The Dangers of Leverage – Jorge Paulo Leman's brokerage firm and Belgium mines

 During his time forming a brokerage, Lemann met a famous speculator called 'Mendoncinha'. 'Mendoncinha' decided that he would take control of the steelmaker Belgo Mineira (Belgium Mines), a giant of the sector at the time.

Mendoncinha was leveraging more and more and, in the end, in addition to giving Belgo Mineira's own shares as collateral, he gave Bill of Exchange for a financial company and everybody thought that was a good ballast, because if the stock market fell, there would be collateral. 

According to Lemann, at one point the prices of the assets collapsed, the money of the 'Mendoncinha' ended and everyone with whom the speculator dealt had losses. Also according to the businessman, the bills of exchange given in guarantee were false.

Six months after the 'Mendoncinha' break the stock market recovered and had a strong high. "I was 24 years old and I saw all that. It gave me a good sense of timing. If he had endured, he would probably be the richest man in Brazil. “

The entrepreneur remembers that his financier lost some money but did not do so badly of the operation. How could it be otherwise, he took an apprenticeship out of the situation: "I had a lesson in timing, that is, how important it is to do the right things at the right time.“

Decades later, when buying the Anheuser-Busch, Lemann would remember again that such 'Mendoncinha': "In the purchase were indebted by 54 billion dollars. Several times I thought of him. Is it Mendoncinha of the time or is this business going to work?"

It worked. Anheuser-Busch was acquired by InBev as the world's largest brewery and Lemann continues to search good deals. The 'Mendoncinha' was never seen again. 

https://financenews.com.br/2018/11/licao-que-paulo-lemman-aprendeu-com-o-mendoncinha/

Carol Loomis Interview - Becoming Warren Buffett

 

Peter Buffett Interview - Becoming Warren Buffett

 

Sandy Gottesman Interview - Becoming Warren Buffett

 

Charles Munger Interview - Becoming Warren Buffett

 

Bloomberg Wealth with David Rubenstein: Blackstone's Jon Gray

Original Interview from

https://www.youtube.com/watch?v=UKkykksZHOU

Transcript

“When I met my wife in English class I showed up wearing a suit and tie. Everyone else was in Birkenstocks. It was clear I'd made a decision which path I was on.” 

“I think it's still pretty good time for real estate. Texas and Florida are well-positioned. You should stay away from buggy whip businesses.” 

"Go where the creative and technology types are because those are the markets where they'll be the most economic activity." 

"I say to my kids all the time luck is a core competency but it wasn't all luck."

 - Jon Gray

 

Jon Gray went from aspiring journalist to become one of the top real estate investors in the world.

Jon joined Blackstone in 1992 and was the second employee in its real estate division.

I've had the opportunity to do work with Jon since his second day of Blackstone when he had just gotten out of Penn. Well I think to a degree luck is you know involved in anybody's success. I think with John it's a gross overstatement. I think it is. It is just simply raw talent.

By 2005 Jon was running Blackstone's real estate unit and spent the next 13 years building it into a behemoth with about one hundred and nineteen billion dollars of assets.

I think he has a very unique ability to combine tremendous amount of vision and understanding trends generally ahead of a lot of other people and conviction.  And he turns that conviction unlike few people I have seen into very bold big moves that have generally paid off.

What put Jon on the map was Blackstone's 26 billion dollar deal to buy Hilton on the eve of the financial crisis.

There were a lot of things going really, really wrong. I'd say Jon's leadership throughout was what I would describe as sort of a steady hand on the wheel. 

The Hilton deal ultimately became one of the most successful private equity investments of all time reaping more than 14 billion dollars in profits and catapulting Jon to the number two job at Blackstone.

He’s a natural. He's just got it all.

Seems like journalism's loss has become private equity’s gain.

 

 

David R: 

When you're growing up in the Chicago area. Did you say one day I want to be the greatest real estate investor in the world?

 

Jon G: 

No, I got here as an accident. I had grown up in suburban Chicago. I've never really been to the East Coast prior to going to college. And when I got to college I decided that I really wanted to be an English major.  I wanted to be a journalist. I wrote for the Daily Pennsylvanian and about a year into school I realized a bunch of my friends and fraternity brothers liked business.  They were in Wharton and I owned a few stocks. I liked numbers.

So I decided to get a dual degree. And that was really important for me because my senior year in college I met a young woman who was an English major. A few weeks later I got a job working for a small investment advisory firm— that was about 30 years ago. And that was Blackstone and that was my wife Mindy. So that really set me off.

And so I went from Philadelphia. I came to New York and I started at Blackstone in the private equity area and in the MBA area. And I was mostly running numbers doing pitch books for clients and ordering dinner. I had to make sure the associates got their food by seven o'clock for about a year.

And two things—

1.    The real estate market had collapsed.

2.    The visionary founders of Blackstone Steve Schwartzman and Pete Peterson said look real estate is a place we should go.

