My Investment Journey

In fact, investing and financial management are not as difficult as experts claim. By maintaining a rational mindset, seeking logical approaches, and learning relevant knowledge, you may be able to achieve higher returns than those around you. Investing is a skill, much like learning English. With the right methods and consistent practice, you will eventually see results.

As a subtopic under the broader theme of ‘finance,’ it also aligns with the fundamental definition of finance: the exchange and allocation of value across time and space.

Excerpt from the Zhihu e-book “Manage Your Finances Even Without Money,” by Fan Francis Read the full book on Zhihu: https://www.zhihu.com/pub/book/119554222

Returns of Different Investment Tools

Here are the annualized returns of common investment tools (data for reference only):

• Bank deposits: 2.5%
• 1-year Treasury bonds: 3% (benchmark rate)
• 5-year Treasury bonds: 4%
• 10-year Treasury bonds: 5%
• Mortgage-Backed Securities: 6%
• S&P Index: 7%
• Unsecured High-Yield Corporate Bonds: 8%
• Small-Cap Stocks: 12%
• Real Estate: 15%
• Venture Capital: 25%

Differences between time deposits and government bonds: Government bonds allow interest to be withdrawn before maturity. Neither incurs interest tax. Differences between government bonds and government bond reverse repurchase: Government bonds are issued by the country. Government bond reverse repurchase refers to financial institutions lending government bonds to borrow from investors. They purchase the government bonds upon maturity and pay interest. Government bond reverse repurchase carries slightly higher risk.

Index Investing

Recently, I reread an investment book titled “Extraordinary Success” and built my own investment portfolio based on the content of “A Random Walk Down Wall Street.” The first time I read it, I found the book overly complex, lacking practical experience, and even gave me a sense of “reading it but not really getting anything.” However, this time I read it more slowly and deeply, gradually realizing it’s a highly underrated gem.

Many people on Douban shared similar feelings upon their first reading of this book as I did: too many concepts, awkward translation, and insufficient practical experience. However, there are two reasons behind this perception:

1. Dense Concepts and Translation Issues: As it is a translated work, the language expression is not smooth, which increases the difficulty of reading.

2. Lack of Patience and Misaligned Expectations: Many readers hope to obtain instant “treasure keys,” but the core of investment lies in long-term accumulation and deep understanding. As the author states, “One cannot give another person’s cognition.” True learning requires time and reflection, not haste.

Why is this book undervalued?

The value of this book lies in its in-depth analysis of investment logic, particularly its emphasis on asset allocation and long-term investment. Although it doesn’t provide specific “operation guides,” it reveals the core principles of successful investing:

• The Power of Long-Term Investing: Through the compound interest formula (the 72 rule), we can see the power of time and return rates. For example:

  • An annual return rate of 8%, doubles in 9 years;
  • An annual return rate of 12%, doubles in 6 years;
  • The author of this book achieved a 17% annual return rate, doubling approximately every 4-5 years.

• Key to Accumulating Wealth: Long-term is not just a concept of time, but about properly managing asset allocation to achieve high returns in a stable and secure manner.

Keynes once said, “In the long run, we are all dead.” This reminds us that short-term fluctuations are inevitable, but long-term trends are the decisive factors.

Sources of Investment Returns

Investment returns primarily come from two aspects:

1. Market Effect: Achieve market returns through asset allocation, market timing, and security selection.
2. Speculative Trading: Profit from short-term fluctuations but do not realize the true value of assets.

Research shows that 90% of the variation in investment returns comes from asset allocation, while market timing and security selection account for only 10%. Therefore, asset allocation is the key to investment success.

Three Principles of Asset Allocation

1. Focus on Stock Assets: Stocks have higher long-term return potential.
2. Diversification: Spreading risk, reducing the impact of volatility in a single asset.
3. Consider Tax Implications: Plan taxes reasonably to maximize net returns.

Importance of Asset Allocation

Reasons for Favoring Stocks

Stocks are a way to realize residual value/ equity, and shareholders bear higher risks, so their return rates are higher than those of bonds. Historical data also supports this point:

• Over the past 78 years, the annualized return rate of large-cap stocks in the U.S. has been 10.4%;
• Long-term bonds were 5.4%, and short-term bonds were 3.7%.

Even small differences in return rates can lead to significant wealth gaps over the long term. This is the power of compounding.

The Necessity of Diversification

Although stocks have high long-term returns, they may face significant short-term volatility. For example:

• Small-cap stocks have experienced declines of up to 90%;
• The stock market dropped by 20% in a single day;
• In some cases, it takes the stock market 21 years to recover.

Keynes’ famous quote reminds us again: “In the long run, we are all dead.” Therefore, diversification is essential. It allows us to enjoy the “free lunch,” reducing risk while ensuring returns.

How to Achieve True Diversification

The key to diversification lies in avoiding excessive concentration on a single market or asset class. For example:

• Incorrect example: 50% domestic stocks + 40% domestic bonds and cash. This allocation is not only biased towards low-yield assets but also vulnerable to the single impact of domestic interest rate levels.
• Correct example: Domestic securities account for approximately 32%, with the remainder invested in globally diversified assets (such as real estate, developed/emerging market stocks, U.S. Treasuries, inflation-indexed bonds, etc.).

Specific recommendations:

• High-yield assets (such as stocks, real estate) account for 70%;
• Single asset ratio: No less than 5%, no more than 30%.

How to Choose Reasonable ETFs

When selecting ETFs, pay attention to the following points:

1. Well-structured: Aims to invest broadly across six core asset classes (domestic stocks, international stocks, bonds, real estate, commodities, etc.).
2. Reasonable pricing: Low fees, avoiding high management expenses.
3. Prudent selection: Avoids funds focused on a single country or industry, which cannot react flexibly to market changes.

Rebalancing and Tax Optimization

When the asset allocation deviates from the target, we need to rebalance. To optimize taxes, it is recommended to add assets with lower cash investment ratios rather than directly selling high-proportion assets. This approach can avoid capital gains tax and transaction fees.

