The following is an article contributed by GuruFocus user Isiah Zhang. It profiles Mr. Danyang Zhao, who won the 2008 auction to have lunch with Warren Buffett. It is encouraging to see that Value Investing is also practiced else where in the world.
Isiah's blog can be found here
To know more about Danyang Zhao, click here.
-----------------------
In the equity market, 2008 will be remembered as a year filled with busted heroes. Many “gurus” were forced to expose themselves naked with the tide of liquidity and human contagion receded. This is true across the world, e.g. in the US, famed investors like Bill Miller, Mohnish Pabrai, etc. all faced unprecedented challenges in their portfolio performance as well as public trust. It is of course even more dramatic in the China market, where the broad index has plunged 70% and most market participants and commentators were long only focused.
Against this backdrop, Mr. Zhao Danyang, a private investor who runs decent-sized hedge funds investing in both H and A shares, emerged as the most amazing public figure. His proficient calls proved to be contrarian in nature and meticulous in timing: He called the historical bottom of A share market when Shanghai Index hovered around 1000 (which earned him the name of “no.1 practitioner in the Chinese hedge fund”). Then in January 2008, just as the others were blown away with the mass enthusiasm and 10000 target price for the Shanghai Index, he surprised the market by voluntarily liquidating his hedge fund of A-share companies. He shunned the market altogether afterwards during the fast price decline, claiming that “I could not find value when the Shanghai index is above 3000”… and below 3000 the index dropped, within a matter of months. He forked out US$2.1 million to win the bid for a lunch with guru of all gurus – Mr. Buffett. And last but not the least; just when the market became clueless after a bloodshed year of 2008, he published a new letter to his shareholders in January 2009, announcing that the market will form its bottom in 2009. While he did not say explicitly that he is now buying stocks, it is clear that he returned to a bargain hunting mood and apparently not deterred by all the scary news surrounding us on the financial tsunami.
With only limited information scattered around internet, I could not find too much material to study the success and the wisdom of Mr. Zhao. But suffice it to say that certain themes did jump at me even with the little information that I managed to find in public. Here is my read of KSFs of Mr. Zhao’s achievement, based on our favorite framework in dissecting investment managers (i.e. by the factors of fundamental, money management, and psychology)
Fundamental:
He is probably the best business sleuth in China market. Rather than sitting in the office and merely pouring through the numerous reports (they do have a tendency to occupy time and desk space, as I would personally testify), he believed in coming up with tailored made techniques (different for every company or industry) to investigate first-hand on the viability of the business. His most famous feat is about uncovering the fraud of NingGuangXia by tapping to the electricity bill of its most “profitable” subsidiary in Tianjin. On other occasions he was also known to disguise and sneak in the distributor meeting of Wuliangye and dug out first –hand info about the sales trend. He owed his ingenuity to his earlier days as owner of a small manufacturing business, and the effectiveness to the fact that there are still too many things one must and should doubt with regard to the audited reports in China today (of course you can say the same anywhere given what happened to PWC and Sataym lately…)
Money management:
This is the most amazing finding. One only needs to read Mr. Zhao’s strategic thinking as early as mid 2006 to appreciate why he can miraculously get out the market while it is red-hot. The answer is, he had seen and planned his moves way ahead.
“Today, at the end of bear market and the onset of the bull market, we have already planned our future exit date, based on a even longer term consideration. We want to expand our investing career in a relatively longer time frame. We want to get into a strategic position in the next 3-5 years, so we will not alter our way of thinking and strategy by short term fluctuations.” (June 2006)
With that in mind, Mr. Zhao cashed in all his chips at a point where he felt the updated real time risk and reward equation does not support him holding on further. Against the siren of “golden 10 years”, etc., he called quits, calmly and alone.
This, of course, exemplifies the wisdom of Su Tze: 夫未战而庙算胜者，得算多也；夫未战而庙算ä¸èƒœè€…，得算少也。多算胜，少算ä¸èƒœï¼Œè€Œå†µäºŽæ— 算乎ï¼å¾ä»¥æ¤è§‚之，胜负è§çŸ£ã€‚ (English Translation: Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose.)
This is the point that I keep asking myself these days, how an investor can “keep his cool” amidst the overwhelming tainted noise surrounding him day-in and day-out? Our perception of thing, our eyes and ears, are to a large extent at the mercy of the mass media and flood of unfounded and skewed news flow. If you don’t find a way to maintain your discipline and belief, it is just a matter of time before you get swayed by the current tide, assimilated by the mass and become one of the victims in the end. Mr. Zhao has set a great example of how a thoughtful and disciplined investor can outsmart the market.