They found a guy in Chicago, John Schreiber – a terrifically talented investor and they formed a real estate business and they had no people.  I had been helping them draft their private placement memorandum for the first real estate fund. They said you seem like a reasonable person. Do you want to move over and join this group? And I talked to Mindy and to my parents and I came back and said yes— and that's how I ended up in the real estate business.

 

David R:

Ok, so what did you all do in the beginning that you have money to invest because you didn't have a fund I presume in real estate? So what did you do to raise money?

 

Jon: 

We had very little deals to begin. So the first deal I worked on was a shopping center in Chesapeake Virginia. The Great Bridge shopping center.  It was a $6 million transaction. We borrowed $4 million, so it was a $2 million equity check. And you would have thought I was buying the island of Manhattan. I was down there for three weeks. 

I mean I was down there for three weeks. I met every tenant. I was counting the car traffic. I was learning the business. And it was an amazing experience because I was the chief bottle washer. I was the waiter. I was the maître d – we were this tiny little business and I was learning it firsthand.

 

David: 

Let's talk about two deals that you did eventually that became two of the best known deals in the history of U.S. real estate I would say. The first is EOP built by Sam Zell. Can you explain what that deal was? Why was it such a risky deal and why it turned out to be for you, a very good deal?  (Blackstone sold 2/3s of the EOP portfolio, 27 billion worth of Assets, within 3 months of closing)

 

Jon G: 

I stumbled on the public real estate markets when there were companies that owned real estate that were trading well below where these buildings traded out individually.

During that time, there's this new commercial mortgage backed securities debt stack which is much lower cost than leveraged loans, and high yield that you typically use in a buyout. And we convinced the banks to let us use that to go buy real estate companies.

And beginning in late 03 through 07, I think we did 12 of these deals— where we started buying these big public real estate companies.

We used the public CMBS stack and then in many cases we would sell off pieces.

Think about it as a fruit basket. You'd sell the grapes to the people who wanted that and the bananas over here.

And that's what Equity Office was all about. We bought the biggest collection of office buildings in the United States. And so it's like running a store, where in the front end you're taking in the merchandise and in the back and you're selling it.

And so within 60 days we ultimately won the auction. We sold almost two thirds of the real estate. We paid down our debt, and we ended up owning really great real estate.

One thing people don't focus on is we kept the assets in California, New York, and Boston.

Had we kept suburban assets like Chicago and Stamford, Connecticut, our results would not have been so good.

So at the end of the day— it was a wholesale to retail arbitrage.

But the key was what we kept and held, which ultimately tripled investor capital.

 

David:  In the end it turned out to be a great deal for you.

Jon:  Yeah, right.

 

 

David: 

That people you sold the real estate to. It wasn't so good for them because the real estate market collapsed— more or less when you completed the deal.

So ultimately, did you ever buy some of that stuff back from the people you sold it to before?

Jon:  We ended up buying some of it back. And a lot of those people are my friends. No one knew at the time the music was going to stop.

 

 

 

David:

Let's talk about another deal you did that. This also turned out to be probably the most profitable buyout of all time. It is real estate related— right before the market crashed in 2007-08, you bought the entire Hilton Hotel Company. What was your thinking about buying Hilton Hotel? Was it a real estate play or a corporate play?

Jon:

It was a bit of both. We did the transaction with our real estate private equity funds, and our corporate private equity fund, because Hilton owned great real estate, like the Waldorf Astoria, the Hilton Hawaiian Village. But it also had this amazing management franchise business.

And when we bought the company it was similar to the Equity Office transaction in that we thought we were able to buy something because of the scale and because it was in the public markets more inexpensively than we could buying these assets individually.

And we also believed that the multiple was reasonable. We were paying 13 or 14 times cash-flow for what we thought was a great business. Our mistake, of course, was that our timing was terrible. We closed on the transaction at the end of 2007.

In less than a year, of course, Lehman would collapse, the global economy would be melting down, and global travel would decline dramatically.

This company's revenues would go down 20 percent. Cash flow would go down 40 percent. And we marked our largest investment ever as a firm down by 71 percent. That was not a good feeling. But what I would tell you is we believe the decline was cyclical in nature.

We still saw tremendous opportunity to grow the company around the world, and so we invested $800 million more at the bottom, we stuck with the company, it started growing. There was a cyclical recovery.

We ultimately took it public, we broke it into three different companies: a management franchise, time share, and real estate business, and we made $14 billion for our investors. So it ended well.

 

 

David: 

So, when it wasn't looking so good that you go home to your wife and say you knew told me to go into real estate and maybe it wasn't a good thing? You didn't say that?

 

Jon:  

You know it's funny in all seriousness. My wife and my children. And that that was really important.

As you know in a period of time when things are stressed— having people you can rely on and talk to and who still believe in you is really important. And it was hard because you felt terrible. You felt badly with your colleagues with your investors.

But we never lost faith in and really, for me, that experience— that searing experience at Hilton was probably the most important thing for me as an investor— because what I learned was we bought it the worst time possible and we ended up having the most successful deal of all time.

