“Civilization, Modernization, Value Investing, and China” is a book by the renowned value investor Mr. Lu Li. It discusses the development of civilization, the emergence of modernization, and value investing, and explores these topics in the context of China’s actual situation. I personally feel this is an extremely valuable book worth reading repeatedly. It is of great help in understanding the logic of how this world operates and in building correct investment philosophy.

As the title suggests, this book actually covers two relatively independent topics: civilization and modernization, and value investing. It also discusses each topic’s relationship with China.

Civilization and Modernization

The Limitations of Agricultural Civilization

The author first devoted considerable space to describing the entire process of civilization’s emergence and evolution. Particularly精彩的 is the discussion of the ceiling of agricultural civilization. Agricultural civilization’s output essentially comes from photosynthesis. Plants grow through photosynthesis, and raising livestock also requires consuming plants. The upper limit of energy produced by photosynthesis is constrained by land area and per-unit land output — both of which have very clear upper limits, so natural resources also have upper limits. Limited natural resources and nearly unlimited population growth mean that the population can ultimately only be reduced through non-natural disasters.

The Emergence and Essence of Modernization

The emergence of modernization originated from the Atlantic free market economy brought by the New World and the simultaneous Scientific Revolution. 1776 was an important year when three events occurred that were crucial to modernization’s development. First, Adam Smith published “The Wealth of Nations,” whose core topic was the nature of the Atlantic economy — free trade. Second, the Declaration of Independence was issued, giving birth to a new regime deeply influenced by Adam Smith’s theories, which would greatly help the development of free markets. Third, the steam engine was created, dramatically increasing productivity. From then on, the combination of free markets and technology released astonishing power.

The free market itself is a mechanism that can continuously self-evolve, self-improve, and self-perfect. The intervention of modern technology has made this process incredibly rapid. Thus, among competing markets, the largest market will eventually become the only market.

Any organization that leaves this market will continuously fall behind, just as the Soviet Union did in its time.

Many of China’s initiatives in recent years, such as the Belt and Road Initiative and RCEP, are aimed at increasing the scale of the free market it can influence. We should thank Trump for continuously withdrawing from groups and leaving this largest free market on his own.

Modernization and China

So, could modernization have been born in China? The answer is no. Because in the process of modernization’s emergence, private capital has always played a crucial role. Since the Qin and Han dynasties, China has had a very strong central government, making it difficult for private capital to rise. Additionally, the original intent of discovering the New World was to find China. As the center of civilization at that time, China had no motivation to seek out more prosperous places.

It can be said that the emergence of modernization originally stemmed from a series of very coincidental factors. The originally barbarous Anglo-Saxons won this lottery, allowing them to get ahead through a shortcut. But history will ultimately return to where it should be. So there’s no need to regret why modernization didn’t originate in China.

Over the past few decades, China’s rapid development has actually been following the path others have taken. In this situation, a strong government can play a very important role. But as we gradually catch up with others’ progress and need to explore the next direction, the free market will gradually demonstrate its advantages.

Culturally, in China, restoring traditional culture to its proper position is really the only option. Culture has deep historical and geographical origins, having long since penetrated into one’s bones. As the economy develops, people’s spiritual needs will continue to improve, and a Chinese-style Renaissance may well emerge, allowing people to rediscover the most essential parts of Chinese culture.

One day, most Chinese people will realize that the Twenty-Four Histories, Tang and Song poetry, the Four Great Classical Novels, the Analerta, the Tao Te Ching, and the Art of War — these ancient cultural heritages — are far superior to a culture that says “thank the Native Americans for being killed by us.”

Value Investing

The Current State of the Investment Industry

When it comes to investing, we must look at the current state of the entire industry. The biggest problem in the current investment industry is, of course, the inability to evaluate whether a product is good or bad. Investing is a long-term process, and short-term fluctuations have virtually no reference value. The current profit model of funds means that fund managers with poor performance can still collect large fees.

The author mentions an important concept — fiduciary responsibility. Only when most people in the industry embrace this concept can the industry develop in a positive direction.

Historical Experience of Investing

Over the long term, stocks’ returns far exceed those of any other type of asset by several orders of magnitude. In China, this is no exception. There are two reasons: first, inflation, and second, economic growth. Stocks can in fact largely reflect GDP growth.

The Philosophy of Value Investing

The basic principles of value investing are only four.

Stocks Represent Ownership of Companies

Investment returns come from company development. The reason you can earn returns is because you’ve contributed to the company’s development. This is not a zero-sum game. Profiting from betting on market fluctuations is speculation — a zero-sum or even negative-sum game no different from gambling. Therefore, value investing is the right path, the grand path. We create value for society and then receive returns — that’s all there is to it. We don’t hope to obtain returns through deception or exploitation of others.

Understanding the Market

The market is just an institution that provides you with services. You can get buying opportunities here, and you can sell when you need money. Other information the market reveals, such as the short-term fluctuations of a stock, is purely noise.

Margin of Safety

Investment is essentially a prediction of the future, and predictions are inevitably not 100% accurate. Therefore, increasing the margin of safety is particularly important.

Building a Circle of Competence

A circle of competence can be developed through long-term effort and training. Before building a circle of competence, there’s a prerequisite: we need to have awareness of our own circle of competence and be able to identify the boundaries of our abilities. This requires an honest attitude toward knowledge. When we hold a view, we need to find the smartest person who disagrees with us and be able to refute their viewpoint — only then can we claim to truly hold that view.

As for how to build a circle of competence, it’s different for everyone, depending on each person’s usual learning methods and abilities. However, Mr. Lu Li has given us some suggestions: 1. Look at businesses from an owner’s perspective; 2. Accumulate gradually; 3. Let interest and opportunity guide your research; 4. Practice more — choose a company and research it thoroughly with an investment mindset.

Who Is Suited for Value Investing

Finally, let me discuss some requirements that value investing places on one’s character.

  • Independence — one needs to value one’s own internal judgment standards more
  • Relatively objective — less influenced by emotions
  • Patience and decisiveness. These two requirements may seem somewhat contradictory, but for a value investor, one needs enough patience to wait years without acting, yet once the right moment arrives, be able to act quickly and decisively
  • Must have an interest in business

Source: https://lichuanyang.top/en/posts/44866/