasp
of general knowledge. It offered everyone a path of upward social mobility, and a fairer way
of allocating political power. On the whole, the Shang Yang Reforms laid the cornerstone for
a relatively stable political system in the following 2,000 years. This system witnessed the
rise and fall across various dynasties, propelled the Chinese Empire to the apex of Agrarian
Civilization, and seemed to mark “the end of history” in that era.

Meanwhile, the West had only relatively small and fragmented areas of alluvial plains suitable
for agriculture. As for transportation, there was the Mediterranean Sea, almost completely
landlocked like a lake; but with a narrow strait connecting it to the Atlantic, it was calm and
therefore easy to navigate. It was an ideal place for the birth of an empire. Along the
Mediterranean basin, there were agricultural plains in Egypt and a smaller one on the Iberian
Peninsula (where Spain and Portugal are located). But all of these plains were much smaller
than those in China. At that time, the forests on the European continent were still virgin lands
that had never been cleared for farming. Against that backdrop, the Roman Republic was
already rising from the central region of present-day Italy. This region had a limited amount
of arable land, and so its expansion was fueled in large part by conquering other regions. The
Roman political system had always been a hybrid system of meritocracy in the military,
bloodline inheritance in politics (the number in the Senate grew from dozens of families at

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 the earliest to one to two hundred families). The empire’s largest granary was in Egypt, but
it paled by comparison to those found in China’s Yangtze and Yellow River basins. So there
was a large disparity between the rich and the poor; and slavery was a necessity. The good
life enjoyed by the aristocrats was built on the backs of the slaves. These economic realities
inevitably impeded political reform. With about one-third of its population as slaves, a hybrid
political system of feudalism and meritocracy, it was impossible to create a society that was
of “one heart and one mind”. Compared to the Chinese society after the Qin and Han
dynasties, the Roman Empire had several inherent problems: aristocrats vs. plebians; free
citizens vs. slaves, and a shaky economic foundation dependent on slavery and continued
conquests. Once expansionary conquests were no longer feasible, the civilization itself had
nowhere to go but down.

Both Roman Empire and Han Dynasty were threatened by invasions from the barbarians to
the north, but in very different geographic contexts. The northernmost part of the Han
Dynasty territory was the Mongolian steppe, suitable only for herding and not for farming.
The northern part of the Roman Empire was at roughly the same latitude but was much
warmer due to North Atlantic currents from the Gulf Stream, and therefore suitable for
farming. Still, agriculture was delayed by thousands of years because of its dense forest
coverage. When the northern barbarian tribes learned to clear the forests for farming,
agrarian civilization began its gradual ascent. By then, though, the conflicts between Roman
Empire and Germanic barbarians had already intensified. In the fifth century AD, the Roman
Empire was brought down by Germanic tribes. After the collapse of the empire, the Roman
political system failed to regain a foothold in Europe due to its inherent weaknesses. The
Roman system was not the best political system in Agrarian Civilization.

More than 1,000 years after the fall of the Roman Empire, small nation states of the original
empire and emerging vassal states in northern Europe were still in the midst of various wars.
There was still no unified empire in the West. The European medieval period was very similar
to “the Spring and Autumn period and the Warring States period (770 BC to 221 BC)” in China.
However, when considering the 2,000 years history of the stable Chinese Empire since the
Qin and Han dynasties as a whole, one can certainly see a clear divergence between Eastern
and Western civilizations. At that time it was China that stood at the apex of Agrarian
Civilization, because of her institutional innovations in political organization.

4. Emergence of the Modern Sci-Tech Civilization: the Second Point of Divergence between the
East and the West

After 1,500 AD, developments in the East and the West saw another great divergence. This
set the history of Europe and China (after the Spring and Autumn Period and the Warring
States Periods) on completely different paths, with the starting point marked by the Age of
Discovery. Advancement in sailing and navigation technology enabled the discovery of the
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New World. The Europeans landed on the shores of the Americas, largely by chance. And
the Atlantic was to Europe as the Mediterranean was to the Roman Empire. By way of a
cheaper mode of transportation (sailing), Europe quickly took over the largest agricultural
plains on Earth – North America and South America. In “Li Lu on Discussion of
Modernization”, I argued that, in the beginning, various natural conditions limited the
development of agriculture in the Americas. Isolated from Eurasia, they also had
underdeveloped agricultural practices, negligible animal domestication, and sparse
populations. Without the immunity that the Europeans had to all the germs they brought
with them, large numbers of the native Americans succumbed various plagues brought by
the Europeans, and the native populations were all but decimated. The Europeans were quick
to take over these vast American plains so suited to growing crops. Through their American
colonies, these European states could access granaries substantially larger than those of the
central plains of China, leading to a tremendous burst of sustained economic growth.

