Investing Rules You Can Learn From Kathy Xu, China’s Top Female Venture Capitalist Who Invested In JD.com
Hey readers,
For this week’s post, I’m highlighting a great inspiration of mine.
This lady is Kathy Xu – the founder of Capital Today, a firm she started in 2005. Among her many accomplishments, she made 150x returns from JD.com’s IPO. She believes that her top 5 companies will always contribute over 90% of her total gains.
She seldom gives out interviews. Here are the biggest takeaways from my readings:
Qualify Your Companies
Our money is hard-earned and it deserves to be invested with strong growth companies, not weak companies. An investor needs to have a set of criteria before investing in any company.
Look at the top 3 things:
- Growth rate
- The number of years it can grow
- How certain is the growth rate
For a young and matured company, 40% and 20% growth rates are the minimum respectively. A 20% growth for 10 years is very powerful in the long run.
What happens if we lower our standards? How about choosing a company with a 10% growth rate?
Using this table below, you can see the compounding differences between a company growing at 20% versus 10%. So don’t compromise.
A Good Business > A Good Founder
If we put an outstanding CEO in a low-margin construction company versus an average CEO in a high-margin software company, which CEO would do better?
The answer is very straightforward. It is the CEO of the software company.
Before buying any stock, ask yourself:
- Is the business a great business?
- Is there value in doing this?
- What kind of pain point is it solving?
If the business is bad, it will be a mediocre company at best. It will be difficult to succeed.
The Importance of Conviction
Many investors trade in and out of stocks within days. Most investors become renters, instead of owners. The stock market is becoming more volatile and it’s more difficult to hold on to stocks.
For Kathy, she has the capacity to hold on to her companies for a long time because she has a deep understanding of her businesses. She makes her judgement of her companies by studying the patterns of past winners.
She encourages investors to improve their information input to have a better output.
Understanding Compounding
Kathy’s investment in Yifeng Pharmacy grew from $30 million to $400 million in 11 years. Then, in two years, it made another $600 million.
Just one decision guided by conviction and patience.
Similar to Buffett’s wealth, the bulk of the returns came much later.
Her sharing reminds me of Tesla.
Tesla took 3 years to grow its share price by 137%. Then, within 2 years, its share price grew by close to 600%. If an investor held from the start, the returns would be more than 10x.
The difficulty here is staying invested because our eyes tend to wander and we might just sell our golden goose to buy something else.
Unconventional Concentration
“There are not many good companies. If you found a few winners, hold on to them, double down and triple down. That’s how you win.”
My personal opinion is that Kathy is a very skilled investor and she has the experience to feel comfortable being a concentrated investor. However, this may not be suitable for new investors.
For reputable fund managers, a 15-20% allocation on a single stock is seen as a form of concentration already. I don’t encourage new investors to have such allocations unless they have done their due diligence and valuation work.
Lifelong Learning to Compound Success
- Study patterns of past winners
- Discuss with smart people in your industry to learn more about blindspots
- Perform deep dives into companies
Do this repeatedly.
Summary
- Qualify a Good Business
- A Good Business > A Good Founder
- The Importance of Conviction
- Understanding Compounding
- Unconventional Concentration
- Lifelong Learning to Compound Success
If you wish to learn more about Kathy Xu, this is an excellent video by Wizards Institute:
Miscellaneous
This week, my team and I will be making a trip to the United States. We are visiting Oregon, Omaha for Berkshire Hathaway’s Annual General Meeting, before ending our trip in New York. We’d love to meet new people! If you know of anyone who we should meet, send me a message on Telegram here!