In 2016, the Shanghai Composite Index fell by 12.31%, and the "market bottom" moved down from 2850 points to 2638 points. In the eyes of pessimists, it was a bad year; but in the eyes of optimists, A-shares were full of gold at that time. This year, value investor Liu Xu began to emerge in investment.
After experiencing a plunge in the bubble at the beginning of the year, Liu Xu, who has been tracking home appliances and manufacturing for a long time, is keenly aware that many companies have fallen out of value and have a high margin of safety, so he has laid out a number of stocks in a long-term manner. This laid the foundation for his performance in the coming years.
Among the many manufacturing stocks bought at that time, Sanhua Zhikong was not the most profitable, but it was the most in line with Liu Xu's playing style. The company's main air conditioning refrigerator parts, is a traditional manufacturing industry for many years of deep ploughing of the upstream enterprises, downstream customers are mainly Gree, Midea these well-known enterprises, with a certain moat. The company is one of the targets that Liu Xu has tracked for a long time, and has deep coverage as early as when he was a researcher.
At the beginning of 2016, the market value of Sanhua Zhikong fell to about 13 billion yuan, Liu Xu found that the company's operation was healthy and stable growth when screening financial statements; at the same time, the founder of the company will hand over the baton to his eldest son, who is a college student decades ago, not only professional counterpart, very familiar with the company's business, but also well managed, the company up and down are conscientious.
After synthesizing various information, Liu Xu believed that the company's stock price was seriously wrongly killed, so he chose to buy in a heavy position, and soon became the first heavy stock. Subsequently, the company's stock price climbed steadily, and after holding it for more than 2 years, he fought and retreated, until the fourth quarter of 2020 fully cashed in the income and exited, with a single ticket profit of more than 2 times.
Screening financial statements, looking for investment clues→ in-depth research→ buying when undervalued, lying dormant→ profit after achieving the expected goal, such an operation Liu Xu has long been familiar with the road, rotten familiar with the heart. As a value investor, he pays great attention to the margin of safety when buying, and easily does not sell, but every time he sells, he hopes to gain something, even if it backfires, he strives not to make a big loss, resulting in huge fluctuations in net worth.
For him, who has come from auditing, it seems that he is more accustomed to reading listed companies from financial statements. He admits that when buying some stocks, he does not go to the field research. From past experience, the opportunities that you can find through the statements, the investment success rate is often higher.
In his view, the reason for frequent research means that there are still many questions about this company, and it is full of uncertainty about its future judgment. And he prefers to seize the opportunity of relative certainty in the market, and the investment decision is based on a deep understanding of the industry and the company, and buy when the margin of safety is high enough. He believes that the perception of a company surpasses the market and peers, which is the main source of excess revenue.
Liu Xu is more cautious and does not have the slightest sloppiness in research and investment. He places great emphasis on research with a sense of substitution. In the past year, he has spent a lot of energy on consumer stocks, looked at a large number of consumer goods companies, and conducted a lot of offline channels in the field, and he hopes that he can immerse himself in them, truly understand the business model of a certain subdivision of the industry and a company, and have a keen perception of industry changes, channel operations, technological progress, business management capabilities and other disturbing factors.
Low-key humility is another of Liu Xu's characteristics. He claims that the stocks that he has really understood and earned money in the past 7 years can be counted with one hand; when asked about the areas he is good at, he modestly says that he is not good at it, but has a higher success rate in some areas; he claims that he has just started on the road of value investment, and his understanding of the consumer industry is only "beginner"; he even modestly said that he can really count as only twenty or thirty companies with deep coverage...
He also did not hide the confusion in his own investment. He felt that his ability was not good, his level was not enough, his understanding of many problems was not deep enough, it was difficult to get the core points when studying some companies, and he worked very hard to break through the last layer of "window paper".
In the author's opinion, this "not complacent" empty cup mentality is precisely the necessary potential of excellent fund managers. Fund managers who do not give up and do not abandon at any time will not have bad long-term performance.
In the past 6 years, Liu Xu has managed the Dentons high-tech industry with a return of 227% and an annualized return of nearly 20%; it has outperformed the same average and CSI 300 for 6 consecutive years, achieving three authoritative awards "Grand Slam". These figures not only bear witness to his strength, but will continue to write his glory.
How did such a good performance come about? Where did his excess earnings come from? A few days ago, the Yuanchuan Research Institute and Liu Xu had an in-depth exchange, from which the answer may be found.
The following is a compilation of the dialogue, with deletions:
01
Entry is a high level, deep ploughing manufacturing
Yuanchuan Investment Review: When you first became a fund manager, you encountered a stock market crash in 2015, how did you deal with it at that time?
