Investment involves three key elements: analysis, trading, and the connection between them—waiting. The core of investment analysis lies in business acumen and probabilistic thinking, while the essence of trading is about odds and contrarian thinking. Waiting demands adherence to one’s circle of competence and respect for common sense. Over the long term, excellent trades cannot rescue poor analysis, whereas great analysis can be undermined by bad trading. However, the hardest part is learning to wait. Although investment performance is ex post, the medium and long-term probabilities and odds of each investment can be determined beforehand. Excellent performance is merely the result; the underlying causes are what matter. Three significant factors are effort, talent, and luck: working in the right direction sets a baseline for success, talent determines growth efficiency and time cost, and luck offers pleasant surprises to those who persist on the right path. Successful investors are not necessarily those who calculate and choose best but those who know when to give up and when to hold on. They are not those with omnipresent senses but those who maintain unwavering focus, and they are not necessarily extraordinarily talented but those profoundly aware of their limitations and clear about what is achievable in the market. The so-called investment “gurus” are not individuals who receive divine inspiration but those who remain loyal to the principle of compounding and practice it rigorously. Those who understand compounding realize that its sustainability contradicts profitability; high compound returns and long periods are incompatible. Buffett’s nearly 25% over 50 years is the human limit (and those who only flaunt high compound returns without considering the time are far from grasping the essence of investment). Following high compound returns, reversion to the mean is inevitable, driven both by objective and subjective factors. The best investment scenario is high initial compound returns followed by stable and strong sustainability. At some stage, investors are often obsessed with building “perfect systems,” akin to lifelong efforts to create perpetual motion machines. The more complex the system and the deeper the thinking sinks into details, the further it drifts from the essence of investment. As one invests longer, the most reliable methods are often simple and fundamental yet hit the core, and success on a grand strategic level is what matters most. A dangerous situation for an investor is the premature feeling of holding onto the “truth.” If one also becomes bored or combative, harshly criticizing those with differing views, it indicates a lack of room for growth. Investment undoubtedly adheres to unshakable principles, but the weighting of different elements has no “sacred model.” This doesn’t suggest a wandering mind but maintaining openness to other ideas—an ability in itself. Concentrated or diversified? From a phased perspective, it depends on whether flexibility or safety is more critical. From a long-term perspective, concentration reflects a high confidence in company analysis, but if truly confident, more high-quality targets should be identifiable for adequate diversification. This is inherently about balance, ultimately matching research depth with position efficiency and investment flexibility with risk diversification. Critical points in investment decision-making boil down to: 1) Big-picture perspective: Knowing where you are in the market cycle and whether to fear, be greedy, or remain indifferent. 2) Value judgment: Aim at future advantageous categories and become friends with time. 3) Expectation differences: Clarify the assumptions and expectations in value judgment, remaining sensitive to opportunities with high expectation gaps. Investment myths often depict invincible stories, but reality is stark, even Buffett acknowledges continual mistakes. The difference between fatal mistakes and recoverable ones lies in: 1) Subjective acknowledgment of being fallible humans. 2) Objective use of safety margins for protection. 3) Diversified risks and use of good odds as recompense. Loss depends on the pre-treatment of errors. ROE itself’s trend is a core valuation element, with the greatest valuation secret not being simple arithmetic but foresighted judgment of future earnings and accurate characterization of a company’s operational stage. Vaguely right means specific PE and PB can be somewhat vague (or specifically analyzed), but ROE trend judgment must be correct. High ROE reflects earning capabilities, and high, sustainable ROE shows formidable competitive advantage. Consequently, high ROE companies typically command capital premiums or high PB. If a high ROE company has low PB, reconsider why. It might be: 1) The market is foolish. 2) The company is cyclical, currently at a profit peak. While this contradiction can occasionally occur, high ROE and low PB are fundamentally contradictory.
In investment, "dancing with shackles" might not be a constraint but a protective mechanism. A prime example is Buffett's notion of "punching twenty holes in a lifetime," as well as common practices like regularly investing in index funds. Although these actions seem highly restricted, over time, such "shackles" often turn into golden bracelets. This explains why "free-acting" often underperforms one's virtual portfolio.