In Agrarian Civilization, if an economy followed the normal course of progress, it would grow
until it fell into the Malthusian Trap. But, the West’s fall into this trap was preempted by
another epochal event – the scientific and technological revolution. The Age of Discovery not
only brought material wealth to the peoples of Europe, but also generated a strong curiosity
in science and technology, thus triggering ideological and spiritual revolution. Europe
underwent a fundamental transformation from the Renaissance, the Protestant Reformation
to the Enlightenment. That was the historic context in which Scientific Revolution was born.

Multiple factors such as Scientific Revolution, transatlantic free trade, an autonomous

American continent, and competition among European feudal states, together brought about
great advances in human civilization. The Scientific Revolution and free market economy
emerged right around the same time; and that combination resulted in hundreds of years of
sustained and compounded economic growth, which finally allowed the economy to break
through the bottleneck of Agrarian Civilization, and land itself was no longer a constraint on
economic growth. This period saw exponential economic growth that was fully capable of
supporting any level of population growth. In fact, we still have not seen the upper limit of
such growth even today. It was then that mankind ushered in the era of Modern Sci-tech
Civilization. This era has been marked by unlimited and sustained compound economic
growth driven by the dual engines of modern science and technology and the free market.

In a free market, people willingly exchange products and services, benefiting both parties
such that 1+1 is greater than 2. When knowledge is exchanged, both sides gain from the
other without losing what it had to start, sparking a multiplier effect, such that 1+1 is greater
than 4. So, when science and technology know-how is used to make products and services,
and then exchanged on the free market, a lasting, mutually reinforcing virtuous cycle is
created. The insatiability of human needs and desires fuels the never-ending innovation and
delivery of new products and services. The market plays the vital role of multiplier, and keeps
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the cycle going at the rate of 1+1 is greater than 4. The bigger the market, the more efficient
it is. The more efficient the market is, the more needs are met. The more these original needs
are met, the more demand is created. A self-sustaining virtuous growth cycle ensues. This is
known in economics as compounding. When everyone has access to science and technology
and free market, competition is reduced to, and centered around, the size of the market.
Relatively speaking, bigger markets are more efficient; more efficient markets have greater
capacity; and greater capacity means larger economies. These larger economies can sustain
stronger military, making it easier for them to win over their competitors. The shift from
competing for land to competing for markets reflects the transition from Agrarian Civilization
to Modern Sci-tech Civilization. This is exactly the shifting tide that we have been witnessing
for the past five hundred years.

In the beginning, Europe was still living in the Agrarian Civilization, and the various feudal
states were still waging wars over land and fighting over territory. But gradually, all of these
warring states began to break free of the constraints of the land itself and discovered new
drivers for economic growth. Participants in the economy were no longer only aristocrats or
plebians. Businessmen, capitalists, new classes of industrialists and consumers emerged as
active participants in the economy. As economies crossed over from Agrarian Civilization to
Modern Sci-tech Civilization, political structures and people's demands changed too.

In this new era, old rivalries among European countries quickly turned into competition for
colonies. Market size was what colonial powers were interested in; and colonies were a good
source of raw materials, markets, and labor. As the first real global empire, the British
Empire's most important contribution to a new world order was its global free market system
that included its own colonies that ran on its own currency (the Pound Sterling). This market
system gave her a decisive competitive advantage over other major powers. So early on in
the transition from Agrarian Civilization to Modern Sci-tech Civilization, European countries
were waging wars of colonial aggression abroad and wars among rivals at home, both in the
interest of colonial expansion. Land and markets were both at the center of it all.

As economic progress accelerated during the transition from Agrarian Civilization to Modern
Sci-tech Civilization, rival European powers began searching for the best type of political
system for the new era, and that process produced a series of institutional innovations. By
the twentieth century, three different camps had emerged: fascism as practiced by Germany,
Japan and Italy, communism under the leadership of the Soviet Union, and liberalism led by
the United States and Great Britain. In the nearly 100 years of conflicts and wars that
followed, first to fall was fascism (at the end of World War II), and next came communism
(the end of the Cold War). By the early 1990s, liberalism had won a resounding victory. The
United States emerged as the legitimate single superpower in the new world order, ushering
in a new era of "The American Order”, and marking the end of the previous era.

