Tao and the art of investing in modern China
If you can’t practice it, that means you don’t understand it.
I’m writing this week’s newsletter after a trip to China, with 4am by soft siren in my ears.
It's my first time back in China since the COVID-19 restrictions were lifted in 2022. In the years since, the country has been searching for a new identity—its youth disillusioned about the future, the economy in recession—while simultaneously making breathtaking strides in technology, science, and governance.
I paused my public writing for a bit to take it all in. There’s too much to fit on a single page, and I wanted to give space for the ideas to surface.
During my stay, I found myself rediscovering Chinese books, grateful for the simple fact that I can read them. One in particular—The Tao (大道), a compilation of conversations with Yongping Duan, one of China’s OG venture investors and entrepreneurs—stayed with me. Duan’s fingerprints are everywhere: Apple, Alibaba, Tencent, Pinduoduo, and BBK Electronics, which he founded and today commands 20% of the global smartphone market through brands like Oppo and Vivo.
Some of his words struck me deeply, and I wanted to share them here. In the age of AI, I could have machine-translated the text instantly, but I chose instead to translate it by hand, line by line, the old-fashioned way.
Duan’s way of articulation could be borderline philosophical. As such, what follows is less literal than it is faithful to his spirit.
Many years ago, Yu Bin (fmr. MD at Chinese Sovereign Wealth Fund) asked me what being “capable of investing” means. Here’s my answer: it’s the same as being “capable of playing chess.” Now, I can certainly play chess — and so can Yu Bin — but in reality, they are not the same thing.
Tao needs to be grasped through intuition; Craft can be mastered through study.
Investing is simple because it follows clear principles: don't touch what you don't understand. However, it's not easy, because truly comprehending business is exceptionally challenging.
The hardest part about investing is that it’s so simple. Buying stocks is essentially buying a company, so do not invest in something you don’t understand. Understanding how businesses work is pretty easy, but really comprehending it isn't.
Knowledge is difficult; action is harder still. In practice, knowing the right thing to do is challenging, but doing things right is even more so. Thinking and believing that one already knows is easy, but practicing is hard, which means a lack of fundamental understanding.
The right thing to do in investing is to treat buying stocks like buying companies, buying the businesses of the company, and buying the discounted free cash flow of the company. You can understand this without even reading a book. You either understand it or you don’t. If you don’t understand this, reading a book won’t help either.
To do things right is to really comprehend the business of a company. Some books can help you understand a business. Buffett’s shareholder letters include both understanding the business of a company and understanding the value of a company. If repeatedly reading Buffett doesn’t help you, then other books can’t really help either. I personally don’t read that many books, but having built a business has helped me understand them better.
Netizen: I feel like you’re someone who can simplify really complex problems and make them extremely simple. I don’t know how much of that is due to nurture versus nature.
Duan: Hehe, I don't think I'm anything special. If there’s anything special about me, it’s that I spend quite a bit of time on this practice. Simplifying a very complex problem is not an easy task. A lot of the “simple” conclusions take a long time to derive, so don’t ever think I was able to do it in an instant! But overall, having an “ordinary mind” can help one find the essence of things.
Netizen: Understanding Buffett’s ideas isn’t that hard, but practicing it is more challenging than climbing Mount Everest!
Duan: If you can’t practice it, that means you don’t understand it! "Understanding" here means a bone-deep conviction—not merely reciting words without truly grasping the essence. In reality, value investing is arguably the only legitimate path to investing; otherwise, what exactly are you investing in?
The Tao needs to be grasped through intuition; the Craft can be mastered through study.
Tao is about doing the right things, or not doing things that are not right, or correcting course the moment a mistake is made – no matter how much the cost, it’s still the lowest cost.
Craft refers to tactics. It takes learning and also practicing, not something you can accomplish overnight.
It’s only helpful to first comprehend the Tao before mastering the Craft, or else it’s a total waste of time.
In fact, Buffett can’t teach us much if we haven’t already intuitively grasped it; no one can teach us anything.
