Chen Jiahe Chief Investment Officer of Jiuyuan Qingquan Technology
This article was originally published in Securities Times
Qi Baishi, a famous Chinese painter in China, once said a famous saying: “Those who learn from me live, and those who resemble me die.” This means that if you can learn the essence of traditional Chinese painting and learn his charm, you can paint very good painting.
However, if he only paints similar paintings to him, such as Qi Baishi’s painting of shrimps, he also paints shrimps, and his paintings are exactly the same, then he will definitely not be able to excel in the field of traditional Chinese painting.
In value investing, things are the same. What investors need to learn and master is the “god” of value investing, not the “shape” of value investing. However, many investors have been deceived by the “form” of the value investment technique, and they pursued too much to replicate the investment skills of value investment masters, and as a result lost the core “god” of value investment.
So, what is the god of value investing? In one sentence: “Long-term value growth”.
In addition to this sentence, we can derive two sentences: “Avoid any risk that may lead to the loss of fundamentally stable growth, while ignoring others’ perceptions of such growth (market prices).” However, if it is simpler, then Investors only need to remember the phrase “long-term value (fundamental) growth” and 6 words, it is enough.
In addition to “long-term value growth”, the “god” of value investing, all investment technical means can be attributed to the “shape” of value investing.
The so-called “shape” follows what Sun Tzu said in “The Art of War”: “Water controls the flow because of the ground, and soldiers win because of the enemy. Therefore, the army has no constant force, and the water has no constant shape.” There is no “shape” at all, and it needs to be rigid To abide by it, to say that it is absolutely necessary, and anything that is different is a crooked way.
The purpose of all “forms” is to best achieve the “god” of value investment according to the situation at that time. At that time, when the circumstances changed and external conditions changed, it became unnecessary to follow the previous “investment shape”.
If you don’t believe me, let’s look at a few cases.
Centralized or decentralized?
The question of whether investments should be concentrated or dispersed is perhaps a topic that many investors like to argue about most. Some investors think that they can just pick one or two good companies. Anyway, many investment masters do the same! Then other investors think you are too lazy, why don’t you buy more companies? The two factions quarreled endlessly, with no result.
In fact, if we look at the positions of the value investment masters, we will find that there are some concentrated ones, and many others are scattered.
For example, Charlie Munger is a famous concentrated investment, and the results are so volatile that Buffett sometimes can’t stand it, saying “probably only Charlie can bear such a lot of volatility”, but his long-term performance is also very good; Warren? Buffett and Chen Guangming are also more concentrated; Peter? Lynch, Walter Schloss and Cao Mingchang are relatively scattered.
However, whether concentrated or dispersed, these investors have achieved good investment performance in the long run. Obviously, centralization or decentralization is not the “god” of value investing.
Should I use leverage?
Whether or not to use leverage in investment has also caused many investors to feel conflicted. The more contradictory thing comes from Buffett.
On the one hand, this sly old American said to investors: “Don’t use leverage to invest! They will make you lose money in market turmoil, and then wait for long-term value discovery!” On the other hand, Buffett himself passed the early Partnership funds and mid-to-late insurance companies have used enough investment leverage.
As a result, many investors who learned Buffett’s leverage, borrowed money from securities companies, or even borrowed money from over-the-counter funds, but suffered heavy losses in the market volatility such as 2015. And those who listened to his words, refused to use leverage, and only used their own savings for investment, it was difficult to make too much money.
In fact, whether leverage is used or not is only the “shape” in investment. Whether to use leverage or not depends on whether the leverage can serve the “god” of value investing, which is “long-term value growth”. It’s just that we need to figure out the three words “long-term”, “value” and “growth”.
If a kind of leverage may lead to the loss of value in the long term, for example, because the stock price plummets in the short term, resulting in forced liquidation, then this kind of leverage is “bad leverage” and is not the “god” of compound value investing.
Conversely, if a leverage does not cause permanent loss of the account due to a short-term price drop, it will better promote the “long-term, value-added” effect of leverage and an increase in value (note that both are equally important). , growth”, then this leverage is “good leverage”. The leverage Buffett uses is of this type.
So, leveraging and not leveraging in investing is not necessarily a good-or-bad relationship: they are nothing more than different “value investing shapes”.
Valuation or quality?
In the Chinese market, many investors are constantly debating whether to buy stocks based on quality or valuation.
Some people think that as long as the quality of the company is good enough, the valuation does not matter, and then they say Charlie? That’s what Munger said. Others say that as long as the valuation is good enough, the quality of the company doesn’t matter, because Charlie? Munger’s predecessor, Benjamin That’s what Graham said.
In fact, no matter the valuation or quality of a company, it is the “shape” of value investment, and essentially serves the “god” of “long-term value growth”.
