Status Quo, Mission, History and Investment Philosophy

2013-06-17

HUANG Xiaojie, founding partner of JD Capital, presently General Manager of Tongchuangjiuding Management Co., Ltd. (JD Group) This is an excerpt of HUANG Xiaojie’s speech at the second-quarter training session of JD Fortune in June 2013.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

My speech comprises four parts. Firstly, I’m going to talk about my view on the status quo of China’s and the world’s economy. Then I’m going to talk about JD’s mission. What kind of agency would we become in the future? Thirdly, the development course of JD – I’m going to share with you some interesting things that happened in the history of JD. And finally, some investment tactics, i.e., what is a good investment idea and a bad one like.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Momentum and lawxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

I quoted the following words on many occasions. They are a summary of what I’ve learnt from reading books about history. If you can discern and understand such wisdom which has been held true throughout history, you will be more likely to succeed in your investment and life.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Firstly, “momentum.” It’s said in The Art of War, “Thus the energy developed by good fighting men is as the momentum of a round stone rolling down a mountain with thousands of feet in height.” It takes little force to push the stone down, but the stone would gain great momentum while rolling down the mountain, gaining an irrepressible energy. This is what “momentum” means. If one can’t discern the momentum of the time, one is prone to making big mistakes, and if one has a clear understanding of the momentum, one would generally do well.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Secondly, “law.” What is law? They are objective rules. Li, the Chinese word for “law,” appeared firstly in ancient times referring to the texture of jade, which craftsmen had to follow while polishing the jade. It is both a noun and a verb. Polishing a jade following its texture means to follow objective rules. There are also objective rules concerning investing. Following them makes it easier to succeed and going against them would often bring failure.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The third thing I want to talk about is the three phases of making money set forth by the great historian SIMA Qian. The first phase is doing physical labor when you have nothing. One cannot earn much by this. In China there are two typical groups of such people, industrial workers and farmers. What they have earned can only sustain reproduction and barely leave them any profit. The second phase is using mental power when one is relatively well off. This means to use our brains and think of new ways to earn a little money. Most of us are at this stage. The third phase is grasping the trend of the time when one is already wealthy. To make a big fortune one has to discern the historical trend and grasp the opportunities offered by the time. This is the “momentum” I mentioned just now and it takes much wisdom to grasp.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The last quote I want to share is what I wrote in an article for The Economic Observer in 2010: “We believe great things are awaiting China. In 20 years China will be much better than it was 20 years ago and also much better than it is today. That’s why we have decided to continue doing investment in this country.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Without such basic belief it would make no sense investing in China. As far as I am concerned, or even as JD is concerned, it isn’t impossible to do investment around the world, but at this stage we are devoting most of our energy, capital, resources and personnel to Chinese market, and it’s precisely because we believe China will have a great future. Though jokingly, Buffett once put it well by saying: “There is nothing more stupid than to bet against China in the coming 20 years.” He also said decades ago, “I believe there is nothing more stupid than to bet against the US. No such bet has ever won since 1776.”xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Our predication of China’s long-term economic growthxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

We believe in the next 20 years China will become better in every aspect. The reasons are as follow:xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Firstly, Chinese people have strong desire to make money and become rich, which is the primary drive for China’s economic growth. I don’t think such desire will abate in next two or three decades. The current generation has grown up in hunger and insecurity, which has brought them a strong desire for wealth, a desire that is to last throughout their lifetime. As long as there is such desire in its people, China’s economy will continue to grow steadily.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The second is about the labor. The short-term economic growth, marked by either corporate profits or production gains, is determined by demand. Because short-term supply is limited and its amount is difficult to be changed. But in the long run, the economic growth is determined by supply, because human desire is never to be totally fulfilled while all human supply is to be consumed eventually. What is the determining factor of economic supply? It is labor. The labor input is the biggest variable to determine the economic growth. Marx said: “Labor is the only source of value creation.” Nevertheless, he made a minor mistake by failing to distinguish between simple labor and complex labor or between physical labor and mental labor, narrowing the concept of labor only to simple physical labor. The fact is that mental labor is also a type of labor, and is more complex and sophisticated and might be able to create more value.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