And what that said is— we had bought a really great business in what we call a great neighborhood— it had terrific tailwinds people global travel to growth industry. These brands were super valuable. And so what it's led me to think is, too often when we invest capital we focus on. I'll call it the individual house— not am I in the right sector? Do I have those tailwinds?

And in this case, this was a fundamentally great business— and we could afford to have paid too much and do it at the wrong time. But ultimately with the right management team, the right financial support— we made a bunch of money and that has really impacted everything I've done since then.

I think this shortage in housing will become more acute. And so we continue to like it as a sector to invest in. 

 

 

David Rubenstein

Call it the incredible shrinking office building— As more Americans work from home, demand for office space is plunging. The result— big investors are putting their money into warehouses that have centers and studios and other production spaces used for streaming. In January Blackstone took a majority stake in dozens of warehouses— most of them in California and Seattle. The rise of online shopping has made warehouses and other logistics properties more valuable.

Last month Blackstone bought data center operator UTSA Realty Trust for roughly 10 billion dollars. The numbers tell the story. Office space in the U.S. made up 90 percent of Blackstone's portfolio in 2015. Now it's 4 percent. Hotels where twenty three percent of the firm's portfolio in 2015 now 6 percent. But logistics properties have surged from 9 percent in 2017 to 38 percent now.

 

 

David R:

Let's talk about different two different types of real estate is residential and there's commercial. So is residential less risky or more risky than commercial?

 

Jon G:

If you talk about for-sale, single-family housing, there’s probably more risk, in the sense that you’re building something and you’re selling it, and it’s a function of the market. If you’re talking about rental housing – think about an apartment complex – that tends to be less risky because it’s less cyclical. People don’t give up their apartments when there’s some volatility but nothing like, say, office buildings or hotels.

So I would say, residential rental rates in real estate is safer and less volatile. And then commercial real estate involves office buildings; warehouses— which has been the biggest theme for us over the last 10 years. Hotels, shopping centers, senior living facilities; all of them have different risk returns depending on geography.

 

 

David: 

Another way of looking at real estate are things that are already existing and things to be built. So is it riskier and higher reward to build something, or are you more in the category of trying to buy things that already exist?

 

John: 

We generally are in the business of trying to buy existing real estate at a discount. So we bought that cosmopolitan hotel and casino in Las Vegas and we bought it for less than half of what it built for because it was built during the financial crisis.

So that to me is ideal.

Occasionally we'll build things. But in general we like to try to get into real estate at a lower basis when it's already producing income.

The problem with development is it's a bit like saying I'm an IPO three years from now. When you show up to lease up your building, you could be in a different economic environment and therefore, you may not have tenants, you may not have revenue. So we've generally bias towards existing real estate.

David R: 

Now as a general rule of thumb over the last hundred, two hundred thousand years, real estate prices generally go up— values increase generally.  But why is it that sometimes real estate developers— you read about them going bankrupt— is it because of leverage or because the values actually went down?

Jon G:

I'd say that the classic sin in real estate is you have long duration assets and people finance them short term. And so, for developers who often rely on a lot of leverage— that can get them into trouble.

The other thing that could impact real estate— particularly today, are changes in technology the ways we live and work.

So if you think about enclosed shopping malls. They were from really the postwar period until a decade ago— the best assets. A large shopping mall anchored by department stores lots of retailer’s food court. They grew value 5 percent a year on leverage 40-50 years because they were very hard. They were really fortresses.

And what's happened of course is the Internet showed up. E-commerce showed up. And that's really impacted those businesses. And we've seen sharp declines. But that happened over a long period of time. So it can be secular changes in the way we live in work. But the bigger thing generally to your point has been leverage.

 

David: 

Some people say that real estate is favorably taxed by the US government. I assume that's because of depreciation and other kinds of things. One of the most favorable parts of the US tax code for real estate is the “like-kind” 1031 exchange. President Biden has proposed changing that. Will this affect real estate?

Jon G:

It will affect individual investors who've owned assets for long time, who will harvest gains and then buy a new piece of real estate. For the institutional investors, it's less of an impact because we're selling, and we're paying taxes. The way may impact us is if there's less selling as a result.

The same thing could happen if capital gains go up. You could see some individual owners of real estate be more reluctant. But I don't think as much of an impact on the institutional market.

 

 

David: 

New York City has seen a lot of people leave during Covid. Do you expect that people will come back, work five days a week, and use all the office space in New York or similar cities that they did before?

 

John: 

There is sort of a recent bias -- that because we’ve been home, we assume that’s the way it’ll be. When we think about our company, we know we’re better together. We don’t have the formula for Coca Cola, but we have a lot of smart talented people who are connected by culture. Being together matters. It’s really an apprenticeship business, learning how to invest.

I would point out, though, outside the U.S. -- for instance, in China -- buildings are back to full capacity, and in Europe people don’t have as much space in their home lives. So not all geographies are the same. And even here, I think there’ll be a bias toward going back to the office, even though it won’t be like it was before, in full.

