Philosophy Dissemination | Investment: A Path to Leap Forward Relying on Cognition

In 1990, 24-year-old Li Lu went to the United States with almost no financial foundation. He had no family resources or social connections to rely on, and was even not proficient in basic English communication. To cover his tuition fees at Columbia University, he took multiple part-time jobs while studying. During his hardest days, he could not even secure stable accommodation. It was against such a backdrop that after accidentally attending a lecture by Warren Buffett, he gradually formed a crucial judgment. Among all life paths, investment is one of the rare fields that does not depend on family background or personal connections, enabling people to gain a firm foothold and even change their destiny in the long run merely through rational analysis and sound judgment.

This insight was no fleeting thought. It has been verified through decades of practice and gradually evolved into a systematic cognitive framework. In his book Civilization, Modernization, Value Investing and China, Li Lu pointed out on multiple occasions that the capital market offers ordinary people institutional access to participation, and it is cognitive ability and judgment quality rather than resources or background that ultimately determine investment outcomes. Investment is widely regarded as a field dominated by information superiority and personal networks, yet this view is incomplete from the perspective of value investing. The four cornerstones proposed by Li Lu illustrate that the core competitiveness in investment essentially derives from cognition itself.

The First Cornerstone: Treat Stocks as Partial Ownership of Enterprises

When investors purchase stocks, they are essentially participating in the long-term operation of enterprises. Returns stem from sustained value creation by businesses rather than short-term price fluctuations. As Warren Buffett put it, "I have never seen anyone achieve lasting investment success solely by inheriting wealth and connections. Investment success hinges only on your understanding of enterprises and your patience." This perspective shifts investors’ focus from price movements to corporate fundamentals, bringing investment back to the judgment of business logic. Under this framework, all participants are equal under market rules, and gaps in performance mainly arise from varying levels of understanding.

The Second Cornerstone: The Classic Theory of Mr. Market

Benjamin Graham likened the market to an emotionally volatile price-quoter offering vastly different prices at different times, swinging between excessive optimism and pessimism, which are often disconnected from enterprises’ true intrinsic value. For investors, the priority is not to predict market trends, but to make rational decisions when prices deviate from intrinsic value. Li Lu emphasized in his investment practice that market fluctuations themselves create opportunities accessible to all without exclusive inside information.

During the 1998 Asian financial crisis, market sentiment turned overwhelmingly pessimistic, triggering massive sell-offs of Asian-related enterprises. Shares of brands including Nike, Reebok and Timberland slumped, with Timberland’s market value plunging to 320 million US dollars. Nevertheless, its fundamentals remained solid: the company held 275 million US dollars in current assets and 100 million US dollars in real estate assets, generating an annual net profit of around 110 million US dollars, while Asian business accounted for less than 5% of its total profits. Market sentiment magnified limited business impacts into systemic risks. Through analyzing public information, Li Lu identified this obvious value mispricing and finalized his investment decision. This case proves that rational analysis can largely replace so-called exclusive information advantages.

The Third Cornerstone: Margin of Safety

Benjamin Graham stated, "The margin of safety lies at the core of value investing. It allows investors to secure steady returns without relying on precise forecasts or special connections." Its core logic is to acquire assets at prices obviously lower than their intrinsic value, leaving ample room for judgment errors. This principle is particularly vital for investors lacking sufficient resources, who are more vulnerable to risks. Li Lu stressed repeatedly in his books that avoiding substantial losses is the primary prerequisite for investment, and the margin of safety serves as the core means to achieve this goal.

The Fourth Cornerstone: Circle of Competence

An individual’s knowledge, skills and cognitive level determine their income-generating capacity as well as the quality of investment judgments. Li Lu persisted in systematic reading and corporate data research during his student years, which was essentially continuous investment in upgrading personal cognition. Ordinary people can make progress in two ways simultaneously: improving professional skills to boost personal income, and learning investment theories systematically to build a complete cognitive framework. These two aspects jointly set the upper limit of future investment performance.

Warren Buffett remarked, "When it comes to your circle of competence, what matters most is not how broad it is, but how clearly you define its boundaries." Li Lu shared the same view that investment success depends not on the volume of information mastered, but on clear awareness of one’s own cognitive limits. Many investment failures result from venturing into unfamiliar fields.