With regards to the input of labor, I don’t think any other country can compete with China, either in terms of population size or in working time. For instance, most people in our company, myself included, work for seven days a week and over ten hours a day. A large population is working like this in China and it is hard for any other countries to do so. In western countries not many women work but in China almost all women do. It’s the same for the elderly. In western countries people over 60 are traveling around the globe but in China, most elderly people, like my 60-year-old father, are taking care of their grandchildren, which is also work. These people have constituted huge labor input for China’s economy, which will not change as along as the above pattern continues.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The third is the status quo of China’s economy and China’s position in the world. The World Bank published about a month ago the latest statistics of the global economy in 2012. What’s the economic situation around the globe right now? We don’t have to bother with countries like Luxembourg, Abu Dhabi and Kuwait which have the highest per capita GDPs in the world, because they are completely different from China. Abu Dhabi has oil to sell and Luxembourg does money laundry, neither something a huge country like China can learn from. Among large countries, I believe the US, whose population ranks the third in the world, represents the growth limit human society can see at this stage. Its per capita GDP of USD 49,000, ranking the ninth, is also the ultimate we can strive for. Its rich specialized personnel and expertise in institution, education, environment, and etc. have brought it to the top. Other countries might have higher per capita GDPs but don’t offer as much experience for us to draw upon. xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Then let’s look at Japan, whose per capita GDP of USD 43,000 is the most likely to be the growth limit of Asia. If we assume there is something true about racial determinism and even admit the argument that Asians might not be as competitive as white people under modern capitalist economy, Japan still reaches USD 43,000 in per capital GDP, and compared to that China still has much room for progress. Some might also say that Japanese are Yamato people and have samurai spirit, which Chinese people do not have, and that China has typical small-farmer culture and mindset, with many drawbacks including lack of foresight, unwillingness to make sacrifice and proneness to compromise, which they believe has set China different from Japan and made it harder for China to reach the same per capita GDP. OK, let’s presume this to make sense and drop comparing China with Japan. We can look at Taiwan. The per capita GDP of Taiwan last year was USD 19,000. What’s about the Chinese mainland? After modification it was raised a bit to about USD 6,000, which is one third of that of Taiwan and one seventh or one eighth of that of Japan and the US.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Taiwan once went through the same stage we are at now. There used to be a company, a big one actually, dealing in poor-quality cooking oil in Taiwan, and the company even went public. But Taiwan’s per capita GDP still reached USD 19,000. If we see Taiwan as a model province of China, then the rest of the country can still grow for over 30 years to be three times as good as it is now. Based on the present conditions I believe this will happen –the Chinese economy will keep growing for a long time to come.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The first three points construct a potential growth model which demonstrates how good China’s economy could be in the future. The three points are a result of years of discussion, modification and summary and we can come to this basic conclusion: China’s economy is much likely to continue to grow in the coming two or three decades.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The fourth is about external conditions, which comprise two aspects, the first being how the Chinese government deals with the economy. We have faith in our government in this respect. Firstly, it has high motivation. We believe the Chinese government wants to promote economic growth more than any other government in the world does and no matter how it restructures the economy the primary purpose is still to sustain growth. Secondly, the Chinese government obviously has the capability to realize this. By the end of last year (2012), the total assets of China’s SOEs reached 80 trillion yuan and those of China’s banks reached 130 trillion. Besides, China has a large number of mines and vast land. The Chinese government has the right to issue money and China issues more money than any other big country does in the world, which indicates that we have great strength in boosting economic growth with inflation. Therefore, the Chinese government has the ability to regulate the economy at least in the coming two decades.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Another aspect of external conditions is the international environment. Are peace and development really the mainstream of today’s world? I believe they are. Either from the standpoint of a nation or an individual, unless one acts impulsively without considering one’s own interest, one is unlikely to pick a fight. The predominant trend is to preserve systemic stability around the globe. We made the forecast back in 2005 when discussing the macro economy that “China’s GDP growth rate will drop to about 2%.” Now the rate is rather high and it will gradually get lower. Why did we predict that it would drop to 2%? Because that was the average rate globally. We believe eventually China’s growth rate will return to the global average, because China lacks motive force – it is essentially a large processing plant – and it will be hard for China to lead the world economy with its special culture and institution. Nevertheless, mere repeated construction can enable China to grow at the world’s average rate.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Now China’s growth rate is 8%, and before it drops to 2% it is always to your profit to participate in this market since during this period China’s growth rate will be higher than the world’s average. This is our view on China’s current economy and a forecast on its development for the next two or three decades. I believe it holds water since it’s the result of years of deliberation and can be demonstrated from multiple perspectives.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