I never systematically read Buffett’s work, but I agree on a fundamental level that the logic of buying stocks is buying companies. To me, this logic didn’t even stem from Buffett, but from my own heart. It’s only later, realizing that Buffett shared the same philosophy and had success with it, that I’ve started to really follow my faith. So, actually, the reason I like Buffett so much is probably because he’s a kindred spirit (“同道中人”).
Two main ideas recur throughout Buffett’s shareholder letters: one is doing the right thing, which involves identifying good companies and focusing on their long-term future; the other is doing things right, which encompasses how to find good companies and how to project their future.
The first point (doing the right thing) epitomizes the most incredible truth: the simplest truths are often the greatest. It’s incredibly challenging in practice, which’s why most people struggle to cross the chasm here and focus primarily on the market (as opposed to the company).
The second point (doing things right) is about one’s competency. Being an investor means finding businesses that you can really understand. There are businesses that Buffett understands that I don’t, vice versa. I’ve read so many of his letters and watched his lectures at universities; he’s concise, humorous, and highly logical —they are music to my ears! For those who can truly understand what he’s saying, these materials are sufficient; for those who cannot, more detailed explanations are not particularly useful.
All in all, Buffett has anything there is to say about investing. I’ve not yet met anyone who can be clearer than him!
Tao is indeed very hard to teach, and it takes one to really intuit and comprehend. If you don’t have Tao in your heart, words don’t matter. Most people are not open-minded enough to accept something that challenges their prior worldview. What really baffles me is that I could understand why, if you’ve been successful and had all these experiences, you could somewhat justify being closed-minded to new things. But the most close-minded people I know are the least successful ones. For example, if they’ve been in the stock market for 30 years (or 10, 20 years) and they didn’t make money, and when I mention Buffett and value investing, they happen to be the first to say, “But no, what about blah blah blah…”
Netizen: Changing your mindset is possible, just like I did!
Duan: hehe, then congratulations! What I meant wasn’t that it’s absolutely impossible to change, it’s just really rare. But, for some people, changing means rediscovering oneself.
Netizen: So does it mean that one can’t really comprehend your answers without an ordinary mind and self-awareness? You can only understand with those two things in mind?
Duan: Maybe it also takes time? What took me 20 years might only take you 15 years. If someone has Tao in their hearts, they can also be enlightened in an instant. It really depends on your gift!
I thought of this little story from many years ago. I was playing Go with Yigang Hua (former Go champion), and during a round of the game, I felt highly uncomfortable.
So I asked him: Why do I feel like every move I make is wrong?!
He said: It actually doesn’t matter how you play for the rest of the game, because you’ve made a mistake from much earlier.
Netizen: I remember reading something you wrote in 2016 – ‘to correct course the moment a mistake is made – no matter how much the cost, it’s still the lowest cost’ – so I decided to sell a stock that I was hesitating on selling. I lost 20%, but if I had left it alone, the loss would’ve been 60%. Practicing it really hurts!
Duan: Not practicing it would hurt even more!
Netizen: Yes, not practicing it would mean brutal losses, and missing out on good opportunities too. The longer you wait, the bigger the delta becomes and the greater the losses.
Duan: Exactly! Like the concept of opportunity cost.
Netizen: How do you know if you’re right or wrong? Some people you only know after the fact?
Duan: Haha, great question. Correcting the course as soon as possible is almost always the best strategy. In fact, there are many people in the world (including myself) who won’t correct course for whatever reason, so the mistake only grew bigger. Hehe, I definitely have made this mistake before. Everyone makes mistakes, but those who understand this principle make fewer mistakes and correct them more quickly.
Netizen: But the question is, how do you know that something is right from the beginning?
Duan: You must know when some things are just wrong. Many people know something is wrong but do it anyway, because there are temptations and benefits in front of you. For example: scams, smoking, gambling, etc.
Netizen: So, in stock investing, investing short-term is the wrong thing to do (unless you’re just having fun), true value investing means doing the right thing. Although making mistakes occasionally can be understood, don’t make principled mistakes.
Duan: That’s right!
Netizen: What can you learn from Omaha?
Duan: Although I think I do understand value investing, I’m still in awe of the depth of Buffett’s understanding. When Buffett was answering a question from a young PE guy, he said, “In PE, buying is for selling later. If I were you, I would try to make some money and then buy some good companies and hold them.” I would say something along the same lines, but it’s just not that simple.