Psychology:
This is the part that is most personal to every individual investor. Even among the famed value investors, you will find a wide spectrum of different styles in practice based on their temperament and experience. For instance, Seth Klarman is more risk averse. He would gauge down-side loss more rigorously in order to avoid the negative absolute return. Monish Pabrai, on the other hand, adopts a statistician approach: He tried to allocate capital based on various scenario and an objective weighting to multiple scenarios respectively. His “yellow stone” theory says that one should not simply avoid setting foot on Yellow Stone park just because it has a small chance of earthquake. So he bets on overall favorable odds. Take another dimension, some gurus, such as Bill Miller, will not mind buying the GARP (growth at the reasonable price) stocks like Amazon, arguing that the superb growth prospect will ultimately catch up with the lofty share price. Others, like John Neff, will not be interested for anything at the double digit PER. On the issues of investment style, there is no right or wrong. Yet it is crucial that investor has to find the one style that makes most sense to him, be brutally honest about the likely weakness of his, and avidly guard against the remiss.
In the case of Mr. Zhao, he has no problem admitting in public that he was a “coward”. He looked at the downside most seriously than many of his hedge fund peers (OPM). He accredited it to personal history of being a business owner before. He makes it clear that as an investor, “to be alive is the number one consideration”. And indeed he and his fund seemed to cherish the capital entrusted to them as dear as their own lives. One has to think that this attitude is different from Mr. Linyuan when he takes on other people’s money to “prove his point”; and one has to believe that the philosophy here has something to do with his early and lonely exit from the go-go market in 2008
Based off what I can gather around the public sources, I found Mr. Zhao to be one of the most insightful and pragmatic investors in China market. It is no fluke that he had timed the bottom and the peak of China’s stock market in the past. And it is certain not vanity that drives his bid of whopping $2 million dollars for a lunch with Mr. Buffett. I think he may even capable of identifying his own weakness: One of the questions he outlined in an open letter to the public mentioned several key questions that he kept wrestling with and “will continue to search for the answers during whole investment-life time”, is about “what kind of businesses are worth holding for eternity vs. selling out after making decent profit”. My guess is Mr. Buffett would tell him something about the snowball - it takes a long enough slope and plenty of snow to make the snowball ever-larger over time. Like many of his commemorate smart young guns in the trench of Chinese stock market, Mr. Zhao knows only too well about “competitive advantage” but maybe less well about “sustainable”. Hopefully, Mr. Buffett will enlighten him and he would in turn enlighten us – by letter or by practice.
Isiah Zhang
blog.sina.com.cn
Isiah's blog can be found here
To know more about Danyang Zhao, click here.
-----------------------
In the equity market, 2008 will be remembered as a year filled with busted heroes. Many “gurus” were forced to expose themselves naked with the tide of liquidity and human contagion receded. This is true across the world, e.g. in the US, famed investors like Bill Miller, Mohnish Pabrai, etc. all faced unprecedented challenges in their portfolio performance as well as public trust. It is of course even more dramatic in the China market, where the broad index has plunged 70% and most market participants and commentators were long only focused.
Against this backdrop, Mr. Zhao Danyang, a private investor who runs decent-sized hedge funds investing in both H and A shares, emerged as the most amazing public figure. His proficient calls proved to be contrarian in nature and meticulous in timing: He called the historical bottom of A share market when Shanghai Index hovered around 1000 (which earned him the name of “no.1 practitioner in the Chinese hedge fund”). Then in January 2008, just as the others were blown away with the mass enthusiasm and 10000 target price for the Shanghai Index, he surprised the market by voluntarily liquidating his hedge fund of A-share companies. He shunned the market altogether afterwards during the fast price decline, claiming that “I could not find value when the Shanghai index is above 3000”… and below 3000 the index dropped, within a matter of months. He forked out US$2.1 million to win the bid for a lunch with guru of all gurus – Mr. Buffett. And last but not the least; just when the market became clueless after a bloodshed year of 2008, he published a new letter to his shareholders in January 2009, announcing that the market will form its bottom in 2009. While he did not say explicitly that he is now buying stocks, it is clear that he returned to a bargain hunting mood and apparently not deterred by all the scary news surrounding us on the financial tsunami.
