Aim for the Moon, Not Just the Stars: Investing in Timeless Companies - 2019-04-18

I recently stumbled upon an interview with a sharp Chinese fund manager, and his insights really resonated with me. He advocates "aiming for the moon, not just the stars," emphasizing the importance of focusing on a few truly exceptional companies rather than scattering your resources across a multitude of mediocre ones.

His approach is refreshingly straightforward. When analysts pitch him a stock, he always asks three crucial questions:

  1. Is this a truly great business? (Not just a good company, but an exceptional one.)

  2. What makes you believe it's undervalued? (Where's the margin of safety?)

  3. Why is now the right time to buy? (What's the catalyst?)

He stresses the need for logical, independent judgment, urging investors to filter out the noise and avoid being swayed by market hype or company spin. "First-class people are expensive," he says, "but second-class people are even more expensive." In other words, paying a premium for top talent is a better investment than hiring cheap, incompetent people who will cost you dearly in the long run.

When to Say Goodbye: A Disciplined Exit Strategy

He also outlines a clear exit strategy, with three key triggers:

  1. Fundamental deterioration: If the company's performance falls significantly below expectations, it's time to cut your losses, regardless of the price. This signals a fundamental misunderstanding of the business.

  2. Rapid, excessive gains: When a stock doubles in a short period, the margin of safety disappears. While it might continue to climb, he prefers to leave some potential profit on the table rather than risk a sharp reversal.

  3. A superior opportunity: If a better company with higher potential returns emerges, he's willing to switch, though he rarely does so.

Investment Styles: A Matter of Preference

He acknowledges that different investment styles exist:

  • Value investing: Seeking undervalued companies with strong fundamentals.

  • Reverse investing: Buying when others are selling, capitalizing on market pessimism.

  • Trend investing: Riding market momentum, but facing increased competition.

  • Long-term investing: Holding quality companies for extended periods, minimizing transaction costs and maximizing compounding.

He favors long-term investing, believing it offers the greatest potential for sustained growth.

The Buffett-Munger Mindset: Value is King

My own investment philosophy, heavily influenced by Warren Buffett and Charlie Munger, echoes this focus on long-term value. I've learned that "cheap" isn't just about price; it's about the potential for future growth. A company that can compound its earnings over time, even if I pay a premium today, will ultimately deliver exceptional returns. Conversely, a seemingly "cheap" stock that delivers only mediocre growth, or worse, losses, is ultimately very expensive.

Essentially, I look for companies that are so fundamentally sound that they are resistant to the constant changes of the world. Companies that will be just as needed in the future as they are today. To find those, you need to aim for the moon.

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