What we are experiencing now: an era of a ten trillion worth of marketxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Next I’ll talk about “the big business” brought about by several trends. The first trend we are seeing is urbanization. Urban land is constantly appreciating and almost any business involving urban land is profitable.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The second trend is securitization. This has three aspects from a micro perspective. The first is stock equity taking the form of shares. This is part of what we are doing – getting companies listed and selling their shares. The second is credit taking the form of bonds – transforming your credit or debt into bonds and selling them. The third is ability taking the form of futures – turning your ability into futures, subdividing them and selling them. There is great profit in all these. Securitization is already happening in China and we have made some money in securities over the last few years.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The third major trend is the marketization of the interest rate, also offering a chance to make money. The efficiency of China’s financial market is generally low because the majority of the financial assets are owned by banks. One can make money by taking out banks’ assets and liabilities, which is the essence of interest rate marketization. The marketization of the interest rate in China is essentially a process of assets gradually flowing out of commercial banks, eventually leading to the disappearance of commercial banks’ assets. An analogy would be the Middle East supporting new energy development with money gained from selling oil. Eventually new energy will replace oil and the Middle East will realize sustainable development through new energy. If they are to restrict the development of new energy, the Middle East might become the poorest region in the world. Likewise, over the past five years many agencies have been making lots of money taking advantage of the marketization of the interest rate, and among them are trust companies, whose customers are banks and whose assets come from banks.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Let’s take banks for another example. In 2003, two financial institutions in China both had about 100 billion yuan worth of assets, one being Guotai Junan Securities and the other being China Minsheng Bank. Now one decade has passed, Guotai Junan has an asset of are RMB 300 billion while Minsheng Bank has RMB 3,000 billion, ten times that of Guotai Junan. What has led the huge gap? The main reason is that Minsheng Bank has legal access to commercial banks’ assets and then it absorbed into its own. I remember when we were discussing China’s banking sector in 2004 we mentioned Minsheng Bank and predicted that it would make big fortunes at an annual rate of 30%, increasing each year. Now it turned out that even such forecast is rather conservative – its growth over the past eight years has been more rapid than we predicted, and that was precisely due to the marketization of the interest rate. Now we are also taking advantage of this trend to do relevant business.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The fourth trend is the asset globalization, which again offers lucrative business opportunities. China will one day shift from a capital importer to a capital exporter, and by then one can earn a lot by setting up a bridge for China’s money to go out. Why did I assert that China’s capital would surely flow out? One reason is that long-term property security in China is not as good as in some foreign countries. Take house purchase for example. If you buy a house in the US, you have perpetual ownership of the house, and in Singapore, you have 900 years of disposal right on the house or land you own, while in China you only have 70 years. Even the 70 years doesn’t offer much security. If we look back to 1943, 70 years from now, after all the wars, turbulence and demolitions, who still owns a house in 1943? Therefore, it is of great benefit for Chinese, especially rich Chinese, to put their long-term property overseas.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

