Core investment system: good business, good company, good price

Throughout the investment community, the success of those great investors, be they value investments, growth investments or trend investments, are similar. These great people all have: the analytical ability of macro industry (good business), the analytical ability of micro enterprise (good enterprise), the ability to control self-human nature, the ability to understand market sentiment, and the ability to analyze capital preference (good price). So, in my opinion, successful investment is not complicated. It comes and goes in only three words: good business, good company and good price. Among them, good price is the biggest difference between ordinary investors and great investors (that is, the analysis of human nature, market and capital, Chapter 2).

The essence of investment is to find good business, good company and good price.Therefore, in order to make a successful investment, the "three good" criteria are indispensable. as long as the "three good" conditions are met, it does not matter what market, sector, time, or even a listed company it is in. Investors must not be biased against this. We should look for the nature of investment and not get lost in the market. We should understand that although the pendulum of the market has been swinging, no matter how the pendulum swings, it will not affect those real "three good" companies. For outstanding investors, there is only a distinction between the quality of the macro industry, the quality of micro companies, and the level of valuation. Many people do not have a correct investment system at all and do not understand the nature of investment, but they are still arguing over the merits of blue chip stocks and gem. In the final analysis, a good investment does not distinguish between factions at all.

To invest in this market in China, we need a firm will to adhere to the "three good" investment system, because most viewpoints now believe that no matter what method is used, as long as it is right to make money, this is a typical money-making theory and performance-only theory. with such values, it is not difficult to understand why the market is so crazy, most retail investors are pseudo-investment, while the fund only net worth theory, so huddle together, pursue high, gamble. But obviously this is a great misthinking, long-term view of the market is bound to return, because the wrong way to make money is better than the right way to lose money, investment is never a flat road sprint, but a vertical rock climbing marathon. A big rise in small-cap stocks does not mean reasonable, nor does a sharp fall in blue-chip stocks mean junk. Although the market is often ineffective in a short period of time, we cannot change our values.

There are too many pseudo-investors in the market, their analysis is superficial, they are often optimistic about a company for a certain subject matter or concept, but they have never done detailed research on the company, and even do not even know the main business of the company. But after several years of brainwashing in the unreasonable market of China (in the past few years, small-cap stocks have high valuations but continue to rise, while blue-chip valuations are very low but continue to fall) In the eyes of these people who "make money from the market", value investment even becomes synonymous with loss.

But in fact, in the past few years, those really good investors stood up and still made money. For example, when there was a cash crunch in June of 13 years, the market fell below 1850 points, although some undervalued high-quality stocks were also killed miserably. But this is also the best opportunity to print a sentence: the worst time is precisely the best time, when the whole market is chasing hot spots. Some unpopular stocks with good prospects and low valuations and high-quality low-priced blue chips, because no one is concerned about getting a large percentage of the discount. It is very important to understand that investment is "making money from the enterprise".

Judge a good business, find a good company, find a good price

The criterion of good business is to understand two questions:

1. What are the current barriers in the industry (moat)

two。 What are the prospects for the industry (growth).

It is not difficult to understand these two problems. It is mainly a comprehensive analysis of the value and growth of an industry. For example, the pharmaceutical industry, as a typical good business, is because excellent pharmaceutical companies can constantly develop new drugs and apply for patents. This is a moat, and the huge market is the growth of the future.

The good business in the future is mainly concentrated in three major industries: pharmaceuticals, consumer stocks and TMT.Why? Whether you are rich or poor, economic crisis or war, human beings will give birth, old age, sickness and death, and need to eat and drink Lhasa. So only medicine and consumption can become a century-old enterprise, long Niu stock. The consumption of medicine allows human beings to survive, and technology makes people live better. However, unlike the investment concept of pharmaceutical consumption, the science and technology industry will either enter or die. The technology giants of 20 years ago are still bankrupt today, and Google, Apple Inc and Tencent will be eliminated in the future if they do not make progress or innovate. Therefore, the core element of investing in technology stocks is to seize the trend of the times and live in the present.