Why Choose Index Funds

Limitations of Active Funds

• Survivorship Bias: Most active funds perform well in the short term, but it is difficult for them to consistently outperform the market in the long run.
• Insufficient personal ability: Judging whether an individual stock’s price is lower than its intrinsic value requires professional knowledge and time, which is difficult for ordinary people to do.

Advantages of Index Funds

• Low fees: The management fees and custody fees of index funds are far lower than those of actively managed funds.
• Stable long-term returns: Through low turnover rates and broad market coverage, index funds can outperform most actively managed funds.
• Easy to operate: No need to frequently select stocks or timing, suitable for ordinary investors.

Relationship between Stocks and Bonds

Risk and Return of Stocks

• In the long term, the return rate of stocks is far higher than that of bonds (e.g., the annualized return rate of large U.S. company stocks is about 10.4%).
• But in the short term, stock market fluctuations are large, and it may even experience decades of low periods.

The Role of Bonds

• Hedging Risk: When the stock market falls, bonds often perform well, serving as a hedge.
• Stable Income: Although bond yields are lower, they have smaller fluctuations, providing stability for the investment portfolio.
• Inflation Protection: In the U.S. market, inflation-linked bonds (like TIP) can hedge against inflation risk.

Stock-Bond Ratio and Dynamic Balancing

Setting the Stock-Bond Ratio

• Age Rule: Adjust the stock-bond ratio based on age. For example, at age 30, you can allocate 80% to stocks and 20% to bonds; as you age, gradually increase the bond allocation.
• Risk tolerance: The specific ratio should be adjusted according to individual risk preferences.

The significance of dynamic balancing

• Buy low, sell high: Adjust the stock-bond ratio regularly each year, sell the portion of assets that have risen, and buy assets that have fallen, thereby achieving the goal of buying low and selling high.
• Optimize returns: Through dynamic balancing, higher risk-adjusted returns can be achieved in long-term investments.

How to Choose Index Funds

On-Exchange vs Off-Exchange

• On-Exchange Funds:
  • Low transaction fees (e.g., the ETF trading commission on Futu 牛牛 is 0.015%, which is 0.015% of the trade value).
• High liquidity, suitable for frequent trading.
• Over-the-counter funds:
  • Higher fees (e.g., subscription fees may reach 1%-1.5%).
  • Need to pay attention to whether there are hidden costs such as redemption fees, sales management fees, etc.

US Stock Trading Fees and Tax Considerations

• Trading Fees:
  • The commission fee for US stock trading on Tiger Bro is $0.0049 per share, with a minimum of $1 per trade.
  • The clearing fee is $0.0000221 per trade.
• Tax Issues:
  • Filling out the W-8BEN form can exempt 30% of U.S. taxes.
  • If this form is not filled out, high taxes may be deducted.

Tips for Choosing Index Funds

Chinese Market

• CSI 300 ETF: Tracks the core index of China’s A-share market, with low fees and good liquidity.
• China Asia Bond Index A (F001021):
  • Established for over 10 years, with an annualized return of 3.75%.
• Tracking the CSI Government Bond and Policy Financial Bond Index, with stable returns.

U.S. Market

• TIP (Inflation-Protected Securities Index): Combats inflation risk, suitable for long-term holding.
• BND (Total Bond Market): A broad index covering the U.S. bond market, with extremely low fees.
• VTI (Overall Stock Market Index): Tracks the overall U.S. stock market, with moderate volatility.
• VT (Global Stock Market Index): Covers the global stock market, with slightly higher volatility than VTI.

Recommended Portfolio:

• Bond indices (such as BND, TIP) and stock market indices (such as VTI) are allocated proportionally.
• Adjust the ratio of developed markets, emerging markets, and real estate according to your personal risk preference.

Evaluation Metrics

shiller-pe

Shiller PE (Shiller Price-to-Earnings Ratio), also known as Cyclically Adjusted Price-to-Earnings Ratio (CAPE), is a valuation metric proposed by Nobel laureate Robert Shiller. It is primarily used to measure the long-term valuation level of the stock market. Compared to the traditional Price-to-Earnings (PE) ratio, Shiller PE smooths out the impact of economic cycles, providing a more stable valuation perspective.

Private Equity Funds

• Definition: Private Equity (PE) is a type of fund product issued to specific investors, typically with high entry barriers and higher risks.
• Characteristics:
  • High investment threshold, suitable for high-net-worth individuals.
• Higher risk, but also higher potential returns.
  • Usually provided with professional advice by a Personal Financial Advisor (PC).
  • Suitable for investors with a certain risk tolerance.

Public Funds

Public funds are fund products issued to the general investors, with relatively balanced risk and return, suitable for investors with different risk preferences.

Money Market Funds

• Features:
  • The lowest risk, similar to time deposits.
• Good liquidity, suitable for short-term capital management.
• Low yield, but stable.
• Applicable scenarios:
• Used for storing short-term idle funds.
• As an alternative to bank current deposits or short-term wealth management products.

Bond Funds

Bond funds primarily invest in various types of bonds, offering low risk and stable returns.

BND (Diversified Bond Fund)

• Features:
  • Invests in a variety of bonds across global markets to diversify risk.
  • Low management fees.
  • Distributes dividends monthly, suitable for investors seeking stable cash flows.

TIP (Inflation-Protected Bond Fund)

• Features:
  • Invests in inflation-protected bonds (TIPS) to combat inflation.
  • Annualized yield of approximately 7.3%.
• Distributed dividends monthly, suitable for long-term investors.

TLT (Long-Term Treasury Fund)

• Features:
  • Tracks U.S. long-term Treasury bonds, suitable for investment during a rate-cutting cycle.
• Dividends are distributed at the beginning of each month, with high certainty of returns.
• Suitable for investors with strong macroeconomic analysis skills.

Equity Funds

Equity funds primarily invest in the stock market, offering both high risk and high returns, and are divided into active funds and passive funds.

