In the long run, good transactions cannot save bad analysis, and good analysis may ruin bad transactions. However, comparatively speaking, learning to wait (whether to hold assets or cash) is the most difficult.
While investment performance is measurable, the medium to long-term probability and odds of each investment can be determined in advance. Exceptional performance is merely a result; the reasons behind it are fundamental.
Diligence, talent, and luck might be the three most important factors: Effort in the right direction sets the lower limit for your success; talent determines the efficiency of growth and the cost of time, while luck can surprise those who persist in the right path unexpectedly.
Rather than micromanaging, it’s better to be skilled in choosing; successful investors know when to let go and when to persist. More people concentrate wholeheartedly rather than being distracted; more are endowed with extraordinary talent and insight, deeply recognizing their limitations and clearly understanding what the market allows and forbids. Those so-called investment gurus did not receive mystical revelations but were faithful to compound interest and persisted forever.
Those who understand compound interest know that its sustainability and profitability are contradictory (similar to ROE); high compound rates and long cycles are mutually exclusive, which is a limit humanity has approached with Buffett’s nearly 25% compound interest over 50 years (those who think high compound rates can trump Buffett without considering time have likely never touched on investment).
Reverting to the mean from high compound interest is inevitable, involving both objective and subjective factors. The best scenario in one's investment career starts with high compound rates and ends with stability and lasting returns.
At some stages, investment is especially prone to the fallacy of creating a perfect system, which is almost no different than dedicating one’s life to creating a perpetual motion machine. The more complex the system, the more one gets lost in minutiae, the farther one strays from the essence of investment. Only through long-term investment can one appreciate that simplicity and succinctness are key, focusing on substantial methodological strategies for success.
For investors, a more dangerous scenario is having the feeling of having "truth in one's grasp" early on. If one is a bit more idle or competitive, attacking those slightly irrelevant with words or pen, it generally indicates limited room for progress. Some fundamental principles won’t waver, but the importance of different investment elements can vary. This doesn’t mean being fickle, but maintaining an open mind, which is a capability in itself.
Should one focus or diversify? It depends on which stage you're at, and whether flexibility (fish) or security (bear's paw) is more important to you. Seen from a long-term perspective, focusing signifies high confidence in company research and analysis. However, if one is truly that confident, it should be possible to find more excellent topics, justifying a degree of diversification. The essence of this issue, of course, is a matter of balance, ultimately concerning the match between research depth and portfolio returns, and a suitable balance between investment flexibility and risk diversification.
In the process of investment decisions, many factors are involved, but after summarizing, there might be three most crucial points:
- First, the big picture—knowing one's position in the market cycle, whether it's fear, greed, or numbness;
- Second, value judgment—betting on future strengths and befriending time;
- Third, expectation gap—maintaining sensitivity amidst clear value judgment assumptions and valuations at high expectation gaps.
In investment myths, there are stories of being victorious in every battle, but reality is much harsher; even Buffett admits he’s constantly making mistakes. However, why do some people’s mistakes prove fatal while others do not cause severe damage? The difference lies in:
- 1, Whether one subjectively admits to being fallible;
- 2, Whether one objectively uses a safety margin to protect oneself;
- 3, Whether one diversifies risks and compensates with good odds; thus, the loss depends on pre-handling of the mistake.
Based on the formula PB = PE * ROE, with an ROE of 8%, even if PE is 35 times, PB is only 2.8 times. If a company can continue to grow, raising its ROE to 25%, then PE would be at 25, while PB would actually be 6.25. This shows that PE reflects the expected premium, while PB reflects the asset premium. The expectation often precedes actual changes in ROE, while PB changes synchronously or lags relative to changes in ROE.
This helps understand that the trend of ROE is the core element of valuation; the biggest mystery of valuation is not in simply manipulating indicators but in proactively judging a company’s future profitability, thus accurately determining its operating phase. The so-called general accuracy actually means that specific PE and PB can be relatively vague (or subjectively analyzed), but the trend analysis of ROE must be correct.
High ROE indicates a company's profitability, and a high and sustainable ROE indicates a strong competitive advantage. Therefore, in most cases, such good companies will inevitably attract a capital premium, meaning a higher PB.
When a high ROE company has a low PB, you might wonder why. Maybe: 1, the market is foolish; 2, the company fundamentally is highly cyclical, currently at the peak of profitability. This contradiction might seem accidental, but frequently, high ROE and low PB basically contradict each other.