However, many Chinese don’t a have good understanding of the overseas market. I was also confused when I started thinking about global assets in 2011. Actually until now I’m not sure about it, like I’m not sure how much money we will be able to make in China. But no matter to what extent we will be able to build the bridge, putting customers’ money into overseas investment system is something we are definitely going to do.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The fifth trend is the industrial concentration. There are too many small enterprises in China, which will disappear sooner or later. The only way to stay for long is to grow into leading enterprises in the industry, which requires great perseverance. If you don’t have the spirit, you’d better sell the company as soon as possible. What we endeavor to do is to help build industry leaders in China and even in the world.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Our missions and opportunitiesxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

What investment strategy did we choose then based on the above understandings? The investment strategy we’ve followed over the past five years is quite simple – growth capital plus pre-IPO, which is a tiny part of the securitization trend I mentioned. We invest in excellent and mature enterprises by buying their shares and after the enterprises go public we make money from their growth and from the price differences between the primary market and the secondary market. This is a small point that we’ve chosen against a bigger historical trend. xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

We chose to do so for the following reasons: firstly, we believe when GDP growth rate is between 6% and 8%, we can find industries with growth rates up to 10%, and in these industries there must be enterprises with growth rates between 15% and 20%; secondly, there are price differences before and after the enterprises go public and we can make money from such differences; thirdly, China is going through rapid securitization, i.e., large numbers of companies are going public, and during this process we can make money from their growth and price differences, eventually earning a 20% compound interest; fourthly, China is a huge country, offering enormous market in terms of scale and time. This is the basic logic behind our decision, which I believe is the right one evidenced by our success over the past five years.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

For now we have the following business opportunities.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

First type of business: what we’ve been doing over the past five years will continue in the next five years – equity investment based on the growth of company value and valuation differences. I used to divide this type of business into three stages, “picking money, looking for money and earning money,” corresponding to three business modes, namely share holding, becoming controlling shareholder, and share transaction on the secondary market. The essence of these three modes is actually the same – value growth and valuation differences.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Second type of business: channeled arbitrage based on the fragmentation of financial assets. We can build a channel to take assets out of the pocket of the “slow” institutions, making profits from the price differences, and then return some of the assets through the channel, earning the money left. We put this type of business into two stages. The first stage is engaging in standard bonds, i.e., regular circulating bonds. Such business involves almost no risk and is relatively easy. Last year, the rate of return of it reached 40% and in this year it could range between 10% to 12%. The second stage is a transition to non-standardized bonds, i.e., allocating money got from the “slow” institutions into non-standardized assets, which is much more difficult but also much more lucrative. Our short-term plan is to devote most of the money to standard bonds and use two to three billion for non-standardized bonds. In the future we will put two to three billion yuan in standard bonds to provide liquidity and devote seven to eight billion yuan to the non-standardized to make money. We have already started such business.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Third type of business: the optimization of risk and return based on the global asset allocation. In the future it will lead to losses for a Chinese or an investor to allocate assets solely in China. The better approach for the Chinese is to allocate their assets on a global scale. For the long run I think the following places are especially recommendable. The first is the US, the most sustainable, reliable and secure place for investment acknowledged worldwide. The second is China, for its high growth rate, stable growth in the next two or three decades, and relative advantages in knowledge and competition. The third is the EU and the fourth is Africa. In 2011 Africa exceeded Asia becoming the fastest growing region in the world, but of course it still has many problems.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The above four places are of especially valuable for global asset allocation. Here lies a great opportunity for us and we will make it step by step. The volume of our present PE business can reach a size of 30 to 40 billion yuan within five years; that of the second type of business might reach 100 billion yuan within five years; and that of the third type of business will be even larger. The Blackstone Group is an example. The company was founded in the 1980s and now the value of assets under its management is USD 3.68 trillion. Those are the three types of business we are able to see at present.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

