Shu Taifeng: 10 virtual dialogues across time and space, revealing the methodology of investment

Editor's note: Shu Taifeng, partner of Chongyang Investment and visiting researcher of Chongyang Institute for Financial Studies of Chinese University, is one of the experts who has studied "Bamang" thought most deeply and disseminated it most widely in China. In 2024, Shu Taifeng's new book "Wealth Fighter Says" will be released, which is another blockbuster work after "Wealth is the Realization of Cognition", which combines theory with practice and further focuses on how to build a scientific investment methodology operating system to help us remain invincible in the foggy investment market. Qiu Guogen, founder of Chongyang Investment, wrote a recommended preface to the book (click on the blue font to view it). The author's preface to this book is published for readers' reference:

▲ "Fortune Good Fighters Say" January 2024 Zhanlu Culture/Zhejiang Education Publishing House Production

"The metaphysical is the way, and the metaphysical is the instrument." The highest level of any skill is a methodology, and this methodology must be logically self-consistent, and it is a beautiful closed loop. When he is at his most proficient, it has become a philosophy.

At the time of the book's writing, Charlie Munger passed away, just a month and two days before his centennial. A month earlier, he had also been interviewed by a long podcast and worked almost until the last moment of his life, which can be described as the end of his life and his merits. His longtime partner, Warren Buffett, is also approaching 94 years old, not only staying healthy, but also working happily, still able to talk for five or six hours while eating a snack.

How did the miracle of their lives come about? In addition to some factors that are destined for nature and cannot be replicated, such as genes and intelligence, they are also related to the worldview and methodology they have constructed. The author tries to sort out the architecture of the wonderful thinking edifice in their brains, their "methodological operating system" with a Chinese expression. To this end, the author borrowed another top "thinking weapon" - "The Art of War", and let Sun Tzu have a total of 10 virtual dialogues across time and space with Warren Buffett and Munger. Through this series of dialogues, the author sorted out the closed loop of Warren Buffett's investment methodology, which also happens to be the theoretical closed loop of "The Art of War". Although this closed-loop path may not be very accurate and clear, as the investment community often says, "vague right is better than precise error", and I hope that this book can also be "vaguely correct". This closed loop is roughly paved by the following 10 links.

First, to win the inferior: choose people and let the situation go

What makes a good business? It is a company that can create long-term profits for shareholders and create value for society. What can we measure whether a company is a good company? It needs to have good management, a good business model, and be in line with industry trends. So how do you correspond to these three criteria from the perspective of "The Art of War"? Sun Tzu said: "Therefore, those who are good at fighting seek the situation and do not blame others, so they can choose people and let them be in power." "Selecting people" is equivalent to selecting good management, and "Renshi" is equivalent to following the development trend of the industry and choosing the best business model, which together constitute the competitive advantage of the enterprise.

Second, overcome obedience with adversity: avoid its sharpness and hit its laziness

A good enterprise is not equal to a good target, and a good enterprise plus a good investment price is a good target. So in addition to buying good, you should also buy well, that is, buy cheaply. But how can you buy it cheaply? This requires reverse thinking, so that people abandon me and take me. Buy when others don't like it, or buy in a place that others ignore, so that you can buy a good target at a reasonable or even lower price than the valuation. "Sun Tzu's Art of War" has a cloud: "Avoid its sharpness, hit its laziness." "The principle of avoiding the exuberant fighting spirit of the enemy at the beginning of the campaign, and striking him when the enemy returns from a slack is the same as the principle of investment.

Third, slow to fast: to treat the unsafe wins

Good prices don't come automatically, just like good prey always hides in the depths of a jungle. They all require us to be patient and wait until the tide goes out and the noise ceases. Warren Buffett is very good at waiting. He admires baseball player Ted Williams because Williams never swings his bat before the real good ball arrives. Warren Buffett always spends years or even decades waiting for a good target, which Munger calls "sitting and waiting for the investment method". The Art of War advocates that "those who are good at defending should be kept under the nine lands", and finally realize "those who are not safe will win", that is, only by attacking the unprepared enemy with a prepared army can the final victory be obtained.

Fourth, win more with less: it depends on the first battle

Warren Buffett, who pursues the "sit and wait investment method", will definitely not make too many moves. Unlike many who prefer diversification, he prefers Mark Twain's advice, "Put all your eggs in the same basket and watch it carefully". Of course, investing only once is too little, and his advice to the average investor is to get yourself a card with only 20 punch slots, representing all the investments you can make in your lifetime. Once you've made 20 holes in this card, you can't make any more investments. Correspondingly, the Art of War does not advocate fighting more wars, because wars consume a lot of manpower and material resources, which will lead to "death after several victories", and countries that always win wars may eventually perish. The way of "The Art of War" is actually the way of cautious war, paying attention to fighting less (it is better not to fight), and the soldier who surrenders without fighting is the highest level, and if you really want to fight, you must also pursue "it depends on the first war".