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5. The Global Market System under the American Order

Shortly after the end of WWII, the United States withdrew victorious from the occupied
territories of Europe and Japan, making it the first country in the history of man to do so
voluntarily. Since WWII started as a fight over territory, this act was completely different
from any that had ever preceded it, including that of the Roman Empire, Chinese Empire or
the British Empire. The new American Order already had the distinct features of Modern Sci-
tech Civilization. If it can be said that what mattered in Agrarian Civilization was the size of
the territory, I argue that it is the size of the market that matters in Modern Sci-tech
Civilization. Market size is what determines whether an economy can really succeed in the
long run. The market economy has a decentralized structure organized around individuals
and small entities (companies). It is market size – not national borders – that determines the
amount of energy that is brought to bear. In this way, the dynamics of Agrarian Civilization
and Modern Sci-tech Civilization are very different. Withdrawing victorious from occupied
territories as a world superpower did not mean that the US gave up the fruits of victory.
Postwar era, the United States has gone on to create a tightly woven global market system
by establishing of a series of international institutions, including the United Nations, the
Bretton Woods system, the IMF and the World Bank. It has made sure to remain in control
of setting the rules, accessing the markets, and imposing and lifting sanctions. In post-war
Europe, the United States quickly brought its European allies into this system with The
Marshall Plan. Even though they lost the war, Germany and Japan, were also incorporated
into the system through a series of constitutional amendments. The US has also built a
network of military bases throughout the world with a series of treaties and security
arrangements, such as NATO, US-Japan, and US-South Korea alliances. This serves to secure
the safe transportation and supply of raw materials in the American-led global market. As
the creator of the American Order, the United States has always retained the rights to make
rules for the market, admit membership to access the market, and impose and lift sanctions
on states that violate the rules. At the same time, it has borne most of the costs – military
and economic – of safeguarding this global market. Rights and obligations together form
the core of this American Order.

The United States has also established and promoted her set of ideological values, which we
now know as her soft power. In Agrarian Civilization, imperial China established a political
system structured around Legalism, and a belief system rooted in the values of Confucius and
Mencius. This system of beliefs was intended to achieve the willing submission of its people
through subtle cultural and spiritual influence. Similarly, the American ideology promotes
freedom, democracy, human rights, constitutional government, the rule of law, free markets,
free competition, free trade, and the sanctity of private property. These universal values are
so powerful that they have been adopted by almost everyone in the world. It is the very
combination of hard and soft power that has brought the United States such tremendous
success. Since the end of WWII, the US has managed to avoid another world war, and, for
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the most part, has kept the peace in the world. On top of that, she has also created the
largest global market in human history. Since the end of the Cold War, this market has been
open to everyone around the world, giving everyone the opportunity to create wealth like
never before. At the same time, science and technology have been advancing by leaps and
bounds. Instant messaging and the Internet are connecting almost everyone around the
globe. Mankind has achieved unprecedented progress in areas such as education, gender
and racial equality, the alleviation of poverty, and human rights. Average life expectancy has
increased significantly. What we are left with since the end of colonialism is a world of almost
all independent autonomous countries. We have seen a significant reduction in war-related
deaths and violence. It is fair to say, by all measures, the 70 years since the end of WWII,
especially the 30 years since the end of the Cold War, have been the best times in the history
of mankind. The deeply revered US ideologies and "The American Dream" have been
spreading all around the world, and winning the hearts and minds of peoples everywhere.
American culture and American brands increasingly become global culture and global brands.

However, one must recognize that ideology and power are inherently different. In China, for
example, the question of a “belief system” (道统 Confucius orthodoxy) versus a “political
system” (政统 political orthodoxy) has been debated throughout the ages. The former refers
to Confucius ideology, whereas the latter refers to the powers of the imperial ruler. These
have always been distinct concepts. A similar distinction also holds true in the American
context. Ideologically, the United States advocates that all men are created equal and are all
entitled to universal human rights. A closer look, however, shows inconsistencies in the way
it conducts domestic and foreign policy, and inconsistencies in the way it treats different
countries and their peoples. Its stance in international relations often does not square with
what it advocates at home. This is especially true for countries, for whatever reason, find
themselves on the opposite side of an issue. Two examples come to mind – Cuba and North
Korea. The United States has completely excluded both of them from the global market. The
case of Cuba is particularly telling. Cuba has diplomatic ties with many countries but not with
the US (limited ties restored in 2015). Because of the American embargo, Cuba has not had
access to the global market and has remained a poor developing country. The United States
can also take former allies who become enemies, such as Iran, and kick them to the sidelines
through sanctions. Since the collapse of the former Soviet Union, Eastern Europe has been
invited and welcomed into this global market because of political democratization, whereas
Russia has been marginalized since Putin came to power. China is actually a special case. It
has not undertaken any reforms in its political institutions and is still governed by a
completely different political system from that of the US; yet China has been more or less
fully integrated into the American-led global market. Today, however, the different schools
of thought in the US are coming together on China policy, agreeing that the existing WTO
rules as we know them are no longer effective, given the current realities in China.

