Three Dimensions of deterministic Research

Deterministic research is the core of my investment system.

To study a company, it is important to understand certainty, not high growth. Certainty brings high valuation, and high growth brings high valuation volatility, because high growth is often accompanied by long-term uncertainty.

So every time I finish studying a company, I have to give it a definite rating, which has a lot to do with the position and operation in the future.For example, in a decline, priority should be given to the varieties with high certainty, and so on. I introduced this system in the article "want to copy homework with me, first understand my investment system". If you don't understand it, you can take a look.

Certainty does not mean "rising" or "anti-falling". It has nothing to do with the short-and medium-term trend, and it does not mean that you will not lose money in the short-and medium-term after you buy it.

Certainty does not mean that the valuation is reasonable, for example, in my stock pool, the equally deterministic Lixun and Ningde era are completely different from Ping An Insurance and China Merchants Bank, the percentile of historical valuation.

The most important feature of the high level of certainty is that "dare to increase your position when you fall", because the future performance is certain, and the fundamentals are not easy to change, so how much you fall today will rise in the future-tit for tat, double return.

So before determining the rating, I first have to ask myself, this company fell 30%, do I dare to increase the position, can I still hold it? There are very few companies that can stand such a question.

Perhaps what you are confused about is how to judge certainty. Two previous articles have said, "Why is certainty the core of value investment research?" "Seven premium and discount factors make the PEG valuation method more accurate and easier to use." but now it's still a little complicated.I further simplified these factors into three dimensions: "business model, competition pattern and industry space".

In this way, the way to rate is simple:

All three dimensions are "excellent", and there is a very bright one, which is a highly deterministic variety.

Two of the three dimensions are "excellent", one of which is mediocre, which is medium certainty.

There are bright spots and fatal defects, or there is a dead corner in the research, is low certainty.

If all three are relatively mediocre, or do not understand them at all, they will directly give up the research.

First, let's take a look at the characteristics of highly deterministic varieties.

Characteristics of varieties with high certainty

The most important thing with high certainty is the pattern of competition.

Those who can form a good competition pattern either have advantages that others can't match, or the industry has economies of scale, or the track has natural barriers.For example, Maotai, Guangzhou Lianda and Pian Tsai Kun are completely competing with themselves, and this is a special case in which the competition pattern is extremely good.

Most industries have a characteristic that if new entrants cut prices, it is easy to trigger a price war. Everyone's profits are not guaranteed. So there is a good way to think about the competition pattern: do competitors dare to reduce prices to compete? What will it do if the price is reduced?

Although there is no room for the liquor industry, in my stock pool, middle and high-end spirits are the most selected industries, because the most important thing for middle and high-end spirits is the "price list". No one is willing to reduce the price competition, and price reduction is self-harm. This is the good part of this industry. No matter how fierce the competition is, they do not dare to fight a price war casually.

In some highly competitive industries, the company's competition pattern depends on correct early strategic decisions, such as Anhui Conch Cement, who took the lead in completing the industrial layout, and Jianlang hardware, which took the lead in achieving a full category and spending a lot of money to upgrade the product information system. Mindray Medical, for example, took the lead in establishing a more complete medical equipment and device platform.

In the 2C industry, the competition pattern is reflected in the pricing ability, China Merchants Bank consignment fund almost does not discount, Ping an insurance, Haidilao International Holding hot pot, Vanke houses are more expensive than others.

The second factor of high certainty is industry space.

The most common industries are in rapid development, mainly some emerging technology industries.Such as innovative healthcare, semiconductors, cloud computing, lithium electricity

Of course, in an era of downward GDP growth, most industries have little room for themselves.It is more likely to expand the development of the industry through the increase of industry concentration, or to improve the space through asset integration.Such as chain service industry.

The third factor of high certainty is the barrier to the business model.

There are some business models that cannot be imitated by others once you use them, or the gap will only widen in the same way, including:

• The first-mover advantage forms a huge stickiness in the use of the product., such as Guangzhou Lianda

• Industries that generate advantages of scale, such as the oriental rainbow

• The long-formed special management culture enables it to solve the stubborn problems of the industry.For example, Haidilao International Holding's "master-apprentice" staff management and the expansion of the "patriarch model".

Of course, not all companies have innovative business models, and some asset-heavy business models are still a little out of date, but some companies can use their strong management integration ability to "dial a thousand pounds". For example, Lixun, the king of A-share mergers and acquisitions introduced the week before last week.