Yes, some companies will conclude they don’t need quite as much space, so that’ll create some additional vacancy. People will be concerned about owning office buildings, and that may create an opportunity. There will be some headwinds for a number of years and then, over time, things will recover.

 

 

David R:

A lot of people have moved to Florida and Texas, maybe for warm weather, maybe because those states don’t have income taxes. Do you think that trend will continue? And is that a good place to invest in real estate now?

 

Jon G:

It’s a bit of both. The weather, the lower cost of living, lower taxes, concerns about quality of life, crime rates— Texas is one of the fastest-growing states in the country, even though it’s enormous.

I think that will continue, and it was accelerated a bit by the pandemic. On the other hand, New York City, San Francisco— these are amazing places. And when you think about technology and innovation, entrepreneurship, immigrants – there will be a rediscovery of these cities.

My daughter is graduating from college; she wants to live there. But I think longer term the policymakers in these cities can have a big impact.

We saw it, obviously, in the 60’s, 70’s, and 80’s when these cities suffered. I don't believe that's what's going to happen.

I think with the right policy I think these cities can really thrive.

But, yes, Texas and Florida are well-positioned.

 

David: 

When you were growing up, and certainly when I was growing up; I'm older than you—

People really wanted to own their house. It was part of the American dream— to own your own house. But you've been buying a lot of rental housing. 

Now is that because you think young adults are not as interested in buying their own home and they want to rent now?

John: 

No. Home ownership rates have gone down a bit, but if you look in the last 12 months, during Covid, there’s been a surge in people wanting to own homes.

Our investment in rental housing is based on the fact that we just haven’t built a lot of housing since 2008-09.

So we've averaged less than a million homes built in the United States during that period, versus probably a million five to keep up with population and obsolescence. And so that's created support for single family values but also rental values. And I think now as the economy reopens here I think this shortage in housing will become more acute.

So we continue to like it as a sector to invest in. 

 

 

David: 

So what's the pleasure of being a real estate investor which you've been doing for almost 30 years as opposed to being a private equity investor or being some other type investor? What is it that you liked about real estate that kept you in it for 30 something years?

 

John:

I would say I love the people, I love learning about all these different places. I mean, I got to see all of the United States, and virtually all of the developed world.

You know, when you're investing in pharmaceutical businesses or other companies, it's harder to say I have real expertise about the efficacy of this drug versus that drug. But as an individual you can say—

“I've been in the neighborhood here.  I'm in Oakland today. Gosh it feels a lot like Brooklyn did. They are starting to gentrify the area. I'll connect the dots and do that.”

So I think the tangible nature of it, the experience, if you love to travel if you love to see places I think real estate's hard to beat.

David: 

So let's suppose somebody is watching this, and I say OK this guy has done a great job of building a great real estate business. I want to invest with him or I want to invest in real estate as an individual investor. What is the best way to invest in real estate?

 

John:

So for the individual investor I'd say there are a couple of ways. One is there's a public reap market where you can invest in some excellent companies here in the United States. There are REITS frankly around the world. That's one way to do it. Another way to do it today is we have things called private rates.

We have Blackstone have a vehicle called Beat which today owns primarily logistics, and rental apartments, across the southeast and southwest the United States. And that's another way to do it. There are others who offer similar products.

For some who are more adventurous, they can partner with local developers. The challenge I worry about is just misalignment of interests and liquidity. How do you get out at some point? You’re investing and you're generally not getting a lot of diversity with that approach.

 

David: 

Are you worried about the economy now? Its economy has been pretty good but it probably will head down at some point. Economy's always correct. So if I say I won't invest in real estate is now a good time or should I wait a while before the economy to correct?

 

Jon G: 

It’s still a pretty good time for real estate for a couple of reasons. The warning signs are twofold -- too much leverage, too much capital -- and we don’t really have that in the real estate system today. The other is too many cranes, and too much building, and we’re actually below historic levels in terms of new supply.

The other thing I’d point out is that— the S&P 500 delivered something like four-times the return of public REITs since the beginning of 2020, before Covid.

So real estate is lagging coming out of the recovery, because obviously, people have been concerned about the physical world.

As the economy reopens, people go back into spaces, real estate is going to see a little bit of a bounce. I think the risk is, if interest rates move a lot.

One positive thing about real estate also, is inflation drives up the replacement cost of buildings. And that gives you a little bit of a cushion on existing real estate.

 

David:

Where should I not invest my money? 

 

Jon G:

You should stay away from buggy-whip businesses. You should stay away from landline phone companies, and some of the legacy retailers, some legacy media businesses. You want to focus on the future.

On real estate in particular, if I had one piece of advice— go where geographically the creative and technology types are, because those are the markets where they'll be the most economic activity.

So the West coast of the United States, Austin, Texas; Cambridge; Shenzhen; London; Amsterdam; Tel-Aviv; Bangalore. Tech is driving so much of the growth in this global economy. Those are the most interesting places to invest.

 

David:

Do people come up to you at cocktail parties and ask you for investment advice?