In his book Beating the Street, Peter Lynch also mentioned that ordinary investors can outperform professional Wall Street institutions merely by applying common sense and daily observation. It proves that building cognitive advantages within familiar fields constitutes valid core competitiveness. Furthermore, many resource-endowed investors tend to overstep their competence boundaries out of overconfidence and step into unfamiliar sectors, thus amplifying investment risks. In contrast, ordinary investors who exercise strict self-restraint are more likely to secure steady returns within their own scope of understanding.

From a long-term perspective, the capital market is gradually breaking away from relational influences. While information and resources may bring temporary advantages in the short run, the market essentially functions as a value-based screening mechanism in the long term. Asset prices eventually reflect enterprises’ real intrinsic value rather than investors’ social status or background. Historical experience has shown that profits gained through non-market means are unsustainable, while value-oriented investment delivers far greater stability. For individuals short of resources, investment is not only a way to accumulate wealth, but also a reliable path to build competitive edges step by step via cognition. To some extent, it is also one of the few effective ways to break inherent class constraints and achieve long-term self-improvement. The key to embarking on this path lies in translating cognition into executable investment systems.

Step One: Build a Financial Safety Cushion to Secure Risk Bottom Lines

Prior to formal investment, set aside living expenses covering three to six months as emergency funds and keep them highly liquid. This arrangement prevents forced liquidation of long-term assets amid unexpected emergencies and ensures uninterrupted investment strategies.

Step Two: Prioritize Investing in Yourself, the Core Productive Asset

Upgrade personal professional capabilities to raise stable income streams, and lay a solid theoretical foundation for investment. Stable cash flow serves as the source of investment capital, while sound cognition acts as the core guarantee for rational decision-making.

Step Three: Make Sustained Financial Investments to Unleash the Power of Compounding

Ordinary investors do not need to pursue high-risk strategies for profits. Steady long-term accumulation works best. Regular fixed-amount investment in broad-based index funds such as CSI 300, CSI 500 or S&P 500 enables investors to share the overall growth of high-quality domestic and global enterprises. This approach requires no market timing, frequent trading or exclusive information, only consistent investment and long-term holding. The power of compounding delivers remarkable cumulative returns over time. After upgrading cognitive capabilities gradually, investors may allocate a small portion of funds to assets within familiar sectors such as industry ETFs or thoroughly researched individual stocks, always staying within their own circle of competence.

Step Four: Uphold Long-termism and Avoid Fatal Mistakes

Li Lu once said that understanding the principles of value investing and truly practicing them are two entirely different matters. In actual operations, behavioral biases rather than insufficient cognition become the biggest hindrance. Short-term market swings, emotional fluctuations and external information tend to disrupt established strategies. Therefore, investors must stick to core rules in the long run: refrain from using leverage or borrowed funds for investment, stay away from insider information, avoid emotional trading, and never invest in unfamiliar fields. Chasing market rallies and panicking amid declines rank among the most common behavioral errors, making investors miss long-term gains due to sentiment-driven decisions. These principles are simple, yet long-term adherence determines final investment results.

Charlie Munger once said, "The safest way to get what you want is to deserve it." In this sense, investment is not merely an asset allocation process, but also a journey of continuous cognitive improvement. As Li Lu noted, value investing is more than an investment method; it is a worldview emphasizing rationality, patience and long-term vision, offering a development path independent of external resources.

Numerous industries are restricted by family background, social connections and resource endowments, forcing individuals to rely on platforms and external environments for opportunities. In contrast, the investment sector follows unified rules, where returns are largely determined by personal judgment and execution discipline. As Warren Buffett put it, "Life is like rolling a snowball; what matters most is finding wet snow and a long slope." For ordinary people, the "snow" stands for continuously invested capital and upgraded cognition, while the "long slope" refers to time itself. Sustained accumulation in these two dimensions will bring relatively definite long-term returns. In this sense, the value of investment lies not only in wealth appreciation, but also in offering ordinary people the possibility of long-term accumulation and life breakthrough through constant cognitive improvement.