3 Years, 1030% return

1st Quarter of March 2019 Portfolio Performance

2019 YTD  32.37%

Performance since inception  1030.63%

Portfolio 
Haidilao 77.41% 
Pinduoduo 12.09% 
China Sunsine 9.61%

End of this quarter marks the 3rd anniversary of my investing journey. I’ve got a good start. I would like to give thanks to all the people who have been following me since I started writing in Investingnote. It’s good that I could store my transaction date and data in here. The performance is good and perhaps it is useful to share in my opinion what makes it. 

First of all, Luck is important in investing and I know it perhaps better than most people. Michael Mauboussin has a good way of determine it. Just ask myself, how easy can I purposely lose on a game? It turns out that compare to other game, I could more likely benefits from wrong decisions in equity market.

“Be fearful when other people is greedy and be greedy when other people are fearful” 

Almost everyone know this and I believe this is what most people intend to do. Strangely in my investing journey most people I observe would just do the opposite. Famous Smoked Filled Room experiment might explain the behaviours well. When some stocks or some countries’ stock got heat up people tend to favour them more and suddenly have good opinion of the stock. Human is a social animal. Some behaviours that contributed to survival of the race are not useful in the modern investing.

It leads me to think the one thing that contribute most to my performance is that I try my best not to contradict my investing principles. I’m old enough to know my IQ is probably below average and the best thing I can do is not to be too clever. I have to 100% adhere to Charlie Munger’s system first before adding in anything funny. I’ve learnt a concept called “本分“ from the famed Chinese investor Duan Yong Ping. What it means is to do the right thing without interference not only from outside noise but also from inner distraction of greed, fear, envy, and laziness. Is learning accounting finance industries history psychology business.. etc the right thing to do according to Charlie? Yes, then I’ll do it. 

 Since the early day of my investing journey I know that I must go all in into his philosophy to at least differentiate from the crowd. Every decision I’ve made in investing I’d ask myself “What would Charlie think?”. Trust me this action alone saved my ass for many many times. There were times I was thinking outside of “本分“ to do something like market timing and using leverage but luckily my principles stopped me. Based on what happened, I would be a lot poorer without constrains blessed by his wisdom.

 I’m lucky that my brokerage account profited on every stock that I bought thus far but If I’m engage in profit taking or stop lose(which is not my”本分“) I could still lose money on the right stocks. It is important to understand that “The World” we see is perception instead of reality. We can only sense what our brains hallucinate. Hence philosophy or principles serve as guiding light in the dark.

The other thing that might contribute to the performance might be I understand “What worked in the past will continue to work in the future” is the mindset that killed many prudent companies and investors in the past. The wishful thinking, while comforting, is not useful in the current fast changing world. Oddly excessive day dreaming since childhood trained my imagination to see where I will die, and logically I should choose to avoid going to that place. Low PE purchases worked wonder for me. Delong had PE of 1 but if I avoid the next purchase which had PE of 70, I would be poorer now. 

My biggest weakness is still my line of circle of competence. I tend to overestimate my understanding of certain business and industry at early stage. Dunning Kruger effect plagued me. Luckily I made the right choice at the end. Past 3 years I got money on the floor that could easily be picked up but then my portfolio would just be as good as the random opportunities I could get if I’m just waiting for them. Haidilao might be the only one stock I beat the market with real understanding of the business but that is because I’m in that industry for 10 years already. I’m craving for more resource on businesses other than internet. I desperately need every bit of industrial data to work the unit economy of businesses out. Often I’d need to rely on educated guess to fill in the unknown variables. The restriction could severely slow my progression if it persists. Joining a good investment firm will open the resource for me but that won’t happen anytime soon.

All my knowledge in accounting and finance are self-learnt. They are not really verified by other party. I’m lacking a proper and systematic education. Going back to school this year will be helpful to me. 

I was looking for 20% annual return without realising how difficult it is. Somehow until now I’ve got triple digit performance every year. It is encouraging but at the same time it is also dangerous. I could get ahead of myself expecting the same return in the future. I’m poised to be doomed if I’m foolish enough to believe that It is sustainable while in fact they are opportunistic. 

Haidilao 

The 2018 result is good. Seldom you could find a restaurant business’ revenue grow 60%, increase stores from 266 to 466 and still maintaining exceptional table turnover of 5. 6.2% increase in same store sales. Profit up 38% while operating cash flow up 70%. Cash flow is 44% more than profit. I know more than other people that restaurant business is tough but while other players are surviving they are exploring ways to automate their kitchen already. It has a expensive valuation when I bought it. 100billions rmb at that time. Now it has 2.38billion rmb operating cash flow. Based on past performance, average every restaurant that they opened has cash yield rate of 100% per year. They are still at the early state of scaling. Total addressable market is above trillions. Furthermore the their gigantic market has 11% CAGR.  The price I paid for the business, 10 years later when I look back, will it look expensive?

I know it is hard for people from other industry to comprehend how insanely good their management is. People aren’y likely to believe me that Zhang Yong is no ordinary human. However, as Rob Siltanen once said, they’re not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can't do is ignore them. 

I will write about a new company FuYao Glass in near future before going back to school.  Thank you for your patient to finish reading my writing. 

Investing has many approaches- Hunter has a thrill playing the game with instant reward while Farmer has relatively boring work with delayed reward. I hope I could be latter. It is the boring farming that got homo sapiens to the modern world. 保持平常心，做好本分，坚持完成每样应该做的事。