 

Jon:

You know, it's funny— they often ask me residential home prices which is not my area of expertise.

I tend to tell people to focus on the longer term. Focus on you know.

I think the danger in the world is that we live in the sort of Snapchat, Tik Tok era which is dangerous.

To be a high-conviction investor — that when you dabble, and just put a bunch of money here on things you don’t know or understand, it tends to work out badly. But when you see something, single-family housing, global logistics, the movement of everything online, and you lean into that, that’s when you have the best outcomes.

What you want to say is, “Is this fundamentally a good business? Is it in a good sector? Is this a good piece of real estate, where supply is limited, demand is favorable?” And if you own something good, hold it for a long period of time. Find those right neighborhoods to invest in, deploy your capital and then be patient.

 

 

David:  

John, thank you for a great overview of the real estate investment world and I appreciate you're giving us this time.

John:  

Thank you David. It's been terrific.

Notes From Duan Yongping's Talk at Stanford University

https://www.gurufocus.com/news/750142/notes-from-duan-yongpings-talk-at-stanford-university 

Duan's Q&A session

On Sept. 30, renowned Chinese entrepreneur and investor Duan Yongping had a conversation with Chinese students at Stanford University. For those of you who don’t know Duan Yongping, he is the key figure behind OPPO and VIVO smartphone brands. Duan Yongping won the lunch auciton with Warren Buffett in 2006 and brought Huang Zheng, founder of Pinduoduo (PDD), with him.

He reminds me a lot of Charlie Munger  – full of wisdom, multi-disciplinary and very concentrated in his investment portfolios. In fact, Duan Yongping basically only owns Apple (AAPL, Financial) and Kweichow Maotai (SHSE : 600519, Financial).

During the conversation, he revealed his secret of success, which he calls the Stop Doing List – a list of wrong things that you shouldn’t do. In his opinion, “resisting doing the wrong things” is more important than “doing the right things.” Many people often do things they know are wrong because they can't resist the temptation of short-term benefits.

The following is the translation of the Q&A:

Q1:  What is most important to you? Why?

Duan Yongping: There are different important things in life in different life stages. For me at this age, the most important things are family and friendship.

Q2: Without a sales department, what is your pricing mechanism (for OPPO and VIVO)?

Duan Yongping: If you do enough market research you will be able to set the right price when the products are on the markets. And if you are wrong, you adjust the price. The essence of (electronic products) competition is product differentiation, which means you have to provide utilities and functionalities that others cannot provide. Without differentiation, it becomes a commodity product and can only compete based on price. It’s hard to make money that way.

Q3: Have you ever tried to change your personality and your way of thinking?

Duan Yongping: No. It is very difficult to reshape your personality. But there’s a study done by the China-Europe Business School which shows there is one common personality trait among the CEOs of the Fortune 500 companies - integrity.

Q4: How should Chinese companies respond to the challenges of trade wars?

Duan Yongping: The most important thing for a company is to do the best it can do regardless of what’s going on. It doesn't matter if there is a trade war. A lot of bad companies will use trade wars as the excuse when things are not going well. A great business sees opportunities when the crisis comes.

Q5: What is your logic behind investing in an early stage business (PDD)?

Duan Yongping: I don't usually invest in early stage. I usually only invest in listed companies. I invested in Pinduoduo (PDD) for personal reasons. Huang Zheng is my good friend. I know him well and believe in him. He is among the very few people I know who just gets things.

Q6: Can you talk about your sales and marketing philosophy?

Duan Yongping: Outsiders often think that we place great value on sales and marketing. But that’s not true. In fact, for us, marketing is not that important. The most important thing is our product. No company has failed because their marketing strategy failed. Usually the failure of a company is due to the failure of its product. Of course, I am not saying that we don't want to market our products at all. In fact, our marketing is very effective. The best marketing will tell your customers what they need to know about the products in the simplest language.

I want to emphasize here that marketing is not the essence, the essence is the product. Corporate culture is the most important thing. Advertising can only affect up to 20% of consumers, and the remaining 80% is affected by the product. If marketing is not effective, the product will sell slowly. But as long as the product is good, no matter how good or bad the marketing is, the result will be the same after 20 years – the product will sell.

Q7: What opportunities do Chinese brands have in emerging market countries?

Duan Yongping: I don't know much about this, but I don't think there will be much difference – it’s all about paying attention to the needs of consumers.

Q8: Can you tell us a little bit about your lunch with Warren Buffett ?

Duan Yongping: It’s a philanthropic support for Warren Buffett. I can donate the money directly or I can donate the money through him, but I can learn something from him if I win the lunch auction. Buffett is very logical – listening to him is like listening to smooth music.

Q9: There are two business models in the smartphone industry mobile phone – the Xiaomi model and the Apple model? Which one is better?

Duan Yongping: First of all, from the perspective of customers, Apple is more powerful than Xiaomi. Secondly, in the long run, no companies can make much money by selling cheap products. The so-called cost-effectiveness is just an excuse. We must focus on users’ needs, whether it’s high-end or low-end smartphones. Even the iPhone won’t meet everyone’s needs.

