The bloody week is finally over. This week, the Shanghai Composite Index fell 4.16%, the Shenzhen Component Index fell 5.19%, and the ChiNext Index fell 7.10%.
This drop in the entire history of A-shares is not terrible at all. Scary is the “this time is different” reason:
Biden has successively signed three bills on chips, biopharmaceuticals, and new energy; Powell is going to raise interest rates again; the RMB exchange rate has broken 7 again; They are all running into deficits, and in some places they can’t even drive buses…
Every time is different, every time seems to be the same.
I asked myself a series of questions: Should I pay attention to these? Of course it should. Do I understand? Not even understand. Can I predict? Unpredictable. Can I use them to guide investment decisions? I’m afraid not.
What to do then?
Now is an extreme stress test of the investment system and a touchstone of investment principles. It’s just a matter of reviewing and summarizing to see what loopholes still exist in your investment system and what can be improved.
I was lucky enough to imitate and learn from Buffett from the very beginning of investing, and it took me several years to learn. Although he didn’t make a lot of money, he still surpassed 90% of the people in this market with seven losses, two draws and one profit.
Looking back now, most of this system is worth sticking to, and a few need to be improved. The previous understanding was not in place, but now through my own practice, I have a deeper understanding.
There are many things worth insisting on, such as sticking to the circle of competence and buying companies that are easy to understand and change less; buying companies that make real money and making real money; stick to the margin of safety and don’t overbid; stick to a shareholder perspective based on fundamental analysis; Stay away from leverage and ensure long-term funding sources.
These are all familiar and the secrets that made me the lucky 10%. “Don’t fix the machine if it’s not broken”, if it’s done well, just keep it up. What we don’t do well is an important reason why we can’t learn Buffett well, and it is worth talking about.
Based on my own experience, I have summed up the reasons why we can’t learn Buffett well: if we don’t learn everything and understand the constraints behind it, there will be a lack of logic and a closed loop of the investment system cannot be formed. Investing is very cruel. If you cannot close the loop, you may not make any money, or even lose money.
First, several common logical loopholes.
1. The Circle of Competence is not a place where we can draw a dungeon.
The circle of competence should be like this: Only what we really understand can we buy; as long as we really understand, we can buy.
In a simple sentence, it can be divided into three elements: only, oneself, and truly understand. These three elements, the trinity, are indispensable:
a. [Only], has two meanings: let us never take chances, no matter how wonderful the world outside the circle is, we must never leave the circle. This is easy to understand, but many people simply understand that: you can only invest in industries that Buffett has bought, such as consumption, banking, insurance, etc., and fall into a fundamentalist error similar to “two whatevers”. Therefore, another meaning is: as long as we can really understand it, we can buy it, it doesn’t matter whether Buffett has bought it or not.
b . [Myself], also has two meanings: no one else understands, no matter whether the other person is Buffett, Munger, or the big V on the snowball, or a friend around him. No matter how much they understand, it has nothing to do with me. Only companies that I really understand can buy. On the contrary, no matter how optimistic others are, as long as we really understand it, we can buy it.
c. [Really understand], it is said that investment is a very cruel thing, no one cares whether you really understand or pretend to understand, but the market value of the account will tell us the answer. We must be honest with ourselves and not be ruthless and deceive ourselves. As for what is really understanding, it is not zero or one, black and white, it is a qualitative standard, which can be roughly summed up as: don’t vote if you don’t understand, if you know a little, vote a little, if you know more, vote more. This also matches the third point.
2. Buffett’s investment style should match the duration of the funds.
Why does Buffett dare to ignore stock price volatility? Why do you dare to be more excited when you fall, and buy more when you fall? In addition to buying companies within his circle of competence, there is a particularly important but often overlooked element: his capital has a long duration.
Whether he just started investing with personal funds, or after setting up a partnership company, the money he used to invest will not be used in the short term. Later, in order to solve the problem of long-term funding sources, he was willing to give up the commission of partners and took the initiative to transform the company into a joint-stock company.
