In my previous article, I wrote about my thoughts on what Chang Jing meant by "right values" for value investors, which is one of the "five rights for value investors" he brought up at the end of his lecture series.
In today's article I'll share my understanding of the other four "rights" for value investors that Chang mentioned.
Right attitude
It may seem that it's very straightforward what Chang meant by the "right attitude." However, nowadays many value investors are having doubts about whether value investing still works, because even the best value investors, such as Warren Buffett (Trades, Portfolio), have badly underperformed the indexes since the financial crisis. It is the longest stretch of underperformance for value investors, and if it lasts even longer, more investors may lose faith in value investing.
I think Chang's message is that value investing, if practiced at the highest standard, still works and will always work. It is really hard to pursue the highest standard in value investing, which requires not only a deep understanding of the key concepts in value investing but also a stoic lifestyle. This unwavering attitude towards pursuing the highest standards of value investing is why Himalaya Capital is sponsoring the value investing seminar at Peking University.
Right approach
Some investors may find the "right approach" to be confusing. Some may ask, isn't value investing itself the right approach?
Well, if we think about it, there are actually multiple approaches within the value investing general framework. For instance, there's the Ben Graham deep value approach. There's also the Buffett-Munger approach. Graham's approach emphasizes asset value whereas Buffett and Munger's approach emphasizes economic moat.
I don't think value investors should dogmatically adopt one approach. What Chang meant by the right approach is, according to my understanding, one that is suitable to each investor's own personality and experiences. For many value investors, Graham's approach may well be the right approach, and for other value investors, the Buffett-Munger approach may fit better.
Beside the general framework, there's also the research approach. For instance, under the Buffett-Munger approach, an investor has to choose a research approach. There are different research approaches. Some investors choose to depend entirely on publicly available information such as annual reports and earnings calls. They are not interested in meeting with the management team. Other investors may choose to do more scuttlebutt works and get a more complete picture of the business. Some investors place more emphasis on quantitative factors while others may prefer qualitative factors. These are all examples of different approaches to research. Again, there's no right or wrong approach here. Investors can choose the one that fits their own personalities and experiences, while acknowledging the advantages and disadvantages of different approaches.
Right habits
Chang encouraged the students to inspect the habits of the best investors and learn from them. For instance, reading is a good habit. Taking notes while reading is a good habit. Prioritizing your tasks and saying no to trivial events is a good habit. Waking up early every day around the same time is a good habit.
But we all know how hard it is to change habits. Warren Buffett (Trades, Portfolio) has famously said that "chains of habit are too light to be felt until they are too heavy to be broken." There's so much truth with this simple statement. Generally speaking, the older we get, the harder it is for us to change habits. The key to cultivate a new habit is establish daily routines and start with mini habits.
For instance, if you want to cultivate the habit of reading, you can start by setting an easily achievable goal of reading five pages per day for a while. Once you're used to read five pages a day, you can then set the bar higher to 10 pages. It's not how ambitious the goal is that matters, it's the commitment and consistency that does the trick.
Do right things
Last but not least, Chang told the students that value investors have to "do the right things." This is similar to Duan Yongping's "Stop Doing List," which is a list of wrong things that you shouldn't do. The main thing is to do the right thing. It's not a skill or a formula, but a way of thinking: if you find something wrong, stop doing it immediately, because the opportunity cost is minimal at this time.
So what are the right things? I think here it's better to inverse and ask, what are the wrong things to do for value investors? It's very easy to come up with a list. Don't lie to yourself. Don't step outside of your circle of competency. Don't have a heads-you-lose-tails-I-win fee structure. Again, they all sound simple, but most of us will find how hard it is in practice to not do the wrong things.
Doing the right things also means no shortcuts. You have to accumulate the experiences and lessons over time. When you find something wrong, stop right away. If you insist on doing the right things, the long-term cumulative effect is very obvious. Many people can't let go of the temptation, and they are the same many years later. If you are wrong, you must stop and resist the short-term temptation.
Conclusion
I really like Chang Jing's "five rights for value investors" because it is so simple and powerful. It's a great checklist to use. It's also a great tool for self-reflection.
In the end, I want to thank Chang Jing and Himalaya Capital for generously sharing their knowledge and wisdom. It was truly an honor and privilege to learn from the best.
Read more here:
- The 5 'Rights' for Value Investors: Right Values
- Notes From Peking University's Fall 2020 Value Investing Course - Lecture 4 Q&A
- Notes From Peking University's Fall 2020 Value Investing Course - Meituan Dianping Case Study
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