JD’s historical missionxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

What’s our mission? What’s the value of JD? An institution won’t last long or grow if it cannot create value. If an institution has improved social welfare and made society a better place and is capable of assuming more important responsibilities, it should exist and grow stronger. Then, does JD have such objective missions? For one, we have raised the efficiency of asset allocation; for another, we have improved risk and return structure for investors. This is the value we are creating for society.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

JD is a comprehensive service provider with a focus on equity investment. Our core strength lies in the ability to make value judgment, and in constantly enriching the variety of our financial services based on this ability. What about our core competitiveness? We have to steadily improve our investment ability, which is a hard power. We also have to constantly seek and grasp major market opportunities. At the same time, we should also grasp the phased and speculative opportunities for a big fortune.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

JD was established in January 2007. At that time we deemed there was great profit in buying initial offerings. Initially our office was in a basement. Of JD’s present employees only another co-founder and I had been there. How have we come this far? At first we thought it would be a huge triumph if our accumulated management scale could reached 100 million yuan, which meant we needed to invest in 50 projects since our goal was to invest two million yuan in each project. This would mean that half of all the enterprises being reviewed by China Securities Regulatory Commission then were to be invested by us, which was impossible. So we gave up the idea later. Now, we can invest 100 million yuan in one single project. xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

We set up our first fund in September 2007. From 2007 to 2009 we were faced with two major challenges, to survive and to keep a foothold in the market. Initially we were often looked down upon by others. Even in 2009 when JD grew into the ninth largest in this sector, many still belittled us. They often said, “we think this industry… while you, JD…” as if it wasn’t worth it to talk about the development of this industry with such a small company as JD. Then we earned a firm foothold after several years. Now at least no one in this industry can ignore us. In 2010 we seized the opportunities and made some breakthroughs.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

From 2011 to 2012 we made some mistakes due to excessive optimism. We overlooked two issues. Firstly, we failed to pay due attention to the law of development in this industry. There are certain rules concerning the growth rate. It’s not that enterprises shouldn’t grow fast. Instead, it means that if your development mode goes against the underlying law of this industry, you are bound to make mistakes. Secondly, we overlooked people’s feelings. At that time we recruited lots of people within a short time and then dismissed many soon after that. Each new recruit was full of expectations on JD and on their future, but was put in very difficult positions and even in great anguish when dismissed. But there was really no other way. This industry could not hold so many people and neither could us. As a result, some had to leave.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Nevertheless, we were still able to control the risk, so we didn’t make any big mistake. Some of the companies we invested in might be too expensive, but none of them are unqualified. In addition, we did recruit and then dismiss lots of people, but at the same time we also kept lots of outstanding employees.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

In 2013, we constantly reflected upon, adjusted and improved our business and opened up new business opportunities. We are now considering doing new business including bond platform, merger & acquisition, and arbitrage in overseas capital market. I think not many large PE agencies in China have thought about doing such business, but we have already started.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

I believe, thanks to the change of the regulatory mode, we are going to embrace a new era of asset management industry. In the past, when evaluating financial agencies people looked at two things, namely, its background, i.e., whether it is state owned, and its capital size. Now a slogan has been brought up, “everyone can do finance.” Anyone capable can get a license, which means all excellent people will enter China’s asset management industry, resulting in the rapid expansion of this sector. I believe eventually China’s asset management industry will nibble away all assets of banks, which is not only a major reform of China’s asset management industry and financial industry, but also a reform of China’s economy as a whole.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

We are diligent, hardworking and visionary. I believe as long as there are opportunities offered by the new era, we will definitely do better than most other financial institutions in China.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Investment tacticsxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