After the identification of large industries, it is necessary to subdivide the three industries: medicine, consumption and TMT, such as dentistry, ophthalmology, in vitro diagnosis (China's huge market), FMCG with special attributes, and TMT. Of course, good business is not limited to pharmaceutical consumption TMT, no matter what segment of industry, as long as it has its own moat and bright growth prospects, it can also be defined as a good business.

Generally speaking, good business is the judgment of future macro-industry changes (including macro-policy changes). If we can foresee the inevitable results after the changes in the industry, then we do not have to care about the music of the development process and are not afraid of any short-term changes.

The key points for finding a good company are three points:

1. Non-quantitative indicators: management, corporate culture, goodwill

two。 Quantitative indicators: financial statements

3. The core indicator is to judge a company's ability to create value: ROIC and ROE.

1. The judgment of non-quantitative indicators needs to rely on the long-term tracking of an enterprise to draw a conclusion, frequent field research to feel the corporate culture, understand the management of the company, and understand the management ability of the management through the tracking of the operation of the enterprise for a long time.

two。 The judgment of quantitative financial indicators needs to have a solid financial foundation. Reading financial statements is not only a simple way to look at income and profits, but also to understand deep-seated things. It is necessary to analyze financial data to find out the quality of enterprise operation, whether there is a trap of fraud, and whether there is potential for development.

3. The core of judging a good company is to judge a company's ability to create value, and the indicators are ROE (return on equity) and ROIC (return on investment).

Why ROE and ROIC? Because the simple valuation method of EPS and PEG may be a false proposition. For example, Company An earned 10, 000 last year and this year earned 100000, 10 times; Company B earned 100 million last year and 200 million, twice this year. Which is better? In real life, everyone knows that B company is good. But not in the capital market, because people are always short-sighted and only look at the growth rate (especially the Chinese market). While ROIC and ROE directly reflect the effect of a company's input and output, he tells us whether a company creates value or destroys value. There is no competitive advantage, whether the performance is a short-lived surprise, how the quality of growth.

From the ROIC's point of view, most stocks in the Chinese stock market are being destroyed in value. A considerable number of companies have been able to keep their ROIC below 6% for a long time, and their profits can't beat the base rate, let alone inflation. Such companies have a low profit base, and even a sudden increase in profits of several times makes no sense. Even do not produce real profits, are rich on paper, or rely on the continuous circle of money, or substantial use of financial leverage, the surface of high returns correspond to the high risk of operation. If the future operation of the company is to constantly destroy value, then no matter how cheap it is, it is not a reason to buy. Therefore, from the point of view of good companies, they are still regardless of factions. whether they are growth stocks or value stocks, really good enterprises have low input and high output, have excellent management (not to produce high ROIC but low ROE results), and take sustainable operation as the ultimate goal.

The way to find a good price is to have an in-depth understanding and analysis of human nature, market and capital.

For ordinary investors, there is often a misunderstanding, that is, after finding a good company, its purchase price will be determined by the valuation model, which is a great mistake. Because the valuation model determines the long-term margin of safety (of course, some investors use technical graphics and indicators, which is even more ridiculous, because any index is only a summary and inference of history). At present, the quality of the buying and selling price needs to be determined by analyzing human nature and the market.

This is easy to understand, because the market is bound to be efficient in the long run, so valuation models are needed to estimate the long-term margin of safety. But trading takes place at the moment, and in the short term, the market is often ineffective, and the short-term rise and fall of stock prices are not driven by fundamentals at all, but only changes in valuation driven by changes in human sentiment and capital preferences, because of this ineffectiveness, so even if you accurately calculate the "margin of safety" through various valuation models It could also be beaten worthless by the market (although in extreme cases any valuation system would collapse, it doesn't mean it's not important. In addition, ROE, ROIC these indicators are more to evaluate the quality of enterprises rather than the level of prices, pay attention to distinction). So the masters have repeatedly warned us that investment is an art rather than a rigorous science, and it is better to be vaguely right than accurate.