Fifth, overcome cowardice with bravery: swift as the wind and plundering like fire

Waiting is not an end but a means, and it only applies when the opportunity does not come. When the opportunity comes, you have to be brave enough to pounce on it. As Mr. Qiu Guogen, founder and chief investment officer of Chongyang Investment, said: "When the opportunity comes, we must dare to attack with heavy positions and step on two feet." Warren Buffett's statement is: "When the day is raining gold, it should be picked up with a large vat, not a small ring." "The financial crisis is often the time when Warren Buffett sweeps the market. The more you observe Buffett's investment operations, the more you will find that he is like a seasoned hunter, with superhuman patience and perseverance, always waiting quietly before the prey does not appear, and once the prey appears, he will strike decisively and hit with one blow. "The Art of War" also stresses that once the army moves, it must "move above the nine heavens", and its "swiftness is like the wind", "invasion is like fire", and "movement is like thunder". That is to say, the troops that are really good at attacking are like divine soldiers falling from the sky, sweeping thousands of armies, like wind, fire, and thunder.

Sixth, win the risk with stability: win with the right and win with the odd

There is a limit to everything, and it is too much. PUNCHING OUT DOESN'T MEAN "ALL IN" OR PUTTING LEVERAGE IN A BIG WAY. Because leverage is a double-edged sword, it can make you rich overnight or get you to zero overnight. There is always uncertainty in the world of investing, and "black swans" are often infested, so remember to keep a hand. Warren Buffett will always have at least $30 billion in cash and cash equivalents on his books, and although their returns are low, they can make Buffett sleep soundly. Once the financial crisis breaks out, when other companies are struggling to survive, Buffett still has enough "bullets" to buy the bottom. As the saying goes, you can attack when you advance, and you can defend when you retreat. "The Art of War" says: "Whoever fights, with the right combination, with the odd victory." Therefore, those who are good and surprising are as infinite as heaven and earth, and inexhaustible as rivers. "Whenever there is a war, it is necessary to divide the troops, use the regular soldiers to fight, and win with surprise troops. Those who know how to use strange weapons are as endless as heaven and earth, and as endless as rivers and seas. The essence of Han Xin's last battle is not actually the courage to survive in a desperate situation, but the division of troops in advance, and the echo of the main soldiers and the surprise soldiers produced a miraculous effect. Like Warren Buffett and Han Shin, the good fighter will always have a back hand.

Seventh, overcome stiffness with change: soldiers are impermanent, and water is impermanent

Warren Buffett's investment approach seems to be a paradox, when it is slow, it is like a thousand-year turtle, you can wait for years or even decades, but when it is fast, it is like lightning. Some of his investments have long holds, he says: "Our preference is forever. But he also said, "We are not promising that Berkshire Hathaway will hold any securities forever." In fact, there is no shortage of fast-in and fast-out operation cases of Buffett, and some of them have not even held shares for more than a quarter. His approach to investing is not rigid, but rather flexible, which Munger sums up as "when conditions change, we have to change". This is like the wisdom of water, "The Art of War" says that "soldiers are impermanent, water is impermanent", water is soft but can overcome all things, precisely because it is good at change.

Eighth, avoid life with familiarity: those who know what they can fight and those who can't win win

To achieve the first 7 links, an important premise is to know each other and know oneself. In the final analysis, investing is about two things: one is to know the objective world, and the other is to know the subjective self. Warren Buffett advocates not being familiar with it, that is, first of all, we must have a clear understanding of ourselves, avoid unfamiliar things, never step out of the circle of competence, and then judge the target. This requires investors to continue to acquire various knowledge and skills to understand the objective world on the one hand, and on the other hand, they must also be honest with themselves, analyze their own cognitive biases, and avoid becoming a fool who "doesn't know what he doesn't know". "The Art of War" says that "those who know what can and cannot fight win", that is, those who know what battles can be fought and what battles cannot be fought can win.

Ninth, defeat the weak with the strong: win first and then seek war

There is also a limit to change, the specific operation of investment can change, but the basic principles cannot be changed, these basic principles include not only taking stocks as part of the ownership of the enterprise, buying a good business, buying a reasonable price, etc., but also not fighting a battle that is uncertain. Warren Buffett's exact words were: "In terms of investing, we've been very successful because we're so focused on finding the 1-foot railings that we can easily cross, and avoiding the 7-foot railings that we can't cross." "The Art of War" says that "the so-called good fighter in ancient times is better than the easy to win", everyone likes the legendary story of winning more with less, and defeating the strong with the weak, but in fact, these stories are very wrong, and the right way to fight is to defeat the weak with more and the weak with the strong. Those who are truly good at fighting have won before the war begins, for the sake of "winning first and fighting later".