I. Overview of the investment historyxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Investment tools and skills are ever-changing, but the basic philosophy stays unchanged. This is evidenced by the following statistics. The average annual rate of return on stock in the US over the past 75 years was 10%, that of long-term bonds was 5% and that of short-term bonds was 3%. Over the past 200 years, corrected for inflation, one US dollar, when invested in gold, has not make much money– it only doubled, when invested in bonds, earned 1,000 times its worth, and when invested in stocks, earned 750,000 times. These are all historical statistics, but you should know that many things have remained unchanged. It has been like this in the past two centuries, and will generally stay the same in the next two centuries.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Statistics from China: In the past 20 years China’s CPI surged making the purchasing power of RMB shrink by 65%. If in 1990 you deposited 100 yuan in the bank, now the real return rate for it would be negative. If you used the the money to buy treasury bonds, the return rate would be about zero. And if you used it to buy gold, there might be some nominal return, but you actually have suffered loss, because China’s statistics are not accurate. In 1990 China practiced a scheme called “mandatory procurement of gold.” Ordinary citizens weren’t allowed to buy physical gold and so gold price was low. Now that citizens are allowed to buy gold, the price has been pushed up. The pricing mechanism is problematic. So in effect, you would lose money by buying gold over the 20 years. However, buy stocks would have brought you seven to eight times of profit.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Therefore, in the long run, even in such a highly speculative market as China, buying stocks is a sound investment choice. Why is that? I’ve pondered over this for long and came up with a definition on investing: “Investing is a competition between people on their predictions of future exchange value.” We hope we can win the competition through investment. Twenty years later, you can make more exchanges with others. Therefore, if the value of the assets will be lower in future exchanges, it’s better to sell them for something else right now.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

II. The nature of investmentxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

I believe there are two keys to successful investment:xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The first is to occupy a scarce kind of capital. The second is to make sure the assets are procreative. When answering a question at this year’s annual meeting Buffett said that gold is like a goose that never lays eggs, because it does not multiply and cannot generate cash flow. xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

If you accept this view, then there are valuable and simple assets at three levels. The first level would be gold. Though gold is scarce though with little use value. However, because of people’s inertia thinking, it has been thought to have use value. We believe such thinking will last even after one to two centuries.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

What’s scarcer than gold is urban land. Investment in urban land seldom brings huge loss since the demand is surging due to an increasing urban population. Even scarcer than urban land is human abilities to organize and innovate, which are also procreative. Among human abilities two are of especially high value for doing commercial investment, the ability to innovate and the to organize.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

I often say that one should first invest in oneself, building oneself into an intelligent, healthy and capable person. Then we should invest in our children, offering them good education and helping them grow into capable people. Thirdly we can invest in companies, which offers much more choices. Till now JD has invested in more than 200 companies, meaning we have over 200 entrepreneurs working for us. We can also invest in people. Indeed, investing in entrepreneurs is investing in people. Choose those with potential. I often say that the creativity and organizing ability of entrepreneurs is a kind of “commodity” that we can legally purchase. Getting great return from small input is the nature of investing. As long as we understand the nature of the investing practice, we can understand how to plan investment and how to choose enterprises. As long as our basic business architecture and employee structure do not undergo dramatic changes, we can solve all the problems and overcome all the difficulties we face.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

III. Primary questions about investingxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The following are my answers to some primary questions about investing in the form of stories. Here is the first story. If you bought a cup for 10 yuan on last Sunday, would you sell it for five yuan on Friday? You may say no, but in real life this frequently happens. You bought a cup for 10 yuan on last Sunday. Then on Monday morning you saw someone wanting to buy the same cup for 20 yuan, and you waved him off with a smile. On Tuesday there came someone willing to buy the cup for 30 yuan, and at this time you would think gleefully: “The cup has appreciated so much in only two days. I bought the cup for many reasons. I really have an eye for this and am quite good at investing.” Then you would predict that “tomorrow someone will want to buy it for 40 yuan.” Then on Wednesday there was really someone offering 40 yuan for the cup, and by this time you could have become quite self-satisfied.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

