How did Feng Liu achieve a 370-fold increase in 9 years?

This world is complex and full of changes. We earn money through perspectives and changes rather than correcting market errors. The market is always right; the key is to act contrary after its correctness has been repeatedly proven, and one must avoid the process of its correctness being unfolded.

Feng Liu, currently a partner at Gao Yi Asset Management, is a senior fund manager with rich investment experience and unique investment insights. Feng Liu graduated from Jiangxi University of Finance and Economics in his early years and worked in sales for the fast-moving consumer goods sector at Wahaha Group after graduation. However, he did not enjoy sales work, and a chance opportunity sparked his strong interest in stock investment. After self-studying Graham's "Security Analysis" and accumulating three years of investment knowledge, Feng Liu resolutely resigned from his sales job and fully immersed himself in the stock market in 2003, starting his investment career.

It is said that he achieved a staggering 370-fold return within nine years of entering the stock market, making him a veritable "bull market player." In 2015, Feng Liu was invited to join Gao Yi Asset Management as a private fund manager, transitioning from a personal investor to a professional fund manager. Feng Liu is known for his long-term investment, value investment, contrarian investment, and high-position operations, making him a well-deserved fundamental value investor. Below is a summary of some of Feng Liu's investment philosophy:

Q: What are the core elements of contrarian investment?

Feng Liu: The core is to buy when thinking negatively. A decline is merely a manifestation of negative thinking, but not all declines represent sufficient negative thinking; sometimes, insufficient rises may also represent another form of negative thinking.

This world is complex and full of changes. We earn money through perspectives and changes rather than correcting market errors. The market is always right; the key is to act contrary after its correctness has been repeatedly proven, and one must avoid the process of its correctness being unfolded.

Most things can have different angles and interpretations. When the negative is fully manifested, a positive interpretation can unfold. Even if it is not temporary, when the negative is presented so significantly, positive changes will naturally follow.

Q: How should we understand the statement that the market is always right? It goes up and down; which is correct, the rise or the fall?

Feng Liu: Both are correct. When it rises, it is thinking positively; when it falls, it is thinking negatively. Each rise and fall is a perspective and thought process. Understanding the market means understanding its thinking and emphasis during rises and falls, and then integrating that into one's own research. The market reflects collective wisdom; it can help us refine our perspectives while gaining a sense of time and process thinking. The market has provided numerous pricing, expectations, and thought processes under different information and states, which contains great diversity and logic. Understanding these is very beneficial for our investments, allowing for a more comprehensive and objective understanding of enterprises.

Of course, saying it is always right is just an emphasis. Due to the dimensionality of perspectives, certain aspects of incorrectness will inevitably arise, but you must first recognize its correctness to understand the incorrectness. Additionally, we cannot judge the market beforehand based on results afterward; that is a completely different information foundation and possibility, and its correctness only exists in the present Q: What are the core elements of concentrated investment?

Feng Liu: It is certainty, which is probability. However, since what you consider certain others will also perceive as such, this will lower the "odds." These two points generally oppose each other, but occasionally there can be consistency under different frameworks. I have always prioritized "odds" over probability in my thinking, so I tend to diversify by buying many stocks to track. Only when I find alignment between the two will I focus my investments.

Q: What is your strategy for uncovering stocks, and what are the core criteria for stock selection?

Feng Liu: A good business model must also meet three requirements: predictable, foreseeable, and imaginable. Predictable means understanding the performance and valuation situation within a year. Foreseeable means being able to roughly sense the company's development path over three years. Imaginable means having some hope for the future ten years down the line; it can be vague, but there must be some vision. The first two determine the company's performance and sustainability, while the last one determines whether performance can be expressed in the context of rising valuations.

Additionally, it is important to clearly define whether the investment is strategic or tactical. Strategic investments involve buying hot stocks and leading companies that everyone wants, even if they are expensive; tactical investments involve buying unpopular stocks, engaging in speculative plays, and selecting companies that are temporarily overlooked but have solid fundamentals, waiting for changes under price protection.

Q: What insights do you have regarding uncovering inflection point companies?

