Bear Market – The Spring of Value Investing, Part I
Author: Dong Baozhen
Text/Chen Jiawei
Today to bring you a value investment book, "Bear Market - The Spring of Value Investment", the author Dong Baozhen is an old investor who entered the stock market in 1994, this book records his personal experience of investing in Moutai and what he thinks in the process, although its basic philosophy, logic, methodology, have long been in contact with other investment books we read, I think it is still very valuable, because this is a real experience of investors.
2013 was a year of doom for Moutai because the previous year had begun a massive anti-corruption campaign to restrict consumption, and the price of tourist attractions, high-end restaurants, high-end drinks, and luxury goods had plummeted this year.
The media reports are overwhelming, the market believes that Moutai has become a corrupt wine, and more importantly, the market believes that under the pressure of anti-corruption, no one in the official field drinks Moutai anymore, and it is impossible for ordinary people to pay for thousands of yuan a bottle of liquor, so Moutai has lost its growth.
In this view, investors panicked, the entire market was selling Moutai and the stock price fell all the way, falling by 30% in the second quarter of 2013.
Dong Baozhen set up a private equity fund in June 2010 and bought three stocks, namely Maotai, Luzhou Laojiao, and Daqin Railway, and by the third quarter of 2012, the annual return on investment was 10%, which was not outstanding.
By 2013, the two liquors he held had plummeted at the same time, while the Daqin Railway was still rising. When Moutai fell by 30%, when Moutai's price-to-earnings ratio fell from 25 times to 15 times, his first decision was to sell Luzhou Laojiao and continue to buy Moutai because the same liquor was also falling, and Moutai's brand was better and more certain.
Moutai continued to fall, and he sold the Daqin Railway, which had a price-to-earnings ratio of more than eight times at that time, and continued to buy Moutai, at this time, his fund only had one stock in Moutai.
But Moutai is still falling, until it has fallen to 8 times the price-earnings ratio, at this time Dong Baozhen has no funds to make up for the position, so he opened financing, through financing to continue to buy Moutai and became a leveraged company.
In the process of the decline in Moutai stock price, Dong Baozhen encountered tremendous pressure, on the one hand, from the doubts of investors about Dong Baozhen, on the other hand, from the media's doubts about its ability, negative reports on its performance, in 2013 its fund became the worst fund in the country, with a yield of -70%, and the media reports made the public mercilessly ridicule Dong Baozhen.
When only Moutai remained in his position, the investor could not sit still, and first of all was skeptical of his concentrated position, and the investor said:
Bruno was burned to death for adhering to the heliocentric theory, and although this theory is incorrect, it is a huge improvement for the time, but is this kind of martyrdom that our funders should bear? Should we really pay such a heavy price for the value investment philosophy? Or is it more important to be alive? Come out first, then kill back when the time comes, your position does not have any dispersion, never seen in the Chinese stock market, you make the mistake of not scattering.
Dong Baozhen replied with a long letter expressing the following meaning:
He said that he is not blind, but based on his own investment ideas, based on his very familiar with Moutai, the so-called confidant knows that the other is invincible, he has long tracked Moutai to form a deep understanding, over the years, he has written a large number of investment analysis and research notes about Moutai, and many have been recognized by industry experts, when the liquor industry falls sharply, the internal meetings of the liquor industry will ask him to share.
What he does is in line with Buffett's principle of the circle of ability, because his knowledge of liquor has made him one of the top 100 in the industry, and in the past he spent a lot of time focusing on the liquor industry, so he knows baijiu better than most general investors.
The principle of Buffett's circle of power is actually the same as what Adam Smith said in "The Wealth of Nations", and the most creative ideas in "The Wealth of Nations" are two:
One is that the division of labor to improve social efficiency, can create more wealth, for example, a young man in the countryside may only earn 1500 yuan a month, but to the city to deliver takeaway can earn 8000 yuan a month, because he joined the urban division of labor system, after the professional division of labor his efficiency is higher than the average person, and in the countryside he wants to grow rice, grow vegetables, raise fish and pigs, almost everything, the result is inefficient, is a typical self-sufficient small peasant economy, can not create surplus wealth at all.
A person who has been specializing in a certain field for a long time, his ability, efficiency, and quality of work will certainly be higher than that of ordinary people, which is the fundamental reason for the division of labor to increase social wealth.
Another great idea of The Wealth of Nations is that free trade can increase the total wealth of society.
These two ideas laid the foundation of the human market economy and promoted the progress of mankind, and the principle of the circle of competence is the same as the essence of Adam Smith's division of labor theory, because the circle of competence requires concentrated research in a small field, so that his ability, depth of study, cognition, will exceed that of ordinary people.
Then he gave a negative example, why did LeTV fail? It is because of the violation of the theory of social division of labor, LeTV expanded its career to television, mobile phones, automobiles, real estate and other fields within a few years, and the capabilities, resources, and logic behind these areas are completely different, and finally LeTV has not done a good job in any industry, and failure is inevitable.
Dong Baozhen's meaning is obvious, his cognition of liquor is more than that of ordinary people, so he dares to re-warehouse Maotai.