One of US economic hard powers is the US Dollar as the default currency of global trade,
finance, and settlement. So, in theory, the United States can track each and every cross-
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border transaction in the world, whether it is in goods, services or investment. In that sense,
all the international business flows of all banks everywhere is somewhat under American
supervision. This is why American sanctions are so effective, as evidenced by the
developments following Trump's announcement of America’s unilateral withdrawal from the
Iran nuclear deal. ZTE and Huawei, two Chinese companies, have also fallen victim to
American sanctions.

America’s hard powers also includes its global network of military bases, the shear size of its
economy, its huge domestic market, its open investment climate, its competitive tech sector,
and its world-class universities. So, whenever a global financial crisis strikes, investors around
the world will flock to the safe havens of the US Dollar and American assets. This remains
true even after what happened in the 2008 crisis.

The United States has always acted decisively whenever it was necessary for it to use its
military or economic hard power, as demonstrated by the two Iraq wars and the quantitative
easing measures during the 2008 crisis. The latter is a typical example of the US tapping into
international capital to bail out a domestic market in crisis. The US has effectively put all the
countries in today’s global market into three concentric circles, according to how close they
are to itself. There is the inner circle with most of the WTO members; then there is the
periphery for limited-access participants; and finally there is the outer circle for countries
under comprehensive sanctions. Today’s global market is dominated and governed by the
American Order. In “Li Lu on Discussion of Modernization”, I argued that the ironclad rule of
Modern Sci-tech Civilization is that the biggest market will eventually become the only
market that matters. Other stand-alone markets will be relatively inefficient and unable to
compete; so the American-led market is the only one that matters. Therefore, access to this
market determines which countries will prosper and which countries will live in poverty. The
US holds that key.

In his memoirs, LI Zhenzhi (李慎之 1923-2003, counselor and translator to Chinese leaders)
recounts what DENG Xiaoping said about Sino-US relations while en-route on a visit to the
US. It was DENG’s first official visit to the United States after his return to power. DENG said
the reason for attaching such great importance to the relations was based on his observation
that in the postwar era, countries who aligned themselves with the US had all become rich,
whereas those who sided with the Soviet Union had stayed poor. This observation is still
relevant today and is an accurate description of the present global order.

Naturally, the United States relies mostly on soft power to keep the American Order in times
of strength and confidence. But peeling away layers of soft power, one can still find the kernel
of hard power. Whenever the US becomes less confident, it dispenses with the niceties of
soft power, and unabashedly resorts to hard power. Those on the receiving end of American
hard power are likely to conclude that while the US implements democracy at home,
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 internationally it resorts to hegemony. As the creator of the American Order, its
prerogatives include market access, market denial, and selective sanctions and penalties.
These special privileges are constituent elements of American hard power.

Since Trump took office, a lot of what we have seen is actually the casting aside of traditional
ideology in favor of such hard power. The power Trump has exercised is the power the US
has always had. If, once upon a time, there had been a Chinese emperor who ceased to follow
Confucian values, and stopped being benevolent, just and magnanimous, that emperor may
have later gone down in history as a tyrant; but no one would have been able to do much
about it while he was still in power. By the same analogy, America's trading partners all
initially protested against Trump's unreasonable trade polices; but within a very short period
of time, almost all the countries, except for China, capitulated and signed new agreements
that were more favorable to the US. So, the election of Trump has revealed the true nature
of American hard power in the context of the American Order.

6. Sino-US Relations under the American Order

China’s integration into the global market is a modern phenomenon, as China had minimal
international trade before 1840 during the Qing Dynasty. The Opium Wars ended China’s
isolation and eventually forced China into a quasi-colonial trading entity in an global system
led by the European powers. With the establishment of People’s Republic of China (PRC) in
1949, modern China under the MAO era had a centralized political system, a planned
economy, and an independent foreign policy characterized by confrontation with both the
US and the Soviet Union. This isolationist policy cut her off from both American-dominated
and Soviet-dominated markets. Fast forward to the DENG era, when China implemented a
series of market reforms and open door policies. Economically, China moved towards a
market-based economy. Politically, her citizenry and society enjoyed more freedom and
rights, as long as the rule of the Communist Party was not challenged. Individuals, the society
at large, and private companies were given considerably more freedom. On the foreign policy
front, China normalized diplomatic relations with the United States, and joined the WTO after
successful conclusion of trade negotiations with the US. China’s WTO membership marked
her final integration into the American-led global market and signified her full membership
in the American Order. China was careful to play by the rules of the American Order and keep
a low profile; she set about to quietly amass wealth. The result was an economic miracle.

