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Interview guest: Xu Haidaohan Fund Investment Director/Fund Manager

Q1: When was the first time you came into contact with investment?

A: It was probably between 2006 and 2007. I started buying stock funds in 2006 when the stock market was doing very well. When the stock market was rising, I sold the funds. Later, when the stock market continued to rise, I decided not to buy funds anymore and buy stocks myself. Around May 2007, I started buying stocks myself, which should be the starting point of my investment. From 2005 and 2006 to now, it has been almost 20 years. There are actually many types of investment, such as stocks, futures and some other investment products.

Q2: How did you decide to choose stocks as your final choice?A: It is like this. For ordinary people, I think the stock market is a relatively fair and reasonable investment field. In my opinion, futures are a zero-sum market, that is, in futures trading, one party A and B must lose and the other party must win. If the handling fee is deducted, theoretically, A and B cannot win together. The stock market is different, because we are not only participating in the game, but more importantly, sharing the growth of the company. In the process of enterprise or industry growth, the profit of the enterprise will increase, and we can share the benefits brought by the growth of the enterprise. Therefore, we chose stocks as an investment field at the beginning, which is also in line with our actual feelings, because most investors still participate in the stock market, and everyone is more familiar with this type of asset.

Q3: How do you think your previous work experience is helpful for your current investment?: I think our education and work experience mainly cultivate our common sense, which is the so-called "common sense". My investment philosophy is also based on common sense. So your past work experience and education background, as well as the hobbies you have cultivated, will actually be transformed into a helpful aid for you when investing, helping you make better and more objective decisions. Another idea is that the industry you worked in before may give you a deeper understanding of these industries than others. But this is not necessarily the case, because sometimes there is a feeling of "darkness under the lamp". As professional technicians, when investing in communications or IT, we often see the flaws of the industry or company rather than the advantages. Because we have been immersed in this industry for many years, we see more shortcomings, which may lead to a mindset or thinking trap when investing, and we will avoid these companies or industries instead. So in order to overcome this thinking defect or trap, you need a more objective perspective. This view may be different from the understanding of ordinary people. People generally think that they will understand the industry they have worked in for many years, but due to the mindset, we will be more cautious when investing. For me, my previous work field was just an ordinary programmer, and later I became a project manager, and I saw a lower level. If you are very successful in the communications field and have reached the level of a senior professional manager, you will see many advantages that will be of great help to your investment decisions.

Q4: What is your investment philosophy?：My investment philosophy is biased towards value investing. When we invest in stocks, we pay more attention to choosing companies that can share their growth and profits, rather than participating in market games. Our investment starting point is not to buy at a low price and sell at a high price, but to make a profit by sharing the growth of the company. I hope to earn the benefits of the company's growth and value growth by investing in a company as it grows. If we share both the growth of the company's profits and the growth of the price-earnings ratio in a bull market, that is double income, which is a very ideal situation, but this is not our main goal. We pay more attention to high-win investment, that is, a successful investment is more important than an investment with high odds but low success rate. We tend to invest heavily in those varieties with high win rates, and participate in high odds varieties with small positions. In investment, we prefer low price-earnings ratios, high dividends, and growth potential varieties. High-growth varieties are usually highly valued, and such investments are also accompanied by high risks. If growth fails to materialize, it may suffer a great loss. So our favorite investment targets are those companies with low valuations, high dividends, and growth potential. In the final analysis, we pay more attention to long-term victory, not short-term gains. This strategy also confirms the old saying: "High returns come with high risks." We hope to achieve big successes by accumulating small victories.

Q5: What do you think of value investing and growth investing?: How should I put it? I think good growth investment is definitely better than good value investment. At least in my opinion, there is no doubt about this. In fact, you can observe over a long period of time. Whether it is the stock market in China or the United States, the returns brought by good growth stocks must far exceed good value investments. But as I mentioned just now, the valuations given by the market for good growth stocks are usually very high. It is much more difficult to find truly good long-term growth stocks than to find good value stocks. The difficulty of the two is different. We have a saying: do something less difficult, such as jumping over a one-meter hurdle instead of a three-meter hurdle. It is difficult to find a good high-growth target, but it is relatively easier to find a good value target. So for us, if we can find a good growth target, we will definitely give priority to investing.