When prices are similar, of course gold is better than waste paper: quality is far more important than price at this point. But when gold is 100,000 yuan per gram, the brightest gold is also a bad investment, and if waste paper is worth 1 yuan per ton at the same time, then what is the point of making money by selling waste paper?
In the mainland holding group stock bubble and the US China concept stock bubble that peaked in early 2021, many investors mistakenly believed that as long as the quality of the company is good enough, it doesn’t matter how much valuation they pay. In the next two years in the market, this investment method that placed too much emphasis on the “form of enterprise quality” and forgot the god of “long-term value growth” suffered huge losses.
Regarding this bubble, Yang Dong, the founder of Ningquan Assets, made a comment at the end of 2022, and summed it up very well: “The track investment that has been enthusiastic in the past two years is more of a trend investment aimed at the prosperity. (But ) The core of value investing is valuation pricing (that is, valuation measurement of corporate quality). Those who think that valuation is not important, or even think that it is outdated to value valuation, these people are not doing value investing.”
In fact, if we firmly grasp the “god” of value investing, that is, “long-term value growth”, then sometimes depending on the specific market environment at the time, we can even completely jump out of the discussion of “quality” and “valuation” and find A new way to invest in stocks.
For example, when Wang Yawei managed the Huaxia Big Market Selected Fund in his early years, he took advantage of the characteristics of the Chinese market at that time to find ways to inject and restructure assets of listed companies. Between 2006 and 2011, the corresponding net assets of the investment portfolio were obtained. It has achieved a CAGR (compound annual growth rate) of about 40%. What followed was the net worth of the fund at that time, which also grew at a CAGR of about 40%.
Wang Yawei’s investment method even completely jumped out of the discussion of “valuation” and “quality”, but it was still an effective way to increase long-term value at that time, so it did not prevent him from achieving excellent investment performance.
Are index funds necessarily good investments?
Let’s look at another example. Buffett once said that for ordinary people who are not familiar with securities investment, it is better to buy a low-cost S&P 500 index fund instead of struggling to choose stocks and find funds.
As a result, many investors listened to Buffett’s words, and learned Buffett’s shape, not the god behind value investing, thinking that as long as they want to invest and don’t like to use their brains, then they can “brainless” to buy an index fund. . As a result, many investors were hurt badly over the years.
Why copy the pattern of “Buffett said to buy the S&P 500 index fund” and just buy and buy index funds, there will be problems? Here, let’s start with why Buffett said “buy the S&P 500 index fund”.
For unwary investors, they have simplified what Buffett calls “buy cheap S&P 500 index funds” to “buy index funds.” The two missing points here are deadly: the S&P 500, and the low fees.
First of all, why is Buffett talking about the S&P 500? There are many indices in the US, NASDAQ, Dow, S&P 100, various industry indices, style indices, etc.
These many indices have different committees and different compilation methods, but Buffett specifically picked the S&P 500, which proves that Buffett recognizes the S&P 500’s compilation methods and rules, as well as the people responsible for managing the S&P 500. index committee.
Secondly, Buffett also added an attribute, low cost.
When saying this, Buffett’s main recommendation is John. The index fund of Vanguard Fund, founded by Borg, has two characteristics: one is that the fees mentioned above are very low, and the second is that it is large in scale and stable in management. This also means that buying this index fund can best, most efficiently and accurately replicate the trend of the S&P 500.
Therefore, when I heard Buffett say that “ordinary investors should buy low-cost S&P 500 index funds”, investors who only learned the “shape” of value investing learned “I want to buy index funds, that’s all.” , Buffett said that index funds are suitable for novices.”
As a result, in many cases in the capital market, these investors suffered a lot of losses. For example, in the slump of some high-dividend-yield index funds in the Hong Kong market in the second half of 2022, some investors who “I want to buy Hong Kong high-dividend-yield stocks, so I just chose an index fund” suffered a lot of losses. . Similarly, in 2021-2022, when some major market indexes include high-valued stocks in the index, or increase the weight, and kick low-valued stocks (often also underperforming stocks) out of the index, the value of the index will also increase. suffered damage.
And smart investors will learn the “god” of value investing from it: I am looking for a good stock index, the fundamentals of this stock index must grow steadily like the S&P 500 index, bring investors a yearly The compound growth rate is 10% to 12%, and the valuation should not be too expensive (the PE valuation of the S&P 500 index has been around 20 times for a long time), and then I have to choose a reliable index fund.
The above four examples fully show us the difference between “God” and “Shape” in value investing.
Investors need to keep in mind that all value investing is not what it means in the end. The fundamental purpose of the various methods, forms, means and techniques of value investing is to serve the “god” of value investing at its core, which is “long-term value increase”.
With different market environments, different investment ability circles, and different social cultures, the “shape” of various value investments can be subtly changed, as long as they can truly serve the sole purpose of “long-term value growth”.
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