But recent years have seen a change in strategy. With China rising rapidly, areas of
incompatibility between China and the US have become increasingly pronounced. In the
global arena, China has presented a challenge to American dominance, and conflicts have
arisen. On the economic stage, a China-led system of international institutions has been
established and often without the participation of the United States. China has also pursued
the militarization of the South China Sea. The US economy accounts for 25% of the global
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GDP, but it bears the lion’s share of military costs associated with the maintenance of the
global market. From the American perspective, China’s share of global GDP is 15%, but her
share of the cost is de minimis, making her a free rider. And to make matters worse, as
bilateral frictions mount, the cost of maintaining the American Order has only gone up. To
the US, China is becoming more and more like Russia.

In the United States there are four schools of thought on China policy. Till recently, the
mainstream school of thought was that of engagement. Its proponents argued that China's
market reforms were good for the United States and the international community as a whole,
since they believed that economic liberalization would spill over into politics and lead to
political democratization, and that China would gradually become more and more like the
US. They put their faith in American soft power, believing that the US would exert a subtle
influence on China. On the opposite side were the China hawks that supported the school of
containment, who argued that the ideologies of the two would never be compatible as long
as China remained under the totalitarian rule of the Communist Party. They believed that, as
her economic power grew, China’s threat level would go from mere adversary to potential
enemy. One can see that people from both camps carry a certain amount of missionary zeal
that is the hallmark of American tradition. The third school was the school of pragmatism,
particularly popular in the business community. The rationale behind this approach was that
China’s rise has created many business opportunities for American companies. In addition,
both were big nuclear states, and should stay friendly. Furthermore, closer economic ties
could win China’s cooperation and support in addressing global challenges such as global
financial crises, nuclear nonproliferation, climate change and counterterrorism. The fourth
group was the populists, who came mostly from the lower and middle classes and helped
elect Trump. Supporters of populist policy viewed themselves as primarily victims of
globalization and the rise of China, citing the ills of unemployment and the hollowing-out of
American manufacturing.

The four schools have always had divergent views. But in recent years, in light of all the
developments in China, there has been a gradual convergence. There is a growing consensus
that granting China WTO membership was a mistake and that China's economic rise is the
biggest challenge to the American Order. Abandoning the illusion of China’s economic rise
will lead to political change, those in the school of engagement are moving closer to the
hawks, and closer to the view that China's economic rise will turn China from rival to foe. The
populists blame China for everything that is wrong with America, from the widening income
gap to the stagnation of the middle class. The pragmatists who used to be staunch supporters
of China’s integration into the global trading system are now having a change of heart and
view China with increasing hostility. The reasons are many – China’s restrictive policies
toward foreign companies and private companies; mandatory technology transfers; the
requirement that companies operating in China set up Communist Party cells; and
monopolization or market-dominance by the SOEs (state-owned enterprises). It is not
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surprising that by the time Trump started a trade war, there were few China sympathizers
left. Indeed, the US has always had few true China experts. People with “empathetic
understanding” who take a long-term, holistic and objective view on China, are few and far
between. By contrast, China has far more people with deeper understanding of the United
States.

Whatever the case may be, the reality of Sino-US relations is that today the American
perception of China is approaching its perception of Russia. The US and Russia enjoyed a
short honeymoon period following the end of the Cold War. But since Putin has been in
power, Russia has emerged yet again as an adversary and potential enemy of the West.
Though Russia is a member of the global market, it has remained on the periphery and not in
the inner circle. This is due to a series of international sanctions, especially those imposed
after the Russian annexation of Crimea several years ago. The Russian economy is heavily
reliant on energy and natural resources. Its development has fallen behind in nearly all areas
except for the military. And its population is on the decline. It is conceivable that Russia will
likely lose its major power status twenty years from now. But China is a different story. More
people in the US now views China as potentially the next Russia. This is evident from the
broad-based support Trump's trade war has received. Political and business elites from both
political parties and even average Americans have more or less arrived at a consensus on this
issue. The hawks have even gone so far as to advocate kicking China out of WTO, or set up a
new WTO without China and negotiating separate trade deals with China. This is the current
context in which we find Sino-US relations under the American Order.

