Zhuo Liwei, partner and chief research officer of Gao Yi assets, who has not been seen for a long time, recently held an investment exchange meeting to share his unique views on investment and the latest views on the market.

Zhuo Liwei believes that the market rise in the past two years has two logic, one is valuation expansion, the other is fundamental growth, performance growth, valuation expansion may be greater than the driver of fundamentals. However, affected by the rebound in interest rates, the impact of valuation-driven will weaken and will gradually return to fundamentals-driven and performance-driven.

In Zhuo Liwei's view, there is no difference in investment methodology. He firmly believes in fundamental investment because he believes in the value of enterprises and believes that social and business progress is created by people. As far as investment is concerned, more research is for less decision-making, and the core of research companies is to study business, people, organizations, environment and valuations, and to find good companies in the best businesses.

From the perspective of geography and history, Zhuo Liwei is very optimistic about investing in stocks in China. From the perspective of global history, only a few large continental economies and countries with very stable political society are suitable for stock investment.

"China is a unified market with high cultural identity. If the Northeast likes it, the Southwest may also like it. It is only possible for large countries to have large items, and Chinese consumer local brands are likely to usher in very active innovation. "

At the exchange meeting, Zhuo Liwei said in an interview with a Chinese reporter from a securities firm that he was optimistic about the development of chain service industry in China.

"in the past, it was very difficult to form a scale in the chain process of the service industry, because it was out of control. But now with the means of science and technology, the whole production process can be transformed. China has a large population density, per capita consumer expenditure is increasing, there are many categories of innovation, and the chaining of the service industry is a general trend. "

Pursue "high-quality innovation + sustainable value"

I have invested and worked for 27 years, and have explored a lot. From being a researcher at the earliest, I began to manage the fund slowly, and also brought a research team. Including in Gao Yi, several of our fund managers spend more time together to participate in research management, often have some experience and thinking. After many years of hard exploration and continuous learning, progress has been relatively slow. To sum up, there are a few words:

First, I firmly choose the fundamental investment in the investment methodology, which is slightly larger than the value investment, or the angle is not exactly the same. Value investment is a standard of value evaluation, and fundamental investment is the methodology we start to study. There is an intersection between the two, and it is the two aspects of answering questions.

Second, in addition to fundamental investment, there are many investment methodologies such as macro hedging and emotional game, there is no difference between high and low, but I am more convinced of this road or feel that I am more suitable for this kind of investment method. I often say that investment is to get to know yourself and find a way to match your personality, worldview and way of thinking. Fundamental investment implies an assumption that we believe in the value of enterprises and that social and business progress is created by human beings, and that it is a certain degree of agnosticism, not agnosticism. This is the premise of fundamental research.

In fundamental investment, I like to pursue two types of companies, namely, "high-quality innovation" and "sustainable value". People usually divide the company into value and growth. I now change "growth" to "innovation". In fact, this division is not very accurate. In the long run, value and growth are unified. The value of an enterprise has two parts: current value and future value, which is what we call V0 and V1, but the weight is different. The weight of the current period looks a little more, we say it tends to be partial value; if the weight of V1 is a little more, we tend to think that it is partial innovation.

There are three types of innovation:The first category is really high-quality innovation, the second category is the innovation that is difficult to achieve the path, and the third category is pseudo-innovation. I take the first category, that is, really high-quality innovation.

Value is also divided into three categories:The first category is sustainable value, which has a certain growth rate. If the growth rate is greater than the discount rate, it means that the current PE valuation can be higher from the point of view of DCF. If the growth rate is 0, it will be offset by the discount rate, and the valuation is very different. The second category is zero growth, but the profit level and free cash flow are still very good, we calculate the absolute value and dividend rate. The third category is the value trap, negative growth or business quality is getting worse and worse, and cash flow is unreliable. We divide the two categories of value and growth into six categories, and choose two categories as the main objects of investment.