For the three items of "competition pattern, industry space and business model", there are two kinds of high-certainty companies:

The first is all-excellent, with no obvious weakness.Such as Ping an, China Merchants Bank, Maotai, Hengrui, Mairui and other first-line white horse stocks.The second is that one item is particularly outstanding, and the other two are also very good.Most companies fall into this category.

Take Heng Rui as an example, first look at the industry space, assuming that the size of China's drug market will grow at an average annual rate of 4.5% in the next eight years, and it will be 2.1804 trillion by 2028 (equivalent to that of the United States 10 years ago). Top3 companies in the US have penetration rates of 4.8 per cent and 5.2 per cent respectively, while Hengrui currently accounts for only 1.2 per cent. With 5% as the penetration target, the average annual compound growth rate will be 21% over the next 8 years.

The spatial measurement of this industry is very idealized, as long as the comprehensive strength of the enterprise can be realized. At present, Hengrui has the richest R & D channels, the most powerful sales team and the largest number of foreign cooperation projects among domestic pharmaceutical companies, and this advantage is likely to grow.

What is relatively weak about Heng Rui is that in terms of business model, the pharmaceutical industry is greatly affected by policy, but on the plus side, every policy shock will create opportunities for us to start with lower valuations.

Therefore, Hengrui Pharmaceutical is a typical high-certainty enterprise.

The characteristics of medium-deterministic Enterprises

Medium certainty is the most common target in the stock pool, and the reason to buy it is generally high or underestimated, so it is also an important source of medium-term profits.

High-certainty stocks are basically held for a long time, while medium-certainty stocks can be sold under certain conditions, so it is also the key to the withdrawal of account control.

Medium certainty is usually the other two excellence, but one is mediocre and the whole does not have fatal defects, so it can also be divided into three categories:

First, the most common weakness is the poor competitive situation, especially some catch-up companies on the big track.

Like most of the sub-high-end liquor brands, the competition is very fierce, if it is other industries, this degree of competition would have lost both sides or decided. It is only because the business model of liquor is naturally good that it does not damage the foundation of the enterprise. It is this characteristic that makes a large number of medium-certainty varieties of sub-high-end spirits, but no high-certainty varieties.

Another manifestation of the poor competition pattern is that the technical route of the product changes rapidly, which leads to the instability of the leading position.This is common in technology stocks and innovative medicine

For example, someone asked me why Zhongji Xuchuang is a medium-certainty variety. Communication hardware products are characterized by the need for continuous upgrading in research and development. Even if you are the first manufacturer to develop high-end products and can enjoy high gross profits for a period of time, when other manufacturers develop quality products that meet the requirements, you have to keep cutting prices and invest heavily in next-generation technology. Such a competitive environment can only be given a "medium".

Second, the second weakness of medium certainty companies is the bad business model.

As mentioned earlier, there is something wrong with the business model of most pharmaceutical stocks. Medicine needs to be prescribed by doctors, and the price is negotiated by health insurance, which is not completely under the control of manufacturers, medical supervision is very complex, and the interests of all parties are different, which often leads to a mismatch of resources in which good products are unused.

At present, the great logic of innovative medicine is domestic substitution, but this is forced by the state, and the demand of the hospital itself is not strong, especially in third-class hospitals, after all, it does not pay the money, but it has to bear the responsibility. therefore, this is not a purely market-oriented logic, which will lead to sudden improvement and stagnation in management, reducing certainty.

Medical equipment is relatively good. In fact, the patents of instruments are easily bypassed by "pseudo-innovation," and the R & D barrier is lower than that of innovative drugs, but it is not easy for newcomers to catch up, because medical devices are used by doctors in surgery, and once they are used to them, they are unwilling to change them. medical insurance negotiations and collection should also consider the personal safety of doctors: if there is something wrong with the medicine, the patients will only blame the drug factory, the effect of the operation is not good, and the family members have to cut the doctor.

Therefore, Mindray Medical can become the only high-certainty variety of medical devices, because it has a wide product line, large scale and full variety, and its sales team is the strongest among its peers, and even if the technology of the leader of the subdivided track is very strong, its certainty is usually not too high.

Another manifestation of a bad business model is the emphasis on assets, which requires constant investment in fixed assets.I mentioned this in the official account article "the bad business model is the" accident-prone area "in the investment:

The disadvantages of heavy investment in fixed assets are, first, financing, either diluting profits or increasing financial expenses, second, high depreciation, and third, risks. In case of insufficient demand downstream, it is easy to make huge losses.