Active Fund

• Characteristics:
  • Actively managed by fund managers who select individual stocks and industries.
  • Annualized return rate is typically between 8%-20%.
• Need to pay attention to the fund manager’s capabilities and performance.
• Selection Criteria:
  • 4433 Principle:
    • Top 1/4 performance ranking in the past 1 year.
• Ranked in the top 1/4 in performance over the past 2 years, 3 years, and 5 years.
  • Ranked in the top 1/3 in performance over the past 6 months.
  • Ranked in the top 1/3 in performance over the past 3 months.
  • Other Consideration Factors:
• The years of experience of the fund manager, the scale of assets managed, and the reputation of the affiliated company.

Passive Funds

• Characteristics:
  • Track specific indices, low management fees.
• Annualized return rate is usually between 6% and 8%.
  • Suitable for long-term holding, no need for frequent adjustments.

ETF (Exchange Traded Fund)

• Features:
• Low management fees (0.3%-0.5%).
  • Transaction fees are approximately 0.2%, with high liquidity.
  • Suitable for direct investment, avoiding additional fees of linked funds.
• Common benchmarks:
• US Stocks: VOO (S&P 500 Index Fund), QQQ (NASDAQ 100 Index Fund).
• A-Shares: CSI 300 ETF, SSE 500 ETF.

LOF (Listed Open-Ended Fund)

• Features:
• Management fees are high (1.2%-2%).
  • Can be traded on the secondary market or redeemed/purchased through the fund company.
  • Suitable for investors who want flexible operations.

Source of Information

• “Extraordinary Success - The Winning Way of Personal Investment”
• “The Path to Financial Freedom”
• “Take Your Salary - How You Can Earn 6 Million by Your Thirties”

Individual Stock Investment

As an ordinary employee, we usually do not pay attention to core issues such as the company’s finances, industry attributes, or customer composition. However, as middle-level managers or potential investors, changing our perspective to analyze a company can help us better understand the meaning of our work and the company’s operational logic. And how should individuals select individual stocks?

A company’s perspective is reflected in its products, whether there is a flywheel effect.

Industry Insights

Industry Characteristics and Competitive Landscape

To analyze a company, one must first understand the characteristics of its industry and its competitive landscape. Here are some classic examples:

• Sampson Map Company

  Business characteristics: High initial investment, but very low costs afterward, with high profit margins. High barriers to entry for competitors, making it difficult to recoup costs in the short term.

• Northern Burlington Company

Core business: Railway network operation. A capital-intensive industry, but with relatively low maintenance costs after completion. Strong pricing power, and orderly industry competition.

• Hershey’s Candy

  High brand value, strong user stickiness, has autonomous pricing power, and is an excellent enterprise in the consumer goods sector.

• Coca-Cola

Franchise model, selling syrup and concentrates to canning factories, has built a strong brand moat.

• IBM

  The software department has high customer stickiness, low capital intensity, but high business complexity.

Summary: Focus on core business indicators (such as pricing power, cost advantages, customer stickiness) to evaluate business quality.

Future Development Trends

The future trends of the industry determine the long-term development potential of enterprises. For example:

• Northern Burlington Railroad

  Population growth in the United States and support from environmental policies will ensure that rail freight remains a crucial mode of transportation for the next few decades.

• American Airlines

  With the liberalization of air traffic control, market competition has intensified, and profitability is facing challenges.

Insight: Choose companies in industries with structural advantages, avoiding risks caused by changes in the industry landscape.

Data Validation

Return on Total Committed Equity (ROTCE)

ROTCE is a key indicator for measuring the quality of a company’s business, with the formula:

$$

ROTCE = \frac{\text{Net Profit}}{\text{Total Committed Equity}} $$ Total funds used = Fixed assets + Undeclared goodwill intangible assets + Inventory + Accounts receivable - Accounts payable.

Here are some ROTCE data for companies:

• Mars: 26%

• American Express: 78% (Special for financial institutions)

• Coca-Cola: 55.5%

• Northern Burlington: 7.6% (Marginal tangible capitalization rate is around 15)

Conclusion: Companies with a pre-tax ROTCE above 15% usually have franchise value or structural advantages.

Long-term Growth Potential

By analyzing the long-term growth rates of a company’s revenue, earnings before interest and taxes (EBIT), and net profit, its growth potential can be assessed. Below are the growth data for some companies:

• Northern Burlington Company: The average annual growth rates for revenue, EBIT, and net profit are 8%, 7%, and 9%, respectively.

• Coca-Cola: EBIT has an average annual growth rate of 20%, and net profit has an average annual growth rate of 16%.

• Buffalo Evening News: Only a 4% operating profit margin, but there is significant room for improvement after price increases.

Suggestion: Choose companies with net profit margin growth between 10%-20%.

Liabilities and Financial Risks

Excessive liabilities may bring huge financial risks. For example:

• American Airlines: Huge financial debt and irrevocable operating leases, posing extremely high financial risks.

• American Express: Although facing short-term liability pressures, the float value (travelers’ checks) provides additional income.

Note: When assessing a company’s debt level, it is necessary to consider its cash flow and profitability.

Management Evaluation

Buffett’s criteria for evaluating management include the following points:

1. Successful corporate management experience: The ability to balance revenue and risk.

2. Manager with leadership qualities: Passion and responsibility are key.

3. Integrity: Whether the management prioritizes shareholder interests.

4. Rationally allocate funds: Does the company have the ability to use retained earnings for high-return projects.

Summary: Excellent management is the core driver of corporate value realization.

Valuation Analysis

Price-to-Earnings Ratio and Enterprise Value Multiples

The core of valuation lies in the Price-to-Earnings ratio (P/E) and Enterprise Value to EBITDA multiple (EV/EBIT). Here are the valuation data for some companies:

• Candy Corporation: P/E ratio of 11.9 times, EV/EBIT multiple of 6.3 times.

• Nebraska Furniture Mart: P/E ratio below 9 times, EV/EBIT multiple less than 5 times.

• Northern Burlington: EV/EBIT multiple of 13.2 times.

• IBM: P/E ratio of 14.7 times, EV/EBITDA multiple of 11.9 times.

