Current market conditions have pulled back from highs, and many investors have lost confidence.
As you all know, I have been promoting Buffett's value investing philosophy for a long time. Over the past 10 years, I have attended Berkshire Hathaway's annual shareholder meetings in the United States on-site eight times, precisely to explain clearly what true value investing is. Because Buffett practiced value investing in a mature market like US stocks, we cannot mechanically copy it in the A-share market. Our A-share market is still an emerging market, with characteristics such as high volatility, rapid changes, and a high proportion of retail investors. In terms of trading volume, retail investors may even account for over 60%. Therefore, value investing in A-shares must be combined with the realities of the A-share market, doing value investing with Chinese characteristics.
Doing value investing in China cannot simply copy Buffett's long-term holdings. For example, one of Buffett's well-known sayings is that if you don't want to hold a stock for 10 years, don't hold it for 10 minutes. This actually refers to long-term holding of companies with continuously improving operations in a mature market like US stocks. But in the A-share market, during the process of economic transformation, few industries can sustain growth for 10 years. Some industries may even go from being technology innovation or high-tech industries to ordinary manufacturing within a few years, ultimately resulting in overcapacity. China's manufacturing capacity is very strong. Once it develops, overcapacity may quickly appear. For example, in new energy investment a few years ago, it initially belonged to a high-tech industry supported by policies, but capacity expansion quickly occurred, followed by overcapacity and setbacks in industry development.
Therefore, in the A-share market, everyone must learn to manage positions, meaning that when the market is frenzied, one should dare to reduce positions, and when the market is at a low point, one should dare to increase positions. For example, in the first half of this year, technology stocks rose sharply, many people were speculating in AI technology, and even in early July, some technology stocks had risen dramatically. At these times, one must overcome greed and decisively take profits. At that time, I proposed a three-step strategy to cope: first, resolutely deleverage; second, reduce positions; third, hold technology in one hand and dividend stocks in the other. Following this strategy, one could better cope with the correction in the third quarter. Then when the market is sluggish, for example, after National Day, the market once experienced a significant correction and many investors lost confidence. Although at this time some technology stock prices had clearly fallen from their highs, many people still lacked confidence. This is precisely the time to overcome fear.
We all know one of Buffett's famous sayings: be fearful when others are greedy, and be greedy when others are fearful. But most people cannot do this. Many people are even more greedy when others are greedy, and even more fearful when others are fearful. This leads to many people doing value investing in A-shares without getting good returns, and even losing more. This is why the value investing philosophy does not adapt well, and we must combine it with the realities of the A-share market to practice value investing with Chinese characteristics.
Another layer of meaning is policy interpretation. In mature markets like US stocks, the impact of policy on the market may be relatively small. Buffett even said a famous line: even if Federal Reserve Chairman Greenspan whispered in my ear what monetary policy changes would occur over the next two years, I would not make any changes, because US stocks are a mature market. But in A-shares, we must interpret policy. Whether it is macroeconomic policy, such as fiscal policy and monetary policy, or industrial policy, for example, industries supported by policy should be emphasized in allocation, and industries restricted by policy should be avoided. At the same time, attention should also be paid to the inflow and outflow of funds. When the market is excited, redemptions from some ETFs may be a signal that the market is about to correct. At the market bottom, when investors lack confidence, large funds buy various ETFs to boost market confidence. At such times, one should dare to position at lows. Therefore, interpreting policy is crucial for A-share investment, which is also one reason why A-shares were once called a "policy market."
Next, let us understand the bottom line of Buffett's value investing from a framework perspective. The first cognition to establish is: buying stocks means buying companies. Buffett's teacher Graham emphasized that buying stocks is not buying a string of codes, nor buying a drifting curve on a screen, but becoming a shareholder of a company. If you can think this way, then you have already beaten most investors. This sounds simple, but truly accepting it means a fundamental identity shift. You are no longer someone who speculates in stocks, but an owner of a business. When you buy a company's stock, you are essentially buying a part of that company's future cash flows. Whether the stock price rises or falls tomorrow does not change the business itself, but whether the business is good or not determines what you ultimately get in the long run. Buffett said something to the effect that buying a company is not for selling it next week, next month, or next year, but to become its owner and use a good business model to help you make money in the future. Note that he speaks of owners, not traders. Once this perspective changes, the way many questions are asked changes. Previously you might ask, will this stock rise tomorrow? Now you might ask, is this business good? Do I understand it? Will it still exist 10 years from now? What does it rely on to make money? Previously you might ask, is now a good time to buy? Now you will ask, at the current price, is it worth it for me to buy this portion of ownership? This is the starting point of Buffett's framework: not looking at price first, but looking at the business first. Price comes later, business comes first. If the order is reversed, the framework becomes chaotic.
