Author: Ren Junjie (任俊杰) Original Language: Chinese (Simplified) Market Focus: A-shares and Hong Kong-listed Chinese companies Investment Style: Long-term value investing with emphasis on business quality and psychological discipline
Ren Junjie's "Through the Fog" is a philosophical and practical guide to value investing in the Chinese context. The "fog" is the uncertainty, noise, and confusion that surrounds financial markets — the constant barrage of news, opinions, predictions, and emotions that obscure the fundamental truth about businesses and their value.
The central argument:
| Source | Description | Impact on Investors |
|---|---|---|
| News cycle | Daily headlines, earnings surprises, geopolitical events | Creates urgency to act, usually destructively |
| Market predictions | Analyst forecasts, GDP predictions, interest rate guesses | Creates false confidence in an unknowable future |
| Peer pressure | Others making money in hot stocks, FOMO | Leads to abandoning sound strategy |
| Personal emotions | Fear during crashes, greed during bubbles | Overrides rational analysis |
| Information overload | Too many data points, conflicting signals | Paralysis or impulsive action |
| Short-term focus | Quarterly earnings, monthly performance metrics | Loses sight of multi-year value creation |
Ren argues that the fog is not a temporary condition that can be solved with better data or smarter analysis. It is a permanent feature of markets because:
Instead of trying to eliminate the fog (an impossible task), the value investor should:
A business worthy of long-term investment must demonstrate:
Quality Score Card:
[ ] Consistent revenue growth (5+ years, >= 10% CAGR)
[ ] Stable or expanding profit margins
[ ] High and sustainable ROE (>= 15% for 5+ years)
[ ] Strong free cash flow generation
[ ] Low or manageable debt levels
[ ] Clear competitive advantage (see Section 4)
[ ] Competent and honest management
[ ] Industry with favorable long-term dynamics
[ ] Products/services with real customer value
[ ] Ability to reinvest at high returns
Ren places enormous emphasis on only investing in businesses you genuinely understand:
If you cannot answer all five questions, the business is in the fog — do not invest.
| Category | Characteristics | Examples in China |
|---|---|---|
| Consumer Monopoly | Strong brand, repeat purchase, pricing power | Kweichow Moutai (茅台), Haitian Soy Sauce (海天) |
| Platform Business | Network effects, high switching costs | Tencent, Alibaba |
| Infrastructure Monopoly | Natural or regulatory monopoly, essential service | China Yangtze Power (长江电力) |
| Niche Dominance | Small market leader, specialized product | Mindray (迈瑞), CATL in early stage |
| Cyclical Quality | Great business but cyclical earnings | Gree Electric (格力) |
Adapting Warren Buffett's moat concept to the Chinese context:
Moat Durability Score:
Strong (5+ years visible):
- Brand moats in consumer staples
- Network effects in dominant platforms
- Regulatory moats with stable policy
Moderate (3-5 years visible):
- Switching cost moats (technology may evolve)
- Cost advantages (competitors may catch up)
Weak (< 3 years visible):
- Technology moats (disruption risk)
- Scale moats in rapidly changing industries
Watch for:
Key metrics and what to look for:
| Metric | Healthy Range | Red Flag |
|---|---|---|
| Revenue growth (5-year CAGR) | >= 10% | Volatile or declining |
| Gross margin stability | Stable or rising | Declining > 3% per year |
| Operating margin | >= 15% for quality businesses | < 10% or declining |
| Net profit margin | >= 10% | Volatile or < 5% |
| Revenue quality (cash/accrual) | High cash collection rate | Large gap between revenue and cash received |
| Metric | Healthy Range | Red Flag |
|---|---|---|
| Debt-to-equity | < 0.5 for most industries | > 1.0 (except financials) |
| Current ratio | > 1.5 | < 1.0 |
| Goodwill / Total assets | < 10% | > 20% (acquisition-heavy) |
| Receivables growth vs revenue growth | Receivables growing slower | Receivables growing faster |
| Inventory days | Stable or declining | Rising significantly |
This is the most important statement for Ren:
Key Cash Flow Tests:
1. Free Cash Flow (FCF) = Operating Cash Flow - Capital Expenditure
-> Must be consistently positive for 5+ years
-> FCF should be >= 70% of net income (earnings quality test)
2. Cash Conversion Ratio = Operating Cash Flow / Net Income
-> Should be >= 1.0 over a 3-year rolling average
-> Ratio < 0.7 consistently = earnings quality problem
3. Capital Expenditure Ratio = CapEx / Operating Cash Flow
-> < 30% = light capital needs (ideal)
-> 30-50% = moderate capital needs
-> > 50% = heavy capital needs (less attractive)
4. Owner Earnings = Net Income + Depreciation - Maintenance CapEx
-> The true earning power of the business
-> Must be positive and growing
Cross-reference all three financial statements for consistency:
Valuation is not about finding the "exact" value of a business — this is impossible. Valuation is about establishing a reasonable range and ensuring you do not overpay.