Reference Standards:

• P/E ratio: Around 5 times is ideal, within 10 times is reasonable.
• EV/EBITDA multiple: Below 5 times is undervalued, within 7 times is acceptable.

The Importance of a Margin of Safety

A margin of safety refers to buying at a price below intrinsic value to provide a buffer for investment. Buffett emphasized, “When you build a bridge, you design it to hold a load of 30,000 pounds, but you only allow trucks carrying 10,000 pounds to cross it.”

Taking Hershey’s as an example:

• Net profit in 1972 was $2.1 million. Assuming a fair P/E ratio of 10, the intrinsic value would be $21 million.

• A 30% safety margin requires a purchase price of $14.7 million (21 million × 0.7).

• If another investor buys at the full price, the company must maintain a 3% annual growth rate to offset the 30% safety margin.

Insight: A safety margin not only protects the principal but also increases the probability of investment success.

Source of Information

• “Buffett’s Valuation Logic - An In-depth Review of 20 Investment Cases”

• “Walk Down Wall Street”

• “How to Select Growth Stocks”

Concentrated Investing and the Circle of Competence

The Difficulty of Concentrated Investing

Concentrated investing is one of the main ways Warren Buffett and Tang Tai have achieved substantial returns, but its success hinges on the circle of competence. The circle of competence refers to an investor’s ability to understand why a company can consistently create intrinsic value.

The Importance of the Circle of Competence

Duan Yongping once said: “If a company’s business can’t be explained in one sentence, it’s usually not a good business.” This sentence reveals the core of investing: simple and easy-to-understand business models are easier to assess their intrinsic value.

Why should you understand the company?

• Understanding the company means you can clearly judge whether it can continue to create intrinsic value in the future.
• If you can’t understand the company’s profit model, you can’t evaluate its potential for growth in intrinsic value.

Intrinsic Value and Perspective Surplus

Definition of Intrinsic Value

Buffett mentioned an Aesop’s fable in his “Letters to Shareholders”:

“A bird in the hand is worth two in the bush.”

Here, “the forest” refers to the intrinsic value of the company, while “the birds” are the future cash flows (free cash flows). Investors need to clearly understand whether there are more “birds” in the “forest” and estimate when these birds will appear.

The Concept of Perceived Earnings

Buffett introduced the concept of “perceived earnings,” which refers to the profits that a company continuously creates during its existence.

• Net Profit ≠ Free Cash Flow: Net profit must be real money, not inflated profits on paper.
• Free Cash Flow: The cash remaining after a company maintains its competitive advantages.

How to assess intrinsic value?

• Calculate the return on tangible capital employed (ROTCE) of the enterprise: Net profit ÷ Total employed capital.
• Total employed capital = Fixed assets + Intangible assets excluding goodwill + Inventory + Accounts receivable - Accounts payable.
• The higher the ROTCE, the more the enterprise exhibits the characteristics of a “compound growth machine.”

The Importance of Enterprise Management Leadership

Buffett emphasized that an honest management team is a crucial prerequisite for successful investing.

• Alignment of interests: Does the management team align with shareholder interests? Are there any actions that dilute equity?
• Capital allocation ability: Does the management team use retained earnings for high-return projects rather than blind expansion or acquisitions?

Risks of management inaction

If management dilutes shareholders’ equity through issuing new stock or inefficient acquisitions, even if the company creates intrinsic value, investors may not be able to realize their returns.

Risk-Free Rate and Discounting

The Role of the Risk-Free Rate

The risk-free rate is a crucial indicator for measuring the cost of investment opportunities.

• The current risk-free rate is 3%, while a certain company’s annualized return rate is 2.5% (including dividends and profit surplus). In this case, consider whether to exit the investment.
• All Cash Is Equal: Always compare your current investment opportunities and choose the one that can create higher intrinsic value.

The Meaning of Discounting

The value of 1 dollar in the future is different from 1 dollar today.

• By discounting future cash flows to the present using the risk-free rate, the intrinsic value of a company can be assessed more accurately.

Margin of Safety and Fair Price

The Importance of Margin of Safety

• Uncertainty of Intrinsic Value: The time variable in realizing intrinsic value may be delayed due to market fluctuations or judgment errors.
• Reasonable Price: Buying at a price lower than the intrinsic value ensures a certain safety margin even if judgment is wrong.

Mr. Market’s Quotation

• Stock price fluctuations are the quotations given by Mr. Market every day, not the true value of the enterprise.
• Value listed companies as unlisted ones, focusing on their intrinsic value rather than short-term fluctuations.

Four Basic Principles for Security Selection

1. The intrinsic value created is real
   • Net profit must be real money, not book inflation.

• Free cash flow is a core indicator of intrinsic value.

2. Maintaining current intrinsic value creation does not require continuous large-scale capital investment

   • The company should have marginal effects, avoiding weakening profitability due to excessive capital expenditures.
   • Return on tangible capital employed (ROTCE) is an important indicator of corporate quality.

3. Creating intrinsic value is more attractive than current other opportunities

   • Always compare the investment opportunities at hand, choosing companies that can create higher intrinsic value.

4. Is the management sufficiently trustworthy

   • Does the management align with shareholder interests, and are there any actions that dilute equity.

• Does it have excellent capital allocation capabilities.

The Reasons Why 15PE Will Certainly Have a Successor

1. The Nature of Capital Seeking Profit

• Cash Does Not Generate Returns:

• Cash itself does not bring any return, so capital will inevitably pursue higher rates of return.

• Yield Comparison:

  • Deposit interest rate: Approximately 2.5%
  • Government bond yield: Approximately 4%

• Stock yield of 15PE: approximately 6.67% (The lower the PE, the higher the return)

• Conclusion:

  • As long as the stock yield (such as the 6.67% corresponding to 15PE) is higher than the risk-free yield (such as deposits or government bonds), capital will inevitably flow into the stock market, pushing up stock prices.

2. Value Regression and Time

• Information Asymmetry:

  • Due to the presence of information asymmetry in the market, the value regression of stock prices requires a certain amount of time.