Feng Liu: I prefer to bottom-fish, but I don't have a particular preference for inflection point companies. I categorize declines into valuation cuts, performance cuts (operational rhythm), and logic cuts. Valuation cuts are the best because the factors causing the decline are eliminated once the stock drops; performance cuts are secondary, but investing based on operational rhythm and changes can also present good opportunities; the most caution should be exercised with logic cuts, which I generally do not recommend participating in, as it is difficult to time correctly.

Of course, these three types of declines can sometimes mix together; it may start with a valuation cut, then the performance rhythm worsens, and finally, it turns out that the logic has changed, which can be quite tragic. Therefore, it is essential to leverage the wisdom of the market for judgment, using complexity to resolve complexity. One must never be overly clever; what this market lacks the least is intelligence. Individual power is insignificant in the face of a highly complex system. One should abandon cleverness and embrace humility, facing challenges with common sense, faith, and luck.

Q: You adopt a concentrated holding strategy, do not control drawdowns, and do not hedge. How do you respond to market fluctuations? Can you summarize your methods and provide a past example to illustrate?

Feng Liu: I do not respond; I remain invested. For me, fluctuations are not risks, although they may affect my mood and flexibility. In fact, many market risks can be mitigated through stock selection. Most of my gains are achieved during bear markets; as long as you understand the individual stocks, that is sufficient. Of course, encountering a systemic bear market like in 2008 can be quite painful, but even if I had to do it all over again, I would still choose not to avoid it.

This may seem a bit foolish, but it allows me to maintain a simple psychological and cognitive environment, reducing the complexity of investing. Many people miss opportunities while entangled in various dilemmas, yet fail to avoid corresponding risks. The market's direction is simple, but the process is complex. It is precisely this combination of simplicity and complexity that leads people to take actions they mistakenly believe are clever. Only by acknowledging that one does not possess the ability or temperament to challenge complexity and treating systemic losses as an obligation can one calm down and focus on individual stocks, thus facing fluctuations and tests with greater ease At the same time, gain emotional and mental strength that surpasses others.

Q: What if the market does not recognize the stocks you bought for a long time? Would you consider cutting losses?

Feng Liu: In the stock market, time is the least valuable; direction and potential changes are what matter. Therefore, I do not pursue efficiency too much. Long-term waiting has always been my experience, and it does not affect returns.

However, because this world is complex and full of possibilities, many things can have bad outcomes even if you are right. It is not uncommon to have situations where good intentions lead to bad results, not to mention the possibility of being truly wrong. Therefore, having a mechanism for reminders and corrections is necessary, but this does not conflict with patiently waiting and persisting. The distinction lies in whether one feels surprised or confused.

Q: How do you understand game theory and combine it with investment practice?

Feng Liu: I make a distinction: I prefer high attention and low purchase volume, as valuations can easily rise; I avoid high attention and high purchase or low selling volume, as these valuations face downward pressure; low attention and low purchase or high selling volume may have low valuations but increase slowly; low attention and high purchase or low selling volume do not easily see significant changes in valuation. Attention can be gauged from reports and communication heat, while purchase volume can be understood from chart stages and chip structures.

Q: You have a concentrated and long-term investment strategy, so your turnover rate should be very low, right?

Feng Liu: Not low. I just don't move my main positions much, but I frequently adjust many small positions. This is my way of staying connected with the market. My calmness comes from this activity. Before I establish my main positions, I connect with many stocks, repeatedly testing and making mistakes, opening positions again and again, to feel my own inner self through increasing and decreasing.

I often say that investment requires listening to three voices: first, the voice of the enterprise, which is understanding the fundamentals of the company; second, the voice of the market, which is using market wisdom to enhance understanding; third, the voice of one's own heart, which is a way to gain perspective and process awareness.

After all, the main position is crucial, and during the long-term holding process, one will encounter many tests. In extreme situations, one's inner shortcomings will be magnified. The process of listening and experiencing is about continuously hypothesizing and changing perspectives through increasing and decreasing positions. Everyone has positional thinking and can be influenced by their emotions; these are natural human traits that do not need to be resisted. Instead, one should make good use of their emotions, stimulate changes in them, and thus gain deeper levels of thinking and summarization.

Excerpt from Red and Green