Intrinsic Value = Sum of future free cash flows, discounted to present
Simplified approach:
1. Estimate normalized free cash flow (average of last 3 years)
2. Assume a growth rate for the next 10 years
Conservative: GDP growth rate (5-6% for China)
Moderate: Industry growth rate
Optimistic: Company's historical growth rate
3. Assume a terminal growth rate (2-3%)
4. Discount rate: 10% (Ren's standard for A-shares)
Value = FCF * (1+g) / (r-g) for perpetuity model
Or detailed year-by-year projection for 10 years + terminal value
Fair PE = 1 / Required Return Rate * (1 + Expected Growth Rate)
Example:
Required return: 10%
Expected growth: 15%
Fair PE = 1/0.10 * (1 + 0.15) = 11.5x
Adjusted for quality:
High-quality business: Fair PE * 1.2-1.5
Average business: Fair PE * 1.0
Cyclical business: Fair PE * 0.7-0.8
Ren establishes strict guardrails to prevent overpaying:
| Business Quality | Maximum PE | Maximum PB |
|---|---|---|
| Exceptional (strong moat, >20% ROE) | 25x trailing earnings | 5x |
| Good (moderate moat, 15-20% ROE) | 20x trailing earnings | 3x |
| Acceptable (weak moat, 10-15% ROE) | 15x trailing earnings | 2x |
| Cyclical (at normalized earnings) | 12x normalized earnings | 1.5x |
These are maximum limits, not target entry prices. Actual entry should be well below these levels.
Margin of safety is the difference between the intrinsic value estimate and the purchase price. It serves three purposes:
| Business Quality | Minimum Margin of Safety |
|---|---|
| Exceptional (highest conviction) | >= 25% below estimated fair value |
| Good | >= 30% below estimated fair value |
| Acceptable | >= 40% below estimated fair value |
| Uncertain / first-time analysis | >= 50% below estimated fair value |
entry_price = fair_value_estimate * (1 - required_margin_of_safety)
Example:
Estimated fair value: 50 yuan per share
Business quality: Good (30% margin required)
Maximum entry price: 50 * (1 - 0.30) = 35 yuan
You should be willing to buy at 35 yuan or lower.
If the market price is 40 yuan, you wait.
If the market price is 30 yuan, you buy aggressively.
Ren emphasizes that the hardest part of margin of safety is waiting. The market may not offer your price for months or years. During this waiting period:
Ren advocates for a concentrated portfolio:
Ideal Portfolio Structure:
Top 3 holdings: 50-60% of portfolio
Next 3-5 holdings: 25-35% of portfolio
Cash reserve: 10-20% of portfolio
All positions in high-quality businesses
No more than 30% in any single sector
Minimum 3 different sectors represented
Cash is not a drag on performance — it is an option on future opportunities:
Ren does not advocate regular rebalancing. Instead:
Buying requires the intersection of three conditions:
BUY when ALL three are true:
1. Business quality is confirmed (quality checklist passed)
2. Price is at or below the entry price (fair value - margin of safety)
3. You have available capital to invest
If any one condition is not met, do not buy.
Historically, the best buying opportunities for value investors in the A-share market arise during:
Step 1: Stock appears on watchlist at target entry price
Step 2: Re-verify business quality (has anything changed?)
Step 3: Re-verify valuation (is the margin of safety real?)
Step 4: Start buying — 30% of intended position
Step 5: If price continues to decline, buy another 30% at a lower price
Step 6: If price declines further, buy the final 40%
Step 7: If price rises after initial buy, add only if still below fair value
Ren dedicates significant attention to the mathematics of compounding:
Compounding examples (starting with 100,000 RMB):
At 10% annual return:
5 years: 161,051
10 years: 259,374
20 years: 672,750
30 years: 1,744,940
At 15% annual return:
5 years: 201,136
10 years: 404,556
20 years: 1,636,654
30 years: 6,621,177
At 20% annual return:
5 years: 248,832
10 years: 619,174
20 years: 3,833,760
30 years: 23,737,631
The key insight: a modest improvement in annual returns, sustained over decades, produces dramatically different outcomes. The value investor's edge is not spectacular annual returns but consistent above-average returns over long periods.
