What are the truly sustainable elements in investment?

Source: Qile Club

1. The Four Principles of Value Investing

So what is value investing? Value investing was first formulated as a system by Benjamin Graham roughly eighty or ninety years ago. Today, the prominent leader and representative figure in value investing is, of course, Mr. Buffett, whom we all know well.

There are only four principles of value investing. Remember, just four. The first three come from Benjamin Graham, Buffett's teacher, and the last one is Buffett's unique contribution.

The first principle is that stocks are not merely tradable securities; they actually represent certificates of ownership in a company, signifying partial ownership of the company.

This is the first important concept. Investing in stocks essentially means investing in a company. As GDP grows and the market economy continues to expand, value is continuously created. In this process of value creation, as partial owners, the value of our holdings will grow along with the increase in the company’s value.

If we invest as shareholders and support the company, then we can obtain our rightful share of the gains as the company’s value grows. This path is sustainable.

What is the righteous path, and what is the unrighteous path? The righteous path is where you receive what you deserve. Therefore, such an investment approach is a broad and righteous path. However, very few people are willing to understand stocks in this way.

Second, understanding what the market is.

On one hand, stocks represent partial ownership, but on the other hand, they are indeed tradable securities that can be bought and sold at any time. There are always people making bids in this market. So how should we interpret this phenomenon?

From the perspective of value investors, the market exists only to serve you. It provides opportunities for you to purchase ownership and also gives you a chance to sell it and convert it into cash when you need money many years later. Thus, the market exists to serve you. The market never tells you the true value; it only tells you the price.

Third, the essence of investment is to make predictions about the future, and the results of predictions cannot be 100% accurate; they can only range from zero to close to one hundred.

When making judgments, it is essential to allow for a significant margin of safety because it is impossible to be certain. No matter how confident you are, always remember the margin of safety, ensuring that your purchase price is significantly lower than the intrinsic value of the company. This concept is the third most important notion in value investing.

For instance, even if you are 80% or 90% confident, since absolute certainty is unattainable, when the remaining 10% or 20% probability occurs, the outcome could still negatively impact your intrinsic value. However, with an adequate margin of safety, losses will be minimal. Requiring a substantial margin of safety each time you invest is a key skill in investing.

Fourth, Buffett added a concept after five decades of practice: Investors can, through persistent effort over the long term, genuinely establish their circle of competence, gaining a deeper understanding of certain companies or industries than nearly anyone else. Moreover, they can make more accurate predictions about a company's long-term performance than anyone else. Within this circle lies one’s unique capability.

The most crucial aspect of the circle of competence concept is its boundaries. A capability without boundaries is not a true capability. If you hold a viewpoint, you must be able to tell me the conditions under which this viewpoint would not hold true, only then is it a genuine perspective.

If you simply assert a conclusion without qualification, then this conclusion is certainly incorrect and cannot withstand scrutiny. Why is the concept of the circle of competence important? Because of the 'market'.

What is the purpose of the market's existence?

For market participants, the market exists to uncover human weaknesses. Whatever areas you have not fully understood, whatever psychological or physiological weaknesses you possess, will inevitably be exposed under certain market conditions. Anyone who has ever participated actively in the market will understand what I mean by this statement.

2. Value investing is the righteous path, the grand avenue.

The combination of these four aspects constitutes the full meaning and most fundamental principles of value investing. The philosophy of value investing is not only simple and clear but also represents the righteous path, the grand avenue.

The righteous path is what is sustainable.

What is sustainable? Everything sustainable shares a common characteristic: what you gain is, in the eyes of others and everyone else, what you deserve. That is sustainability. If, when you fully disclose your method of making money without holding anything back, everyone thinks you are a fraud, then that method is definitely not sustainable.

If you reveal every detail of your method of earning money to everyone and they all think that your way of making money is correct, admirable, and worthy of respect, then it is sustainable. This is called the great way, the righteous path.

Why is value investing itself a righteous path, a great way?

Because it tells you that investing in stocks is essentially investing in the ownership of a company. Investment first helps the market value of the company approach its true intrinsic value, which benefits the company.

While helping the company, you are also continuously increasing your own intrinsic value. Ultimately, you benefit the economy, the company, the individual, and yourself in this process. The returns you receive are what you deserve, and everyone recognizes that you have earned them. Therefore, this is a great way.

3. Value investing sounds simple but is difficult to practice.

This is the entire concept of value investing. It sounds very simple and highly logical. But what is the reality?

In the actual investment process, such investors account for an extremely small proportion of the entire market, very few indeed. Almost every investment-related theory has many followers, but genuine value investors are few and far between. Consequently, the characteristic of investment is that most people do not understand what you are doing, and the outcome of investment becomes wealth destruction.

On the broad avenue of investment, there is no one, desolate and quiet. Where have all the people gone? The side paths are bustling with activity! Why take the narrow paths? Because the broad and open road progresses slowly. We also know in life that a company’s success requires many people, a lot of time, relentless effort, and some luck. Thus, this is a very arduous process.

Another challenging aspect is that it is also very difficult to make predictions about the future.

The essence of investing lies in forecasting the future. To truly understand a company or an industry, one must be able to predict its situation five or even ten years down the line. However, given the multitude of uncertain factors, it is nearly impossible to make such long-term forecasts for most industries and companies.

But does that mean it is entirely impossible? No. In fact, after genuine effort, one may discover that within certain companies or industries, it becomes possible to clearly envision what the worst-case scenario might look like for a company ten years later. It could even turn out much better than expected. However, achieving this level of insight requires years of relentless effort and diligent study.

When you are able to make such judgments, you begin to establish your own circle of competence. Initially, this circle will undoubtedly be very narrow, and the time required to build it is exceedingly long. This is why value investing itself is a lengthy journey. While success is ultimately achievable, the vast majority of people are unwilling to embark on it because it demands an immense amount of time, and even then, understanding remains limited.

Anyone who overextends their circle beyond their capabilities will eventually destroy themselves completely under certain market conditions. The market itself is a mechanism for exposing your weaknesses.

The fundamental requirement for working in this field is to be fully honest with oneself in terms of knowledge. One must never deceive oneself, as humans are easiest to fool, especially in this industry. As long as you sit here, you can tell others falsehoods, and if you repeat those lies often enough, you may even start believing them yourself. However, such individuals will never become excellent investors and will inevitably be destroyed under certain market conditions.

4. The broad path is reserved for those who persevere.

Value investing appears to be a broad avenue, but in reality, it is extremely distant from success.

This is because the market always gives the impression of short-term profitability, which leads people to focus their time, energy, and intelligence on short-term market predictions. This explains why most prefer to take shortcuts rather than follow the main path. In reality, almost all shortcuts end up being misguided detours.

Therefore, when we examine long-term records, at least in the U.S., we find that nearly all strategies designed for short-term trading lack a history of sustained success. On the other hand, among those with truly outstanding long-term investment records, almost everyone adheres to value investing principles.

Short-term investment performance is often influenced by overall market luck, unrelated to individual capability. In the short term, there will always be winners and losers, but long-term winners are rare. This raises a core issue in assessing value investing: is it a matter of luck or skill?

The market can yield an average cumulative return of 14% over a continuous period of 15 years. At such times, you don’t need to be a genius; simply being in the market will lead to excellent performance. However, there are also periods when the market generates negative returns for over a decade. Achieving outstanding returns during those times is an entirely different matter.

Although this broad and smooth path will undoubtedly lead to success without any traffic congestion, very few people choose to walk it. Those who do complete the journey achieve success that others indeed view as well-deserved.

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Editor/Jayden