Abandon Pure Technical Analysis and Adhere to Company Fundamentals

As the Pareto Principle , the 80-20 rule states that 80% of a task only yields 20% of the value of that task. This is partly true for investing. Eighty-percent of investors are losers in the market. The successful investors are few and far between. Our goal is to be neither oracles nor predictors of the precise movement of stock indices.

We do not follow stock index and price-volume analysis. We rarely use individual stock charts as the basis for investment decisions. We only partly agree to fundamental analysis. By taking a long-term view, we believe that the share price of a (well managed) enterprise will undoubtedly reflect its intrinsic value over time. Our selection criteria are quite simple. We seek enterprises that can survive. These enterprises have been established usually for a decade or more and have relatively high success track records. We strongly believe that if we own part or most shares of these enterprises, our investment will grow and breed success together with the companies.

We see ourselves as private enterprise investors rather than security analysts. We dedicate ourselves from the onset to the fundamental investment. Our first step is to screen for enterprises with long-term competitive advantages and a high probability of becoming industry leaders within 20 years. We then conduct due diligence on a company’s financial reports and announcements in a critical manner. Our analyst team conducts ground research by visiting their clients, raw material suppliers, electrical power suppliers and so on. We also investigate the actual sales statuses of these enterprises.

We spend a lot of time listening to evaluations from competitors, and at the same time, we process the data of these enterprises from different sources. Only after confirming the story and earning drivers do we begin communication with management in order to further understand its strategy. The goal of such screening is to elucidate questionable dark areas. We need to know whether management is achieving its objectives and if management has the integrity reliability we require in becoming a long-term trusted partner.

Based on quantitative benchmarks, we input data into our evaluation model to calculate its intrinsic value. The market price is then compared with the intrinsic value of the companies. If the market price is traded below to the fair intrinsic values—that is half of the value or even lower—only with sufficient safety margins would we consider taking a position. We continue to monitor all businesses conditions faced by the business and adjust the parameters every quarter according to the real market environment.

We do not invest rashly. We value patience and aim for an ideal price. We would rather lose the opportunity rather than take on un-necessary risks. In the capital market, we believe that survival should always be the first consideration. Controlling risk is the key to smart investing.

Once ready to invest, our strategy is based on concentrated investment and long-term holding. Instead of diversifying investments, we channel investment into the best enterprises. We believe that this strategy is not only a form of risk control, but a way to harness and release their actual inner value. Our strategy is not to follow blindly a diversified portfolio management. Investors with an unclear strategy need the broad and diversified investment strategy. Good enterprises are rare. Once discovered, we would invest heavily in them and hold for the long-term until the rise in share price outgrows its future earning growth. Therefore, we would not trade as frequently as others.

We may find ourselves standing at the starting point of a new era in the Chinese capital market when looking forward 30 years from now on this historical chapter. Pure Heart China Growth Investment fund will accompany you to reap the rewards from these changes.