In our early years, we often say our products provide good value at a cheap price. But over the years I’ve learned that we were just making excuses for inferior products.

Q10: What future trends do you see and what’s your advice for start-up companies?

Duan Yongping: This question is too difficult for me. I personally don't care much about the cutting-edge technology. I’m usually very behind in my understanding of new technology and I only invest in companies after I spend the time to understand the business. It’s Apple’s job to deal with new technologies and my job is to find companies like Apple.

Q11: With so many smartphone companies, why is Apple the most successful one?

Duan Yongping: Apple is doing something really rare – they are very focused on their products. Apple's profits come from “making the best products they can possibly make.” The strength of Apple culture is very strong. They have a very sensible "Stop Doing List." And they are focused on satisfying the users and making the best products. We don't really compete with Apple because Apple is like the National Basketball League and we are like the Chinese Basketball League – we are not on the same level.

Q12: Do you have a social “Stop Doing List?” How is it related to investing?

Duan Yongping: I am anti-social. Social events are so tiring and time consuming. There are too few friends worth making and it’s very difficult to know someone really well. In my free time I play golf. Investing is only a hobby for me even though I’ve been beating the S&P.

Q13: Can you explain OPPO and VIVO’s “Dare to be the late comer, but strive to be No.1 in the market as the late comer”? [Apologies for my awkward translation here.]

Duan Yongping: The best have no problem being the late comers. They just do it better than everyone else. The success of our company is not accidental. We stick to our “Stop Doing List” in terms of screening for partners and suppliers. Slowly we build a great reputation, which is very valuable in the long term.

Dare to be the late comer refers to the product level. It’s hard to predict market demand but if others have already educated the consumers and created the demand, it’s more certain. Strive to be No.1 in the market as the later come means we’ll make the best products out there to compete in the market.

Do the right thing first, then rightly do the right thing.

Q14: Have you ever made any investment mistakes?

Duan Yongping: I have never made any investment mistakes but I’ve made mistakes in speculations. The most stupid mistake I made was shorting Baidu (BIDU, Financial). I got short squeezed and lost 100 million to 200 million U.S. dollars. Buffett is right: Don’t invest (speculate) in things you don’t understand even if it means you might miss out on potential gains. Only bet on the things you understand. Focusing on understanding the business model and how the business makes money. Ninety-five percent of investors focus on what the market will do. It’s wrong.

Q15: When will you sell Apple? Why?

Duan Yongping: I don’t need to sell great companies.

In my previou article, I shared the translated version of Duan Yongping's Q&A session with a group of Chinese students at Stanford University. Below is my translation of the second part of the Q&A session. Enjoy.

Q16: How have you expanded your circle of competency after you came to the U.S?

Duan Yongping: Circle of competency is not a circle you draw on the ground and tell others I don’t want to go out inside of the circle. The elements of circle of competency are: Be honest with yourself; know what you know; know what you don’t know. If I can understand something, it’s within my circle. Otherwise it’s not.

Apple's $1 trillion market value? I never care about this. I only care about its ability to make money. After buying a company I don’t intend to sell it unless its profitability deteriorates or there’s a better use of capital. When I buy a company there are only two filters: understandable and low price compared to value.

Q17: How do reconcile “never giving up” and “Stop Doing List” for entrepreneurs?

Duan Yongping: "Stop Doing List" is about doing the right things. If you know it is wrong, you have to stop. It’s the same with starting up a business. Doing things right is about methodology, which can be learned. If you don't know what is right or wrong, then it is difficult to achieve success in life. You have to have a clear idea of what’s right and what’s wrong and stick to doing the right thing. For example, smoking is bad, yet many people do not quit smoking. Because even though they know it’s bad, they cannot resist short-term temptation.

Q18. Why don't you speak to the media?

Duan Yongping: I don't want to leave the impression that I still control the companies (OPPO and VIVO) and steal the CEO's thunder. In fact, I have not been active in the companies for more than 10 years. If I were still of the CEOs of both companies, they would not have been unable to do so well.

Q19: What do you think are the differences between China and the U.S. in terms of starting up a business?

Duan Yongping: The U.S. is better. It’s harder to do business in China because besides running your own business, you also have to deal with a lot of miscellaneous things that don’t really matter.

Q20: You are against using leverage. But what if you miss the opportunity (by not using leverage)?

Duan Yongping: You make faster money with leverage of course. But as the saying goes, “When you walk by the river all the time, sooner or later you’ll get your shoes wet.” Why take this risk? By the way, most of our past competitors have long gone, and we are still alive, and the reason may be here.

Q21: What do you think of the smartphone protection case industry?

Duan Yongping: I don't understand it. But I know that good products don't needs to be promoted. When smartphones came out, it didn’t take much time for them to become popular. If your products don’t sell very well after launching, it’s probably because they are not good enough. You have to think about what the problem is.