To hold a stock for 5-10+ years, you need:
Every time you sell and buy, you incur:
Ren estimates that the average A-share retail investor loses 3-5% per year to excessive trading. Over 20 years, this compounds to a massive value destruction.
Ren is very strict about selling — there are only three valid reasons:
The business quality has fundamentally and permanently declined:
Note: A single bad quarter is NOT business deterioration. A cyclical downturn is NOT business deterioration.
The stock price has risen to a level that implies wildly optimistic assumptions:
You have identified a significantly superior investment:
Value investing is simple to understand but extraordinarily difficult to execute because of psychological challenges:
| Challenge | Description | Required Response |
|---|---|---|
| Buying fear | The stock is cheap precisely because the market is fearful. You must buy when you feel scared. | Trust your analysis, not your emotions |
| Holding boredom | Quality stocks may be flat for years while speculative stocks soar. | Remember: compounding works over decades |
| Selling greed | When the stock is up 100%, greed says "hold for 200%." | Sell based on valuation, not feelings |
| Regret | After selling, the stock may go higher. After buying, it may go lower. | Accept that you cannot be perfect |
| Social pressure | Friends and family making money in hot stocks while you sit in "boring" value stocks. | Your timeline is different from theirs |
| Information anxiety | Feeling the need to read every piece of news and react. | Most news is noise. Ignore it. |
Ren's practical prescriptions:
When you feel the urge to act:
1. Stop. Do not place an order.
2. Ask: "Has the business changed?"
- If NO: do nothing. The price change is noise.
- If YES: re-analyze the business thesis.
3. Ask: "Is my action based on analysis or emotion?"
- If ANALYSIS: proceed after a 24-hour cooling period.
- If EMOTION: do nothing. Walk away from the screen.
4. Ask: "Will this matter in 5 years?"
- If NO: do nothing.
- If YES: take considered action.
A stock that appears cheap on PE or PB metrics but is cheap for good reasons:
Defense: Focus on business quality first, valuation second. A cheap stock in a bad business is not a value investment.
Selling a quality holding too early because:
Defense: Remember that the best returns come from holding the best businesses for the longest time.
Attempting to time the market based on macroeconomic predictions:
Defense: You cannot predict macro. Invest in businesses that can thrive across economic cycles.
Continuing to buy a stock as it declines without reassessing the thesis:
Defense: Before adding to a losing position, re-do the full analysis as if you had never heard of the stock.
| Feature | Implication for Value Investors |
|---|---|
| Retail-dominated market | Greater mispricing opportunities due to emotional trading |
| T+1 settlement | Cannot day-trade; forced to hold overnight minimum |
| Daily price limits (+/-10%) | Limits extreme daily losses but can trap sellers |
| Government intervention | Sudden policy changes can affect sectors dramatically |
| High turnover culture | Market frequently overshoots on both upside and downside |
| IPO premium | New listings are often overpriced; wait for normalization |
| Seasonal patterns | Year-end window dressing, spring restlessness (春季躁动) |
Ren adapts Buffett and Graham's principles for the Chinese context:
"The fog will never clear completely. Stop waiting for perfect clarity — it does not exist. Invest in what you can see clearly enough, with a margin of safety for what you cannot see."
"The stock market is a device for transferring money from the impatient to the patient. Your only advantage over the market is your willingness to wait."
"A great business at a fair price is far superior to a fair business at a great price. Quality, compounded over time, overwhelms cheapness every time."
"When the market panics, it sells everything — the good, the bad, the mediocre — at the same discount. This is not a crisis; it is a gift. Accept the gift."
"Do not confuse the stock price with the business. The stock price tells you what other people think the business is worth today. The business tells you what it is actually worth over time."
"The most profitable action in investing is also the hardest: doing nothing. Holding a great business while the world around you panics, while friends chase hot stocks, while commentators predict doom — this inaction is the source of wealth."
"Every investment mistake I have made falls into one of two categories: I either compromised on business quality or I abandoned patience. There are no other categories."
"Margin of safety is not a luxury — it is a requirement. You are not smart enough to invest without it. No one is."
"Check the business quarterly. Check the price weekly at most. Check your emotions daily. Of these three, the third is the most important."
"Through the fog, the outline of a great business remains visible even when everything else is obscured. If you cannot see the outline, the fog is not the problem — you do not understand the business."
This specification synthesizes the core methodology from "穿过迷雾" by Ren Junjie, structured as an actionable implementation guide for value investing in the Chinese market with emphasis on business quality, valuation discipline, and psychological resilience.