More research is for less decision-making

There can be a lot of research, but few decisions are made in the end. Although it is agnosticism, we lack the ability to judge and make decisions on most things, because there is too much information, and it is very difficult for us to grasp the principal contradiction. So in many cases, for the vast majority of things, the vast majority of companies we lack the real decision-making ability, the most important thing to invest is to make decisions. We study, think and read a lot, but make few decisions. I often cite an example where snipers are more likely to lie there watching and rarely pull the trigger.

There are 4,000 to 5,000 listed companies, dozens of stocks that I invest in in stages, and only 20 or 30 in core investments. Twenty or thirty portfolio investments are sufficient to offset the volatility of each other, and the goal of portfolio investment is to offset volatility, not to reduce the rate of return of individual stocks. If stocks are small and volatile, but the long-term returns are not poor, there is a problem with this management model as an asset management company, because clients cannot withstand the volatility, which in turn has a certain impact on investment. So we have to use portfolio investment to offset volatility, which is the answer to portfolio investment.

Look for the best companies in the best business

When I was studying a company, I divided it into five aspects and seven questions. The core of the five aspects is the study of business, people, organization, environment and valuation. in most cases, there will be changes in a few times in this order. Different industries, different companies, different stages of development, the order of weight will change, but we always take a unified view to explain a problem.

A great boss can change business, and this boss can build a very good organization and team. I put special emphasis on the system ability and evolution ability of the organization. The environment is also very important, there are many, such as the macroeconomic environment, such as economic and geographical characteristics, historical development stages, changes in social thoughts have significant changes in many business models, which is also related to the international environment and politics.

Stock investment from the perspective of global history, only a few large continental economies and countries with very stable political society are appropriate. Some smaller countries are not suitable. Large institutions in Europe and the United States often have hundreds of billions or tens of thousands of dollars, and companies in one country are not enough to accommodate these funds. China and the United States are the largest, and other countries may have difficulties in this regard.

The era in which we live in China is excellent, as well as the geographical features of China, which I have a framework to explain. We have super-scale, a very large supply chain network that can achieve rapid response and flexibility, as well as population density, urban agglomeration, industrial clusters and geographical features. China has two bay areas and two major river basins of the Yangtze River and the Pearl River, which is a very important point to form a supply chain network.

After studying economic geography, it is clear at a glance why it is China. Some countries do not even have ice-free ports all the year round, and the absence of ice-free ports means that they cannot export. We have ice-free ports and very long rivers, mainly the Yangtze River and Pearl River basins. The starting point of the Ming Dynasty's voyage to the West was Taicang, which formed population clusters and industrial clusters in the tributary system of the Yangtze River, which was very important, and it formed China's supply chain network. as a result, high population density, large consumer market and business model innovation were born.

Business is very important. Why do I put so much emphasis on business, not industry? Because in the same industry, different products are different markets. For example, the logic of sportswear is very different from that of women's wear.

Implement the seven core questions and analyze each listed company. If you conduct in-depth research on them, you must answer seven questions.

The first is value creation, we must know what positive energy value this company has created for society and customers, rather than negative value, which is the most fundamental starting point of value investment.

The second is the business attribute, in terms of time and space, the quality of this business is getting better and better, at least to maintain the status quo. Business is the friend of time, scale and innovation, innovation itself is also the concept of time, innovation is time multiplied by human creation and labor. The quality of some businesses is even worse because technological advances have brought instability to the original business model. We will see if the business accumulates system capabilities in a continuous direction, each company can find it on the ground, and can find the corresponding business data and financial data to verify. We are talking about qualitative concepts, but these concepts should all be explained by mathematics.

The third is entrepreneurship, the difference between enterprises and, more importantly, the differences between entrepreneurs. In retrospect, why are the two leading companies in the same industry so different 10 or 20 years later? The ability, pattern, team-building ability and personality influence of entrepreneurs can be clearly felt. Although it is very difficult to judge, this is the most important and even the most fundamental starting point for us to judge the value of an enterprise.

The fourth is organizational evolution, including governance structure, ownership structure, top-level design and organizational structure, incentive system, process management to adapt to business development.

The fifth is the core competitiveness, every company must have a very unique core competitiveness, one born two, two born three, three born all things. In-depth research, we will think about what is the way to do business, what is the core competition of the company, and whether this ability is significantly stronger, more sustainable, progressive and iterative than other industries and companies.