Although this decision lost a huge amount of commission income, it made the source of funds permanent. Without this decision, his shares in the partnership company would be higher and higher, but the scale of the partnership company would not be as large as it is now, and his total personal wealth would also be lower than it is now.
Short-term funds cannot be used for long-term investment , which is overlooked by many people. I’ve been like this for a while, and even to a certain extent now – it’s not that the money will be used in the short term, but the amount of liquidity left for the family is relatively small, and if something unexpected happens, it’s very It’s hard not to sell stocks passively at all.
Furthermore, many people don’t have the duration of their funds to match Buffett’s investing style. Especially in the last two or three years of turmoil, many planned sources of cash flow that were originally highly certain have become less certain.
To learn Buffett, you have to learn it all, and only use the part of the money that is long enough to make long-term investments like Buffett (most people have this amount of money, it’s just a little different). The remaining short-duration funds can be used for investments with less liquidity and lower volatility, which can be cashed out without loss of principal when convenient, such as monetary funds, debt funds, etc.
Of course, if you are daring, and you can overcome your split personality, it is not a bad idea to use it for short-term stock investments that are not so pure. I’ve been trying this with a small percentage recently, but I’m timid and chose $Gree Electric (SZ000651)$ with guaranteed dividends, both offensive and defensive.
3. The investment position should match the understanding of the company.
This is another of the most common mistakes many Buffett believers (or self-proclaimed believers) make. Many people who claim to be price investors actually buy Evergrande, Sunac, and banks across their entire positions or even add leverage. In many other companies, there is no shortage of cross positions and leveragers.
Of course, it does not exclude peerless masters whose understanding of the company has reached a state of perfection, but I believe that most of them are gamblers in the guise of fake price betting.
In my impression, except for Buffett’s early partner days, when he invested about 40% of his positions in American Express, no single company has such a high proportion of positions. The now popular claim that Apple accounts for more than Berkshire’s stock holdings is actually inaccurate. Berkshire is now a diversified business empire, and Apple’s share of its total assets is low.
Buffett’s heavy 40% position in American Express at the time was based on a deep understanding of the company. Let’s take a look at what Buffett was in at that time:
Started business at the age of five or six, and bought the first stock in life at the age of eleven;
At the age of 19, I read “The Smart Investor”, which opened the investment horizon;
At the age of 20, he learned investment from the godfather of Wall Street and became Graham’s most proud student in his life;
At the age of 21, he visited Lorimer Davis as a disciple of Graham, and thoroughly understood the business of insurance companies;
At the age of 24, he joined Graham-Newman and followed the teacher to learn investment practice, and the income was amazing;
At the age of 26, he returned to his hometown to set up his own investment partnership company, with successful cases such as Dempster Farm Tool Company and Sanborn Map Company, and served as the chairman of the invested company;
In 1963, when 33-year-old Buffett began to buy American Express, the annual returns of his partnership fund from 1957 to 1962 were 10.4%, 40.9%, 25.9%, 22.8%, 45.9%, 13.9%, annualized Return 25.9%.
Such a big man with more than 20 years of stock experience, taught by the godfather of Wall Street, was appointed as his successor by the godfather, and has an annualized return of 25.9% on public performance. His understanding of a company is deeper than that of ordinary people like me. Deeper or shallower? He still only dares to give 40% of the position limit. Where can we be confident and even increase leverage?
In view of the vast difference between me and Buffett’s understanding of the company, I will gradually reduce the position ratio of a single stock to no more than 20% in principle, and no more than 30% at most. Of course, this practice of reducing the proportion of individual shares needs to match more companies that “really understand”.
The reason why I raised the shareholding ratio of the bank to a very high level before, and then raised the ratio of $Dong E E Jiao (SZ000423)$ to 40%, is because I think there are only a few companies that I really know, and I don’t know. dare not buy.
After such an adjustment, it is necessary to be more diligent in enterprise analysis.