In a span of 20 to 30 years, China has worked her way into the inner circle of the global
market. In that process, China’s share of global GDP has risen to 15%. If the US were to really
implement the decoupling policy being pushed by the hawks, it would be met with a great
deal of pushback, and it would incur such huge economic losses that it might even take the
US and the world into a prolonged recession. To implement and sustain the decoupling
policy, the hawks would need “cooperation" from China to bring about a calculated escalation
of bilateral tensions. To a great extent, the recent encirclement of Huawei can be explained
in this context. Huawei is specifically being targeted because it is the poster child of China’s
tech development, and one of the most respected companies in China. But its products and
technologies do fall into one of the most security sensitive industries. It is fair to say this is
one high-tech area where China convincingly leads the US and the world, and that tends to
provoke a sense of unease in many countries because of security concerns. It is very easy for
the US to engage in fear mongering, provoke China into over-reacting, and quickly take the
situation from bad, to worse, to worst. If and only if Sino-US relations become hostile or
devolve into a quasi-war-like state, will the public be able to overlook the high price of the
economic losses and schisms caused by China's withdrawal from the global market system.
Or, other bilateral issues such as Taiwan, Hong Kong, Tibet, and the South China Sea could
end up being the fuse that lights up a Sino-US conflict.
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China’s wisdom in coping with the current situation is really being put to the test. What are
the policy options? What does the trajectory for future development look like? I am of the
view that as long as achieving Modern Sci-tech Civilization remains her key objective, China
has rather limited options.

First of all, China should avoid making fatal mistakes. One such grave error would be to
become an unwitting “collaborator” with the US policy hawks, engaging the US in tit-for-tat,
and acting like Russia as the disruptor of the American Order. If this is the case, the outcome
would be very predictable. The hawks would quickly unite American mainstream forces and
push the economic decoupling strategy. Decoupling would first be taken to the rest of the
Five Eyes countries (the UK, Canada, Australia and New Zealand). Europe and Japan would
join in, and would soon be followed by the rest of the world. China will be pushed from the
inner circle to the peripheral one, where Russia sits now. Though definitely doable, the
process would take a huge short-term toll on the global economy, but could yield some long-
term benefits for the US. Take for example the case of Huawei. If Huawei were to be
completely excluded from the major markets, then 5G technologies in these markets would
have a temporary lag vis-a-vis China and the smaller countries cooperating with China. But
this also means Huawei could only innovate and operate in a much smaller market.
Compared to Huawei, telecom equipment makers of the West would grow faster in freer and
larger markets. Sooner or later they would catch up with Huawei. It is conceivable that they
could be offering more advanced technologies than Huawei in 5, 10, or 20 years. By then, it
would be very difficult for Huawei to maintain its lead. By the same analysis, if China were to
leave the global market willingly or reluctantly, becoming isolated, she might be self-reliant
for a considerable amount of time. But over time, smaller markets would be overtaken and
overrun by larger ones. If so, the Chinese economy would continue to contract in a downward
spiral, while the global market would continue to expand in an upward swing.

The second possible fatal mistake would be to take the existing policies to the extreme, and
let populist principles guide economic policies. The government would put more restrictions
on foreign companies, or even exclude them from the domestic market. SOEs would exercise
greater control over the economy. In choosing technologies, domestic Chinese companies
would always be picked as winners. China would experience another episode of isolationism,
or a so-called self-reliance movement. If so, China will backslide towards nationalism from
globalization, without actually leaving the international market. It is foreseeable that this
policy option may delay the inevitable for some time, but eventually it would set the China
model (State capitalism with Chinese characteristics) on a collision course with the American
model (free market capitalism). The outcome will be lose-lose or mutually assured
destruction.

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Humans have lived in Agrarian Civilization for several thousand years, while Modern Sci-tech
Civilization only emerged some 200 years ago, and the American Order of the modern era
has an even shorter history of barely seven decades. Human beings are still hard-wired to
the old mental model of Agrarian Civilization, and stuck on yesterday's political objectives
even today. In Agrarian Civilization, land was critically important. Most legendary figures in
Chinese imperial history achieved their status by defending existing territories, conquering
new territories, and contributing to the welfare of the future generations. But conflicts and
wars in the past 500 years have made it very clear that Modern Sci-tech Civilization has
different standards from the previous era in judging a leader’s legacy. Things that were once
thought to go down in history with eternal glory may now be judged to be the exact opposite.
This is why I have made a special point to draw the distinction between Agrarian Civilization
and Modern Sci-tech Civilization, reminding us of the blind spot when we apply the old mental
models to our understanding of current events.