Q22. Career advice for young graduates?

Duan Yongping: Fulfill your duties well and don't jump around. Many people in Silicon Valley like to quit. But I think it’s better to spend 30 years at Apple than jumping to another start-up.

Q23: What’s your advice for starting up a business?

Duan Yongping: If you don't understand what you are doing then it’s impossible to make the investors believe in you. Huang Zheng is a little bit better. He will keep asking what does this mean? Why is that? He focuses on the nature of the problem.

Q24. How do you think about corporate culture?

Duan Yongping: Corporate culture is all about mission, vision and core values. "Mission" is why the company is established. "Vision" is where the company is going. "Core values" is what is right and what is wrong.

Recruiting has two dimensions: Recruit the people that fit and recruit the people who quality for the job. Whether a candidate “fits” refers to whether there’s cultural matching. And qualification is related to his or her background experiences and abilities. It’s very dangerous to hire qualified candidates who don’t share the company’s values. Eventually they will be trouble makers.

Q25: What do you think of the Chinese companies who outsmart their competitors by taking shortcuts?

Duan Yongping: Alaska has a saying: “Taking the shortcut is the fastest way to get lost.” Success based on taking shortcuts is not sustainable.

Q26: How do you judge whether the stock price is cheap or not?

Duan Yongping: This is a question that people who pay attention to the short-term market fluctuation will ask. I don't think about it. I am concerned about the long-term and do not invest in companies I don’t understand. Anytime you start caring about what the market will do you may be on the wrong track. I don't look at the market. I pay attention to the business fundamentals. If you say a stock is expensive, how do you know? But if you have a 10-year horizon, you know it’s cheap. The market price is significantly below your estimated intrinsic value of the business, assuming you understand the business of course.

Q27. How should we understand the “Stop Doing List?”

Duan Yongping: The main thing is to do the right thing. It's not a skill or a formula, but a way of thinking: If you find something wrong, stop doing it immediately, because the opportunity cost is minimal at this time. But I can't tell you what is right or wrong or how to judge what’s right or wrong.

In terms of doing business, you should never lie to users or investors. You should know everything you say is a promise. When you don’t have the skill and a viable business plan, you shouldn’t go out and find investors. If you don’t know what you are going to do, how can investors believe in you?

As for how to do things right, it takes time to develop skill sets. If you stick to the Stop Doing List, amazing things will happen. In this regard, OPPO is the same as Apple.

"Stop Doing List" also means no shortcuts. You have to accumulate the experiences and lessons over time. When you find something wrong, stop right away. If you can stick to the “Stop Doing List,” the long-term cumulative effect is very obvious. Many people can't let go of the temptation, and they are the same 30 years later. If you are wrong, you must stop and resist the short-term temptation.

Q28: How to raise a kid in Silicon Valley?

Duan Yongping: The most important thing is to give your child a sense of security. How? Spend quality time with them. Be a good companion. Make friends with them. Put the phone away when you play with them.

Love them unconditionally. The Chinese parents often give conditional love. The Chinese also love to boast to their friends about how outstanding their kids are, which can put a lot of stress on them. The kids may think their parents only love them because they are outstanding.

I try to not say “no” to my kids unless it’s principle related. I let them explore.

Q29: What do you think of Warren Buffett (Trades, Portfolio)?

Duan Yongping: He is a very good person. He is sincere to people. He is very wise and can explain any complicated question in one sentence or two. He is so successful but kind at the same time. He is very rare.

Q30: Why do you sell Netease (NTES)?

Duan Yongping: I don’t feel too comfortable having too much capital managed by Ding Lei, who I think of as a big boy. Although the stock price proves that I may be wrong in selling my Netease stocks.

In my previous two articles I translated the first 30 questions and answers of Duan Yongping's Q&A session with a group of Chinese students at Stanford University. Below is my translation of question 31-53 and Duan Yongping's answers.

Q31: What’s your thoughts on Tesla (TSLA, Financial)?

Duan Yongping: Charlie Munger (Trades, Portfolio) once said that Musk is a proven genius. His IQ may be 190, but he thinks his IQ is 250. But to run a company, you must be rational. I think Tesla’s value is zero. The company’s culture is very bad.

Q32: How do you build a long-term friendship?

Duan Yongping: Be sincere with people.  I've learned this from Warren Buffett -- the most important thing in my life is friendship.  Therefore, be tolerant, be kind and be honest with your friends.  He didn't say you need to have a lot of friends.  A few good friends is enough.

Q33:  How do you sustain a good culture?

Duan Yongping:  There are no secrets.  The best way to maintain a good culture is to find people who share the same values because it's very hard to convince people who don't believe your culture. And you can tell by body language.

Q34: How do you choose the right partners and employees?

Duan Yongping: It would be extremely fortunate to find the right partner on your first try. You have to have your own standards and eliminate the ones who don’t fit over time. You also have to have the courage to end the partnership if you know you’ve made a mistake. The earlier the better.

Q35: Can you give an example of your "Stop Doing List"?