With only limited information scattered around internet, I could not find too much material to study the success and the wisdom of Mr. Zhao. But suffice it to say that certain themes did jump at me even with the little information that I managed to find in public. Here is my read of KSFs of Mr. Zhao’s achievement, based on our favorite framework in dissecting investment managers (i.e. by the factors of fundamental, money management, and psychology)
Fundamental:
He is probably the best business sleuth in China market. Rather than sitting in the office and merely pouring through the numerous reports (they do have a tendency to occupy time and desk space, as I would personally testify), he believed in coming up with tailored made techniques (different for every company or industry) to investigate first-hand on the viability of the business. His most famous feat is about uncovering the fraud of NingGuangXia by tapping to the electricity bill of its most “profitable” subsidiary in Tianjin. On other occasions he was also known to disguise and sneak in the distributor meeting of Wuliangye and dug out first –hand info about the sales trend. He owed his ingenuity to his earlier days as owner of a small manufacturing business, and the effectiveness to the fact that there are still too many things one must and should doubt with regard to the audited reports in China today (of course you can say the same anywhere given what happened to PWC and Sataym lately…)
Money management:
This is the most amazing finding. One only needs to read Mr. Zhao’s strategic thinking as early as mid 2006 to appreciate why he can miraculously get out the market while it is red-hot. The answer is, he had seen and planned his moves way ahead.
“Today, at the end of bear market and the onset of the bull market, we have already planned our future exit date, based on a even longer term consideration. We want to expand our investing career in a relatively longer time frame. We want to get into a strategic position in the next 3-5 years, so we will not alter our way of thinking and strategy by short term fluctuations.” (June 2006)
With that in mind, Mr. Zhao cashed in all his chips at a point where he felt the updated real time risk and reward equation does not support him holding on further. Against the siren of “golden 10 years”, etc., he called quits, calmly and alone.
This, of course, exemplifies the wisdom of Su Tze: 夫未战而庙算胜者，得算多也；夫未战而庙算ä¸èƒœè€…，得算少也。多算胜，少算ä¸èƒœï¼Œè€Œå†µäºŽæ— 算乎ï¼å¾ä»¥æ¤è§‚之，胜负è§çŸ£ã€‚ (English Translation: Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose.)
This is the point that I keep asking myself these days, how an investor can “keep his cool” amidst the overwhelming tainted noise surrounding him day-in and day-out? Our perception of thing, our eyes and ears, are to a large extent at the mercy of the mass media and flood of unfounded and skewed news flow. If you don’t find a way to maintain your discipline and belief, it is just a matter of time before you get swayed by the current tide, assimilated by the mass and become one of the victims in the end. Mr. Zhao has set a great example of how a thoughtful and disciplined investor can outsmart the market.
Psychology:
This is the part that is most personal to every individual investor. Even among the famed value investors, you will find a wide spectrum of different styles in practice based on their temperament and experience. For instance, Seth Klarman is more risk averse. He would gauge down-side loss more rigorously in order to avoid the negative absolute return. Monish Pabrai, on the other hand, adopts a statistician approach: He tried to allocate capital based on various scenario and an objective weighting to multiple scenarios respectively. His “yellow stone” theory says that one should not simply avoid setting foot on Yellow Stone park just because it has a small chance of earthquake. So he bets on overall favorable odds. Take another dimension, some gurus, such as Bill Miller, will not mind buying the GARP (growth at the reasonable price) stocks like Amazon, arguing that the superb growth prospect will ultimately catch up with the lofty share price. Others, like John Neff, will not be interested for anything at the double digit PER. On the issues of investment style, there is no right or wrong. Yet it is crucial that investor has to find the one style that makes most sense to him, be brutally honest about the likely weakness of his, and avidly guard against the remiss.
In the case of Mr. Zhao, he has no problem admitting in public that he was a “coward”. He looked at the downside most seriously than many of his hedge fund peers (OPM). He accredited it to personal history of being a business owner before. He makes it clear that as an investor, “to be alive is the number one consideration”. And indeed he and his fund seemed to cherish the capital entrusted to them as dear as their own lives. One has to think that this attitude is different from Mr. Linyuan when he takes on other people’s money to “prove his point”; and one has to believe that the philosophy here has something to do with his early and lonely exit from the go-go market in 2008
Based off what I can gather around the public sources, I found Mr. Zhao to be one of the most insightful and pragmatic investors in China market. It is no fluke that he had timed the bottom and the peak of China’s stock market in the past. And it is certain not vanity that drives his bid of whopping $2 million dollars for a lunch with Mr. Buffett. I think he may even capable of identifying his own weakness: One of the questions he outlined in an open letter to the public mentioned several key questions that he kept wrestling with and “will continue to search for the answers during whole investment-life time”, is about “what kind of businesses are worth holding for eternity vs. selling out after making decent profit”. My guess is Mr. Buffett would tell him something about the snowball - it takes a long enough slope and plenty of snow to make the snowball ever-larger over time. Like many of his commemorate smart young guns in the trench of Chinese stock market, Mr. Zhao knows only too well about “competitive advantage” but maybe less well about “sustainable”. Hopefully, Mr. Buffett will enlighten him and he would in turn enlighten us – by letter or by practice.
Isiah Zhang
blog.sina.com.cn
