01
My own so-called understanding means that I believe I can roughly understand its business model and future cash flows (discounted).
Understanding a company means that you have a rough idea of its future cash flows (at least an idea of how much money it can make).
02
The definition of 'understanding' shouldn't be too idealized. 'Understanding' doesn't mean being able to see everything in the future like a 'crystal ball'. Being able to see some important things is already quite good.
In the long run, I think that investing is actually a probabilistic event. The people who truly 'understand' have a lower probability of making mistakes, and the final returns are high.
03
Often, one cannot simply judge someone's understanding of investing by their behavior towards a particular stock.
04
For a good company, if you cannot see 20 years of its performance, but you can roughly understand 5 years and believe you can recoup your investment within that time while the company continues to perform well, that is a good investment.
05
The so-called understanding means recognizing that the future free cash flow discounted is far greater than the current market value.
06
What to do if you can't understand a company? Just avoid it.
07
What does it mean to 'understand'? When you 'understand', you truly grasp it. When you still have doubts, it indicates that you do not yet understand or understand enough.
08
For listed companies, the standard for understanding is when you are very eager to buy more when it drops significantly, rather than inquiring everywhere about 'what happened' or constantly thinking about selling.
09
From an investment perspective, when you feel that the drop in your purchased stock does not affect you at all, you probably understand (it’s not about psychological factors). Otherwise, you might be speculating (especially when you feel afraid).
10
The degree of fear is inversely proportional to the level of understanding.
11
Investing should start with examining the business model and understanding how the company makes money. 95% of people focus on the market, which is a misunderstanding of investing; one must focus on the business.
12
A good business model is simple: profits and net cash flows are consistently strong, and even competitors find it difficult to take market share for a long time. You can think about whose business is hard to replicate and then ponder why.
13
Generally speaking, the aspects of a business model that are often scrutinized are whether the moat is sustainably strong (the sustainability of product differentiation, including corporate culture), whether long-term gross margins are reasonable (the substitutability of products), and whether long-term net cash flow (which translates to net profit in the long run) is satisfactory.
14
I generally first try to understand the corporate culture. If I feel distrustful of the company, I won’t even look at the reports. However,
I won’t just buy a company based on corporate culture, but having a good corporate culture is one of the prerequisites for consideration.
A poor corporate culture will definitely harm the company over time, and once a negative corporate culture is established, it is very difficult to eliminate it.
15
Buying a stock often requires numerous reasons. The reasons for not buying are generally just one or two.
16
I value factors that make the company healthier and more sustainable.
Corporate culture is a powerful filter that helps me avoid many mistakes. Choosing the right company is a matter of capability, while avoiding the wrong company is a matter of discernment.
17
In fact, investing is the same as running a business. Whether or not to buy a company's stock, I first look at whether it is healthy and sustainable, which is visible. If this enterprise is overly focused on short-term gains, I will keep my distance, regardless of how prosperous it appears in the short term.
18
How to judge the quality of corporate culture - broadly speaking, it depends on whether the company's actions are based on interests or on right and wrong. If everything is based on profit, I don't particularly like it.
19
I mainly look at two things when evaluating a company: the business model and the corporate culture. If I don't like either of these, I won't continue to look further. So it's not about understanding or not; I don't need to understand a company I'm not interested in.
If I like the business model (of course, it must be something I at least understand), and the corporate culture is good, then I will honestly wait for a better price.
20
Holding a company that you understand and like means you can completely ignore market changes, allowing you to sleep well at night.
21
A good business model (ultimately manifested in high long-term net profits) typically has a unique moat.
Good corporate culture (ultimately manifested in the pursuit of profits) is something most companies cannot achieve, which easily and quickly eliminates 95% of enterprises.
22
If a company does things that contradict corporate logic, and if it lacks integrity, it is not a good company. I would not invest in such a company for the long term.
23
The ways to understand each company might be different. I generally use the process of elimination; if I find something I dislike, I move on, so the targets that remain are few. I won't touch companies I can't understand.
24
Few are willing to simplify complexities; most people think that would seem unrefined, just like buying Moutai, which isn't very meaningful.
25
Reading annual reports is a necessary path to understanding a company.
If you cannot understand the financial reports of all your companies, it’s best not to invest; otherwise, you will inevitably incur losses over time.
26
Understanding a company has no formula or universal remedy.
If there's something you don't understand, find a way to learn about it, reviewing annual reports and conducting on-site inspections are all good methods.
27
If a company makes a mistake, I may not necessarily sell; it depends on what type of mistake it is (McKinsey 7S). It might even be an opportunity to buy more.
McKinsey 7S: Hardware elements: Strategy, Structure, System; Software elements: Style, Staff, Skill; Shared Values.
28
"In the investment world", there are always those trying to find a way to make money in the stock market without understanding the businesses; they will never find it. If it could be found, that method would have been discovered long ago, and the ones making the most money in the investment world would surely be mathematicians.
29
The hardest part of investing is the absence of investments with 'sufficient conditions'; one can only consider it from a probability perspective. The better you understand a company, the greater the confidence in your decisions, but there is never a 100% chance of winning.
30
Investing does not require advanced mathematics, but basic concepts of probability are still necessary.