Liu Xu: At that time, I was still in the exploratory stage of investment, just in time to catch up with the market plunge, although a little confused, but I did not adjust the position, did not buy a new company, did not switch to the bank track, basically still held the original company, especially in 2016, when it was too late to deal with, just with the fluctuations in the market.
Yuanchuan Investment Review: How did this experience affect your later investments?
Liu Xu: The impact of this experience on me, I think, is not what I have experienced, but what I have experienced. I have read many books since then, especially the biographies of some great men, which have given me a deeper understanding of this irrational behavior of human beings. Stock speculation is essentially a group game, in such an industry, how to position yourself is very important, including short-term positioning, long-term career positioning and so on.
This experience made me recognize myself and at the same time strengthened my path to value investment. Its greater help may lie in its own thinking mode, and its impact on the operation is not obvious.
Yuanchuan Investment Review: What are your areas of expertise?
Liu Xu: I dare not say the word "good at". I myself have long covered home appliances and manufacturing, and may have a higher investment winning rate in some manufacturing industries or traditional manufacturing industries.
Togawa Investment Review: Is there any difference in the study of traditional manufacturing? How do you do it?
Liu Xu: When I look at the manufacturing industry, I will study it from the supply side and the demand side.
Let's start with the supply side. This piece needs to look at several aspects: 1) whether the company's products are differentiated, and the products of the traditional manufacturing industry are generally not differentiated; 2) If there is no differentiation, it actually depends on who has higher cost efficiency and better service.
Cost efficiency, in layman's terms, is that the company's products are not good and cheap. There are two decisive factors, one is the ability to control the supply chain, and the other is the control of efficiency in the production process.
Taking a pump company as an example, the pump is composed of a motor and an impeller, the motor is the most core component, and the stator and rotor winding are the core technology of the motor, but it is difficult to achieve automation in China at present. The company solved the problem of winding automation through its own research and development of production lines and processes, and conquered the core technology. Taking advantage of the most difficult links can naturally accumulate profits, which is the ability to control the supply chain.
The control of efficiency involves corporate culture and management concepts, not that the chairman can improve production efficiency by staring at the factory every day, but should pay attention to the improvement of production technology and promote workers and technical engineers to continuously iterate and upgrade technology.
In the service link, the focus is to deeply understand the needs of customers and create an excellent team with strong service awareness and timely information feedback. This is crucial for traditional manufacturing companies.
The demand side is almost impossible to study in the short term, because demand is often not determined by enterprises, but by industry characteristics, or by the stage of China's economic development. Of course, there are also some particularly excellent enterprises that can create demand through technological progress. But there are very few such companies, and most of them just passively accept demand.
On the whole, the study of traditional manufacturing focuses on the supply side, the demand side of the short-term research is very difficult, long-term will be disturbed by technological progress, almost impossible to study.
Yuanchuan Investment Review: In addition to manufacturing, what other industries do you cover? How effective is the expansion of the circle of competence?
Liu Xu: The overall performance of the consumer industry last year was not good, so I spent a lot of time looking at this industry, investigating various types of companies such as food and liquor, and doing some research on products, channels and other aspects, trying to understand how technological progress, management capabilities, channels and other factors disturb the operation of a consumer goods company.
After a year of accumulation, I feel that my understanding of the consumer industry should be an introduction, especially in the channel-led consumer goods have accumulated some methodologies.
Despite spending a lot of energy looking at consumption, I haven't bought a single stock at the moment. On the one hand, I feel that my knowledge is not deep enough, and on the other hand, it may be because the valuation is high, and no company has entered my range. Faced with cognitive uncertainty, I hope to be compensated for the lower valuation and price, and may have to wait for the right moment.
Yuanchuan Investment Review: How many companies have you covered in depth since you started the industry?
Liu Xu: I have more than 100 self-selected stocks, but many of them do not have deep coverage, and the understanding of the company may be about 70%, only when their stock prices fluctuate greatly, especially downward fluctuations, I will seriously study them; when I see some positive changes in the price of the money, I will do further research. I dare say that I have deep coverage of the company, about twenty or thirty of them.
02
Value investing, research with a sense of substitution
Torakawa Investment Review: You want to be a mature value investor, how do you understand value investing?
Liu Xu: I think value investing is an easier said than done thing. For example, Buffett often says that the concepts of ceiling, moat, free cash flow discounting, etc., everyone understands it as soon as they hear it, but in fact, each business has different characteristics, and different business models may disturb different factors. This requires long-term accumulation and continuous reflection, so I think it is a very difficult thing.
