After a long absence, Sister Xu returns with 26 maxims

暗涌Waves·August 28, 2023

"You don't need a high IQ to succeed."

By Qian Ren

Two days ago, Kathy Xu made a rare public appearance at a book club. A devoted follower of Charlie Munger, she delivered a substance-packed talk. (The event was a reading club for The Tao of Charlie Munger, co-hosted by Munger Academy, CITIC Press Group, CITIC Bookstore, and Enoch Study.) Known to the outside world as the "Venture Capital Queen," Xu has never shied away from expressing her admiration for Warren Buffett, Munger, and value investing. She has, in many ways, followed their playbook to the letter — as evidenced by her focused, long-term bets on NetEase and JD.com.

During the pandemic, Xu had two virtual conversations with Munger. Thrilled to be speaking with her idol, she posed a question: "I've invested in some fantastic companies, but what do I do when the fund expires and I have to sell?" Munger told her: "The best exit is to invest in great businesses like Costco — then never sell."

Xu felt struck by lightning. Indeed, since founding Capital Today in 2005, she has pursued the same investment philosophy as Munger — value investing, emphasizing the power of compounding. They both love the kind of great company where you only need to make one decision — "buy" — and then hold forever. She doesn't just treat Buffett and Munger's books as investment bibles; she has read every single one of Buffett's annual letters and requires her Capital Today colleagues to do the same and write reflections.

At the event, Xu identified three things Munger influenced her most deeply in — which are also the most important things in investing: focus, long-term patience, and lifelong learning. She also offered her interpretation of Munger's formula for happiness: inner strength, gritting your teeth and putting your head down to work hard, and a good mindset — the three determinants of one's happiness index.

The following is drawn from Xu's live remarks, edited by An Yong Waves.

VC and Value Investing Are Two Different Businesses

  1. Venture capital invests in businesses that change the world; value investing invests in businesses the world cannot change. One bets on change, the other bets on what doesn't change.

  2. My biggest takeaway from doing venture capital is that you need to hit the home run. A home run means investing in a great company — first, it has to become number one in its industry; second, you need to make 8x your money. A "home run" has two components: frequency, which is determined by luck. Were you born in the right era, the right country? Did you catch the internet wave, the AI wave? We've been truly fortunate in this regard. The other is magnitude — how much money each home run actually makes you. Only two things determine this: your ownership percentage, and how long you hold.

  3. Whether you benefit from the compounding of time depends entirely on whether you have long-term patience. Buffett became the world's richest investor because he figured this out at age 20, but most of his wealth was earned after he turned 50.

  4. The definition of a good business is that it becomes more valuable with age. In 2007, I invested in a pharmacy chain. It grew from 70 stores to several thousand and eventually went public. By then, we'd already made a lot of money and the fund expired, so we had to sell. I hated to sell because it was a good business. Buffett said the standard for backing an entrepreneur is simple: could this person be your son-in-law? Good character, not too incompetent. I felt this pharmacy's founder could be my son-in-law, so I kept holding it personally.

  5. Buffett's eyes light up when he sees cheap; my eyes light up when I see growth.

  6. Investing is an art. You have to believe in the founder because the future is uncertain. He can see the future. If you believe in him, if you have conviction, you dare to invest in him.

  7. Munger said in his 2021 annual letter that getting rich is a process to be savored — you should appreciate its subtleties, and it's better not to get rich too fast. But most people are in a hurry. He said that learning and improving every day is itself deeply rewarding. You have to be good at learning.

You Don't Need Many Opportunities in Life

  1. I often read Buffett and Munger's books, even when traveling. My husband asks why I'm reading the same book every day. The book is the same, but my cognition keeps evolving. Classics deserve to be revisited.

  2. Sometimes it feels lonely because we do things differently — we run a 28-year fund. But every time I read their annual letters, I feel like two great minds are walking alongside me. Great minds think alike. They're like old friends.

  3. Munger said in his 2015 annual letter that his success came from focus, not IQ. He only does one thing: getting to the bottom of things, thinking deeply and thoroughly, finding the right answer, and then acting on it.

  4. Munger said, you live in a thriving small town, and you invest in the three best companies there — isn't that diversified enough? I think he hit the nail on the head. Find your three stocks, and when you find them, bet big.

  5. As VCs, we used to be terrified of missing a great company. But in trying not to miss anything, we'd look at too many. Looking at too many means you don't go deep enough, and not going deep enough means you don't dare to add to your position. Later I realized investing is also the art of regret — there are many great companies you'll never invest in. But if more than half of the ones you do invest in turn out great, that's enough.

  6. You don't need many opportunities in life — four or five major ones are enough. A major opportunity means: first, you saw what others didn't; second, you not only saw it but bet big; third, you dared to hold for a long time.

  7. I once asked Munger: we've invested in some excellent businesses that are friends of time, but what do we do when the fund expires and we have to sell? Munger said, the best exit is to invest in a great business like Costco and never sell.

Learn to Get a Little Smarter Every Day

  1. Those incredibly powerful people who change the world — like Musk — how does he know so much across so many industries? Because he's an extraordinarily voracious reader.

  2. Learning is a curve. The horizontal axis is time, the vertical axis is your level of cognition. It starts off rising gradually, but later there's a very steep curve. You have to accumulate enough to reach the tipping point, though this also depends on the industry.

  3. A grand dream only becomes executable when it turns into a concrete daily habit.

  4. I write down many things in my notebook every day. When I open my eyes in the morning, before reaching for the notebook, I try to recall what I learned yesterday and force myself to remember it. This is a good way to fight the forgetting curve.

  5. Reading is definitely lonely. You can do fixed things at fixed times. I heard someone say they read at a very nice desk with a beautiful view outside — you need a sense of ritual, and then you put in the time.

  6. It's even better to have a group of friends. The best way to learn is to teach. After you've learned something, explain it to your friends — can you make it clear? And everyone should explain to each other.

  7. Methods for breaking out of your circle — skiing, golf — I don't do those and don't have time for them. My hobby is chatting with entrepreneurs. Even if I don't know their circles, I can learn from them.

  8. Some founders you can't meet — like Musk — but I can watch all his speeches. Very useful. You can still learn first principles, still make progress.

The Code to a Happy Life

  1. I read a follow-up study on Harvard graduates. The conclusion: once you have a certain economic foundation, happiness has no necessary linear relationship with wealth; it's related to intimate relationships — that's the number one factor for happiness. I thought I'd found the answer, but Munger went one level higher: happiness comes from lowering your expectations. It has nothing to do with others, only with your inner self. How strong is your inner self, how low are your expectations — that's how happy you'll be. Now that's a true master.

  2. Munger also said who you marry matters. His example was Lee Kuan Yew. Lee was always second in his class. He married the person who was first — not a very pretty wife. Meaning: find someone smart. Genes matter.

  3. Munger's words are very healing. He said you will inevitably experience suffering in this life — losing loved ones, facing all kinds of pressure and troubles. If it's unavoidable, you really need to become strong inside, able to let these things go, grit your teeth, and keep your head down working hard.

  4. Many young people say, I've heard all the principles, I understand them all, but I still can't live this life well. I don't quite agree. Munger's example shows that you can succeed without enough IQ — it's an attitude problem. Persisting with this attitude and working hard, you can still get there.

Image source | Visual China

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