The sixth is three to five years of reliable performance growth. What I said just now is biased, and we have to use quantitative data to show that we must find a clear capacity for performance growth in the next three to five years, and we have to calculate the accounts.

The seventh is valuation. Use DCF, PE, NAV, EV, market value space and IRR and other dimensions to value different businesses, different companies and different stages of development.

Five types of good business suitable for investment

The essence of equity investment is to pursue two Alpha: one is the Alpha of business, the other is the Alpha of enterprise. As for the understanding of good business, we divide it into five categories: the first is brand effect, the second is scale effect, the third is network effect, the fourth is high conversion cost for users, and the fifth is technology monopoly or continuous leading innovation.

In the past, I would put innovation at the back, because innovation is very difficult, and the probability of failure is relatively high. Ten years ago, the so-called value and growth I was concerned about probably accounted for 70% of value and 30% of growth. Now it will be reversed slightly, with innovation accounting for 60% and value accounting for 40%. Because of a major change, the possibility and conversion rate of innovation in China are increasing during this period of development. First, because the cost of social innovation is falling, for example, you do not have to write your own software, you can rent cloud services and share offices; second, the efficiency of the transformation of talents and knowledge in this era has been greatly improved; third, because digitization and algorithms have become a general technology, the efficiency of being transformed by smart people is improving.

The organizational model of this era is "high achiever can fight". Fifteen years ago, more people who were reckless, bold, management and knowledgeable could do a lot of business, but now it's a little different. High achiever, a graduate from Tsinghua University and Stanford, came back to start a business. they are smart, learn very fast, and can penetrate into the reality of China. It was very difficult in the past to put knowledge, insights and ideas into business practice.

Now the ability of knowledge to be monetized and commercialized has been greatly improved, thanks to scientific and technological innovation and the Internet. These smart minds can iterate and exhaust methods in the process. On the one hand, innovation has higher requirements for knowledge, on the other hand, the innovative ability of people with knowledge and the probability of success are also improved.

In China, a country with special economic and geographical characteristics or super-scale, multiplied by the three major levers of science and technology, capital and talent, our brand effect, scale effect and network effect are most easily magnified. It is difficult for a small country to become a big company, and we are super-large enough to form a large product. There are many large items in consumer and industrial products, one of which can be sold for 10 billion. A province in eastern China is equivalent to a country, and China is a unified market with a high degree of cultural identity. The northeast likes it, and the southwest may also like it. You don't need to explain, because we are mainly Chinese culture and have a high degree of cultural identity. Very special.

It is only possible for large countries to have large items. Looking back at Japan, why there are not so many large items of particularly large consumer brands in Japan, but functional research and development or retail store operation companies can go abroad and do more. This is because it is difficult to form large items in the smaller local market, and consumer brands with strong cultural attributes may encounter the obstacles of brand effect in cultural identity in expanding overseas markets, so big brands are more likely to succeed in big countries. From this point of view, local brands consumed in China are likely to usher in very active innovation.

The following is a transcript of the reporter's interview:

The odds are more important than the odds.

Chinese journalists from securities firms:In your idea, the winning rate is more important than the odds, so what are your main ways to deal with your investment this year?

Zhuo Liwei:There are two logic to the rise of the market in the past two years, one is valuation expansion, the other is fundamental growth and performance growth. Both logic exists, but overall, valuation expansion is likely to be greater than driven by fundamentals. The structure of the stock is different, a small number of performance-driven is greater than valuation-driven.

Starting from this year, or for some time later, the valuation driver is weakening, and the valuation driver is more affected by interest rates. The world has been in a state of low interest rates and low growth for many years, and valuation drivers have become weaker, so we are more likely to return to performance-driven and fundamental-driven.

I may have sold out of companies that used to have a very high share of valuation drivers, but now have expensive valuations and low IRR for a long time. If the business and company are really too good, I may keep a few of them. But I will mainly return to fundamental-driven, performance-driven companies. For example, the list of companies in my portfolio may not change much, but the order of weight will change significantly, a small number of companies have sold out, and some new companies have been added.