• Reasons for Volatility:

  • Stock prices fluctuate around the risk-free rate of return.

• Raising interest rates is bearish, lowering interest rates is bullish:

  • Raising interest rates will increase the risk-free rate of return, thereby suppressing asset prices.
  • Lowering interest rates will decrease the risk-free rate of return, thereby pushing up asset prices.

• The relationship between bond and deposit interest rates:

• If the deposit interest rate increases, a bond with a face value of 100 yuan might only be bought when its price drops to 50 yuan, because the fixed interest rate of the bond becomes relatively lower compared to the deposit interest rate.

Financial Statement Analysis

Maotai Qualitative Analysis

• Industry: Baijiu industry

• Market share: Around 17%

• Products: Production and sales of Moutai liquor and its series

• Sales model: Direct sales and wholesale agent channel sales. Direct sales mainly through the iMoutai APP, while agents include supermarkets, distributors, and e-commerce channels. iMoutai currently has 30 million registered users and has achieved sales revenue of 11.9 billion.

• Competitive advantages: Solid brand value and product status. The price of Moutai liquor has not decreased significantly, and direct sales have essentially led to indirect price increases. Sales have not declined, and the public still widely recognizes it. The unique microbial community in Moutai’s origin area is an advantage, as it is essential for 白酒 brewing. This is the natural moat for high-quality baijiu, and even the output of baijiu is related to this. It’s not that anyone with money can enter this industry to share the profits, and it’s somewhat related to the origin. I specifically bought and read a book called “Wine Talks,” and discovered that the process of baijiu brewing is actually very complex. Therefore, the moat for this industry is high enough.

• Company:

  • Moutai Group Co., Ltd. (Guizhou State Holding 90%)
  • Moutai Co., Ltd. (54%)
  • Xijiu Co., Ltd. - Subsidiary

• Guizhou Moutai Financial Group Co., Ltd. - Subsidiary

  • Guizhou Moutai Distillery Group Technology Development Co., Ltd. - Subsidiary The company structure is relatively simple

Quantitative Analysis

Unit default is 100 million

Asset Analysis:

• Total assets: 2543

• Current assets: 2166

• Liabilities: 494

• Total Market Value: 22000 Points of Interest:

• Net Current Assets = (Current Assets - Liabilities) * 2/3 = (2166 - 494) * 2/3 = 1115. From this, the market value is about 20 times the net asset value

((2166 - 494) / 12.56)^(2/3) = 89 yuan This is the stock price calculated based on the net current assets.

• Enterprise Value (EV) = Total Market Capitalization + Long-term and Short-term Liabilities + Lease Liabilities - Cash and Cash Equivalents (find in the cash flow statement): 22000 + 3 - 1523 The actual cost paid by shareholders

No debt, very ample cash

Business Analysis

• Operating Revenue: 1275

• EBIT (Earnings Before Interest and Taxes): 878

• Net Profit: 628

• Net Cash Flow from Operating Activities: 3.67 billion According to Buffett’s valuation logic, the ability to create cash flow is core Focus:

• Return on Equity (ROE) = Net Income / Shareholder Equity: 2049/628 = 30

• Operating Profit Margin = Operating Profit / Operating Revenue: 878/1275 = 68.8 The operating efficiency profit margin is very high

• Net Income as a Percentage of Operating Revenue: 628/1275 = 49.2 Effective cost management or high gross margin

• Return on tangible assets = Net profit / Net tangible assets (=628/2543=25, indicating certain structural advantages or franchise characteristics, able to provide a compound return far exceeding the cost of capital

• Net profit growth of 19.55% is greater than operating revenue growth of 16.87%, indicating a relatively significant scale effect on profits

• Net cash flow from operating activities as a percentage of net profit: 367/628=0.58, less than 1,偏低

• Net cash flow from operations +, net cash flow from investments -, net cash flow from financing -,属于奶牛型，但是经营净额并没有大于投资净额+筹资净额，筹资主要用于还债和回报股东

Valuation

Normal Valuation Method:

Assuming purchase at 1818 yuan per share, with 12.56 circulating shares. The total valuation is calculated as 22834, with a price-to-earnings ratio of 22834/628 net profit = 36 times, meaning purchase at a price-to-earnings ratio of 36 times. If calculated based on enterprise value/EBITDA = 22834/878 = 26 times

The fair price-to-earnings ratio in the liquor industry is approximately 20-40. Calculated at 40, net profit is 628 * 40 = 25120. With a 30% safety margin, the price to be paid should be 25120 * 0.7 = 17584. Divided by 12.56 circulating shares, it results in 1400 yuan, meaning a share price of 1400 yuan is a reasonable valuation.

If buying at full price, 25120 / 12.56 = 2000 yuan. To get a 30% discount, the required value is: 25120 * 1.43 (here, 1.43 * 0.7 = 100, which deducts a 30% safety margin) = 35921 According to the perpetuity formula: present value = C(r-g) This formula calculates how much future payments are worth in the present at a discount rate.

35921 = 628 / (0.1 - g) Here, 0.1 is a 10% discount rate. This gives g = 0.0825, meaning 8.2%. In other words, at least an 8.2% annual net profit growth is required to meet the safety margin requirements. According to the tangible capital yield rate, the required funds for this increment are roughly one-fourth of it, approximately 8980.

If using Tang’s valuation method:

According to the three premises of Tang’s valuation method:

• 1. Profit is real and satisfying
• 2. Profit is sustainable and satisfying
• 3. Maintaining current profit does not require significant investment. Look at the tangible capital return rate; it does not require significant investment

An estimated net profit after three years multiplied by *25 is a reasonable valuation. Based on an 18.7% growth rate (the average of a 10-year growth rate), the net profit after three years would be: 1050, and the market value would be approximately 2,625 billion. Divided by the number of outstanding shares, the stock price would be 2,089. The interest rate calculated after three years is approximately 5%, which is frankly a bit low, but the key is the certainty of Moutai.