The cash flow of some enterprises with heavy assets is not good, the basis of value investment is the discount of free cash flow in the future, and the poor valuation of cash flow should be discounted, which is essentially a deterministic depreciation.

Electronic components, auto parts, lithium electricity, these high-growth tracks all have the problem of overinvestment, and most of the excellent companies can only be regarded as medium-certainty.

Whether the company can become a highly deterministic company depends on whether the company can jump out of the strange circle of this business model.. For example, in the 2B building materials industry, there are many targets for fast growth, but Dongfang Yuhong has the healthiest cash flow, so it can become the target of high certainty; the Ningde era can jump out of this strange circle, because the growth rate of this industry is too fast, and its advantages are too obvious; Lixun can also jump out, because its management is particularly excellent, and assets bought for 80 cents can play the effect of 1 yuan through asset integration.

Third, the third weakness of medium certainty is the lack of industry space.

High certainty is the white horse, but most of the white horse can only belong to medium certainty, mainly the problem of industry space.

For example, a classmate asked Wuxi Apptec why it is medium certainty. Although CRO/CDMO itself is developing at a high speed, the industry space cannot be higher than innovative drugs and medical devices. Wuxi Apptec's volume is already half that of Heng Rui Minui, and the industry space may be limited in the future.

Many leaders of the consumer industry have the problem of the ceiling of the industry, coupled with their own concentration is already very high. If listed companies are willing to make steady money in low-ceiling industries, they will become value stocks.A few years ago, for example, Shuanghui tried desperately to pay dividends in order to repay its debts, stop expanding and pay dividends.If you are not reconciled, you have to enter other tracks and compete for food with others.For example, Fuling mustard, the market share of mustard mustard is limited, so it is necessary to expand kimchiThere is uncertainty in the transformation, so in the middle, the certainty can not go up.

The characteristics of enterprises with low certainty

Low certainty is not a bad company, nor is it a mediocre company (stay away from the mediocre company as far away from the plague). On the contrary, the low certainty variety is often a company with special personality and obvious advantages and disadvantages.

First of all, it should be emphasized that personality will bring obvious elasticity of stock prices, but the goal of tracking low-certainty stocks is not to make money from flexibility, but to see if it has room to improve certainty. So,The real money-making opportunity for low-certainty stocks is that you can find good changes in fundamentals ahead of the market through long-term tracking, so as to increase your position, or dare to make a bottom, and actually earn money that is a "dilemma reversal".

The most obvious target in the stock pool should be focus, understand the logic that it can go from low to medium certainty, either you dare to make a bottom around 4 yuan, or you dare to take a heavy position around 6 yuan, you can make money.

Based on this goal, there are two low-certainty varieties:

First, it is good or even excellent in other aspects, but there is a fatal flaw or something that we cannot study thoroughly, which requires us to solve the problem by ourselves through time observation, or to dispel this misunderstanding through research, or the company can dispel investors' worries through continuous growth in performance.

Second, once excellent companies encounter some serious problems, and they are not sure whether the management of the company can solve them through their own efforts.It is also put here. You know, there are very few companies that can be evergreen, and the rise and fall of companies is a natural law, and most companies will move towards mediocrity after glory.

Therefore, low-certainty varieties must be bought cheaply in operation.Because certainty no longer provides a margin of safety Then, when the rise in stock prices is only a market style preference rather than a significant increase in certainty, we should also dare to sell, because it is no longer cheap.

Research should focus on certainty

The research should focus on, many people study the company, industrial chain, financial indicators, industry, product characteristics, customers, suppliers, all aspects, but in the end there is no conclusion, or the conclusion is meaningless good company and bad company, these are the performance of the research without focus.

The research should focus, focus on the "certainty" first, and output at least one conclusion: certainty.

With a deterministic conclusion, there is initial value for long-term investors who study fundamentals; with a deterministic conclusion, combined with the core tracking indicators, the prosperity can be judged; with a deterministic conclusion, combined with the business cycle, the previous valuation range, and the ROE level, the valuation range can be judged.

Although most investors know that certainty is important, they pay far less attention to it than valuation, mainly because certainty is too subjective to be quantified, and valuation, especially PE, can be seen at a glance.

But in investment, it is always a small number of people who earn most people's money, and the valuation that can be seen at a glance belongs to the small money earned (or lost) by most people, while the Alpha gain that certainty gives you is the big money that a few people can earn.