Value Investment Core Principles: Ability Circle, Opportunity Cost, and Waiting for Great Opportunities

1. Opportunity Cost and “Waiting for Great Opportunities”
   : The core of value investing lies in identifying and waiting for ‘no-brainer great opportunities’ rather than being distracted by ‘a bunch of ordinary opportunities’. Munger emphasizes that when you see an opportunity clearly superior to others, you can firmly eliminate the remaining 98%[1]. Investors should understand that ‘opportunity cost’ is the price of giving up other high-quality opportunities: with limited capital, investing in an unfamiliar target or switching frequently is likely to miss excellent opportunities while increasing the probability of wrong judgments. Therefore, use ‘whether it is within the ability circle’ and ‘whether it has long-term judgment ability’ as decision filters, give up small opportunities without absolute certainty, and leave time and capital for truly excellent and understandable long-term investment targets[2].

2. Subtraction Thinking and Waiting for High-Quality Targets
   : Just as Didi drivers only wait for big orders during peak traffic hours, investors should also do ‘subtraction’ — streamline potential targets, retain a few truly high-quality companies with reasonable valuations through reverse screening, rather than chasing all opportunities that seem to have slight highlights. This concentrated and patient holding approach aligns with the concept of ‘fewer opportunities but higher quality’[2].

3. Construction and Dynamic Expansion of the Ability Circle
   :
   • Clarify Boundaries
     : First, map out the industries and companies you truly understand and take them as your core ability circle. Buffett says the size of the ability circle doesn’t matter, but you must clearly define its boundaries and avoid making decisions outside of it[2][3].
   • Deepen Understanding
     : Conduct in-depth research around dimensions such as the company’s business model, moat, cash flow, and management quality, and be able to judge its sustainability for at least 5 to 10 years, not just short-term performance[2].
   • Evidence Accumulation
     : Accumulate experience and knowledge through regular tracking, research, and communication with industry participants, and gradually expand the ability circle over time, but always maintain the discipline of ‘only betting within the scope you understand’[2].
   • Opportunity Screening Mechanism
     : Continuously compare the ‘valuation-quality-growth’ combination of all potential targets within the ability circle, and introduce the concept of ‘margin of safety’ to judge whether the current price is sufficiently lower than the intrinsic value[3]. Once a high-quality and reasonably priced opportunity is confirmed, dare to take a heavy position; if there is no clear advantage, it is better to wait.

4. Ability Circle Practice Example: Moutai (600519.SS)
   : High-quality consumer leaders represented by Moutai have high ROE (36.48%), ultra-high profit margins (net profit margin 51.51%, operating profit margin 71.37%), and a healthy balance sheet structure (current ratio 6.62, quick ratio 5.18)[0]. Within the ability circle, investors can build high confidence in future cash flows through understanding its stable brand premium, channel control, and pricing power. When the valuation is reasonable (such as the current P/E ratio of 19.79x) and the price retracts, it is worth waiting and acting decisively instead of diverting energy to other unfamiliar ‘hotspots’[0].

5. Balancing “Waiting” and “Missing”
   : In practice, self-calibration can be done through a ‘time/opportunity trade-off table’: set clear entry criteria (quality, valuation, event trigger) for each opportunity you are interested in; if it does not meet the criteria, continue to wait and hold cash for the next better opportunity. This not only avoids chasing ups and downs but also prevents missing truly high-quality targets due to over-waiting; the risk control for ‘missing small opportunities’ lies in continuously optimizing the ‘screening threshold’ and ‘ability circle cognition’ to gradually reduce waiting costs.

6. Suggestion to Enable Deep Research Mode (for More Detailed Data)
   : If you want to further quantify changes in the competitive landscape of targets and industries within the ability circle, or need to conduct a centralized comparison of multiple candidate companies, you can use the deep research mode to obtain more detailed industry data, daily technical indicators, and financial report tracking to help make more scientific judgments between ‘waiting’ and ‘acting’.

[0] Gilin AI Data - Moutai (600519.SS) Company Overview and Historical Stock Indicators (https://gilin-data.cn/company/600519?lang=zh)
[1] Investment Data Network - “Buffett and Munger’s Wonderful Discussion on Company Valuation” (https://www.touzid.com/article/282)
[2] LJF.COM - “Investment to Simplicity — Building a Value Investment System from the Origin” (https://ljf.com/2024/01/13/1337/)
[3] Sina Finance - “Buffett’s Investment Philosophy and Methodology” (https://finance.sina.com.cn/money/smjj/smdt/2021-03-08/doc-ikkntiak6307312.shtml)