Let’s talk about something not directly related to investing: the 80-year-old Buffett and 86-year-old Munger were answering questions at the meeting for 6 hours straight! They were both in high spirits. When I saw them the morning after, they still looked incredible and didn’t seem tired at all. That made me think that value investing is one secret to longevity.
By the way, Poor Charlie’s Almanac was a great book with an excellent foreword by Li Lu. The book had some tactical solutions to “practically hard things.” Don’t think the book is a bit expensive, because it’s totally worth it. I spent 110 dollars on the signed version by them, and it’s probably one of the best investments I've made in my life.
There’s no sufficient condition for investing.
The hardest thing in investing is that there’s no concrete sufficient condition. You can only think probabilistically. The more you understand a company, the better chance of making a good decision, but there’s never a 100% win rate. So position sizing must be informed by your own understanding.
Essentially, you can’t find sufficient conditions for investing; even the necessary conditions are hard to find.
For example, why aren’t “good business model, good corporate culture, and good management team, good price” sufficient conditions for a good investment? Because a company like this can be a fatal mistake. It’s just that a company with these properties has a much lower probability of making these fatal mistakes, with a stronger ability to recover. Hence, investing in them has a higher likelihood of success.
The hardest thing about investing is that there isn’t a sufficient condition. If there is one, then computers would outperform humans in investing.
There’s always someone in the investing industry to figure out ways to make money without understanding the underlying companies. They can’t find them. If they could, they would have a long time ago. The people who would make the most money doing investment would be mathematicians.
In the United States, I have observed professors at elite universities utilizing computers and mathematics to devise strategies for profit. Some of their assumptions were just wrong, so no matter how reasonable and “advanced” the conclusions are, they can’t get the correct result. Interestingly, these professors and I used to be in the same discipline – Econometrics (I earned my Master's in Econometrics, haha).
Netizen: Munger once said that one of Buffet’s strengths after working many years with him is that he could always see problems through the lens of permutation and combination.
Duan: I think what he meant by permutation and combination is actually probability. Overall, Buffett can approach problems very rationally; this is crucial for long-term value investing.
Investing doesn’t require any profound math, but you need the basics of probability. If you’ve never learned about probability, it’s worth roughly understanding these concepts. For example, someone claimed he's still winning after placing 100,000 bets in a casino. Anyone with a grasp of probability would immediately see that this guy’s memory is somewhat malfunctioning…
Margin of safety refers to how well you truly understand the concept. There is no 100% certainty in the mathematical sense when it comes to investing. Gambling typically refers to bets with a 48% chance of winning. What I call investing is placing bets when the odds are overwhelmingly in your favor—90% or better.
Netizen: Can you make a move when the odds are 70 or 80%?
Duan: There’s no sufficient condition for investing. What those 70 or 80% refer to is very important. If you mean the understanding of the business in 10 years, then that confidence of experience is your margin of safety.
At least 85% of the people are not suitable for investing.
Netizen: Do you think it’s good to join the investing profession right out of college? Or do you think it’s important first to operate a business to understand them truly?
Duan: To be honest, I don’t really know what kind of people are suitable for investing, but I know that roughly 85 to 90% of people going into the stock market lose money. So, if we include the interest rate, the loss ratio is even higher. Many people want to get into investing, probably thinking that it’s easier money to make, or that the money comes faster. For someone who has built and operated a business and also invested, I personally think operating a business is slightly easier than investing. Although the two are not fundamentally that different, operating a business usually only lies in an area that I’m most familiar with, so there’s less surface area for error. Investing, on the other hand, always faces new things and uncertainty, and it’s easy for investors to turn into speculators and take risks they shouldn’t take. It takes much longer for speculators to become true investors.
Investment and speculation are fundamentally different games, yet they appear almost identical at first glance. In Vegas, the owners of casinos are investors, and the ones gambling are speculators. The reason why casinos have an endless flow of customers is that there are always some customers who make money, and those who win have louder voices. As a form of entertainment, gambling small is totally fine, but gambling your entire net worth isn’t. I’ve seen many who’ve actually gambled away their entire net worth!