So that is why even if the average investor studies hard enough and accumulates experience, he can only become a good investor, but it is almost impossible to become a great investor. There are very few great investors in the world, because great investors have the ability to discover price and value, which can not be generated through acquired learning and accumulation, and the ability to find a good price is almost innate. The understanding of human nature and the market cannot be replicated.

The judgment of "good price" is the biggest difference between ordinary investors and great investors in the "three good" investment criteria.

Sum up two main points for great investors to find a "good price":

1. To judge market sentiment, that is, to judge the change of human nature:It means that we have to make reverse investment (anti-human investment). It is precisely what Ba Lao said that others are afraid that I am greedy. Very often, the fundamentals of the company have not changed, but only the mood of the market has changed. after judging the opportunity of the big bear market, black swan and performance inflection point, we should resist the panic pressure of the market and seize the opportunity of reverse investment. If you can't control your emotions, you will be affected. Greed and fear is the main reason for our failure, always thinking that it is cheaper to buy and more expensive to sell, and the imbalance of mentality is the biggest reason for the failure of many fundamental experts, and it is the demons that kill you. The hardest part of investing is not to understand the fundamentals of the company, but to understand the human nature of the market and beat yourself.

So how to quantify this reverse investment? Unfortunately, it is impossible to quantify or even learn. Mark Seller said in a speech at Harvard why we can't be the next Buffett. He believes that the determinant of a successful investor is not how intelligent he is, how much experience he has or how much experience he has in his future career. Knowledge can be learned, but human nature cannot be replicated. Successful investors are born to judge human nature and control their own human nature, and no matter how hard the vast majority of ordinary people try, it is absolutely impossible to become masters like Buffett. Few people can achieve a compound rate of return of 25% throughout their career.

Genius is destined to be a genius from birth, and only a very small number of people will achieve great success, which is the same not only in the stock market, but in any industry (any industry basically conforms to the law of seven losses, two draws and one win). Maybe in the short term, the average person can win above the average, but in the long run, the average is bound to return. Countless facts tell me that great scientists, successful business people, artistic geniuses, investment masters, these great people with extraordinary achievements almost all have a personality different from ordinary people, extremely conceited, arrogant, completely indifferent to the opinions of others, isolated from the world, ruthless, different from ordinary people's point of view.

Even if we can't be a great investor, as a good investor, we still have to learn to control our emotions. We should not pay too much attention to price and too indifferent to value. Just because the stock price has fallen doesn't mean the company is doing badly. Similarly, if the stock price goes up, it doesn't mean the company is doing well. The truth is, if you really see the stock as a business, your mood will not fluctuate with the rise or fall of the stock price. So always remember that value, value, or value, not just price, can resist fear only if you have a strong sense of value in your heart. Human nature has not changed for thousands of years, and it will never change in the future (unless we are all robots).

two。 Judge the preference of funds, that is, the direction of market capital flows:This can be learned and quantified. The concrete performance is the trend and the change of volume and price.

The fluctuation of the stock price is due to the change of the market funds, and the formation of the trend is due to the consistent expectation of the market funds, showing the consistency of the direction, that is, the long-term and short-term upward or downward of the stock price. At this time, the core idea of grasping the "good price" is to judge the expectation of market capital consistency and seize the moment of capital turn. Specifically, we can look at the changes in volume and price, because the entry or departure of funds will leave clues, and then the behavior of long-term funds will form a long-term trend, while the behavior of short-term funds will form a short-term trend.

Judging the preference of short-term market funds can enable us to better find a good price, this is very important, no matter what style investors must not ignore, especially those who claim that value investment does not need technical analysis, do not buy rashly just because a company is undervalued, because Mr. Market will still bankrupt you! Why is there a discount when calculating the margin of safety? The discount is considering Mr. Market's temper, but how much is this discount? The theory of value investment will not tell you, only the information on the market will tell you. The feeling of the market, the flow of funds need years of experience accumulation, the cultivation of the sense of disk is not overnight.