Duan Yongping: I can’t think of a current example. I majored in radio communications. But I didn't do this because it was not something I loved doing. When I graduated from graduate school, I found a job and my boss said that you could be the director of the company in a few years and we’ll give you an apartment. But I was not interested in them so I left.

Many people often think there aren’t many opportunities for them. But in fact, what really happens is that they do not have the courage to stop doing the wrong things. Again, when you find yourself doing the wrong thing, stop doing it right away. I always think long term. If you focus on the short-term interest, you’ll be the same in 30 years.

Q36: Are there any misunderstandings of the United States against China?

Duan Yongping: Americans' understanding of China is generally very good. I support being politically correct, because if you are not even politically correct, how can you be correct? The current president of the Americans is very confused, but I believe that it will eventually get better.

Q37: What is the most important thing about investing?

Duan Yongping: Right business with right people at right price. Right business is about the business model. Right people is about the corporate culture. Price is not that important; business and people are the most important. Culture has a lot to do with the founder. Business model is the way to make money. This is something you have to realize yourself. I can't tell you. Just like if you don't play golf, I can't tell you how fun it is.

Q38: How should entrepreneurship persist?

Duan Yongping: My understanding is very simple. If you can't hold on, you can't hold on. What you insist on is definitely something you can't put down. You will know by yourself.

Q39: What’s your view of bitcoin?

Duan Yongping: I am not interested in things that do not generate cash flow. I don't understand the blockchain. But that doesn’t mean you can’t understand it.

But I don't understand, it doesn't mean you can't read it. You have to vote for yourself to understand.

40: How do you keep calm?

Duan Yongping: It is not difficult to keep it because it is already there (it is something already in you). However, Jack Ma also said: "It is very difficult for ordinary people to keep calm.” So you have to be rational and philosophical about adverse events.

Q41: How do you find your passion?

Duan Yongping: If you always stay where you don't like, you may never know what you really like. So if you find the wrong thing, you have to stop. Try more things and you’ll find what you love.

Q42: Do you think that failure is inevitable but success is accidental?

Duan Yongping: There must be a reason for success.

Q43: If you could choose to live another life, what would you do differently?

Duan Yongping: I don't know, I didn't think about it. Maybe drink less red wine?

Q44: What do you want to tell your son at this point?

Duan Yongping: It is useless to tell him what to do. As Warren Buffett said, watch what you do, not what you say.

Q45: How do you find the right thing to do?

Duan Yongping: I have time to think. I may think for a long time and one day I may have a eureka moment. When I was thinking about the advertising lines for my first business’ major products, I thought about it for half a year. Many people are busy all day long and have no time to think. They may never understand.

Q46: ”‹”‹Is there a big crisis in China?

Duan Yongping: Some people also asked on WeChat whether there will be a big crisis coming. I said that I think we have always had some sort of crisis. Some people see problems and others see opportunities.

Q47: What do you think of the trade war?

Duan Yongping: If you look back at today 10 years from now, you’ll see the trade war, too, shall pass. If we have a bear market, Apple will come out stronger with so much cash. When the market goes down, you should buy a good company.

Q48: How did you find the mission of your company?

Duan Yongping: We slowly explored what our products should look like. If you find it is wrong, stop quickly. Take Apple's new charger as an example. They still haven’t launched the new charger after a year when they said they were going to launch it. It is definitely because there’s a problem with the charger that has not been resolved. If you don't solve it, don't push it to the market.

Q49: We are afraid of getting into the wrong occupation. But how do you choose among what you like, what you are good at and what looks like a promising industry?

Duan Yongping: If you know a job you enjoy and are good at, and the company is in a cutting-edge industry, go for it. The problem is that it's hard to know, so I would give priority to what you like. Money is not a good thing, because earning money is a lot of fun, and once you have a lot of money you lose a very important pleasure. You’ll almost always have enough money. It is more important to do what you like.

Q50: Is Apple Watch ECG FDA certification valuable?

Duan Yongping: Of course it is valuable. First of all, it attracts a lot of attention. Second, you have to have the certification for the doctors to admit its legitimacy.

Q51: What is the next breakthrough in machine-human interaction?

Duan Yongping: I don't know. But the machine is definitely getting stronger and stronger. Human beings people have lost to machines in Go. I would say this, you can't beat the machine if you speculate in the market. But in terms of investment, the machine will never beat human beings because the machine can't understand the essence of the business.

Q52: What’s your view of price discrimination (different prices for different customers)?

Duan Yongping: If there’s price discrimination, customers will find out sooner or later. Second, once the customers find out about it, they will try their best to bargain with you and waste a lot of time. This causes a lot of unnecessary issues. A consistent price will save a lot of trouble. The main thing to do is to cater to the customers’ needs. Take a look at Airbus's John Leahy.

Q53: Why do you invest in Huang Zheng and Pinduoduo (PDD, Financial)?

Duan Yongping: I have been friends with Huang Zheng for more than 10 years. I know him well and I trust him!