From a personal perspective, I think anyone can invest, as long as they understand what they’re buying and where value lies. Speculation actually requires more skills. It’s not an area I'm familiar with, and I don’t plan to learn it. When I’m free, I would rather spend time playing a couple more rounds of golf with my family.
As a new grad, there’s nothing wrong with entering investing right away, but naturally, your understanding of businesses would be weaker. However, as long as you do what you love and acknowledge your weaknesses, learning slowly will eventually lead to a deeper understanding.
As someone who claims to have extensive experience building businesses, I only understand investing better after making numerous brutal mistakes. I’ve asked Buffett what things you should NOT do in investing. He told me: do not short, do not borrow, and do not touch what you don’t understand. All these years, I’ve lost hundreds of millions of dollars in investing, and every time I lose money, I violate one of Buffett’s rules. And every time I make money is when I make money from what I truly understand. So, for a new grad, you might know a lot from reading books, but internalizing those lessons takes some brutal mistakes! So, the most important thing when you enter the space is to be realistic and conservative, don’t be defeated by just making one mistake! Because the only thing I can guarantee you is that you will make mistakes.
Regardless, investing is a very interesting endeavor. If you’re truly ready, then do it! Are you really prepared?
Netizen: What kind of person is a value investor?
Duan: I’ve been a value investor from the very beginning. When I buy a stock I always assume whether I would buy the entire company if I had enough money.
Netizen: Investing means understanding businesses, but in reality, a lot of entrepreneurs aren’t good at investing; do they not understand businesses?
Duan: Generally speaking, good entrepreneurs can become good value investors relatively easily if they can comprehend that buying stocks is essentially buying companies; however, truly understanding this is challenging.
Netizen: How do you judge someone’s success? By luck or skill?
Duan: If someone made their money by luck, sooner or later, they will lose due to their lack of skills. If someone has been “lucky” for decades, then don’t think that’s an example of survivorship bias.
Netizen: I think less than a million in principal, there’s really no need to invest in the stock market. It’s probably better to invest in one’s own or a friend’s business that you understand. I have much better returns from my own companies than from the stock market. It’s a lot of work, but I also learn a lot. When I accumulate sufficient capital, I can likely become a better investor at some point.
Duan: I really agree with what you say. What you invest in the public markets should be idle money. If you can find your own business, you should invest in your business. Actually, investing in a public company has similar fundamental principles; the difference is that you don’t have to operate the business yourself and can have people who are much more capable of running it. If you don’t know investing but want to manage your small wealth base, then delegate it to Buffett’s stocks! It’s better than managing it yourself, and you don’t have to think about it.
Netizen: Can being an individual stock investor become a means of survival and help actualize my dream of financial freedom?
Duan: I'll be blunt: you probably can't. When someone has to ask whether they can make money investing, they've already answered their own question. The most important ability in investing is the ability to think independently and rationally.
Netizen: This month Kweichow Moutai (a Chinese alcohol stock with $250B market cap) dropped 30 basis point, I don’t think my heart could take it!
Duan: If you can’t take this volatility, then you shouldn’t touch the stock market. Statistically speaking, the majority of the people who put money in the stock market lose money! This statistic is particularly noteworthy because, in the long term, the stock market tends to trend upward. But why do 80% of people lose money?!
Netizen: Although most of my capital has been in Maotai, Tencent, and Apple, I don’t think I really understood them (for example, I couldn’t understand how Apple would be different from Sony in 10 years). I’ve grown my understanding in the past decade or so, and made some money, but I'm a bit in the dark about what’s going on. I don’t really think I’ve been in a sustainable circle of competency, and I'm feeling quite anxious about that.
Duan: If you've been thinking consistently and still can't figure it out, buy the S&P 500 and get on with your life. For most people, spending too much time on “investing” isn’t worth it. It has nothing to do with your degrees or qualifications.
I realized this conversation is getting long, so I’ll share Part II next week. I hope this taste of Duan’s wisdom leaves you as intrigued as I was, and gives you a reason to come back for part II.
In Part II, Duan will cover his thoughts on index funds, the mainstream view of value investing, the “craft” of value investing, why slow is fast, and why he believes thinking about the market is typically wrong.