Q6: People usually think that growth stocks are technology stocks and value stocks are bank stocks. Do you think this view is correct?：Well, I can only say that this is not entirely correct, but many people understand it this way. I think a good value target should be an undervalued target with a safety margin, and I can get a reasonable return when I buy it. Growth will be much more difficult because good growth stocks are not cheap in the market. In order to cover this not cheap price, you need to predict its high growth in the next three, five, or even ten years, which is very difficult. Especially in China, the stock market is more affected by policies than in the United States. In this case, it is very difficult to predict a long-term target, such as the situation in five years. Of course, there have been some successful examples in the past 20 years or even nearly 30 years, but this is probably a survivor bias. There are many excellent investors around me who have chosen companies like Tencent to share at least 10 years of growth; some have bought companies like Yangtze Power or Moutai and shared at least 10 years of high returns. Although there are value investment components in these examples, they also have high growth. But I want to emphasize that the risks taken are different. Investors need to find a balance based on their own judgment and risk tolerance.

Q7: What do you think is your investment style?A: My investment style is more prudent and growth-oriented. As I have summarized, my investment strategy is "stay true to the right and do something surprising". We will choose some targets with high winning rates to obtain reasonable returns, and we will also choose some targets with high growth and high odds with small positions. In terms of investment style, most people will pay attention to some details, such as whether the fund manager is biased towards the left or right, whether he prefers large-cap, mid-cap or small-cap when selecting targets, or whether he adopts a top-down or bottom-up selection method. When choosing investment targets, we have no particular preference for large-cap, mid-cap and small-cap. Historically, I will choose more mid-cap and large-cap stocks, but I do not exclude small-cap stocks, because many large companies have grown from small-cap stocks. If there are particularly good small-cap stocks, we will also invest in them. Of course, liquidity is an issue that needs to be considered. Even small-scale private equity funds may encounter extreme situations and lead to drawdowns if there are liquidity problems. Regarding left-side and right-side investment strategies, about 10 years ago, as an investor, I personally leaned towards the left side and firmly believed that I could outperform the market. Now in terms of left-side and right-side trend trading, I am increasingly leaning towards the right side. Although we will do some operations on the left, in most cases our trend is to the right.

Q8: How to analyze a company from the perspective of “fundamentals”?A: Our recent investment style is to choose the industry first. Because investment in the Chinese stock market is greatly affected by policies. For example, the education and training industry used to be very good. For example, New Oriental and Xueersi in the US stock market are both good targets, but after the policy restrictions, the industry declined, so we now give priority to choosing industries. Another example is the real estate industry. From 2000 to about 2020, it was a 20-year boom cycle. Companies like Vanke, Sunac and Country Garden are all excellent, but after the end of the real estate cycle, they entered a recession and the company's performance also declined rapidly. After choosing an industry, we will look at the competitive landscape of the industry. We will attach great importance to good companies in good industries, pay attention to the unique advantages of these companies in the industry and whether these advantages are irreplaceable. For example, TSMC is the world's leading chip manufacturer, and its technological advantages have enabled it to make good profits in the field of chip manufacturing. Similarly, Nvidia has made huge profits because of its advantages in the field of artificial intelligence chips. This is the advantage brought by technology. An example of brand advantage is Moutai. The market for high-end liquor in China is dominated by Moutai. This is the power of the brand. An example of cost advantage is Conch Cement, which has the lowest production cost. For non-differentiated products, we value cost advantages, but for differentiated products, such as Apple mobile phones, we focus on their brand and market position. After choosing a good industry, we also need to see whether the company's unique advantages are sustainable. If they are sustainable, we are very interested. We also need to look at corporate culture and management team. A good company may not share profits with shareholders if it does not have a good management team. Especially in Hong Kong stocks, some companies have bad behaviors, so corporate culture and management team are very important. Then we will also analyze the company's financial statements. Financial statements can help us understand the company's past performance. Most of them are used to eliminate bad companies or fraudulent companies, but they also reflect the company's fundamentals and historical performance. We do not rely entirely on financial reports to determine our investment targets, but mainly use them to exclude our investment targets.