You would come up with all sorts of reasons to show how insightful you are and you would tell others, “tomorrow the cup’s price will rise to 50 yuan and then I’ll sell it.” But on Thursday there came only someone offering RMB 30 instead of the RMB 50 you were fancying. You got a bit agitated at this, thinking that yesterday there was someone offering RMB 40. You decided that you would wait for the one that came yesterday and then sell him the cup. But on Friday, alas, someone offered only five yuan. You got really anxious and thought, “perhaps by next Monday it would drop to one yuan. I’d better sell it right away.” Most investors and stock market speculators have had similar experiences.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Here’s the second story. If you like lamb kebabs and don’t raise lambs yourself, will you prefer lamb price to rise or to fall? Of course everyone hopes it to fall. Now that it’s one yuan instead of two yuan for each one, you can buy more with the same amount of money. Following value investment philosophy, will you hope stock prices to rise or to fall? Anyone would say, “certainly to rise after I buy it”. This is rather strange, because according to value investment philosophy you should be happy if the stocks you have bought for ten yuan drop to five yuan since that means you can buy more with the same amount of money. It’s the same story with the lamb kebab scenario. But why are you unhappy with the drop? It’s because you are in fact speculating, hoping to sell them when the price goes up. This is not in line with value investment philosophy at all.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Here is the third story. Someone once asked whether all investors on the secondary market as a whole can defeat the market indexes, emphasizing that the only thing they wanted was no more than defeating the market indexes. Well, the answer is no, because all investors in the secondary market as a whole represent the market indexes. They are the results themselves. How can one defeat oneself? This is why it is difficult to make money on the secondary market since those above average are always in the minority.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

IV. Is investing a skill or an art?xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The issue has long been a bone of contention. In some way the basic framework of JD’s thinking on investing is derived from this very question. We regard investing as both a skill and an art. It’s a skill because certain investment tactics could be improved through systematic training such as learning in industry knowledge, accounting knowledge, risk control and decision making. At the same time, investing is also an art because some investment decisions are made subconsciously, depending on a hunch that cannot be cultivated. It is an inborn talent. That we have divided the investment process into several steps, letting each person deal with only one part and letting only a few make the final decision, is an attempt to demarcate investment skills and investment art form each other.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

What determines the quality of investment decisions? I believe apart from diligence, hard work, carefulness and integrity, one’s risk preference also plays a vital part. Risk preference is determined by one’s genes and personal experiences. That’s why training might produce good investors but cannot produce masters.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Two abilities are especially important for investing. One is insight, the ability to look into the future from the present standpoint. The other is decisiveness, i.e. the ability to make the optimal decision when all the information is at place. This ability is an inborn one. People suitable for doing investment should have four qualities. The first is diligence. The second is independence, i.e. one should not blindly follow others. The third is inquisitiveness – it’s safe to say that nothing great is in store for those who have lost their curiosity. The fourth is honesty. xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

V. The enemies of investmentxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Here are some things to avoid in investment. The first is laziness. It’s human nature to expect reaping without sowing. To overcome such impulse requires one to make detailed working and learning plans and follow them tightly. The second is subjectivity. It’s also human nature that we tend to augment information favorable to us but find it hard to face our mistakes and look directly and honestly into our soul. The third is greediness, greediness for money, for information, and for achievement. The fourth is fear, including the state of shuttling between hesitation and impulse. Therefore, the key to successful investment is not to beat the market, but to beat the weaknesses in human nature, which are nevertheless truly difficult to defeat, and that’s why we have to set up external constraints to regulate ourselves.xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

VI. Comparisons between China’s present PE and secondary marketsxZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

In the long run, investing in PE and the secondary market is essentially the same, for both of their sources of income are the increase in the value of enterprise. It’s just that at this stage I think compared with the secondary market, it is easier for PE to make money. Here are the advantages of PE. Firstly, while competition in the secondary market is fierce, things are better for PE for there are fewer competitors. Secondly, information is symmetrical and investors can get to know enterprises comprehensively. Thirdly, if there is any problem after the investment, there is a chance to call it off through buy-backs. Fourthly, PE investment can better curb the downside of human nature, because with its long investment circle, it’s less likely for investors to make irrational decisions when faced with difficult situations. xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


xZG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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