Source: China Securities News
If the market declines and core asset stocks experience significant pullbacks, most investors endure hardship and realize the difficulty of maintaining long-term investments.
However, waiting and enduring also have value. Time is a friend to good companies; on one hand, falling stock prices lower the valuation of listed companies, while on the other hand, the operating results of good companies continue to improve. The longer good companies are suppressed, the greater the opportunity to make money, a process akin to a spring recoiling higher the more it is compressed.
In 2000, Amazon’s price plummeted by 80%, shattering dreams of overnight wealth. Jeff Bezos, then 37-year-old chairman of Amazon, hastily scribbled on a whiteboard in his office: 'Stock price doesn’t represent me.' By the spring of 2003, Amazon had turned its first quarterly profit; today, Amazon has become a behemoth with a market capitalization exceeding $1.8 trillion.
In fact, if investors stay too close to the market and cannot resist the temptation to constantly monitor stock prices, they are very likely to be influenced by emotions, lose their positions, and repeatedly make mistakes due to a lack of long-term discipline. Do not fantasize about selling at the peak and buying at the trough—such flawless timing is almost impossible. Investors who can correctly time the market twice consecutively are virtually nonexistent.
Over a longer cycle, often only patience and perseverance allow investors to share in the growth of good companies. Only by adhering to simplicity and enduring hardships can one become a friend of time. 'When you hold the stock of a good company, time is on your side; the longer you hold, the greater the chance of making money,' as legendary Wall Street investor Peter Lynch once said. This is also what renowned local investor Guobin Wang has expressed: Investment becomes immensely appealing when viewed over an extended period, but may seem bleak in the short term. Use your long-term holdings to wait for those critical 30 days, those crucial three years.
From the experiences of successful investors, no one can predict short-term market fluctuations, and worrying about them is essentially futile. Investors should focus on what they can control in the investment process: 'the right business, the right people, and the right price,' as well as on researching and understanding companies. Only by minimizing attention to market volatility and strictly adhering to the correct investment process can investors ultimately reap long-term rewards and become friends of time.
Human willpower is limited; one must cut off noise.
Short-term market fluctuations are the collective behavior of all market participants, beyond the control of individual investors. Worrying about short-term market movements is meaningless; investors should focus on the investment process rather than short-term market volatility.
Ben Carlson, who has managed portfolios for institutional investors such as endowment funds, foundations, and pension plans over the long term, shared the example of Nick Saban in his book 'The Mental Game of Investing.' Nick Saban, head coach of the Alabama Crimson Tide football team, led his team to four national championships in U.S. college football. Saban adheres to a strict work methodology he calls 'the Process,' which involves focusing on what you can control.
Every day at noon, Saban eats virtually the same lunch: a salad with lettuce, cherry tomatoes, and turkey slices, served in a foam plastic container. This routine lunch arrangement allows Saban to focus on more important tasks at hand, as trivial matters are automatically taken care of. Saban says, 'If you can ignore the noise and everything happening around you, and focus on what you can control while managing your own affairs, never change.'
Saban does not expend energy considering the latest and best offensive and defensive strategies. Instead, he focuses on the current plan and its execution. He demands that his players concentrate on the present rather than dwelling on the results of the previous game or the entire season. This mindset holds that if effort is made and discipline is adhered to, the outcomes will naturally follow.
Saban actually downplays the emphasis on winning or losing because he knows that strict adherence to the process will eventually pay off. He instills in his players the need to control their emotions and maintain discipline in fulfilling their responsibilities. Clearly, the results speak for themselves. His fanatical focus on the process has ultimately led to extraordinary achievements, even though the results were never his primary concern.
Saban's approach bears significant resemblance to the construction of an investment plan. Although worrying about short-term market fluctuations is futile, investors persistently indulge in it. Human willpower is limited, and investors must allow it time to rest, just like any other muscle in the body. Focusing on minutiae can overwhelm investors, leading only to mistakes.
In sports, it is often said that you cannot choose your talent, but you can control your effort. In investing, you cannot control the market, but you can manage your investment process. Without a consistent investment plan, concepts such as investment philosophy, asset allocation, and diversification strategies are merely illusions.
Focusing on the investment process
In investing, investors should focus on what they can control, emphasizing the investment process. Only when the process is correct can it lead to favorable investment outcomes. Unless compelled to sell due to leverage or similar factors, fluctuations in stock prices hold little significance.
The investment process begins with evaluating the 'business model' (right business). As Duan Yongping stated, a business model refers to the pattern of generating net cash flow. A good business model ensures robust profitability and cash flow, making it difficult for competitors to seize market share even over extended periods. 'Time is the enemy of mediocre companies but the friend of great ones.' Consider which businesses are hard to disrupt, then ponder why.
In the investment process, business models capable of thriving across generations are exceedingly rare. The sustainability of a business model should be a continual focus for investors. Good investors consistently assess how changes in the broader environment affect the companies they invest in, paying attention to the impact of systemic risks. For instance, the advent of smartphones dealt a devastating blow to feature phones; the rise of the mobile internet era profoundly affected print media; the e-commerce era significantly impacted department stores; the emergence of mobile payment systems negatively affected ATM manufacturers; the arrival of the 'housing for living, not speculation' era brought transformative changes to real estate companies’ core businesses and valuations; and the 'double reduction' policy drastically reduced the survival space for after-school training institutions…
Buffett once remarked that extraordinary and even bizarre events will inevitably occur in markets over the long term. A single, major event could wipe out years of accumulated success. We need individuals who can genetically identify and avoid such risks, including unprecedented major threats.
The investment process also involves evaluating the integrity of corporate management (right people). Munger advises avoiding transactions with individuals of questionable moral character. When investors discover a company involved in fraudulent activities, it is time to distance themselves from that company, regardless of the cost. Correcting mistakes is never too late. For instance, A-share history has seen incidents such as 'scallops fleeing,' 'scallops starving,' 'pigs starving,' and 'cross-sector futures trading,' where related companies saw their stock prices decline continuously, leaving bottom-fishing investors repeatedly mistaken. As Buffett put it, if one cockroach is found in the kitchen, there is no way it is the only one.
The investment process focuses on changes in fundamentals rather than fluctuations in stock prices. In 2000, Amazon's stock price plummeted by 80%, shattering dreams of overnight wealth. Jeff Bezos, the 37-year-old chairman of Amazon, scribbled on a whiteboard in his office, 'Stock price is not me,' and then doubled down on customer satisfaction. By the spring of 2003, Amazon reported its first profitable quarter; today, Amazon has become a behemoth with a market capitalization exceeding $1.8 trillion.
Ben Carlson stated that one should not expect comfort from the market, as it does not always cooperate. Sometimes it aligns with your judgment, and other times your judgment may not work. Efforts should focus on making sound decisions without worrying about the outcome every time. Short-term results are hard to evaluate as they often depend more on luck. The best approach is to consider only long-term outcomes; perfection in decision-making cannot be expected every time. However, making the right decisions most of the time, or avoiding the worst ones, can be beneficial.
Renowned investor Li Lu mentioned in the preface to 'Poor Charlie's Almanack' that after restructuring his investment firm into a partnership, operations became much smoother, and performance improved significantly. He no longer fixated on stock price movements and instead devoted all his time to researching and understanding companies.
Editor /rice