Today, some people in China hold the view that Chinese economy has become too big to hide,
and DENG’s strategy of “coolly observe, calmly deal with things, hold your position, hide your
capacities, bide your time, and accomplish things where possible” will no longer work. They
believe that the US will no longer stand by and allow the Chinese economy to continue to
grow. At the same time, they argue that the Chinese political system won’t change, which
means conflicts with the US are inevitable, and the two countries are destined for war in the
future. It follows that the best policy option, given all that, is to take advantage of the current
situation, and establish a China-led international trading system, with a view to competing
with and eventually replacing the American-led system. This view misreads and misjudges
both the American Order and China’s powers home and abroad.

Economically, under the American Order, there is a free, competitive global market that
provides a level playing field for every member of the WTO. Since the end of WWII, Germany
and Japan, both erstwhile enemies of the United States, have developed into major
economies accounting for 5% and 6% of the world's GDP respectively. Since the reforms and
open door policy, China’s share of the global GDP has risen from 1.75% to 15%. The American
Order has made all this possible. But the US has seen its share of global GDP drop from about
50% at the end of WWII to 25% today, while shouldering most of the costs in maintaining the
smooth operations of this global market. So, generally speaking, the American Order has
been basically generous and fair. No WTO member really wants to leave the trading system.
As long as China abides by its rules, there is still plenty of room for growth. At present, the
United States still has the most dynamic economy in the world, and it remains confident
about its competitiveness.

To challenge the existing world order, a nation not only has to be strong at home, but more
importantly needs a set of ideologies that is widely accepted by the global community.

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Judging by how well the “China Dream” has been received by the Chinese people, China is
not quite there yet, and doesn’t have the necessary soft power.

Politically, under the American Order, every nation has free rein to develop as it wishes. The
American Order is mainly preoccupied with the rules of access to and exit from the global
market. It doesn’t wield much power over other nations’ political choices. The UN Charter
states “the Organization is based on the principle of sovereign equality of all its Members”.
So in fact, under the American Order, different political systems may develop, provided that
they do not directly challenge America’s superpower status. The rapid growth of China’s
share of global GDP (from less than 2% to 15%) is proof of this. Indeed, there is plenty of
room for sustained growth.

In Modern Sci-tech Civilization, economic development is not necessarily tied to a certain

political structure. As a nation’s economy develops, its political system also evolves. In the
early stages of economic development, almost all nations have a relatively centralized
political system. Even those who chose democracy chose a republic form of constitutional
democracy. For example, at the time of industrial revolution, Britain was a constitutional
monarchy. In order to establish a global market, it relied on colonial expansion. Those were
times of bloody politics. During the early stages of America's economic development, less
than 10% of American citizens even had the right to vote. The US was not a colonial power,
but it was the largest country to have slavery at that time. Japan, Germany, and other
countries chose even more destructive paths, such as fascism and foreign aggression at the
early stages in their development. The good news is with economic development and
improving living standards, major western countries have gradually embarked on a path to
constitutionalism, democracy, human rights and freedom. This process of political evolution
is the effect rather than the cause of economic development in the era of Modern Sci-tech
Civilization. For this reason, the US has not placed any hard-and-fast rules on the political
system of developing countries, respecting the sovereignty of all individual nations. All
members are equal at the United Nations, and there is no inherent discrimination against
China. If China can seize this opportunity, playing by and not challenging the global market
rules of the American Order, the potential for economic growth is still huge, and the
“Thucydides Trap” can be avoided.

Based on this analysis, the appropriate policy option is to stay on the course charted by
DENG. In building a new model for relations between major countries, China must try to
escape the "Thucydides Trap” by avoiding directly challenging the US, by respecting the US
as the superpower of Modern Sci-tech Civilization, and by playing by the rules.
Economically, China should continue her market liberalization efforts, promoting a more
market-oriented and open economy, carry out SOE reforms (move from managing assets
to managing capital), and driving domestic demand, so that China can make due
contributions to the global economy. Internationally, China should bear the cost of
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maintaining the global market commensurate with her 15% share of global GDP, by
supporting American-led international organizations. In this regard, China’s response to the
2008-09 global financial crisis was exemplary. Domestically, China introduced a stimulus
package (worth 4 Trillion RMB, or 600 Billion USD), implemented a series of stimulus
measures, and contributed to half of the world's economic growth in 2008. Internationally,
China purchased hundreds of billions of US treasuries in support of US monetary policy.
Joining the American initiative to set up the G20, China and other major economies
introduced coordinated monetary and fiscal policies, stemmed the spread of the financial
crisis, and averted the repeat of the Great Depression of the 1930s. During the crisis, China
acted as a responsible stakeholder and was lauded by the international community.

