Trade with a business mindset

I don't know from what time, value investment has slowly been labeled as "long-term holding". In fact, value investment is not at all holding still, and even when it is appropriate, value investment can be traded frequently.

However, how to trade in this is very exquisite. Here, let's take a look at a very important trading model in value investing: trading with a business mindset.

Value investing is not long-term holding

When it comes to trading, many investors like the term, as if trading represents change, and there will be opportunities for change. In fact, unprepared trading is very bad, and it is actually no different from gambling: it's all about making a bet and counting on random movements to make money for yourself.

In the book "No Magic Hands: 26 Years of Investment Insights of Female Private Equity Fund Managers" written by Ms. Liu Hong of Lubao Investment, it is recorded that a famous old Chinese medicine doctor in Shanghai Beach, Mr. Qin Lao, made an evaluation of stock trading in 2005: "Every day I try my best to earn money, I sit for a long time and hurt my kidneys, I think about my spleen for a long time, and I hurt my blood for a long time." In daily life, we can often see family relationships being disturbed by the trading of stocks, and even in some promotional slogans, we can also see descriptions such as "it is a liar who teaches you to speculate in stocks.".

In fact, stocks are originally commercial vouchers, transactions are originally a sharp weapon for value investment, trading stocks can make us rich, food and clothing, why did it suddenly become a pathogenic act in the mouth of Chinese medicine, the fuse of family relations, and the fraud in the slogan? The reason is that I don't know how to trade stocks.

In the value investment system from Benjamin Graham to Warren Buffett, "Mr. Market" is a very important concept. The counterparty of a value investor is Mr. Market, which is the anthropomorphic name of the stock market. This market gentleman is sometimes very enthusiastic, sometimes depressed, like a polarized Gemini.

So how can value investors make money from this adversary? Taking advantage of Mr. Market's weakness, he sells to him when his mood is high, and buys from him instead. This buy and sell is all the way to trade. It can be seen that some people think that value investors must hold on for a long time, which is really wrong.

The above statement to Mr. Market to buy low and sell high is just a simple expression of Graham and Buffett's approach to value investing. This statement is too simple, so that many people misunderstand this kind of trading as value investment is just high and low on a target, making money from market fluctuations. In fact, the above is just the core spirit of the value investment trading method. Expand this spirit, and we will get a new way of trading: trading with a business mindset.

Treat positions as your own business

To put it simply, trading with a business mindset refers to seeing all of your stock holdings as your own business, and at the same time viewing your overall positions as a business group. Then, we have to refer to the quotations of the market at any time and go back and forth between these businesses. These inversions have three purposes: 1, through selling poor companies, buying good companies, improve the overall quality of the enterprise group; 2, through buying low and selling high, increase the overall value of the enterprise group; 3, through diversification, optimize the stability of the enterprise group.

For the transaction of value investment, the above three trading objectives will increase the commercial value of the portfolio, that is, let our overall position as a large corporate group become better and better. Although any transaction in the open market will not increase the market value of the portfolio measured by the transaction price on the spot, as long as the commercial value continues to grow, then the market value will inevitably increase in the long term.

So, how do you weigh between different businesses? Let's look at a small example. This example does not contain the above point 3, that is, the dispersion and stability of the overall position, but it does interpret points 1 and 2, that is, the quality and price of the enterprise.

Suppose you have a normally operating cake shop, and there are some tailor shops made by others next door, and the profits brought by both stores are 50,000 yuan per year, and the difference is not much. Usually, the transaction price of each store is also about 500,000 yuan, that is, 10 times PE. Life is too peaceful, the neighbors need both cakes and clothes modification, and everyone is safe.

Slowly, perhaps under the publicity of the media, making cakes has slowly become a popular thing in society. At this time, there are a few young people who are planning to start a business, and they find you and want to buy your cake shop for 1 million yuan. Although 1 million yuan corresponds to 20 times PE is not too high, you now have 3 reasons to support you to sell the cake shop.

First, if you sell a cake shop, you can go and buy two tailor shops (here we don't consider the situation where the tailor shop won't sell). Second, making cakes has become a hot market, competition will begin to grow, and the profits of a single store may gradually decline in the long run. Third, the increase in the e-commerce industry has led to the gradual reduction of physical clothing stores, people buy more and more clothes through the Internet, and the proportion of online shopping clothes found to be inappropriate is higher than in physical stores, resulting in a slow rise in the modification business of tailor shops.

In this case, selling 1 cake shop and buying 2 tailor shops is a good opportunity to significantly increase the overall value of the portfolio and change the annual profit from 50,000 yuan to 100,000 yuan. At the same time, the deal will make the portfolio's long-term business outlook better. Although selling 1 cake shop at a market price of 1 million yuan and buying 2 tailor shops at a market price of 1 million yuan does not make you cash, in the long run, the market price will definitely keep up with the change in commercial value.

It should be pointed out that when a value investor trades with a business mindset, he does not have to achieve the three goals of better, cheaper, and more stable business portfolio at the same time, but only needs to significantly improve 1 or 2 goals, and at the same time do not cause significant harm to other goals, or cause significantly less harm than the improvement.

For example, in the capital market, the price of the same company in different markets may change greatly over the long term. At this time, although trading the shares of the same company back and forth will neither improve the quality of the enterprise nor reduce the volatility of the conglomerate, it will increase the book value. In this way, it is a good deal.

In the case of China's Shenhua, the country's largest coal company, its A-share and H-share stock prices often show huge differences. On October 14, 2007, the A-share-to-H-share ratio of China Shenhua was 1.76 (adjusted for currency adjustment), fell sharply to 1.14 on September 7, 2008, soared to 1.97 on October 26, 2007, fell again to 1.14 on January 4, 2009, rose to 1.44 on July 12 of the same year, and fell to 0.89 on July 11, 2010 a year and a half later (that is, A-shares were cheaper than H-shares). Then, on May 27, 2012, the number rose to 1.16 (that is, A shares were more expensive than H shares), on January 12, 2014 it fell to 0.83, and just a year and a half later, on July 12, 2015, the number rose to 1.77. On January 13, 2019, the price of China Shenhua A shares and H shares fell back to 1.15 again, and on July 11, 2021, this magical price once again returned to 1.61.

In the above-mentioned time, China Shenhua did not have fatal problems in operation. The same company, the same sound operation, representing the same equity stock, at different times and in different markets, can actually show such huge price movements. For value investors, in the face of such a huge business opportunity, is there no reason not to trade?

In Sun Tzu's Art of War, there is a sentence that describes the difference between the victor and the loser: "The victorious soldier wins first and then seeks to fight, and the defeated soldier fights first and then wins." "For investing in this matter of money as an army and the market as a war, value investors are definitely not not trading, but they are not easy to do and will not do without preparation." When we trade with a business mindset, we have already made money at the same time as placing an order, and the change in market value after that is just a matter of course. For those gamble-style traders who are lucky, they are probably facing the dilemma of "defeating soldiers first and then seeking victory".

(The author is the Chief Investment Officer of Jiuyuan Qingquan Technology)

(Editor: Peng Bo)