Many people have heard of value investing and may hold fragments of understanding — that value investing means buying good companies, that it means holding for the long term (or that long-term holding simply is value investing). You often hear the joke that after getting stuck in a losing position, one “converts to value investing” — using the concept to console oneself.

Of course, I’m no exception: I have never studied value investing, let alone analyzed companies through that lens. I didn’t even know how high the bar for value investing actually is.

By chance, I listened to Duan Yongping’s sharing on Xueqiu and Li Lu’s 2024 talk at Peking University. Although neither addressed value investing head-on, one can still glimpse its bar from the side. What follows is my personal record — necessarily partial and one-sided. I hope it can serve as a small landmark for my future reference.

The essence of value investing is being bullish on a company’s growth over a considerably long period. “Considerably long” means roughly the scale of 10 to 20 years. Only at that scale are returns dominated by the company’s own growth rather than short-term market fluctuations. “The stock market is a voting machine in the short run and a weighing machine in the long run” — that’s exactly the idea.

In other words, under the value-investing framework, decisions by default only bear fruit on a very long timescale. If you expect profit within days or months, you’re still fundamentally gambling. What’s more: after a large loss (most likely just market fluctuation), would you doubt your judgment of the company and hope to cut your losses and leave? These are the psychological thresholds of value investing.

So how does one stay psychologically balanced amid market turbulence and truly practice value investing? The most essential thing is having substantial confidence in the company you invest in. That confidence can come from many angles — Duan Yongping and Li Lu are both masters of value investing, yet their angles differ greatly. Duan starts more from the company itself: he studies its business model and corporate culture, which connects to his own entrepreneurial history. Li Lu starts more from the laws of socioeconomic development, using the patterns of social evolution to judge the future. If your judgment mainly derives from the last few weeks of price action, chats with friends online or nearby, or even some “mysterious stock code” you picked up somewhere, you cannot possibly have an independent judgment system. One market swing and your “confidence” collapses — cutting losses and leaving is inevitable. Value investing therefore requires rich, solid domain knowledge to make reliable judgments about a company — that is the most fundamental bar. I believe that in Duan’s vocabulary, circle of competence and margin of safety are both highly related to the concept of domain knowledge. No one is omniscient: we should invest in companies we know deeply; the quality of our judgment directly determines the margin of safety.

“Value investing is buying good companies” sounds simple. Many think big companies are good companies — nothing special. I too was once ignorant of the depth here. But from Duan’s few words I can feel that the learning involved is inexhaustible. (As for Li Lu’s framework of civilization and modernization, I understand it even less and haven’t thought deeply about it; this post won’t cover it.)

Duan believes a good company must have a good business model plus a good corporate culture. Over more than 20 years, in the value-investing sense he has owned only a handful of companies (NetEase, Yahoo — indirectly holding Alibaba — Apple, Moutai, Tencent, Pinduoduo). “Understanding a company is hard,” “most companies are not easy to understand,” and investing in a business you don’t understand “will end badly.” Seen this way, his bar for deciding to invest in a company is extremely high. He never casually “understands a company” just because he’s a “master value investor.”

What does Duan actually mean by “understanding a company”? Why stress business model and corporate culture? My personal reading: most companies cannot be predicted to still be thriving 10 or 20 years out. On one hand, industry markets change fast and competition is fierce — industries full of cheap substitutes obviously cannot nurture stable companies. That demands a business model strong enough, with sufficient leadership and pricing power. On the other hand, over such a long span there will surely be plenty of black-swan events, wave after wave of technological shifts, and management turnover — demanding a corporate culture that is strong, healthy, and stable.

Take Apple as an example: Duan’s judgment of Apple goes far beyond “the iPhone is a good product.” Back in 2011 he already judged that software services would become one of Apple’s main profit centers (at the time the market still suspected Apple was just a hardware seller). While others saw only the iPhone, he could see “the elephant in the distance” and considered it inevitable. Facts proved this judgment led the market by roughly 5 to 10 years, yet he himself doesn’t consider it a brilliant prediction. He also understands Apple’s values and management’s decision logic deeply. On the decision points of whether Apple would make an Apple Car, a big TV, or a big-screen phone, Duan’s judgments also proved correct. His deep understanding of Apple is inseparable from his experience running Subor and BBK. One could say there is a resonance between Apple and the way Duan himself ran companies.

From these details one can glimpse what “knowing a company” means. Can you think independently about a company — judge what opportunities it will have in the future, and how it will respond when challenges come? Only by finding companies you can truly believe in, putting real money in, and riding through bulls and bears together with them does it count as value investing.

The vast majority of people cannot make long-term predictions; they can only do short-term linear extrapolation. “This company is good,” “it’s in the spotlight now,” or even “I really like this company” — none guarantees a good return. A few examples of good companies that, under the value-investing framework, you should at least be able to reason through:

• Is Microsoft a good company? Obviously, Windows has a strong moat — enterprises can hardly switch. But in the AI era, does the software operating system still matter? Could it be disrupted?
• Is Nvidia’s revenue sustainable? Given that other companies are developing their own deep-learning chips and LLM architectures are stabilizing, will dependence on Nvidia’s products decline?
• Will Micron keep rising? The memory industry has always been cyclical — is this time different? Is its moat deep enough? Is this short-term capacity shortage or long-term technology leadership?

Value investing relies heavily on the investor’s knowledge and experience, and requires the courage to use real money to validate one’s judgment. Value investing does not mean “invest and never change.” If the market landscape shifts, or you discover an error in your original judgment, you must exit in time — whether you’re currently up or down. In the end, value investing should not take short-term market fluctuations as the main consideration; it must stretch the timescale of reasoning long enough. On that timescale, quantitative factors largely fail, and only the investor’s thinking can come into play.

I have little investing experience; this was my preliminary understanding of the bar for value investing. I hope that when I look back, I’ll find these ideas immature — or have more concrete thoughts to add.