In this field of investment, "dancing with shackles" may not be a limitation but a protective mechanism, as Old Buffet said about "hitting only twenty holes in a lifetime," referring to the most common practice of index fund investing.
These actions might seem highly restricted, but over time, "shackles" often turn into golden bracelets. Essentially, this is why the majority of people’s "free actions" can never exceed their virtual boundaries.
Companies that continue to foster new expectations tend to be more favored by the market. However, there are two examples here: one is where new expectations revolve around the main business or industry chain upgrades, and the main expectations are consistently "talked and walked," signifying great prospects for outstanding or even great companies; the other is where new expectations have a wide span, prone to trend-following, and continuously use new expectations to cover up old unmet ones, representing unreliable or even dishonest companies.
Regarding the relative relationship between a company and its price, entering at a statically high price is not a good idea but not the worst. Especially if the company continues to maintain low-cost operations, it will become a decent investment.
It’s worrisome to enter at a cheap price, but regretful when entering at an expensive price, indicating that the logic of buying was wrong. In such situations, the most important thing is to quickly correct the mistake; otherwise, the cost of time for a mistake to manifest becomes too high.
High-efficiency operation categories of companies seem to struggle to establish clear barriers, but such efficient operations can lead to a qualitative change, eventually forming real high barriers based on scale, technology, and customer stickiness. Before all this becomes certain, it usually approaches maturity. For these companies, in the initial mid-term, the most important thing should be focusing on three points:
- 1, The long-term cycle of demand expansion;
- 2, The team's focus and strong industry aspirations;
- 3, Continual execution of "talk and walk."
In terms of quality, a deteriorating balance sheet is not a good sign, but the reasons behind its deterioration need to be clarified. One scenario is associated with a significant decrease in revenue growth, along with an abnormal increase in accounts receivable and inventory; another scenario is high-speed revenue growth, which requires pre-financing or lacks scale efficiency, leading to a significant rise in the debt ratio and cash flow deterioration.
The former often indicates that even after credit restrictions are relaxed, the revenue side will still face worse outcomes; the latter is because the demand erupts too quickly, exceeding the current capital's digestion capacity.
There’s a saying, "What is restriction? Limitation is thinking you need a gold yoke for chopping wood during times of the emperor," which is quite appropriate.
To continue the above topic, if you want to learn successful value investing, don’t recite Buffett’s secrets every day; if you want to start a business, don’t read various success theories daily. What you need most is to gather reasons for everyone else’s failures.
Without carefully studying various failure cases, success is impossible. Those who tell you daily that "this is good, if you do this, you will shine with prospects" are either naively idealistic or deceptive.
Everyone talks about the high elasticity of the bull market, and after several stock disasters, they start to focus on "how to avoid net value fluctuations in the stock market." In fact, net value retracement itself is an attached factor of market fluctuations, and completely rejecting retracement equals running counter to investment.
However, the same fluctuation has different meanings in different environments: in a bubble environment, it’s inclined to reject fluctuations, but in an undervalued environment, it is necessary to accept fluctuations. In most uncertain environments, you need to calmly endure the volatility.
A book states, "A mediocre general, in the face of complex environments, always troubles himself and cannot find direction. A true general cuts through chaos with decisive action, appearing routine on the surface but discerning the essence and the critical, acting decisively."
Indeed, this applies analogously to investment decisions, where excellent investors, whether in the market or regarding companies, are adept at identifying the primary conflict and appreciating the details, thus forming a "logical fulcrum" for decisions.
When it comes to valuation, what I first fear is not the expensive price, but the difficulty in measuring value. The core difficulty in measurement is either too many variables or being too far from one’s competency boundary; the second concern is the high cost. It seems easy to take decisive action when something appears cheap, but being proved a trap would result in significant loss.
If other factors are relatively certain, then "expensive" is actually a very simple problem, at least easy to quantify. However, the importance lies in assumptions that are unclear or refuted.
Many things require effort, and even without merit, diligence ensures a basic yield guarantee. However, investing is both cruel and simple; it never asks how much you have put in but whether you are correct. In this kind of work, effort is secondary; foremost are correct values and methods. Otherwise, the wrong direction makes more effort lead to more obstacles and infatuation to more insanity.
Then there’s luck; novice investors often seem correct due to good luck, while seasoned investors often succeed because of it. One is random and passive; the other is of high probability and active.
Individual investment performance, having luck once or twice is normal. However, if luck is consistently good, there must be an attractive factor called "capability." To truly understand investing, one sign is learning to distinguish between capability and luck.