Q9: Which indicator or indicators do you care about most?A: It's hard to say, because the financial statements of different companies will perform differently. We will pay more attention to several aspects, the first of which is revenue, especially high-growth revenue. But sometimes revenue is lagging, for example, contract liabilities will reflect the growth of the company earlier. If we are doing value investing, we will pay more attention to free cash flow, because free cash flow is the embodiment of the company's true value. In addition, financial costs are also very important. For example, power companies, especially new energy power operators, have completely different financial costs for private and state-owned enterprises. In heavy asset companies, the disadvantages of private enterprises relative to state-owned enterprises will lead to their lack of competitiveness. So financial costs are an aspect that we need to pay special attention to.

Q10: How do you conduct research and analysis on the industry to determine which cycle it is in?A: This may require a more macro perspective to look at a cycle. For example, real estate, we believe that from 2000 to around 2020, it has gone through a complete cycle. In fact, the real estate cycle in most countries is generally about 20 to 30 years. In addition, China's population trend began to reverse after 2020, so real estate is no longer a good investment cycle. Similar are liquor and infrastructure, which we believe have passed the high-growth stage. Consumption was originally a good long-term track, but due to the slowdown in economic growth, consumption will generally decline. Although there are many excellent companies in the consumer industry, such as Moutai and Aier Eye Hospital, the high valuations of these companies are also facing adjustments due to changes in the economic environment. From a more macro perspective, we need to judge whether an industry has reached the end of a cycle. For example, new energy vehicles have been a high-growth industry in the past few years, but because the penetration rate has reached 50%, the high growth stage of vehicle manufacturers has ended. Although new energy vehicles still have many market opportunities abroad, the growth rate will slow down due to trade barriers and lagging infrastructure. In addition, recent driverless and AI applications are also some high-growth industries. These emerging industries may have good investment opportunities. We need to look at the rise and fall of an industry from a macro perspective, and try to avoid industries that are shifting from high-speed growth to medium- and low-speed growth, because the valuations of these industries will undergo substantial adjustments. However, when an industry enters a stable period, there will often be a "winner takes all" situation, and the remaining companies will become giants, with improved profit margins and gross profits. This is actually a good time to invest.

Q11: What do you think of the current market situation?: I think it is very difficult to achieve a comprehensive bull market. On the one hand, the market has performed poorly in the past few years, resulting in the withdrawal of funds from the stock market; on the other hand, a large number of IPOs have been issued in the past few years, and these companies have gradually entered a period of reduction. Reduction is reasonable and legal, but it will put pressure on valuations. When there is no buying and selling in the stock market, the price of stocks will fall freely, and the decline is due to the selling pressure in the market. It takes more funds to push stocks up, while it does not require additional financial support for declines. Therefore, a comprehensive bull market faces great challenges, and a structural market is more likely to occur. Despite this, I am not completely pessimistic about the market. We mainly invest in the Chinese market, including A shares and Hong Kong stocks. The current valuations of these markets are very low. Although I have not re-tested whether they are at the lowest valuations in history, it can be confirmed that the valuations of many companies are already quite reasonable, providing good investment opportunities. In the medium term, I think the market has limited room for decline, and high-quality stocks still have investment value. Everyone also says that opportunities often appear in declines. In the future, if policy support is in place, market confidence is restored, and new incremental funds enter the market, then the structural bull market is expected to bring opportunities for a comprehensive bull market. I personally think that a comprehensive bull market is extremely difficult and may require the support of monetary policy, but it is not easy to achieve.

Q12: Which sectors do you think should be focused on in the future?A: The current investment environment is indeed very complex. From the end of last year to the beginning of this year, we focused on the central enterprise dividend sector, and this strategy performed well in the first half of the year. However, the key to investing in the dividend sector is to ensure real dividends, that is, the continuity and stability of the dividends, and the duration must be long. Against the backdrop of China's economic slowdown, we expect long-term interest rates to fall, so the central enterprise dividend sector has performed well in defensive investments. For ordinary investors, the dividend index is a relatively good choice, with obvious long-term excess returns and low investment difficulty. At the same time, we remain optimistic about gold. Although our expectations for gold last year exceeded the actual increase, gold is still an attractive investment target under the current circumstances. Because the international pricing of gold is mainly affected by the total amount of currency, considering the huge size of the US debt, gold may still have room to rise. In addition, it is also a good tool target for hedging conflicts between China and the United States.

