Wang Guobin
"Capital is never free, capital has its discipline and principles, and the capital market will only give high valuations to those enterprises with high capital utilization efficiency."
The long-term development of the capital market depends on the development of enterprises that truly create value for the market, and the development space of the capital market ultimately depends on the space of the enterprise, and the core of the development of the enterprise is the entrepreneur. From the perspective of globalization, increasing urbanization and rapid technological progress, China has created a very large space for enterprises to develop. Whether this space can be realized depends on whether a large number of entrepreneurs can emerge. I think one of the very important results of supply-side reform should be the emergence of a large number of entrepreneurs.
As an investor, I would like to provide entrepreneurs with some personal perspective suggestions based on more than 20 years of investment experience and practice.
Unlike investors and entrepreneurs, for the capital market, the capital market mainly plays two functions: one is to bring returns to investors; the other is to find venture capital for enterprises that need risk capital. Entrepreneurs are inherently adventurous and constantly seek change; investors, especially value investors, are less likely to change, even risk averse, and their relationships are delicate.
A harvard professor once said, "An investor is like a man sitting on a motorcycle, and the more he believes in the character and abilities of a driver, the more attractive the investment becomes." ”
Acquiring wealth requires taking risks, and preserving wealth requires an almost paranoid avoidance of major risks and making compound interest work. Keynes once said, "Over time, I have become more and more convinced that the right way to invest is to put a sizable sum of money in the hands of business managers who think they know and fully trust." ”
Recommendation 1: Pay close attention to risk
Optimism is a very important quality for entrepreneurs. When I went to see Mr. He Xiangjian, he said, "If you are not an optimist, you should not be an entrepreneur." Daniel Kahneman said in his book Thinking, Fast and Slow: "Optimists play a role in shaping life, large and small." Their decisions have had an impact. These optimists are inventors, entrepreneurs, political and military leaders – not ordinary people in short. They seek challenges, take risks, and ultimately succeed. ”
As an investor, I want entrepreneurs to be very optimistic and confident, but I don't want their optimism and self-confidence to be overly fanciful. The benefits of optimism belong only to those who are a little biased and can highlight the positives without being detached from reality. Charlie Munger also said, "Never underestimate those who overestimate themselves." ”
Optimism is also prone to bring significant risks to entrepreneurs, making them unable to face leverage rationally. Buffett said, "The real risk comes from doing something you don't understand." "Since volatility is easier to deal with in the short term through leverage redundancy, the short term does not pose a risk. But in the long run, blind confidence will bring too much leverage, serial acquisitions, too large stalls, etc., at which point entrepreneurs will not be able to withstand fluctuations.
In 2017-2018, I often said that many business founders would go bankrupt because of excessive leverage, or that they personally went bankrupt before the company. When entrepreneurs are successful, they should guard against two of the biggest pitfalls like conservative investors: high leverage and high concentration. In the face of some new projects, we must not only look at its probability of success, but also look at the serious consequences it may have, if it cannot be afforded, no matter how much the probability can not be done. Charlie Munger once said, "Smart people go bankrupt because of wine, women, and leverage." "I think the most common cause of bankruptcy is leverage.
Tip 2: Focus on short-term and long-term relationships
There is an effect in economics called the hyperbolic discounting effect, which refers to the fact that people face the same problem and are more inclined to choose the timely one than the delayed option. We tend to focus too much on short-term problems, thinking that the farther away the consequences of today's choices are, the less relevant they are to the present.
Ren Zhengfei mentioned his daughter and said that he would not choose her as a successor because a leader must be able to foresee the technology trend in the next 10 to 20 years, and his daughter has no technical background and is not able to predict future trends.
A very important point here is not to be short-sighted. Investors speculating about the immortal stocks in the Hong Kong stock market is a short-term fluke, thinking that it will not be their turn to take the last baton. People in the financial industry are more inclined to the short term, thinking that it is enough to get bonuses this year, and it does not matter whether to do this industry next year or the year after. Capital markets have always focused on vanity fair that only focuses on short-term effects, so it is easy for entrepreneurs to confuse short-lived good news with market competitive advantage. For entrepreneurs, such short-term behavior also carries great risks.
