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Grahamites
Grahamites
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Notes From Duan Yongping's Talk at Stanford University

Part I of Duan's Q&A session

October 09, 2018 | About:

On Sept. 30, renowned Chinese entrepreneur and investor Duan Yongping had a conversation with Chinese students at Stanford University. For those of you who don’t know Duan Yongping, he is the key figure behind OPPO and VIVO smartphone brands. Duan Yongping won the lunch auciton with Warren Buffett (Trades, Portfolio) in 2006 and brought Huang Zheng, founder of Pinduoduo (PDD), with him.

He reminds me a lot of Charlie Munger (Trades, Portfolio) – full of wisdom, multi-disciplinary and very concentrated in his investment portfolios. In fact, Duan Yongping basically only owns Apple (NASDAQ:AAPL) and Kweichow Maotai (SHSE:600519).

During the conversation, he revealed his secret of success, which he calls the Stop Doing List – a list of wrong things that you shouldn’t do. In his opinion, “resisting doing the wrong things” is more important than “doing the right things.” Many people often do things they know are wrong because they can't resist the temptation of short-term benefits.

The following is the translation of the Q&A:

Q1: What is most important to you? Why?

Duan Yongping: There are different important things in life in different life stages. For me at this age, the most important things are family and friendship.

Q2: Without a sales department, what is your pricing mechanism (for OPPO and VIVO)?

Duan Yongping: If you do enough market research you will be able to set the right price when the products are on the markets. And if you are wrong, you adjust the price. The essence of (electronic products) competition is product differentiation, which means you have to provide utilities and functionalities that others cannot provide. Without differentiation, it becomes a commodity product and can only compete based on price. It’s hard to make money that way.

Q3: Have you ever tried to change your personality and your way of thinking?

Duan Yongping: No. It is very difficult to reshape your personality. But there’s a study done by the China-Europe Business School which shows there is one common personality trait among the CEOs of the Fortune 500 companies - integrity.

Q4: How should Chinese companies respond to the challenges of trade wars?

Duan Yongping: The most important thing for a company is to do the best it can do regardless of what’s going on. It doesn't matter if there is a trade war. A lot of bad companies will use trade wars as the excuse when things are not going well. A great business sees opportunities when the crisis comes.

Q5: What is your logic behind investing in an early stage business (PDD)?

Duan Yongping: I don't usually invest in early stage. I usually only invest in listed companies. I invested in Pinduoduo (PDD) for personal reasons. Huang Zheng is my good friend. I know him well and believe in him. He is among the very few people I know who just gets things.

Q6: Can you talk about your sales and marketing philosophy?

Duan Yongping: Outsiders often think that we place great value on sales and marketing. But that’s not true. In fact, for us, marketing is not that important. The most important thing is our product. No company has failed because their marketing strategy failed. Usually the failure of a company is due to the failure of its producst. Of course, I am not saying that we don't want to market our products at all. In fact, our marketing is very effective. The best marketing will tell your customers what they need to know about the products in the simplest language.

I want to emphasize here that marketing is not the essence, the essence is the product. Corporate culture is the most important thing. Advertising can only affect up to 20% of consumers, and the remaining 80% is affected by the product. If marketing is not effective, the product will sell slowly. But as long as the product is good, no matter how good or bad the marketing is, the result will be the same after 20 years – the product will sell.

Q7: What opportunities do Chinese brands have in emerging market countries?

Duan Yongping: I don't know much about this, but I don't think there will be much difference – it’s all about paying attention to the needs of consumers.

Q8: Can you tell us a little bit about your lunch with Warren Buffett (Trades, Portfolio)?

Duan Yongping: It’s a philanthropic support for Warren Buffett (Trades, Portfolio). I can donate the money directly or I can donate the money through him, but I can learn something from him if I win the lunch auction. Buffett is very logical – listening to him is like listening to smooth music.

Q9: There are two business models in the smartphone industry mobile phone – the Xiaomi model and the Apple model? Which one is better?

Duan Yongping: First of all, from the perspective of customers, Apple is more powerful than Xiaomi. Secondly, in the long run, no companies can make much money by selling cheap products. The so-called cost-effectiveness is just an excuse. We must focus on users’ needs, whether it’s high-end or low-end smartphones. Even the iPhone won’t meet everyone’s needs.

In our early years, we often say our products provide good value at a cheap price. But over the years I’ve learned that we were just making excuses for inferior products.

Q10: What future trends do you see and what’s your advice for start-up companies?

Duan Yongping: This question is too difficult for me. I personally don't care much about the cutting-edge technology. I’m usually very behind in my understanding of new technology and I only invest in companies after I spend the time to understand the business. It’s Apple’s job to deal with new technologies and my job is to find companies like Apple.

Q11: With so many smartphone companies, why is Apple the most successful one?

Duan Yongping: Apple is doing something really rare – they are very focused on their products. Apple's profits come from “making the best products they can possibly make.” The strength of Apple culture is very strong. They have a very sensible "Stop Doing List." And they are focused on satisfying the users and making the best products. We don't really compete with Apple because Apple is like the National Basketball League and we are like the Chinese Basketball League – we are not on the same level.

Q12: Do you have a social “Stop Doing List?” How is it related to investing?

Duan Yongping: I am anti-social. Social events are so tiring and time consuming. There are too few friends worth making and it’s very difficult to know someone really well. In my free time I play golf. Investing is only a hobby for me even though I’ve been beating the S&P.

Q13: Can you explain OPPO and VIVO’s “Dare to be the late comer, but strive to be No.1 in the market as the late comer”? [Apologies for my awkward translation here.]

Duan Yongping: The best have no problem being the late comers. They just do it better than everyone else. The success of our company is not accidental. We stick to our “Stop Doing List” in terms of screening for partners and suppliers. Slowly we build a great reputation, which is very valuable in the long term.

Dare to be the late comer refers to the product level. It’s hard to predict market demand but if others have already educated the consumers and created the demand, it’s more certain. Strive to be No.1 in the market as the later come means we’ll make the best products out there to compete in the market.

Do the right thing first, then rightly do the right thing.

Q14: Have you ever made any investment mistakes?

Duan Yongping: I have never made any investment mistakes but I’ve made mistakes in speculations. The most stupid mistake I made was shorting Baidu (NASDAQ:BIDU). I got short squeezed and lost 100 million to 200 million U.S. dollars. Buffett is right: Don’t invest (speculate) in things you don’t understand even if it means you might miss out on potential gains. Only bet on the things you understand. Focusing on understanding the business model and how the business makes money. Ninety-five percent of investors focus on what the market will do. It’s wrong.

Q15: When will you sell Apple? Why?

Duan Yongping: I don’t need to sell great companies.

About the author:

Grahamites
A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

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