The real worry of the investors is the risk, thinking that the risk of centralized positions is too large, especially in the continuous decline in stock prices, the mentality has collapsed, which has given Dong Baozhen great pressure. But Dong Baozhen believes that centralized positioning is not a risk, he said that the real risk is that you don't know, everything you don't know, what is not clear is the risk, on the contrary, you know, the situation you understand, it is not a risk. For example, if someone falls into a well, the well is not a risk, and not knowing where the well is is the risk.
Diversification does not take the initiative to resolve risks, widely diversify investment in companies that are half-understood, and the final investment results must be bad, because he did not take the initiative to turn the unknown into known, and could not lead the risk resolution.
Investment is a prediction game about the future of the enterprise, is a cognitive game about the future of the enterprise, the company you invest in is bankrupt, resulting in your loss, but this is not the responsibility of the enterprise, but the responsibility of the investors themselves, because you did not predict this in advance.
Diversification to ten companies is not as good as concentrated investment in one company, because the same time, energy focused on researching a company, the depth of obtained is much greater than ten companies, so concentrated investment can improve the accuracy of predicting the future of the enterprise, diversification will increase risk, because the ability to predict the future after diversification has declined.
The core means of risk management is to form a perception that transcends the public, and concentrated investment is the premise of transcending the public perception.
For example, by 1987, Buffett had tens of billions of dollars in assets under management, but he only invested in three stocks.
Soros also concentrated on investing, he said, if an opportunity is found by you, and you are very sure, then you should bet a lot, how much to throw.
Therefore, true risk management and dispersion have nothing to do with it, but with whether the judgment is correct or not, such as a mistake in judgment, and even a small bet is a mistake.
What if the judgment is wrong? How to avoid losses? The funder asked, and Dong Baozhen gave the example of German blitzkrieg during World War II.
He said that at that time, France built fortifications stretching for thousands of kilometers, but the result was useless, because Germany adopted blitzkrieg, which was to concentrate all the war resources, concentrate troops on the 50-kilometer border, release them in an instant, surprise at the fastest speed, regardless of logistics, and then drive straight into France for 1,000 kilometers, cutting France in half, with remarkable results.
However, blitzkrieg also has obvious weaknesses, that is, once the breakthrough is ineffective, a stalemate is formed, it is easy to be copied by the enemy from the second bread, and once the breakthrough is unsuccessful, it will fall into a situation of fighting alone.
This is the same as concentrating on investment, once the mistake will be completely destroyed, then how to deal with it?
The answer is to impact the other side at a faster speed, concentrate more forces, and crush the other side in a shorter period of time, so that the other side has no chance to counterattack, rather than the general public believes that logistics should be strengthened, because strengthening logistics requires a lot of manpower and material resources, but it will weaken the effect of blitzkrieg, it is better to strengthen the strength of support logistics into blitzkrieg, and strengthen the strength of the assault.
The same is true in investment, with a more focused attitude to further narrow the circle of ability, concentrated in a very small range, focus on researching several companies, you can judge the future in advance and resolve risks.
Dong Baozhen went on to say that the reason why I dare to fully position a stock in Moutai is because my long-term research makes me very confident, my understanding of Moutai exceeds that of the general public, and in 2013, when ordinary investors panicked about liquor and Moutai, I was very calm, because I knew that the public's view was wrong.
The volatility of stocks is not a risk, and there are only two real risks: the risk of permanent loss of principal and the risk of insufficient returns.
Although the stock price is falling and falling, the risk of my current concentrated position is actually very small, and the future return only needs time to prove.
Regarding whether it is centralized or decentralized, Dark Horse adds that it is necessary to consider the time dimension, and only from the perspective of 3-5 years can we concentrate on positions like Dong Baozhen, and there are several main reasons
First, the time dimension
Stock price and corporate value in the short term is likely to mismatch, stock price is inflated, the bubble is huge, or the stock price is significantly lower than the intrinsic value, these two situations in the stock market is the norm, and only by extending the time to several years to let the market find this error, the stock price will also reflect it, to put it bluntly, it is to believe in mean reversion, but this regression may not be visible in a year and a half, so there is no time dimension to talk about centralized positions, and value investment is a hooligan.
The second is about market style
In recent years, A shares no longer have a comprehensive bull market, but only structural market, the future with the registration system, more and more listed companies, the market to find the function of value is more and more difficult, structural market will continue to dominate the future, so undervalued, wrongly killed stocks to be found by the market and achieve mean reversion, it takes great patience. Many times the rise in stock prices is not the market fixing his pricing mistakes, but a market is popular in a certain style, resulting in a collective rise in a certain sector of stocks.
The concentrated position of value investment is not to consider the market style, not to consider the industry, only to consider the fundamentals of individual stocks, and the stock price is wrongly killed, and the stock with good fundamentals needs the market to correct the error, and it is difficult to do it without a few years, such as Focus Media, which was wrongly killed in 2019, and only began to rise in 2020, and it needs to wait for a year and a half.
October 25, 2021