Companies that continually generate new expectations are often favored by the market. This can be divided into two scenarios: one where new expectations enhance core business or upgrade the supply chain, consistently meeting or exceeding promises, indicating a potentially great company. Alternatively, when new expectations continually cover up unmet old ones, suggesting an unreliable or even fraudulent company. Regarding the relative relationship between company and price, buying a company at a relatively high static price isn’t ideal but not the worst—especially if the company becomes progressively cheaper in the future, turning it into an excellent investment. The worst is buying cheap initially but growing more expensive over time, indicating an erroneous initial logic. In such cases, the crucial ability is to correct mistakes swiftly; otherwise, the time cost of confirmed errors can be heartbreakingly high.
Highly efficient companies may initially lack obvious barriers, but efficiency might lead to a qualitative change, forming real high barriers based on scale, technology, or customer stickiness. However, by the time this is evident, the company may be nearing maturity. For such companies, during early to mid-stages, three points should be prioritized: 1) Long-term demand expansion, 2) A dedicated and ambitious team, and 3) Consistent “say-do” execution.
Deterioration in the balance sheet qualitatively isn’t positive, but the underlying reasons need a nuanced view. One scenario involves a notable decline in income growth, along with abnormal accounts receivable and inventory. The other involves rapid income growth that necessitates upfront funding or insufficient scale benefits, leading to high debt and deteriorating cash flow. The former usually signals further revenue decline post relaxed credit; the latter signifies that demand surged too quickly for current capital to absorb.
Today, I saw a saying: "What is a limitation? A woodcutter believing emperors use golden shoulder poles." It is very apt!
Continuing the earlier topic, if you want to learn value investing successfully, avoid memorizing Buffett’s aphorisms daily. If you want to start a business, stop reading success stories all the time. Instead, research how others have failed. Without thoroughly studying various failure cases, success is improbable. Those who merely tell you “doing X will make you successful” are either impractical scholars or outright frauds. In a bull market, people discuss high elasticity; after several market crashes, focus shifts to “how to avoid net value fluctuations.” Net value drawdown is a byproduct of market volatility; completely avoiding it is akin to warring with investment. Yet, similar volatility means different things in different contexts: reject in bubbles, embrace in undervaluation, and calmly endure in most uncertain environments.
A book mentioned: "Mediocre generals face complex environments by listing numerous problems and getting lost. True generals swiftly cut through the chaos, discerning essence and key areas of ordinary matters, and act decisively." This parallels investment decisions: excellent investors grasp principal conflicts in the market and companies, see the whole from details, and form a logical decision foundation. From a valuation perspective, my first concern isn’t high prices; it’s value difficulty. If core variables are many or far from one’s competence, value is hard to gauge. Second, I fear not high prices but cheap traps—appear cheap, inviting heavy investment, but once proven a trap, incurring huge losses. When other factors are stable, "expensive" is straightforward, at least measurable. But problematic valuation assumptions or overturned premises are dire.
In many matters, hard work usually ensures at least some reward. However, investment cruelly and simply disregards effort, focusing solely on correctness. In this field, effort is secondary; primary are right values and methodologies. The wrong direction ensures the more diligent you are, the more challenging it becomes, increasing obsession to madness. Similarly, beginners’ fortunate investment looks correct because of luck, while seasoned investors often achieve luck through correctness. The former is random and passive; the latter is high-probability and proactive. Regular luck in investments implies an undercurrent called “ability.” An enlightenment in investment is discerning ability from sheer luck.
Recently, someone on Fondaz asked about pursuing professional investment. Professional investing is a high-risk choice, especially during initial phases with high elimination rates. Professionalism in investing isn't essential—specialization is. Starting professional investment is best during a bear market, providing a brutal environment for realistic self-assessment and understanding investment difficulties. Failing in tough conditions implies unsuitability, whereas perseverance might lead to deciding whether to continue fully.
To thrive long and well in the investment world, rely on risk sensitivity and opportunity intuition. Sensing risk ensures longevity; staying viable means more opportunities. If also attuned to significant opportunities, thriving becomes inevitable. Both risks and opportunities inherently involve handling uncertainty. Understanding the world’s complexity and recognizing personal limitations is fundamental to establishing this handling mechanism.
Life and investment share many similarities: Both are inherently uncertain yet possess long-term success-enhancing methods; knowing what not to do is more crucial than knowing what to do; a few decisions often determine one’s fate; temporary randomness smooths over time, resulting in broadly fair outcomes; what you do sets your height, whom you associate with defines your challenges; the real pain isn’t in missed chances but in realizing too late.