According to Buffett’s valuation logic, growth is the second core point. Moutai’s annual revenue and after-tax operating income have been maintaining growth, and the growth rate is not low. Looking at the return on tangible assets, it does not require a large investment.

Currently, Moutai’s stock price is not very cheap. As long as it can maintain an 8% growth rate, it is within the safety margin, and if it can achieve 18%, it is definitely profitable.

Hikvision

Industry and Market Share

• Industry: Integrated Security - Video Surveillance.

• Market Share:

  • Global Video Surveillance Market Share: 24.1% (2019).
  • Domestic Market Share: 36% (2020).

• Industry Characteristics: Fragmented market, intense competition, high technical barriers.

Product and Sales Model

• Product:

  • Core Product: Front-end Camera.

• Backend services: Security solutions including hardware + cloud storage.

• Sales Model:

  • Partnership with integrators/engineers to provide video surveillance and security solutions.
  • Online e-commerce + offline channel sales.

Competitive Advantages and Risk Points

• Competitive Advantages:

  • Accumulated industry experience in a fragmented market.
  • Leading camera perception technology.

• Special government relations.

• Risk points:

  • Huawei’s entry into the security industry intensifies market competition.
  • Industry involution may compress profit margins.

Company Equity Structure

• State-owned Assets Supervision and Administration Commission of the State Council (100% ownership).

• China Electronics Technology Group Corporation (100% ownership).

• Zhongdi Hikvision (36.09% ownership), China Electronics Technology Group Corporation No. 52 Research Institute (1.92% ownership), Zhongdi Technology Investment Holding (2.46% ownership).

• Hikvision Digital Technology Co., Ltd.

Quantitative Analysis

Asset Analysis

• Total Assets: 119.2 billion

• Current Assets: 98 billion

• Liabilities: 46.2 billion

• Market Capitalization: 305 billion

• Float Shares: 9.108 billion

• Net cash and cash equivalents: 39.8 billion

Key points:

1. Calculation of net current assets:

   [ Net Current Assets = (Current Assets - Liabilities) × \frac{2}{3} = (980 - 462) × \frac{2}{3} = 345 billion ] Stock price calculated based on net current assets: [ \frac{\text{Net Current Assets}}{\text{Circulating Shares}} = \frac{345}{91.08} \approx 3.78 yuan ] The current market value is approximately 8.8 times the net current assets.

2. Enterprise Value (EV) Calculation:

[ EV = Market Capitalization + Short-term and Long-term Liabilities + Lease Liabilities - Cash and Cash Equivalents ] ] EV = 3050 + 33 + 75 + 2.8 - 398 = 2762 billion ]

Business Analysis

• Operating Revenue: 83.1 billion

• Earnings Before Interest and Taxes (EBIT): 13.5 billion

• Net Income: 12.3 billion

• Owner’s Equity: 73 billion

• Net Cash Flow from Operating Activities: 10.1 billion

Points of Focus:

1. Core Financial Ratios:

   • Return on Equity (ROE): [ \frac{\text{Net Profit}}{\text{Owner’s Equity}} = \frac{123}{730} \approx 16.8% ]
   • Operating Profit Margin： [ \frac{\text{EBIT}}{\text{Revenue}} = \frac{135}{831} \approx 16.2% ]
   • Net Profit Margin： [ \frac{\text{Net Profit}}{\text{Operating Revenue}} = \frac{123}{831} \approx 14.8% ]
   • Return on Total Capital Employed (ROTCE): [ \frac{\text{Net Profit}}{\text{Total Assets}} = \frac{123}{1192} \approx 10.3% ]

2. Growth and Cash Flow:

   • Net Profit Growth Rate: -24%, significantly lower than the Revenue Growth Rate (2.14%).

• Net cash flow from operating activities as a percentage of net profit: [ \frac{\text{Net cash flow from operating activities}}{\text{Net profit}} = \frac{101}{123} \approx 82% ]

3. Funding Risk:

   • Net operating amount +, net investment amount +, net financing amount +, but the purpose of funds is unclear.
   • There may be risks of funds flowing to affiliated companies or internal and external investments.

Valuation

Price-to-Earnings Ratio and Enterprise Value Multiples

• Assuming a purchase price of 35.5 yuan per share, with 9.108 billion circulating shares:

  • Total valuation: [ 35.5 \times 91.08 = 3233 billion ]

• Price-to-Earnings Ratio: [ \frac{\text{Total Valuation}}{\text{Net Profit}} = \frac{3233}{123} \approx 26 times ]

  • Enterprise Value Multiple (EV/EBIT)： [ \frac{\text{Enterprise Value}}{\text{EBIT}} = \frac{2762}{135} \approx 20.4 times ]

Safety Margin and Growth Requirement

• The fair P/E ratio range for the security industry: 10-30.

• Calculated fair value at 30 times the P/E ratio: [ 123 \times 30 = 329 billion ]

• According to a 30% safety margin, the price to be paid is: [ 3290 \times 0.7 = 2303 billion ]

• Corresponding stock price: [ \frac{2303}{91.08} \approx 25.2 yuan

]

Growth Requirements

• The perpetuity formula requires calculating the growth rate as follows: [ \text{Present Value} = \frac{\text{Cash Flow}}{\text{Discount Rate} - \text{Growth Rate}} ] Assuming a discount rate of 10%, the present value is 470.4 billion: [ 470.4 = \frac{123}{0.1 - g} ] Solution: [ g \approx 7.4% ] This requires maintaining a net profit growth rate of 7.4% annually to meet the safety margin requirements.

Future Valuation Forecast

• Net Profit Estimate After Three Years: Calculated at a 7% growth rate, net profit is estimated to be around 15 billion.
• Reasonable Valuation: [ 150 \times 30 = 450 billion ] Corresponding stock price: [ \frac{4500}{91.08} \approx 49.4 yuan ]

Concentrated Investment vs Diversified Investment

Risks of Concentrated Investment

• Risk vs Uncertainty:
  • Risk is calculable in terms of probability, such as a company’s financial metrics and industry prospects. Uncertainty is uncalculable, such as changes in the macro economy or unexpected events.
• Advantages of concentrated investment:
  • If there is a deep understanding of the intrinsic value of the business, concentrated investment may bring higher returns.
  • Through the effect of compounding (such as an annualized return of 20%, doubling in 3.6 years), achieve rapid growth in wealth.