Summary

The simple summary of the three good ideas of good business, good company and good price is to analyze the macro industry, the micro enterprise, the market and human nature. To me, the operation direction of the macro economy and the stock market are not important at all. Forecasting is meaningless, what is important is the development prospect of the subdivided industry, the development prospect of the micro enterprise and a good buying point.

So when looking for three good companies, always ask yourself 10 questions:

1. What is the product positioning of the company and what is the future development of the industry?

2. Whether the company is competitive in subdividing the industry and where is the moat?

3. Whether the profit model of the enterprise is sustainable (whether the model is right or not)

4. Whether the historical financial statements are healthy or not, try to rule out the possibility of falsification and whitewashing.

5. How about corporate shareholder governance? it is to defraud minority shareholders or pay no attention to minority shareholders.

6. compare horizontally and vertically to find out where the ceiling of the company is.

7. Whether the current price is within the margin of safety (calculated by valuation model)

8. What is the mood of the whole market and what is the preference for short-term funds?

9. Whether the assets are allocated reasonably (using dynamic balance strategy to reduce investment risk)

10. Improve your inner self-cultivation so that you are not happy with things and not sad with yourself.

Finally, one more word, for the pursuit of three good companies this point must not be dogmatic. It is the best to pursue the "three good" companies, but very often, it is difficult to complete the "three good", and it is helpless to settle for the second place, so sometimes it is not such a good business, but the price is low enough and attractive, sometimes it is not such a good price, but the company industry has been positive for a long time, and it is also worth buying. Mr. Buffett also stressed that. Buying a good company at an average price is far better than buying a mediocre company at an undervalued price.

Looking for the hotbed of "Sanhao" company

Through the previous article, we have understood that "good business, good company, good price" is a necessary indicator for successful investors to find bull stocks, so in what areas can we find a large number of companies that meet the "three good" conditions?

For most people, when they think of bull stocks, they will inevitably look for them in hot industries and enterprises, but throughout the capital market, it is recognized that although white horse stocks meet the conditions of good business and good companies, they do not meet the conditions of good prices. So if you take a closer look at the history of global bull stocks, you will be surprised to find that the most frequent occurrence of bull stocks is unnoticed unpopular stocks, most of them are invisible champions or inflection point companies. The logic is simple: the unpopular stocks of these high-quality industry segments have low enough prices, enough room for growth, and very good fundamentals. So I think: the hotbed of the birth of Sanhao company is high-quality unpopular stocks, and high-quality unpopular stocks are mainly inflection point companies and invisible champions (the investment of unpopular stocks is also the essence of Peter Lynch's investment).

To sum up the characteristics of inflection Point and Invisible Champion:

1. The main characteristics of inflection Point Company (Dilemma reversal):

1. On the surface, if you look at a lot of problems, there are many disadvantages, but at the same time, there is an advantage, that is, resource endowment.

two。 According to the financial indicators, the gross profit margin is very high but the net profit is relatively low.

3. Valuations are more expensive according to PE

4. There is a change in management

5. The company is buying back or increasing its holdings.

The steps to find the inflection point company are: 1. To judge whether the enterprise has resource endowment or not; 2. Whether the resource endowment can not be brought into full play for some reason; 3. Whether the market gives a very low price; 4. Whether there will be an inflection point in the future (for inflection point companies should dialectically see that the stock price will be cheap because of shortcomings, and the key is to be able to grasp whether the shortcomings are fatal and whether they will be improved).

First of all, how to judge the resource endowment, for example: we often hear that a listed company owns a piece of land, if the land is sold, it will recover much more cash than the company's market value, but this is not a resource endowment. Investing in this kind of company is often not an opportunity but a trap. The real resource endowment must be able to continue to bring cash flow to the company, continue to bring profits, this resource endowment is meaningful. Here is divided into two categories, 1, intangible resources, including goodwill (brand), channels; 2, tangible resource endowment, such as the property of department stores can continue to bring cash flow and profits, such as the resources of resource companies, and so on.