Tip three: Focus
The capital market prefers the leading and professional enterprises in the market segment, and the valuation of diversified enterprises must be lower than the valuation of enterprises with subdivided business.
As an investor, I like the combination of focusing on your own industry and at the same time with an open mind, actively conducting various experiments under the premise of controllable risk, especially under the premise of success, and once successful, it can generate great returns.
I think it's okay to be focused at the same time, and distraction can sometimes produce a lot of unexpected gains, penicillin, Viagra, and the birth of chemotherapy. For an entrepreneur, staying competitive requires 100 percent effort, but sustained competitiveness also requires an entrepreneur to pause occasionally to look at other possibilities. However, in the capital markets, focus will certainly lead to higher valuations than diversification.
In the United States, diversified companies and main business concentration companies show different situations: the average cash held by main business concentration companies is twice that of diversified companies. In China's capital market, companies with very concentrated main businesses such as Midea, Gree, Haier and Yili have sufficient cash reserves.
Tip four: Capital is never free
Capital is never free, capital has its discipline and principles, and the capital market will only give high valuations to those enterprises with high capital utilization efficiency.
For enterprises, anything that has nothing to do with capital gains is only a means to the ultimate goal, and the main purpose of the enterprise is to increase the intrinsic value of shareholder equity.
One of the things That Ren thinks about the most is the rational distribution of benefits between employees and capital. This is a very long-term problem, and entrepreneurs have considered this issue since Marx's objective and scientific analysis of the capital market. Ren Zhengfei chose not to go public, unwilling to be coerced by the capital market, that is, to consider the company's long-term strategy and short-term interests of the balance.
Recommendation five: Delay gratification
Regarding delayed gratification, from 1966 to early 1970, there was a famous marshmallow experiment, which was done by a psychologist at Stanford University to test children's patience and willpower. More than a decade later, the researchers found that children who showed stronger endurance and willpower in experiments were more successful as adults. Kahneman's assessment of the book "The Marshmallow Experiment" is that after reading it, "your view of human nature will change deeply."
So a person's success depends not only on intelligence, but also on patience for the future. Entrepreneurs should always ask themselves: Will those additional profits stand the test of time? Is your business a friend of time?
Many companies such as Didi, Meituan, Microsoft, Amazon, you can compare them, which want to quickly get profits, which are in order to get a bigger moat, prefer to sacrifice profits? There is a trade-off between getting a moat and getting a profit.
In the long run, only by constantly building something sustainable will it be the best for entrepreneurs and investors. The most typical failure case is Li Zicheng, who did not choose to delay gratification.
Recommendation six: Avoid speculative cues
Don't ignore the long-term economic outcomes and spend high prices to buy companies in pursuit of diversification. Don't blindly follow the cues of speculative institutions and consultants, and consider what is important rather than what is considered important.
Now, many entrepreneurs are often surrounded and influenced by speculative investors. Charlie Munger and Buffett once cited an example from Lincoln, who once asked the question: "If you call a dog's tail a leg, how many legs does a dog have?" Then, his own answer was: "Four legs, because calling the tail a leg doesn't really turn it into a leg." Charlie Munger said that someone like Lincoln must be lonely to go to Wall Street.
Entrepreneurs need to deal with people who are really knowledgeable, not those who pretend to be knowledgeable. I strongly urge all entrepreneurs, if you want your business to be safe for a long time, to avoid the hints that speculative people give you as much as possible.
Recommendation 7: Integrity
Good reputation is hard to gain, easy to lose. A manager or employee who admits to others that he or she is wrong is more likely to learn from his mistakes. Managers who openly deceive others end up misleading themselves privately. If a manager always blames others for his mistakes or blames the outside world, he is more inclined to deceive himself when faced with other important things.
Therefore, integrity should become a fundamental element that runs through the entrepreneur's career. In the business world, honest managers are a treasure trove of business. If a company establishes a good reputation for integrity, rationality, and fairness, the stock market will eventually reward it with high rewards.
Of the above advice to entrepreneurs, I think there are three most important.
Be sure not to have too much leverage.
Be sure to focus.
Be sure to be honest.
If entrepreneurs can have the above good qualities, in the current era, excellent enterprises will continue to emerge, and the capital market will definitely go better and better.
(This article is a book excerpt from the book "Invest in China", the author is the founder of Quanguo Fund)