Summary of Key Points
This article dispels the misconception that valuation is an exact calculation, emphasizing that the essence of value investing lies not in using models to derive figures with two decimal places of precision. Instead, it involves conducting in-depth research to find certainty within uncertainty, developing a “refined intuition,” and then making decisions guided by principles such as safety margins, areas of expertise (ability circles), and risk management strategies, ultimately gaining a probabilistic advantage in the face of uncertainty.
1. Valuation is not an “exact arithmetic problem” but a “fuzzy cognitive anchor”
Many people use the DCF model to calculate company values, only to find that slight changes in growth rates or discount rates can lead to significant differences in results. This isn’t due to lack of expertise; rather, valuation inherently lacks a standard answer from the start. Just as no one can precisely determine whether a cup of milk tea should cost 3.8 yuan or 4 yuan, the future is always full of uncertainties—no one can predict with 100% certainty a company’s revenue next year or market competition in ten years.
Textbooks define intrinsic value as the present value of future cash flows, but this definition requires predicting business conditions for decades, which is practically impossible. The pursuit of precise figures can lead to misleading accuracy (for example, assuming a 10% annual growth rate when it might actually be only 5%). True valuation involves letting go of the obsession with exact numbers and focusing on directions that are “fuzzy but certain.”
2. The anchor of valuation: Identifying “unchanging structural factors”
Since the future is uncertain, what do value investors really estimate? The answer is to focus on stable, unchanging factors:
- People will still drink cola in ten years (consumption habits are hard to change);
- The demand for essential medicines won’t suddenly disappear (health needs are fundamental);
- People prefer to deposit their money with large banks (trust is built over time).
These facts are not guesses but conclusions drawn from observing industry trends, brand recognition, and consumer behavior. When analyzing a company, the goal is to identify the most stable and resilient elements among thousands of uncertainties (such as茅台’s strong brand position) and use them as anchors to roughly estimate its future earnings—without needing precision to the billion level; it’s enough to know that it can continue to generate profits and won’t collapse easily.
3. Safety margin: Using a “buffer” to handle uncertainty
Admitting the possibility of making mistakes is crucial in value investing. A safety margin acts as a buffer against errors. You don’t need to know the company’s exact value (10 billion or 11 billion yuan); if its current market value drops to 4 billion yuan and you’re confident it’s worth more, you can buy into it. For example, you don’t need to know an old person’s exact weight to determine if they are underweight; similarly, if a company’s market value falls significantly below its fair range, even if the valuation is slightly off, you won’t suffer significant losses. A safety margin turns vague predictions into a rigorous investment principle: you’re betting that the current price is too low and the chances of it rising are higher than falling.
4. Areas of expertise (ability circles): Reducing uncertainty in familiar fields
Value investors don’t try to understand everything; they focus on their areas of expertise. For instance, after twenty years of studying the home appliance industry, you have a deep understanding of the competitive landscape, cost structures, and management styles of companies like Gree and Midea. Your predictions about their sales next year are based on extensive data and experience, not mere guesses. Conversely, if you don’t understand AI but invest in AI stocks, even with precise forecasts, you may still make mistakes due to a lack of industry knowledge. An ability circle defines your “battlefield boundaries,” limiting uncertainty by investing only in areas where you have an advantage.
5. Rational decision-making: Using discipline to turn intuition into reliable choices
Intuition alone is not enough; value investing is a system of rational decision-making:
- Diversification: No matter how confident you are in a company, don’t invest all your money (e.g., limit your investment to 10%) to avoid black swan events.
- Stop-loss strategies: If the core logic of a company changes (e.g., its competitive advantage is compromised by new technology), recognize it and exit promptly, rather than hoping for a rebound.
- Long-term commitment: This approach aims at accumulating returns over time through probabilistic advantages, similar to playing cards where you’ll win in the long run if you bet wisely.
In conclusion: The “intuition” in value investing is not impulsive but the result of time and diligence
Next time you struggle with Excel models, ask yourself: Does my intuition stem from a thorough analysis of the company (e.g., reviewing its annual reports for five years or using its products)? True valuation intuition is the product of time, effort, and independent thinking—it’s not guessing but finding certainty within uncertainty and using discipline to guide your decisions.
By embracing these principles, you’ll no longer worry about the accuracy of valuations. Remember, the essence of valuation lies not in numbers but in your depth of understanding of the company and your ability to make decisions with discipline.