Then it is necessary to judge why the resource endowment is not brought into full play. 1. The biggest factor that resource endowment can not play is the corporate governance system. For example, many companies with resource endowments are in the name of state-owned enterprises due to historical reasons, but their potential has not been brought into full play due to institutional reasons. two。 Black Swan events, such as melamine; 3. Policy change; 4. The changing factors of market demand, periodic dilemma companies.

Finally, we should look for the opportunity of inflection point.

First, corporate system reform (such as equity incentive, MBO, employee stock ownership, introduction of strategic investment, etc.), such as state-owned enterprise reform MBO, equity incentive, introduction of private enterprises as strategic investors, etc. (for example, Pian Tsai Kuang, the sales of state-owned enterprises are basically not good, so we introduced China Resources Group as a strategic investor cooperation, such as Shanghai Jiahua, brand reshaping after the introduction of strategic investment).

Second, the change of management policy after the change of management, the specific changes are reflected in the divestiture of garbage assets (reducing diversification), increasing diversification to expand the market, spin-off and listing of high-quality assets, etc., for example: Hengshun vinegar, in June in December, the chairman of the group company was replaced (this is not the chairman of the listed company), and the market immediately gave a big reaction. Because the market expects that after the replacement of the chairman, the junk assets outside the main business will be stripped off. For example, earlier in Luzhou laojiao, the stock price also flew with the performance after Xie Ming took office, and Gujing Gong also became ten times the shares after the former chairman Cao Jie took office, so replacement is a need to pay close attention to.

Third, the Black Swan incident, due to the guidance of public opinion in the market for a short period of time, it is easy to make the prices of companies with Black Swan events worthless, but the facts are not as serious as we expected. those products that cannot be separated from our lives will eventually get out of trouble, and Black Swan has become the best place to buy. For example, the famous melamine incident in 2008, and finally the inflection point of the success of Yili shares, which became ten times the shares, such as the nuclear power plant leakage and so on.

Fourth, there has been a change in policy. The most typical examples are utilities such as nuclear power stocks, hydropower and natural gas.

Fifth, the plight of cyclical companies reverses, which depends entirely on market and economic changes.

The invisible champion of ② refers to a company that is relatively low known to the public, whose products are not easily detected or invisible, but only exist in the manufacturing process of the final consumer goods, or just the components or raw materials of certain consumer goods. Hermann Simon (Hermann Simon) is the father of Germany's famous "invisible champion" and a world-renowned management guru. He was born in Germany and received his doctorate from the University of Bonn in 1976. The author of "Invisible Champion" and the creator of the concept of "Invisible Champion".

In 1986, Herman Simon, then director of the European Marketing Research Institute, ran into Sydor Levitt, a professor at Harvard Business School in D ü sseldorf. The latter asked him, "have you ever considered why the economic output of the Federal Republic of Germany is less than that of the United States, but its exports rank first in the world? Which companies have made the greatest contribution to this? " Simon began to think seriously about the subject. He quickly ruled out giants like Siemens and Daimler-Mercedes-Benz because they had no particular advantage over their international competitors. In that case, the answer can only be found among small and medium-sized enterprises in Germany.

Since that year, Simon creatively put forward the concept of "invisible champion" (Hidden Champion) through the study of more than 400 outstanding small and medium-sized enterprises in Germany. He proved through a large amount of data and facts that the real cornerstone of the German economy and international trade is not those famous large enterprises, but these small and medium-sized enterprises that work quietly in their respective market segments and become global industry leaders. Their position in the niche market is unshakable, and some even occupy 95% of the global market share (such as German cigarette machinery manufacturer Hauni). Their technological innovation is far ahead of their peers, and their per capita number of patents far exceeds that of the world's top 500 companies such as Siemens. But because of the relative remoteness of their industries, focused strategies and low-key styles, they are invisible from the public eye.