The American Order itself is also a work in progress. Economically and militarily, the order is
strong. The latter is enforced through some selective military alliances, such as NATO, US-
Japan, US-South Korea and other security alliances, as well as military bases across the globe.
Politically, the order mainly relies on soft power. The UN respects the sovereign equality of
its members and recognizes the sovereignty, freedom, and equality of each nation. Even
when a nation is subject to economic sanctions, it is still politically independent. The
arrangements between the US and its allies (including European countries, Five-Eye
countries, Japan, South Korea and others) are somewhat similar to a loose confederation.
The European Union is a more mature confederate system. In the long run, the ironclad rule
of Modern Sci-tech Civilization is that the largest market will eventually become the only
market. Even countries such as Iran, North Korea and ISIS, which are excluded from this
market, and may reject American values, still have to kowtow to the US Dollar. If a single
global market is inevitable, then all countries will converge politically. It is conceivable that
countries will grow tighter politically in the coming decades or centuries. Today’s global
challenges will make this eventuality more likely.

Global challenges, such as climate change, have no national borders and require a global
response. It is especially true that rapidly developing countries need to take action. To
convince other nations of her world leadership, China must step up to the plate and act
responsibly. The rapid development of science and technology presents new challenges to
the current economic order, including the impact of artificial intelligence on employment,
gene editing, biotechnology and the IT revolution. China could help address these common
challenges. In addition, there is the threat of nuclear weapons. No country can tolerate the
risk of a nuclear war, but one might ensue as a result of rivalry among major powers. All
these challenges provide China with plenty of space to develop within the bounds of the
existing global system. On the contrary, if China were to change it forcibly and try to displace
the US as the superpower, the consequences would almost certainly be catastrophic.

Presently, China has many problems of her own, dealing simultaneously with the middle-
income trap at home, and the Thucydides Trap abroad. To solve the domestic problems,
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China must continue to grow its economy. If the problems are handled properly, then they
will just be part of her growing pains. If not, they may morph into something entirely different
and lead China right into the middle-income trap. To escape this trap and grow into an
advanced economy, China is absolutely dependent on the American-led global market under
the American Order.

Broadly speaking, we still live under the American Order, one that is still evolving, and hasn’t
yet arrived at its final destination. Socio-political systems and economic development of
China and many other countries in the world are still at the transitional stage of Civilization
2.5 (between Agrarian Civilization and Modern Sci-tech Civilization). In this sense, “history
has not ended”. A highly unified market will also bring countries and peoples closer socially
and politically. As to what final form it may take – confederation or federation, loose or
tightly-structured – it is hard to predict. Nevertheless, the existing socio-political structures
are the products of Agrarian Civilization, and it is not clear whether they will be applicable to
Modern Sci-tech Civilization. Whatever the case may be, each country has the flexibility to
design and build its own political system.

China, having built the best political structure for Agrarian Civilization, arguably was the first
country to have achieved equitable distribution of political power until then. It behooves
China to keep this political tradition when transitioning to Modern Sci-tech Civilization. The
United States, having created the global order in Modern Sci-tech Civilization, stands at its
pinnacle. China, building on her own experiences and learning from American experiences,
must strive to achieve the following three key objectives – avoiding the Thucydides Trap,
escaping the middle-income trap, and shouldering her proportional share of the cost of
maintaining the global market. The ultimate goal of these endeavors is to realize the
comprehensive modernization of China.

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Reference

1. https://roiss.substack.com/p/li-lus-investing-masterclass-at-columbia
2. https://brianlangis.files.wordpress.com/2018/03/li-lu_s-lecture-at-
columbia-2010.pdf
3. http://csinvesting.org/wp-content/uploads/2013/05/GD-Spring-2013.pdf
4. http://latticeworkinvesting.com/2021/04/13/li-lu-value-investing-in-china-
full-transcript/
5. Chinese Edition of Poor Charlie’s Almanack: The Wit and Wisdom of Charles
T. Munger
6. The Prospect of Value Investing in China
7. https://roiss.substack.com/p/transcript-of-li-lu-and-bruce-greenwald
8. A Discussion of Modernization
9. Discussions About Modernization - A series by Li Lu Part Two
10. https://charlierose.com/videos/18975
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12. https://charlierose.com/videos/13281