For the manufacturing companies with asset attributes in the middle and upper reaches of the structure, the rise in the first two years is mainly due to rising performance, and the proportion of valuation expansion is very small. if the performance of these companies still maintain good growth in the next two years, the comparative advantage will be obvious. In terms of stocks, the multiplication of odds and odds may be passable, and this type of company will increase in structure. There is also a category that may not be large companies, but the invisible champion of medium market capitalization is also the leader, and some medium-sized companies may grow into large companies, which may also be the focus of the future.

In the first quarter, there were also stocks that rose a lot and pulled back some of them, some of which were innovative secondary new stocks. The stocks I am talking about are all Chinese stocks in China, Hong Kong and A shares. Some are volatile, but they are very good innovations in the long run, and short-term valuations are still a bit expensive. These companies need to study them carefully. Long-term IRR (internal rate of return) may be good, but the current PE is expensive. Of course, the "three highs" with high valuation, high market capitalization and high expectations can not be established at the same time for a long time.

Innovation will drive some consumer categories to become bigger

Chinese journalists from securities firms:You just mentioned that from the perspective of large geography and history, China and the United States are the two most likely to produce large items. Starting from the consumer industry, many consumer stocks have relatively high valuations. Are there any new valuations or opportunities that have not been explored?

Zhuo Liwei:It may be difficult not to be discovered. With so many practitioners in the market studying crazily every day, people may have different understanding and confidence in different industries, but it may be more difficult for others not to see this opportunity, but only me to see it. The key is whether we have enough deep research, long enough foresight and high enough confidence.

There are still many big categories, such as chain service industry, China may be very big. In the past, it was difficult to form a scale in the chain process of the service industry. Scale is the enemy, because it is out of control. But now with technology, any frontline worker can have a smartphone, and he can combine process management with KPI and business processes to transform the entire production process. In the past, the consistency of service quality was difficult to determine, but now intelligent terminals and software can be used to arm front-line people and change their behavior motives. The service process is difficult to standardize like a factory, and it used to be difficult to solve, but now with this thing, it can be changed. In the process, there are user comments on who you are served and how the service is served. For example, when we go to a restaurant, who serves this table and how consumers give feedback and comments after eating can correspond to people one by one.

There is a large amount of data for attribution analysis, which is highly related to KPI, which will change the waiter's psychological motivation, in turn improve his service quality, and improve the consistency of service quality. This means that the reliability of the service industry is being chained up. China has a large population density, demand is still upgrading, per capita consumer expenditure is increasing, there are a lot of category innovation, and the chaining of the service industry is a general trend.

For example, sports can still do a lot of business. One is the social trend of thought, where few people wear leather shoes these days. Goldman Sachs Group said that employees do not have to wear formal clothes to work in Wall Street offices, which is essentially a change in global consumer culture brought about by "Silicon Valley heroes." Employees in Silicon Valley can wear slippers to work, which is no longer a very serious costume in the eastern United States. Look at Buffett's annual meeting. Buffett has stopped wearing a tie in the past two years. He is the oldest capitalist.

China's per capita sportswear and sports consumption expenditure is still very low compared with that of Japan and South Korea, and it is at the stage of increasing penetration and upgrading demand at the same time. In addition, we now have a lot of Internet games, consumer Internet can be enabled to the service industry, manufacturing industry, can do DTC, do private domain traffic, in turn, inspire upstream product innovation, reduce the risk of intermediate inventory, reduce the risk of SKU, and even reduce SKU. The sales of flat effect can be increased, and so on. A small number of companies have learned these games and are bound to take more share. Nowadays, more and more people invent and use new weapons, but only a small number of people master them, and this small number of people and a small number of enterprises are very important. The rest of the pile may fall off or even be eliminated.

We say that the head of the stock market is divided, but in fact, the industry is also divided by the head. There are two factors: liquidity and market preference on the one hand, and fundamentals on the other. In retrospect, we see whether the leading companies have a second curve and whether medium-sized companies have the ability to rise from 1 to 3 and then to 5. We have to recognize the fact that it is not simple hype.