2. Other areas for improvement
In addition to the above, there are other points that need to be improved. These are not so closely related to learning Buffett itself, I personally did not do so well and need to improve.
1. Value investing does not equal long-term holding.
Many people may have different understandings of this, but Buffett has reflected on the Coca-Cola investment case. I don’t think there is much to discuss, but it needs to be more thoroughly implemented.
Buying low and selling high is itself one of the ways to make profits in all investments. Although it sounds no different from selling high and buying low in trend investing, in fact, the two are based on completely different foundations: the former is based on intrinsic value to make judgments, while the latter It is based on the upward and downward trend to make judgments.
2. Be sure to adhere to the discipline of investing.
It seems that Buffett has never put forward this clearly, but he has always done it, such as not adding leverage, not out of the circle, not overbid and so on. However, what I want to talk about here is more specific discipline: to manage individual stock positions according to the proportion allocated in advance, to buy and sell according to the planned price, and not to make temporary adjustments when things are imminent.
Investment is a systematic engineering consisting of a series of elements, and the discipline of mechanical execution is also an indispensable link. If this plan is unreasonable, it should also be adjusted in advance, rather than flexibly deal with the situation. There is a high probability that this will not be a flexible response, but will be led by market sentiment.
I had always given a single stock the highest position of 40%, but at the beginning of the year, because of a wave of Chinese medicine stocks, I thought it was a good opportunity, so I increased the position of Dong’e Ejiao to more than 40%, and the outcome was natural. It’s a slap in the face. Almost every time I tried to speculate with discipline and flexibility, the market slapped me in the face.
3. When good prey appears, be decisive.
I like to pursue high certainty, it’s a natural character. The other side of this trait is that he is not decisive enough, and he is a little hesitant when making major decisions. At present, the two decisive strikes have achieved good results, one is Focus and the other is Gree.
$Focus Media (SZ002027)$ After the annual report and the first quarter report in April 2020 were released, the stock price plummeted to just over 4 yuan and sold some of the China Merchants Bank to buy it decisively. The end result was that it rose to a maximum of 13.19 yuan. After I gradually lost some of the highs, this is by far my most profitable investment.
Before the semi-annual report was released this year, Gree sold Xingye to increase its positions. Later, after the semi-annual report was released, it sold some Ejiao and added some. This investment is still relatively short, so I can’t draw conclusions too early, but I am still very confident – the dividend yield of over 7% has formed a strong support for Gree’s share price. In such an uncertain environment , the high certainty of the business + high dividend yield + low interest-bearing debt ratio is very attractive.
At present, it is a pity that some of Ejiao was not sold to buy Gree before the semi-annual report, which is still due to the hesitant character. In the future, when a logical and self-consistent deterministic opportunity appears in the future, a more decisive shot is still required.
The value investment initiated by Graham and carried forward by Buffett is the only investment method in human history that has been repeatedly proved to be effective by countless latecomers. For this investment method, I started out with pilgrimage-like piety, mechanical and slavish imitation and learning. My attitude has always been “if you know the best shape for a wheel is a circle, stop trying to invent a square one.”
After this summary review, my attitude has become: Although Buffett defines the best shape of the wheel, he does not say that we cannot change the size of the wheel and the pattern on the wheel table. Although he drives a Ferrari with 255/35/R20 wheels, he has been driving the high-speed kilometers of the investment for more than 70 years. But what we have to do is to make our own decisions on the premise of distinguishing what kind of car we are driving and what kind of road we are running on:
If it is indeed the same car and road as him, then use his wheels; if the car and road are different, we either give up and wait for the same car and road to appear, or adjust the size and pattern of the tire appropriately. The former is safe, but has many constraints; the latter has certain risks but strong adaptability. Radish and greens, take whatever you like.
However, there are two most important points: First, be sure to figure out the constraints. Never drive a Ferrari off-road and take the road that originally belonged to a Wrangler; second, never try to change the shape of the wheels.
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