I felt like I was just getting started, maybe even just stepping on one foot. Value investment has a broad and narrow sense, I have accumulated so many years, may only be in some sub-sectors of the sub-industry is more understandable, most of the industry is not yet able to do it. I think the road is still very long, very long.
Yuanchuan Investment Review: In investment, pricing enterprises is a key step, how do you do it?
Liu Xu: How much a company should be worth, this is a particularly difficult thing. I think this may need to be looked at separately.
For example, when I bought a pump company, the market value was only a few billion, but there was a lot of cash on the account, and the company's ability to create free cash flow was also very strong; and the industry would certainly not disappear in the long run, so at that time, I just had to endure for a few years, and the free cash flow it created could cover its market value, and it was easy to judge that it was undervalued at this time. Some companies know this clearly, but some companies can't, and many times they need to look at the specific situation of each target.
In fact, most of the time it is difficult to price companies. Whether the company is 20x or 30x is appropriate is actually difficult to judge, because you can't possibly know what the company will look like in 20 or 30 years. So I don't have many companies with more than 30x valuations in my positions.
This question bothers me very much. For companies with a valuation of more than 30 times, I don't know how to price them, unless it is particularly good, short-term growth or long-term prospects can hedge my anxiety, otherwise companies above 30 times PE I will be more cautious. As for whether 10 times or 20 times is necessarily competitive, it is not, but at least the lower the valuation, the clearer it may be to see the future of the company, but it is also very difficult.
Yuanchuan Investment Review: When you choose stocks, the five dimensions - business model, development space, competitive advantage, management, valuation, which one do you value the most?
Liu Xu: I think management and business model are very important, and together they build the company's competitive advantage.
In fact, I think the competitive advantage is just a result, and the source of the advantage may be a good track, or it may be that the management has a strong execution. Of course, in the end, it depends on whether the barriers to competition are high enough. There are certain barriers in industries with stable demand, which are actually acceptable.
Of course, valuation is also important. If the certainty of other aspects is not high enough, then a lower valuation is needed as compensation, otherwise it is quite risky.
Yuanchuan Investment Review: You emphasize the word "sense of substitution" in your research, why?
Liu Xu: Many fund managers have never been in the industry, including me, there is no deep understanding of how a company operates, and it is very important to have a sense of substitution, that is, to truly understand what a company is born for, the current stage of development, core competitiveness and so on. I want to understand an industry and a company from a higher level, rather than simply making performance reviews and profit forecasts based on cold data.
Taking the consumer industry as an example, I have not done this industry before, in the study I hope to find out how this industry operates, what disturbing factors need to be paid attention to, channels, technology, management capabilities and other factors how to affect a company, I hope to establish a comprehensive understanding of this industry, can perceive any wind in the industry.
Togawa Investment Review: What is your research and decision-making process like for a new company?
Liu Xu: The first is to discover the company, that is, which company to study and why to study. This is the first step.
There are many ways to find a company, generally I will first screen the financial statements to find the target with research value; or ask other colleagues if there is a target worth studying; and then start from the company I bought, looking for opportunities for upstream and downstream companies in the industrial chain.
The second step is to grasp the timing of buying. For industries that are relatively good at, I may read the annual report for several years and match the valuation of the company at that time to make a decision. But most companies are not so confident, need to do more systematic research, in-depth communication with founders, management, and long-term tracking.
If that doesn't work, you may need to follow it for a few more years, waiting for a good buying point or deepening your understanding of the industry before buying. Many times if you rush to buy, some risk points you may not be able to perceive. I am more cautious in stock selection and timing.
Yuanchuan Investment Review: When screening companies through financial statements, what are the most important indicators for you?
Liu Xu: The more common indicators include gross profit margin, net profit margin, expense ratio, ROE, ROA and other indicators; the characteristics of each industry are different, and the indicators of concern are different.
Different fund managers have different understandings of financial indicators and more different understandings of the business behind them, which is the difference. If you have a deep understanding of the industry, once a certain indicator changes, you can keenly capture the opportunities behind it, which is the most critical place.
Yuanchuan Investment Review: Are you more inclined to investment certainty, or is it elasticity of returns?
Liu Xu: I prefer the margin of safety. I think the leading companies are certainly reliable, but they are also expensive. Investment certainty and valuation are often not compatible, so many things end up being the result of trade-offs.
I'm afraid of high valuations, not that I resist them completely, but I think that in the case of unclear industry trends, the certainty is very poor, and high valuations need to bear higher risks.