Advantages of Diversified Investment

• Diversified investment is a “free lunch,” reducing overall volatility by spreading risk.
• An investment portfolio with a reasonable structure (enough types of asset allocation) can achieve higher returns.

Which is better?

• The risks of concentrated investment and diversified investment cannot be directly compared, depending on the depth of the investor’s understanding of the business.
• If the safety margin of concentrated investment is high, its risk may be lower than diversification

The fundamental of surviving in the stock market

The fundamental of stock price changes:

Stock Price = Price-to-Earnings Ratio * Earnings Per Share
Company Market Capitalization = Price-to-Earnings Ratio * Net Profit
Classification of people who invest in the stock market:

A: The price-to-earnings ratio is far below the valuation, focusing on book value. Graham, Schloss, and 邓普顿; grid trading advocates, investing in indices or ETFs based on PE levels.
B: Not concerned with the price-to-earnings ratio, more interested in technical analysis schools and hotspots
C: Value investors: Emphasize profits, study financial statements, industry prospects, and industry competition
D: Investors in restructuring or reversal stocks, judging that a company’s profits are about to reverse, usually with insider information

What is Financial Freedom

Four Pillars of Life

Health, finance, relationships, emotions, and life meaning are the most important issues for everyone. Financial freedom is not the end goal, but a tool to achieve a happy life. Through scientific investment methods, we can better balance assets and outputs, moving towards a fulfilling and meaningful life.

A Wake-Up Call for Financial Security

• Salary is not eternal:

  • Your salary won’t keep getting paid to you; one day you might be laid off.

  • You must plan ahead and establish passive income streams.

• Money Views and Consumption Philosophy:

• Rational Consumption:

  • For example, is it worth spending 40 yuan on parking fees? I would choose not to, because it makes me feel like I’m disrespecting money.
  • Attitude Towards Luxury Goods:
    • If I don’t need it, I won’t buy luxury goods.

• Consumption levels should be kept at average levels, avoiding the purchase of expensive items.

  • The burden of luxury goods:
    • After purchasing luxury goods, additional maintenance is required to maintain their value (for future resale), which is also a burden.
    • When elderly or sick and in need of money, it is discovered that savings are insufficient, which is a risk.

• Beware of small gains, focus on the big picture:

  “Don’t focus on small gains while ignoring big problems.”

The core of financial freedom: Income generation

• Investment strategy:

• Fund Investment:

  • Choose excellent fund managers and persist with regular investment.
  • Diversify investments, stick to regular investment during bear markets, and gradually sell at peaks in bull markets.
  • During a stock market crash, sell bond funds and continue the next round of regular investment.

• Believe in the power of compounding interest, and you will eventually achieve financial freedom.

• The Iron Triangle of Financial Freedom:

  1. Cognitive Upgrade:

     • Through learning, gain new perspectives on the world and business.

2. Social Connections:
   • Through networking, find cooperation opportunities and access non-public “insider information.”
3. Ambiguous Opportunities:
   • When new trends emerge but are not yet clear, position yourself early to capture the benefits.

Strengthening Oneself is the Foundation of Solving Problems

Investment Psychology and Behavioral Analysis

The consensus among Hong Kong real estate tycoons is that one should buy houses when the market is bad and sell them when the market is at its best.

1. The Power of Motivation: Deception Driven by Money

Even during financial crises, mortgage lenders and stockbrokers may deceive themselves and others in pursuit of profit. This phenomenon reveals:

• Human weaknesses: Under the temptation of huge profits, people may neglect morality and risks.

• The importance of motivation: Clearly understanding one’s investment motivation (such as wealth growth, financial freedom) is key to avoiding blind following.

2. The power of stories is greater than statistics

Compared to cold, hard data, a vivid story is more likely to spark people’s interest and action. For example:

• Case: A story about a person making $500,000 by flipping properties is more appealing than a complex market analysis report.

• Insights:

  • Stories can evoke emotional resonance, but it’s important to be wary of the risks they might obscure.

• In investing, it’s important to listen to the stories while also combining data for rational judgment.

3. Plant the seeds of madness calmly

Market fluctuations often stem from changes in investors’ emotions. Rational decisions made in calm times may be forgotten during market mania or panic. Therefore:

• Stay calm: In market volatility, avoid being swayed by emotions.

• Recognition Cycle: The cycle of greed and fear is normal in the market; learn to find opportunities from it.

4. The Cycle of Greed and Fear

Greed and fear alternate in the market, forming cyclical patterns of investment. Here are three core rules for dealing with this cycle:

Rule 1: Identify High-Quality Assets

• Don’t just look at the P/E Ratio: While the P/E ratio is an important valuation metric, it cannot fully reflect the quality of an asset.

• Focus on GEP (Gross Economic Profit): Assess the actual profitability of the asset and its contribution to the economy.

Rule 2: Buy index funds

• Diversify risk: Index funds can effectively diversify the risk of individual stocks or industries.
• Long-term returns: Historical data shows that index funds typically outperform most actively managed funds in the long run.

Rule 3: Keep your ammunition for additional investments

• Reduce costs: Gradually adding to your position during market downturns can effectively lower your average cost basis.
• Maintain liquidity: Ensure you have sufficient funds (“ammunition”) to act quickly when opportunities arise.

Must-Read Books for Smart Investors

1. “The Warren Buffett Way: Lessons for the Intelligent Investor” ⭐⭐⭐⭐⭐

   • A summary of Buffett’s investment philosophy and practices, considered a classic in the field of stock company education.

2. “Security Analysis” ⭐⭐⭐⭐⭐

• In-depth exploration of the core concepts of value investing, emphasizing risk control.