Here I want to add a boundary: buying a company does not mean ignoring it after purchase. The long-term holding Buffett talks about is built on two premises: this is a good company, and the price you pay is reasonable. It does not mean you hold indefinitely no matter what you buy. If the premises do not hold, long-term holding becomes stubbornness. Some people have made this mistake. For example, in the past few years, consumption growth declined significantly, but many people still stubbornly held consumer stocks, resulting in huge losses. Many others still insistently held new energy stocks when the industry later experienced overcapacity, and the stock prices fell sharply. Some investors who invested in leading new energy companies also suffered large losses because of overcapacity in the industry and declining corporate profits. This point will be expanded later when discussing the framework.
The second part is about circle of competence and moat. Having understood buying companies, the next two questions to answer are: what kind of company to buy, and what kind of company are you qualified to judge? Buffett said everyone has their own circle of competence, and you should invest within your circle of competence. Once outside your circle of competence, you are investing blindly. Buffett's answer is two words: circle of competence and moat. The circle of competence determines that you do not invest in what you do not understand and only buy companies you can understand. The moat means buying companies with long-term competitive advantages, so that you can truly seize opportunities.
First, let us talk about the circle of competence. Buffett long avoided technology stocks he did not understand. This was not modesty, but active risk management. The first risk in investing is not paying too much, but not knowing at all what you are buying. So the core of the circle of competence is not how many industries you understand, but whether you know what you do not understand. Buffett has a very plain statement: knowing where the boundary of your circle of competence lies is more important than how big the circle is. Let us translate that into a more direct sentence: it is better to be roughly right than precisely wrong. Making a roughly correct judgment in a field you understand is better than making a judgment in a field you do not understand that looks precise but is actually groundless. Here we must prevent one misunderstanding: the circle of competence is not fixed. You can expand it through learning, but the premise of expanding it is honesty. Only when you truly understand the operating logic of the business should you include it in your circle of competence, not because the sector has risen well recently and you tell yourself you understand it. The latter is not expanding your circle of competence, but expanding your risk exposure. Therefore, I think this understanding of the circle of competence is the first step in value investing. If you cannot do this and do not know where your circle of competence is, it is easy to lose money. So I also hope everyone can correctly understand the boundary of their circle of competence and continuously learn to expand that boundary, so that you will have a better experience in the future.
We can compare the circle of competence to a circle. Inside the circle is the area you know, while outside the circle is the unknown world. That is, the larger your circle of competence, the more you can realize how much you do not know, and the more you love learning. The smaller your circle of competence, the more you feel you understand everything, and then you do not love learning. This is a very important difference.
The second word is moat. This is also one of the most core views in Buffett's stock selection framework: the companies I invest in must have a wide moat that makes it difficult for competitors to enter. A moat refers to the structural advantages a company possesses that can resist competitors over the long term. Where does a moat come from? For example, the first is a strong brand. Consumers are willing to pay a premium for the brand, and this willingness is long-term. When Buffett invested in Coca-Cola, what he valued was not sales in a particular year, but the brand's position in consumers' minds. The second is network effects. The more people use it, the more valuable the product becomes, and the harder it is for latecomers to replace it. This is reflected in many areas of the internet. The third is cost advantage. It can produce or sell the same thing at a lower cost, and this advantage is not maintained by short-term subsidies. The fourth is high switching costs. High switching costs are also very important. This means users are not easily lost. Once customers use your product, the cost of switching away is high, and stickiness is strong. For example, everyone uses WeChat, which creates network effects. Your friends also use WeChat, so it is difficult to contact friends from WeChat through DingTalk. If users switch from WeChat to another app, but their friends are not chatting on that app, switching is meaningless. So this has both network effects and high switching costs.
The key word for a moat is durability. Once customers use it, the cost of switching away is high, so it is not easy to switch. A moat must be maintained over the long term. There are many companies that lead an industry in the short term, but few can defend their advantages over the long term. What Buffett looks for is a business that will most likely still be around 10 years later and whose advantages have not been weakened, because only durable advantages can support long-term cash flow, and long-term cash flow is the foothold of the logic of buying companies.
Here I especially want to clarify that the moat is an analytical framework, not a stock selection list. The brand, network effects, cost advantage, and switching costs discussed today are to tell everyone what dimensions to look at when analyzing a company's competitiveness, not to tell everyone which companies currently have moats. These two things are completely different in nature. The framework is used to understand the business, not to generate buy and sell instructions.
A MACD golden cross signal has formed, and these stocks are rising well!
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