Tenth, all-win thinking; A soldier who surrenders without a fight

There are thousands of roads in the world, and there are many investment methods, but value investment is the closest to the benevolence of investment, which requires buying good companies at the lowest cost, and also requires cherishing the invested enterprises, and if necessary, helping enterprises achieve growth by improving governance. It's not a zero-sum game, it's a win-win game. "The Art of War" says: "Soldiers, the major affairs of the country, the place of death and life, and the way of survival, must not be ignored." "Winning first is the means, and winning the whole is the ultimate goal, because fighting a war is a major national event, which will sacrifice human lives, and even directly related to the survival of the country, so winning the war also counts as the price. The whole army is the first, and the broken army is second. "The way of using military force is the best policy to make the enemy surrender the whole country, and using force to destroy the enemy country is the inferior choice; Bringing the enemy to its knees is the best option, and defeating the enemy is the second best option. This is the ultimate value of The Art of War – the idea of total victory.

Among these 10 links, the first 8 are methodologies and branches, and their backbone is "win first and then fight". The last one is the value proposition, which is the root system that underpins the backbone of "win first, fight later". Together, they form a closed loop of Buffett's investment, and at the same time, the closed loop of the theory of the Art of War. They are intertwined to form a tree of cognition full of vitality, and wealth is the brilliant flower of this tree. At the same time, we can use this closed loop to observe business, dissect current events and even look at life.

From the perspective of creative logic, this book is a sequel to the author's previous book "Wealth is the Realization of Cognition". If "Wealth is the Realization of Cognition" is about the underlying logic of investment cognition and human nature, this book is the operating system of the value investment methodology that is further portrayed on this basis. The former book is more basic, and the latter is more practical, but to understand the principles behind this book, you need to read the previous book first. They are closely related to each other and form the "Wealth Cognition" series, which I hope to create along this theme in the future.

Readers may wonder why Sun Tzu has the idea of talking to Warren Buffett and has a reason for it. In "Wealth is the Realization of Cognition", the author created 12 sections of "Lao Tzu Dialogue with Warren Buffett", interspersed throughout the book, presenting the similarities between classical Chinese wisdom and value investment in the form of virtual dialogues through time and space. This idea is loved by many readers and friends, some readers say that this idea is brain-opening, and some readers say that this idea makes reading interest a lot. One reader commented: "The dialogue between Lao Tzu, Warren Buffett and Munger and the three wise men across time and space, integrating the wisdom of the East and the West, is really addictive to read." Another reader said, "I didn't expect to see the best interpretation of Lao Tzu's wisdom from this book." This is naturally ashamed, but it does show a hidden original intention of the author. The author majored in humanities during his university years, so I have always had a desire to contribute to the dissemination of Chinese classical wisdom through my writing. To my surprise, in the first 10 years of my career in the media, I did not find the right opportunity, but after joining Chongyang Investment, I inadvertently discovered that some of the core concepts of value investing have many subtle connections with classical Chinese wisdom, or they all contain some universal wisdom that can be applied everywhere. It is precisely because of this opportunity that when the author pulls these wise men together for a virtual dialogue, the reader will feel that there is no sense of disobedience.

It is not only Lao Tzu's Tao Te Ching that shares the same with the concept of value investment, but also the Art of War. If the Tao Te Ching is more inspired by the "Tao" level, then the "Art of War" is richer in terms of both the "Tao" and the "Technique" level, and the significance of the war is better than that of the Tao Te Ching.

In the 11th section of "Lao Tzu Talks to Warren Buffett", the author has introduced some views of "The Art of War" through Lao Tzu's mouth, and won Buffett's praise, and the idea of this book germinated from here. We imagine that after the studious Buffett heard the views of "The Art of War" from Lao Tzu, he still felt that he was not satisfied, so he found "The Art of War" to read by himself, but after all, there are language differences, and there are bound to be differences in understanding. So he directly established contact with his grandson through Lao Tzu, and his grandson, who had not been out of the mountain for a long time, was also very interested in investment, so they used "Lao Tzu Dialogue with Warren Buffett" as a model, and conducted a series of dialogues on the art of war and investment. (1) The author plays the role of moderator as "Mistershu" to ensure the smooth flow of the dialogue. It needs to be explained here that the original words of the text involving "The Art of War", Buffett and Munger are marked in the form of direct speech, and the part of non-direct speech is a design to make the dialogue flow smoothly or increase the vividness of the language.

The book uses a rare narrative style, so it is necessary to explain it. There are 4 threads in the book, the main line is the dialogue between Sun Tzu and Buffett and Munger, the advantage of the dialogue is that it is easier to read, but it is easy to grasp the theme. Therefore, the author has added a wedge to the front of each dialogue to play the role of an outline; After the dialogue, a part of "Mistershu Praise" was added as a summary and promotion. In addition, in order to add richness and interest, the author interspersed each chapter with two stories, one is a war story and the other is an investment story. Of course, these four threads are intrinsically related, but it is not impossible to read any part of the book as long as you can finally put together a complete picture like a puzzle. Hopefully, this special narrative will enhance your reading pleasure!

❉ Notes:

(1) The cross-time and space dialogues between Sun Tzu and Warren Buffett and Munger in this book are all fictional. In order to make the dialogue more vivid and interesting, the author imagines that Sun Tzu can travel through time and space to modern times, and enjoy military cases from ancient and modern China and foreign countries. Therefore, Sun Tzu will introduce cases that did not happen during his lifetime, and ask the reader to pay attention to the distinction.