3. “You Can Be a Stock Market Genius” ⭐⭐⭐⭐⭐

   • Helps investors enhance their market insight and decision-making abilities.

4. “Great Wisdom in Stock Investment” ⭐⭐⭐⭐☆

• Provide practical investment strategies and wisdom, suitable for advanced investors.

Cryptocurrency

1. Non-Fungible Tokens (NFT)

Definition: A Non-Fungible Token (NFT) is a digital asset based on blockchain technology, characterized by its uniqueness and non-interchangeability. Each NFT is distinct and is typically used to represent digital art, collectibles, virtual items, and more.

Typical Works

• CryptoPunks: One of the earliest NFT projects, developed by Larva Labs, featuring 10,000 unique pixelated avatars.

• CryptoKitties: A blockchain-based virtual pet game where users can buy, breed, and trade digital cats.

• NBA Top Shot: A digital collectible platform for NBA star moments, developed by Dapper Labs.

• CryptoSlam: A platform that provides NFT market data analysis, helping users track NFT trading activity.

Platform

• OpenSea: The world’s largest NFT trading platform, supporting NFT transactions on multiple blockchains.

• Sandbox.Game: A blockchain-based virtual world where users can create, own, and trade virtual land and assets.

• Taobao Store Issuance: Taobao, under Alibaba, has also attempted to issue NFTs, exploring the digital collectibles market.

• Rarible: A decentralized NFT marketplace that allows users to create, buy, and sell NFTs.

• Huankexin: A digital collectibles trading platform launched by Tencent, focusing on the issuance and trading of NFTs in the domestic market.

2. Homogeneous Tokens

Definition: A fungible token (Fungible Token) refers to a token that can be mutually substituted, where each unit has the same value, similar to traditional currency or cryptocurrency. For example, Bitcoin (BTC), Ethereum (ETH), etc., all belong to fungible tokens.

• Characteristics:
  • Divisible: Can be split into smaller units for transactions.
  • Interchangeable: Each token has the same value and no uniqueness.

3. Native Coin

Definition: A native coin (Native Coin) refers to the original cryptocurrency of a blockchain network, typically the core currency of that blockchain, used for paying transaction fees, rewarding miners or validators, etc.

• Typical Examples:
  • Bitcoin (BTC): The native coin of the Bitcoin network, used for paying transaction fees and rewarding miners.
• Ethereum (ETH): The native currency of the Ethereum network, used to pay for the Gas fees of executing smart contracts.

4. Tokens

Definition: A token (Token) is a digital asset issued on an existing blockchain platform, typically used for specific application scenarios or ecosystems. Tokens can be homogeneous or non-homogeneous (such as NFTs).

• Classification:
• Utility Token: Used to access specific services or products, such as Filecoin for storage services.

  • Governance Token: Used to participate in the governance decisions of decentralized projects, such as Uniswap’s UNI token.

  • Security Token: Represents some financial asset, such as stocks, bonds, etc.

Creating Income

As long as you have the right automation tools, it is very possible to generate passive income through automated online businesses. Moreover, this doesn’t require you to have a large number of followers to sustain it. Using the “1,000 True Fans Model,” you only need about 0.0004% of the market share to earn substantial passive income.

Step 1: Think of an idea that helps solve a problem

1. No need for originality, but improvement

It doesn’t even need to be a completely original idea. You can build on successful existing ideas in the market, adding your own creative twist to make it better.

• Case: Facebook

  Facebook is not the first social network, but it became one of the world’s largest social media platforms by improving existing social network concepts (like MySpace).

  • Key Point: Identify existing pain points and propose better solutions.

2. Solving Real-World Problems

Ensure your ideas can truly solve a user’s problem or meet a certain need. Whether it’s improving efficiency, saving time, or providing entertainment, only by solving practical problems can your product or service have a market.

Step 2: Create a website to sell your product/service

1. Create a blog or website

If you want to promote your product or service to an audience, you need a place to showcase and sell them. You can achieve this by creating your own blog or website.

• The Value of a Blog

  Ten years ago, blogs might have been seen as “useless things” or “jokes.” Now, blogs have become a “goldmine” that people enter every day.

  • Why Do You Need a Blog?

    Blogs not only help you attract traffic but also serve as a platform for storing and selling products. This is your passive income machine.

2. Website Functions

• Showcase Products: Display your products or services through blog posts, product pages, and other methods.

• Build Trust: Establish trust with users through content marketing (such as tutorials, case studies, etc.).

• Automate Sales: With the integration of subsequent automation tools, blogs can become a crucial part of your sales funnel.

Step 3: Use ESP to Automate Selling Your Products

1. What is ESP?

ESP (Email Service Provider) is the most important tool for automating the construction and sale of your products. With email, you have a direct way to connect with your fans and a direct channel to promote new products to them.

• The Power of Email
• Direct Communication: Email is the direct bridge between you and your users.
  • Automated Sequences: By setting up automated email sequences, you can provide value to your users while promoting your products.

2. How to Use ESP?

• Build an Email List: Have users join your email list.

• Start the automatic sequence:

  • Provide valuable content (such as free guides, tutorials, etc.).

  • Recommend your products or services to users at the right time.

• Continuous optimization: Continuously optimize your email content and sales strategies based on user feedback and behavior data.

The Core of Passive Income: Automation and Continuous Optimization

1. The Importance of Automation

• Free Up Time: Once all the elements are ready, automation tools can help you free up time to focus on other important matters.
• Continuous Income: Even when you’re not in front of the computer, your passive income machine is still working for you.

2. Effort Required

Although passive income sounds great, it’s not something that can be achieved overnight. It requires you to put in hard work and time, especially in the initial stages:

• Content Creation: Continuously produce high-quality content.

• Product Optimization: Continuously improve your product or service based on user feedback.

• Technical Setup: Learn how to use automation tools and set up websites.

References

• The Little Book of Common Sense Investing — John Bogle — Index investing philosophy by Vanguard’s founder
• Investopedia — Comprehensive financial education resource
• Warren Buffett’s Annual Letters — Berkshire Hathaway shareholder letters with investment wisdom