I still want a portfolio to maintain and increase in value, so the targets I buy are companies with high certainty and a deep margin of safety, and if you do this, you won't lose a lot of money even if you look at it wrong.
Yuanchuan Investment Review: When do you usually sell stocks?
Liu Xu: Selling stocks can be divided into two situations, one is that after buying, it has risen more, achieved a good result, and the valuation is not cheap; the other is that I am wrong and have to sell the stop loss.
In general, in addition to the daily tracking, I will sell if I hold it for more than three years, and of course re-examine the value of the company before selling. For companies with larger gains and higher valuations, I rarely cover up and not sell. While some opportunities may be missed as a result, investment discipline is still to be observed.
Yuanchuan Investment Review: How do you achieve a high concentration of positions and excellent drawdown control?
Liu Xu: I think the concentration of positions is related to the scale, if the scale is smaller, the concentration will be higher. If a person can deeply understand 15 companies at the same time, he will be able to invest well.
Deeply understanding a company does not mean understanding the business structure split, profit ratio forecasting, etc., but transcending social cognition and seeing its opportunities and risk points. I find this difficult. I'm actually worried about my concentration declining because I don't have the ability to transcend society with so many companies.
The retracement is a result, and I don't think it has much to do with concentration. Even if the concentration of positions is very high, as long as the companies that buy have a sufficient margin of safety, the market value rises to a certain extent and sells, and the drawdown is unlikely to be large.
03
Recognize yourself and earn money within your cognitive range
Far River Investment Review: What kind of personality do you feel like?
Liu Xu: I am usually an extrovert and positive and optimistic person, but in my profession, I am a relatively numb and retarded person. Sometimes I just think that my personality dictates that I can't make money trading because I'm not so sensitive to short-term variables.
Yuanchuan Investment Review: In investing, how do you avoid being interfered with by the outside world?
Liu Xu: I think there are two points, the first point is related to personality, I am not the kind of person who buys a stock for two days and does not rise and will be very uncomfortable, everyone may be suitable for different paths;
The second point is thanks to the experience of 2015. You can see that that irrational behavior is still playing out today, which is a warning to me and makes me clear what path I want to take. A person cannot practice both long-distance running and sprinting, and to accept his own shortcomings, some money is not earned by himself. After thinking about it this way, the mentality will be much better.
Yuanchuan Investment Review: What is the biggest confusion you are currently encountering in investing?
Liu Xu: At this stage, in fact, I have thought about many things very clearly. What I am bothering with now is that my ability is not enough, my level is not enough, and many times I can't grasp the essence of things and understand the laws behind events, which sometimes makes me feel uncomfortable.
I actually think about these questions every day, but I think it's quite difficult, and I need to have a deep understanding of things. I will read a lot of books every day, mathematical science, philosophy, logic, etc. will be involved, I will also review the cases of some enterprises, look at the logic behind the rise and fall, I hope that one day I can integrate it.
Yuanchuan Investment Review: What is the upper limit of your management scale?
Liu Xu: I must admit that it is easier to make excess returns on a smaller scale. Because companies with fewer people pricing are more likely to be unfairly priced, and larger companies are much less likely to exceed social consensus. Therefore, the larger the management scale, the less conducive it is to the improvement of long-term yields.
From the perspective of turnover rate, I think that the scale of my management should not be a big problem to double 1-2 times, and there are many companies with large market capitalization in the top ten positions at this stage.
Yuanchuan Investment Review: You have previously publicly stated that you are not optimistic about banks and real estate, and your previous products and layouts have not been laid out, but the new fund issued in March last year has bought leading stocks in banks and real estate, how do you think about these two industries now?
Liu Xu: I am still not optimistic about banks and real estate, because these are two industries with very serious homogenization, especially real estate.
Real estate is a resource organization company, and every link of the business process is homogenized. There is basically no differentiation in the process of land purchase, design and construction; in the sales link, based on the attributes of large fixed assets of real estate, the consumption frequency is very low, and the requirements for sales ability are also very low.
I want to buy a company that has developed a significantly differentiated competitiveness in some part of the world, and this advantage cannot be replicated through capital. Real estate is clearly not such an industry. In addition, China's demographic structure can not support the future sales of real estate companies, and the development has been weak at this stage.
Banks may be slightly better, but the bank's business is too old, that is, a business that sells the right to use money, and the barriers are very low. Some links can form differentiated competitiveness, such as customer identification, risk prediction, regional competitiveness, etc., but these advantages are not deep enough in the long run.
As for why the new fund is bought, it is mainly because the valuation is too cheap and there is enough margin of safety, but I am still not optimistic about banks and real estate.
End of full text. Thank you for your patience in reading.