In terms of A-shares and Hong Kong stocks, many targets are value-oriented. We found that the valuations of some small-cap companies are relatively reasonable, and these companies still have room for growth. Small-cap companies have been included in our scope. Although past experience cannot fully predict the future, from a valuation perspective, if we use the perspective of carving a boat to find a sword and all the cycles in history, we think it is not a loss to buy here. These small companies are worth paying attention to. The semiconductor industry also has pulse opportunities, especially in the context of Sino-US technological competition and the inventory replenishment cycle of consumer electronics, but this is difficult to grasp. China's semiconductor industry is facing fierce competition and price wars, resulting in lower gross profit margins. Although the industry is growing, the actual performance may not be significantly reflected due to the impact of the price war. Investors may not need to rush to invest at this stage, because it may take a long time to get a reasonable return after the price war ends and industry profits recover.

Q13: Can I continue to invest in dividend stocks?：I think for ordinary investors, especially those who prefer defensive strategies, defensive funds are an investment option that can be considered. As I said, based on the current economic environment and forecasts, China's interest rates may be in a long-term downward trend. Therefore, utility stocks and dividend-focused sectors are generally regarded as relatively stable investment directions and are worthy of investors' attention. As I emphasized, when choosing these investment targets, investors need to pay special attention to their "long-term" attributes, that is, those that can provide long-term and stable returns are better choices. In the past period of time, especially in the past six months, although the dividend sector has performed strongly, there is no lack of cyclical dividends. The sustainability of such dividends is often difficult to guarantee, at least in my understanding, they are not always able to continue stably.

Q14: How can managers manage their positions?A: Position management is indeed a part that I am good at and I think is crucial for professional investment. It can not only effectively help reduce the drawdown of the portfolio, but also avoid many potential pitfalls in the investment process. I examine my investment decisions with the mindset of a weak person. Even if I think my decision has a 90%, 95% or even 98% chance of success, I will still be aware of the remaining 2% probability of failure. It is this vigilance that makes me pay more attention to the role of position management, which can help us reduce losses in adverse situations. In my investment practice, we set strict upper limits for both industries and individual targets to control risks. At the same time, we will also try to use hedging methods to further reduce risks, but as you said, these hedging methods may be difficult for ordinary investors to implement. Professional investors can use financial instruments such as futures and options for hedging, but in actual operations, it is not easy to find a perfect hedging strategy. So we prefer to achieve a natural hedging effect by diversifying positions and investing in different industries. For example, in a high-interest rate and a low-interest rate environment, the performance of different sectors will be different. By reasonably allocating the dominant companies in these sectors, we can implicitly obtain some excess returns. I think cash also plays an important role. When the market fluctuates or individual stocks fall, having sufficient cash reserves allows us to cover positions or respond to other investment opportunities. For private equity fund managers, maintaining a certain proportion of cash positions can also effectively cope with redemption pressure, so that you will not fall into a liquidity problem.

Q15: How to avoid misjudgment of investment due to “human factors”?

A: Indeed, the difficulty of investment should not be underestimated. It largely reflects our cognitive level and ability to cope with complex market environments. As you said, no one is perfect, and it is difficult to avoid making mistakes in the investment process. The key lies in how we face and deal with these mistakes. As I said, I put myself in the position of a weak person, and remain humble and cautious, which is the first step to avoid major mistakes. When logical errors, inappropriate target or industry selection are found, decisive stop loss is the key to protecting the principal and reducing losses. However, many investors, especially retail investors, are often unwilling to stop losses in time because of emotions or fluke mentality, which is very dangerous. Consultation and communication are equally important in the investment process. When we are confused or confused, seeking advice from professionals or peers can help us see the problem more clearly and find ways to solve it. Emotional management is also one of the key factors for successful investment. Decisions made when emotional or impulsive are often irrational and prone to greater mistakes. When you find that you may be affected by emotions, it is very necessary to give yourself a cooling-off period, temporarily stay away from the market, calm down your emotions, and re-examine the problem. There is no end to the money that can be made in the market, but the principal is limited. Preserving the principal is the cornerstone of long-term investment success.

Warm reminder: The above content is for reference only and does not constitute investment advice. The market is risky and investment should be cautious.

"Private Equity Club" is jointly launched by NetEase Finance and Zemujia.