When faced with investment 'temptations,' how should one choose? Better to miss out than to make a mistake.

Source: China Securities News

Missing investment opportunities beyond one’s circle of competence is not a mistake; however, being lured by alluring yet fleeting trends and misjudging the boundaries of one’s competence violates a fundamental tenet of investing.

Warren Buffett missed the internet boom, missed the new energy vehicle rally, missed... many other trends—but that did not prevent him from achieving a publicly documented return of over 50,000 times in six years. Even starting from 2010, when the world had already entered the rapidly evolving internet era and Berkshire Hathaway’s market capitalization was already as high as $150 billion, Berkshire’s stock price still rose nearly sixfold over the subsequent 14 years, delivering an annualized return of 15%.

There is always a voice urging people to act—claiming that if you don’t board the train of the times, you’ll miss out on windfall profits. In reality, the primary principle of investing is to focus on risk, not returns. The best investors are those who have avoided irreversible major losses over the long term. Companies whose long-term profitability models remain unclear and untested rarely enter their investment scope.

The market has taught even the most aggressive 'fund hunter' humility.

A former 'fund hunter' who once challenged Buffett chose, after two decades navigating the ups and downs of capital markets, to become a professional investor focused exclusively on 'long-term, deep-value investing.'

This fund manager is Chris Hohn, founder of the hedge fund TCI (The Children’s Investment Fund). TCI currently manages over $60 billion in assets and has consistently delivered annualized returns above 15% over the past 20 years, making it one of the world’s top-performing funds.

In a recent interview, Hohn stated that before every investment, he always asks himself one question: 'Will this company still exist 30 years from now?'

The market has taught even the most aggressive 'fund hunter' humility. Many years ago, Buffett articulated a core investment principle: As an investor, your goal is simple—to buy, at a rational price, a business that is easy to understand and whose earnings are certain to grow substantially over the next five, ten, or twenty years.

Only a small fraction of companies survive for 30 years. Hohn believes that fewer than 5% of companies possess genuine long-term compounding power—they exhibit strong pricing power, extremely wide economic moats, stable governance, and self-correcting mechanisms. The remaining 95%, even if they generate value above their cost of capital and outperform the market in the short term, generally fail to accumulate true excess value over the long run.

Horn said, 'The most important lesson I’ve learned in my investment career is that investors consistently underestimate the power of competition and disruption. Many investors only see today—perhaps a new company enjoys a first-mover advantage—but they overlook the intense competition that inevitably follows.'

Some investors are always chasing 'the next big story,' yet emerging companies with weak business models may experience several years of solid growth. However, growth and profitability are two distinct concepts. Horn cautioned against unprofitable growth, citing the airline industry as an example: it has grown for over a century at an average annual rate of about 5%, yet overall, the industry has generated very little profit due to intense competition.

In fact, growth without a moat is extremely difficult to value. Horn stated, 'Competition erodes profits, and disruption can wipe out entire companies. We seek businesses capable of withstanding both risks—those that truly possess defensible economic moats.'

Why Hot Sectors Lack the Certainty Required for Investment

Emerging sectors have not been tested by time and therefore rarely offer the certainty sought by value investors.

For investors, missing out on popular companies in emerging sectors is not a mistake. Emerging sectors present three major challenges:

First, even if the sector holds great promise, neither ordinary investors nor industry participants can reliably identify which company will emerge as the long-term winner. While we now recognize winners such as Tencent and Alibaba, very few investors held these stocks consistently from their early days until today. The ability to accurately assess both sector potential and future market leaders exceeds the circle of competence of most investors. For the vast majority, emerging sectors should be categorized as 'too hard—avoid.'

Buffett’s investments have consistently centered on traditional industries such as insurance, banking, credit ratings, energy, and beverages, achieving a success-to-failure ratio approaching 100:1. Although Buffett recently recorded a $5 billion write-down related to The Kraft Heinz, this setback is negligible relative to his overall track record of success.

As Buffett once remarked, 'As citizens, Charlie Munger and I welcome change—fresh ideas, novel products, innovative processes, and anything that enhances our nation’s standard of living. These are undoubtedly positive developments. However, as investors, our attitude toward rapidly evolving and inflating industries under fermentation is much like our view of space exploration: we applaud enthusiastically, but we do not participate.'

Second, most emerging sectors rely on technological advantages, yet such advantages—rooted in learning and experience—are easily replicated by latecomers. As an industry matures and technological progress slows, competitors gain access to the same knowledge base as early leaders. For instance, in the 1920s, the Radio Corporation of America (RCA), a prominent high-tech firm producing radios, was considered cutting-edge. Over time, however, competitors caught up—manufacturing a radio eventually became no more complex than making a toaster. Viewed over a sufficiently long horizon, nearly every product becomes as commoditized as a toaster, yielding minimal returns.

As stated in the book Competitive Advantage, production advantages constitute the weakest form of competitive barrier; in contrast, economies of scale that lock in customers represent the strongest barrier to entry. For most chemical and semiconductor manufacturing processes, yield rates improve substantially over time through numerous subtle adjustments to production workflows and raw materials. Cost advantages derived from proprietary technology are uncommon and rarely sustainable over the long term.

Third, without the test of time, it is difficult to be confident about the strength of a company's economic moat. As Horne noted, value investors seek businesses characterized by monopoly power, wide moats, and strong pricing power—but 'most moats are insignificant.' You may believe you have a moat, only to find it has vanished later. Only companies that have weathered multiple downturn cycles can offer the level of certainty that value investors require.

Buffett said, 'In any kind of investing, we look for companies that we believe will almost certainly retain their competitive advantage ten or twenty years from now. An industry undergoing rapid change may offer enormous opportunities for success, but it lacks the certainty we seek.'

Editor /rice