The Importance of Truly Understanding a Business: Investment Philosophy
Duan Yongping often emphasizes the importance of “truly understanding” a business, and it is crucial to ask: Have you really grasped it?
Warren Buffett has also shared his stock selection criteria: businesses he understands, good businesses, good management, and good prices.
Both of them put “understanding” at the top of their list.
Why is understanding so important?
- Understanding a Business is the Core of Investment Philosophy
Investment is not about watching stock price fluctuations; it is about observing the rise and fall of a business. Only by understanding the business can you truly see its potential, recognize when to buy, and know what to invest in. If you’re only chasing trends, buying whatever is rising, you’re playing a numbers game, not investing. In that case, trading futures or leveraging might be a quicker route to losing money, but it will also allow you to exit the doomed game sooner, saving time. It’s better to stop wasting your life and instead discover and develop your own talents. Of course, if you’re just doing it for fun and making random trades, that’s okay too—it might even delay Alzheimer’s.
- Understanding Is Your Moat and Competitive Edge
When you buy or sell in the market, there are always others on the other side of the trade. Why would someone sell you a stock you believe in? Because others have a different perspective. There are many smart people in the market, so why should you believe you can make money? Why wouldn’t the smarter ones sell you the overpriced stocks with large profits? This happens often. When we research a listed company, we spend a lot of time to understand its competitive advantages. Why do customers prioritize it over competitors? Similarly, as an investor, amidst all the smart people in the market, what makes you think you can make money? Your competitive edge is your deeper understanding of the business. While others see the surface, you see the substance. Others notice a company’s actions; you notice its inactions. Others focus on a product’s competitiveness; you understand the company’s cultural stability and strategic resolve. This depth of understanding is key to making money in the stock market. If you’re an expert in the liquor industry, from products to processes, from consumer preferences to management, from industry changes to company strategies, you may be deeply knowledgeable. But if the liquor market is on a downturn, should you still invest? It doesn’t matter. As long as the industry isn’t dying, you’ll find investment opportunities. You will be the one to buy at the start of the next cycle. In life, it’s not about being right many times; it’s about being right at the right time.
- Understanding Provides Safety Margin
Everyone wants to buy low and sell high, but what does “undervalued” or “overvalued” really mean? These are subjective concepts—there’s no universal standard. If there were, low P/E stocks wouldn’t exist. Understanding a business lets you move beyond simplistic numerical valuations. When you truly understand a company, you’ll know it will make a huge leap in the next decade. Even if its current valuation seems high, you’ll buy it with confidence. Conversely, if you understand the business, you’ll recognize when a seemingly cheap stock is actually a value trap, with its foundation eroded, merely squeezing out the last drop of cash flow. You’ll be able to spot trash and avoid it. If you understand the business, you’ll also see that some hot stocks, fueled by market hype or celebrity managers, are just empty stock prices, with no true value. After the mirage fades, there’ll be nothing left. If you truly understand the business, you’ll know your limits and avoid investing in businesses you don’t understand, no matter how high the market hype.
Leave a Reply