In his early research, Simon believed that the "invisible champion" phenomenon was limited to Germany and was rooted in the German nation's long handicraft tradition and professional pride. But further research found that invisible champions are common in the United States, South Africa, New Zealand and Asia, and they not only play a very important role in their respective economies, but also have strikingly similar rules of success to German invisible champions. Simon found that some Chinese companies have become invisible champions in the industry, and they are called market leaders. For example, there is a company in Shanghai that specializes in making port cranes, which is the best in the world in this field; in Chongqing, a container manufacturer has occupied 17% of the global market in the industry; two or three years ago, a manufacturer of mobile phone transmitters in Shangqiu is also the best in the industry. Simon is intrigued by a figure in the Economist that 68 per cent of China's exports come from small companies with fewer than 2000 employees, and China's industrial structure is very similar to Germany's.

Characteristics of the Invisible Industry Champion: in the Invisible Champion, Herman Simon once attributed the success of the invisible champion to burning ambition, focus on paranoia, clinging to customers, being close to great customers, "non-technical" innovation, being close to the strongest, and hands-on. Invisible champions exist in a large number of obscure segments of industry. These areas start from a low starting point and do not have too many threshold restrictions, but there is nothing more central than focus. Whether enterprises are initially engaged in special areas that others disdain to do, cannot do or did not think of, they have persevered, persisted to the end, never gave up easily, and finally gained an unshakeable market position.

Some specific features of the invisible champion (refer to Peter Lynch's criteria):

1. The name of the company sounds boring, even ridiculous (companies with very strange names are often underestimated because the public is not fully aware of their names and do not know their industry. In particular, China is a retail-dominated market.

2. The company's business is boring and even disgusting.

3. The company is spun off from the parent company (because many of them have excellent balance sheets).

4. Institutions hold almost no shares and analysts do not track them.

The company is surrounded by rumors (Black Swan).

6. The company may be in an industry with little growth (facing less competition).

The company has a niche.

8. A company where people keep buying their products.

9. the shares that the company is increasing its holdings or buying back.

Specific to A-shares, many stocks also meet the criteria of "invisible industry champion", but these unknown enterprises have a high probability of becoming the leader of the subdivision industry and becoming great enterprises in the future.

Outlook on life, values, world outlook

Finally, I would like to talk about my mental journey and investment perception in the past few years.

When I first entered the stock market, what I longed for was a vigorous life. At that time, I worshipped people like Levinmore, looking forward to going from nothing to hundreds of millions of dollars, even though I might end up bankrupt and nothing, but I thought it was worth it. at least it was brilliant. So at that time, I didn't know anything about value investment, that is, trend investment, but I hardly had any contact with technical analysis. As soon as I came up, I thought about the banker, how to follow Zhuang, how to take advantage of the situation. This should be the same as some people who are new to the stock market.

After experiencing the training of the market and self-mentality, I finally understand that in order not to make the road of truth overcrowded, fate always makes most people lose their way. In fact, investment and life are the same. A person's investment outlook is his values, world outlook and outlook on life. For a heart who pursues a dream, the most important thing is to persist in being yourself. What others think and do has nothing to do with us. As long as we follow our own rules, we will find our own life and pursue our ideals. By the way, earn money (stand to make money), this is the most important (investment is the same, no matter how the market changes, persist in looking for three good companies, this is the most important. Don't be affected by anything.

I deeply understand that no matter what industry, success will never be plain sailing, success is always a minority.This is especially true in the investment community, the result of independent thinking, away from the public is bound to be a variety of questions and even abuse, very few can persist, regardless of talent factors, except hard work and persistence, can not find a second way to success. I never ask for everyone's approval, or even most of it. Investment is a lonely thing. Zhang Xiaoxian said: loneliness is not inborn, but from the moment you really fall in love with someone.

I think: loneliness is not inborn, but when you really understand the moment of investment. I would rather be a fool in the eyes of the public. I try to stick to my investment view (Sanhao Company). I would rather be paranoid and go on the road alone. Maybe only paranoia can succeed. Success is 99% perspiration and 1% talent, although 1% gift determines whether you can become a great investor, but even without talent, at least we strive to be a good investor instead of leisurely tapping on the keyboard, watching movies and playing games.