Flash back on 2020
I could not recall any year of performance like 2020, which full of so many uncertainty and volatility, within my 10+ years of investment period: from covid-19 still sweeping the world, various battle and conflicts (from BLM to elections), to our loved ones passing, all showed 2020 is full of sadness and sorrow.
In investment, the volatility and cognition renew 2020 has brought is unpresident, clearly shows that human being forecast the future world largely by linear projects, which could have extreme outcomes.
In the beginning of 2020, investors expected the market would go up continously, especially after the 1st round US-Sino trade dispute settled down. However, the following pandemic gave severe questions about how future business model would be and how solid current one is. Even the omaha oracle Buffett waived white flag and dumped all his loved airline shares, due to the unclear supply and demand roadmap in the future.
Just during the time everybody is panic and freezed, the market crimsoned marvously, since every government is pumping money eagerly and nearly every where, totally changed the market sentiment from groom to boom.
After June, the market has almost cleared the fear of the pandemic to the another extreme. On the one side, most of the tech companies benefited from the covid and WFH (work from home) trend, and on the other, the market is flooded with money and the interest rates are so low that once investor community deems one company belongs to the future that its valuation can go as high as unlimited. The market and media bombasted phrases as “long term”and“friends with time”to justify the sky rocketed valuation of some high growth stocks. For that, we trust some of them are extremely excellent companies, but we also have concerns over how good the compounding returns these high flyers can provide, given some already rewarded over 50 PS valuations.
Reading and investment methodology refinements
One of the perks about work from home is that I have more time to read and refine my methodologies (cancelling travels and due dilligence through telephone and video conference are actually more efficient).
During the last year, I delved in more then 40 books covering psycology, social science, cogonition, business management, investment, history, biology, etc. Most of them are quite classic books (the real “friends of time”are those would endure the test of time). I believe those books would help us refine our methodology by building more solid understanding of what can be constant and what can only be flimsy.
We believe in the lattice theory Murger originated that build a portfolio based on longer term and more robust thesis (mathematics, physics, biology, social science, psychology, etc). Even though our investment scope and methodology may different from mastres, our investment philosophy has many similarities:
Value investing in growth opportunities with global horizon.
Mathematical based.
Focus on those with limited, understandable and predictable variables, and those with constant competition advantages.
Our philosophy is built on the believe that the world is more of constancies than jumps.
Our investment decision is purely based on comparing the compounding return opportunities and their probabilities, instead of guessing around how the market would perform and where is the hype.
Focus on the decision process not the result.
Do not fall into the textbooks’ cliches of market benchmarking, sector diversifications, etc.
Selective not Inclusive. Do not afraid to miss.
Some thoughts about the future
In the long run, we have no doubt about the opportunities in China
Our belives in China is not from so called political correctness, but because it is where the most opportunities would be in the coming decade. To be clear, we believe in that it is the place where a lot of opportunities are does not equal to we believe the market would go up soon or the overall index has great potential.
Full of high-quality growth opportunities: Even though the average growth rate of GDP has already decelerated to a level of 5%, which is still amazing, the growth quality has seen largely improved, giving real good companies to build barrier to improve earning potential and consistency. There are many reasons for that: (1) as average income continues to grow, the social gap widens, there are more and more needs for higher quality and diversified services, which gives opportunities to those who can provide; (2) as technology development and cultural confidence built, more and more Chinese companies can climb on the value-chain to provide value-added products and services, avoiding homogenous competition which is the major cause of low capital returns.
The great opportunities are also for good investors to shine: In the first 30 years of opening and reforming, one of the main drivers for China’s growth is the dominating power controlled by the banks, which asked for a ROE only merely over interest rate. Thus, the macro plays most of the role, only very few industries which have limited supplies got most of the benefits, for example housing price. For investors, the key ability is how they can forecast the macro trend, since beta plays far larger role than alpha. Unsurprisingly, most of the fund will make a fortune in a bull market and lose in a bear one, and whether professional or not does not make any difference, until now. In the future, as China’s economy becomes more and more technology and quality driven, instead of capital driven, the need for the ability to choose, understand, analyze different opportunities increased a lot! For those investors who are good at it would be a boon.
We still believe tech and consumer sectors will provide the best opportunities
We understand current market hype may limit our choices, but in the long run we still believe in these would be the places where gold are. Because, we believe these are where we can find companies which can build constant competition advantage: for example economy of scale, network effect, customer captivity, local monopoly, complex know hows, etc.
Extreme twisted investor expectations make both opportunities and risks
No matter how optimistic about the future, hyped valuation would definitely dampen future returns (unless you believe the valuation would be in the air forever, or the future can actually be much better than the already imaginary one). The game we are currently in is more about chasing expectation instead of value investing, meaning even if you got a 99 of 100 in an exam you would still fail to pass.
On the other side, we noticed even within tech and consumer sectors there are many places where investors have no appetite but with solid growth opportunities. And that’s why we paid attention on the service sectors in the suppressed HK market, which still down 10% currency adjusted, and on those with not that exciting stories but with solid competition advantage, decent growth rate, and more fairly valuation giant tech companies.
Keep focus on where the competition advantage could maitain and develop
In tech: those with strong economy of scale and easier to reach monopoly power: social network, e-commerce, cloud, payment, semiconductor, etc.
In consumer: those with strong customer captivity and pricing power: most with strong potential energy.
In service: those with strong customer captivity and local economy of scale: education, property management, etc.
Keep track and gain understanding of where the gold is in those fast moving places
No matter how smart we deem ourselves are, we are full of biases and ignorances. Thus, we have
to keep our heads down and keep track and gain understanding of the fast moving industries and companies, especially in investment. Even though we may not capture those opportunities, we can at least expand our knowledge, refine our understanding of the world, and hope not to fall too far back. Even though our investment philosophy is “the majority of the world is consistent”, we understand it also means “consistent change”or in other words “the only thing unchange is change”. Even though, we focus on long term value investing, it does not mean we can keep our eyes close and lie back. We always believe that diligence, keep learning and upgrading make good investments.
Try to find those with consistent competition advantage and reasonable price tag in those explosive developing sectors, as EV, solar, etc.
Gain understanding of the models of the new consumers, Chinese brands go international, and how the kinetic energy model using in new brand building can keep constant advantage, etc.
Try to find those with strong competition advantage in manufacturing industries.
Thanks for the trust and supporting!Happy New Year! And wish you make great progress in 2021!
Comments