How did RenTech do it? – Book Notes of “The Man Who Solved the Market”

Jim Simons’ shop Renaissance Technology, or as insiders call it “RenTech”, is the hallmark of quant fund managers. I’ve been longing to learn about how they achieved it and can’t wait to read this Greg Zukerman’s new book on Jim Simons.


As usual, I tried to put some lessons/thoughts useful for myself, hopefully for my readers as well.

[Bonus] I also dug up some RenTech job descriptions that no one ever (at least I didn’t see) found regarding what type of talents RenTech has been hiring (thus what type of new techniques they may be using) more recently. Go straight to the last point if that is your only interest.

Continue reading

China Meidong Auto (1268.HK)

Below are excerpts from our 2019 Q3 letter regarding our new position Meidong Auto, for easier reference purpose.

Also, attaching the letter to shareholders from its 2018 annual report, it’s quite a good read: MeidongAuto_2018_Letter

Meidong Auto is a new position from the “Great Operation at Reasonable Price” category. It doesn’t come often that a CEO’s shareholder letter alone made me think seriously to become a shareholder. Meidong had made to this list. In short, it is a easy to understand business (luxury auto dealer), who had an exceptional “outsider” CEO who was able to communicate transparently and sincerely about its strategy and execution. It has been executing its strategy very well, generating excellent return on equity (25+%) over past 3 years.

Meteorology: China has seen its auto market slowing down after a few years of high growth. Luxury car however still enjoyed healthy growth. According to CPCA’s data, luxury brands have maintained a 10~% annual growth rate from 2016 to 2018 (while overall auto market observed +13.9%, 3% & -2.8% for the same three years respectively). Furthermore, CPCA’s most recent July 2019 data even shows an accelerating +24% yoy growth rate for luxury cars. This trend, while perplexing, could be explained by the secular shift of the consumption power in China (from tier 1 cities to lower tier ones, & a growing middle class in all tiers cities, etc.) and further inequality in wealth distribution.

Topography: Meidong uniquely chose to position as the sole dealer of a luxury brand in tier 3-4 cities. Such position allows Meidong to earn a high gross margin (on average about 100 bps higher than multileader in a city) due to weak competition. Such position also increased the stickiness of lucrative after sale service business. it however is a narrow moat because if competitors really want to imitate this strategy, they could achieve so and drive the margin down. In terms of the sustainability of such narrow moat, I think it is still in good position at least for short term (2-3 years), based on our evaluation of incumbents (who are at least a few years behind Meidong’s business principles & executions).

Commander: The management of Meidong is the most impressive factor. In fact, the CEO Ye Tao, reminds me the CEOs from William Thorndike’s book “The Outsiders”. Ye Tao has technical backgrounds, graduated from MIT with both engineering and MBA degrees, also served as executives to various software business in United States & in Asia. The way Ye Tao approaches car dealing business can be described as quite “rational”, which can be seen by reading a single shareholder letter from him. Ye Tao think the most important principles of his business are 1) high inventory turnover, 2) grow service revenue (the high margin business) & 3) focus on new store ROI. It may worth quoting directly from its 2018 letter. On the inventory turnover, it is refreshing to read something like “We live or die by inventory turns. Fast-turns make us a cash printing machine; slow-turns turn us into a cash-sucking black hole.” In addition to the principles laid out, the company’s reporting also provides metrics to track how they performed in these three areas. On capital allocation, the management preferred to use dividends. That 4 is not the most favorable way of distribution value back to shareholders, given the price is still a bit underpriced in my opinion.

System: One thing to note is that Meidong is still very closely held by insiders. 65% of the shares are held by the family trust of Ye’s brothers.

Valuation: we have built a material position at about 12x 2019 est. earning, a reasonable price for such a high-quality business.



Some Thoughts on Recent Factor Trends (Value/Momentum/LowVol)

For what it worth, I have seen my concentrated portfolio (< 15 names) performed relatively closely to the broad market for years. However since last week, I started to see more deviation between these two. This observation coincides with the most significant value factor rebound seen in years. This WSJ article covered this interesting rebound of value factor [link], the author James Mackintosh however doesn’t think the rebound can last because he personally believes in the disrupters’ long term secular advantages.


There are two leading explanations for value’s poor performance for the past decade. The first is that unending cheap money fueled spending sprees by disruptive tech stocks, allowing them to run at a loss and so steal business from traditional companies that try to make profits. Leading examples are Tesla, Uber and WeWork, and higher bond yields offer some hope that this might reverse.

I prefer a second, linked, explanation, that there’s a wave of technological change under way and the market has divided between the disrupters, who can afford to take advantage of it, and the disrupted, who can’t.

It is also important to think through why such reversal happens now. This Barron’s article [link] sourced many street strats who think it is caused by fixed income market, specifically a recent 10 year treasury yield spike.


What was behind the sudden shift? Before last week, investors appeared to be betting that bond yields would fall. And for a while, that trade worked. Both momentum and low-volatility baskets are loaded with defensive stocks that tend to rise as yields fall—a signal that bond investors are losing faith in the economy.

No longer. The 10-year Treasury yield rose from 1.461% on Sept. 3 to 1.733% on Sept. 10, while the yield curve, which had been inverted, steepened. “The extreme factor moves we are seeing in the equity market are driven by activity in the fixed-income market,” Nomura Instinet strategist Joseph Mezrich wrote on Tuesday.

There’s a good reason for that. As investors turned more defensive this year, low-volatility stocks have attracted significant assets across both retail and institutional platforms. And that has made them expensive. Christopher Harvey at Wells Fargo now recommends that investors reduce their exposure to low-volatility stocks, a stark contrast to his position at the beginning of the year.

“About a year ago, we talked about low-vol strategies being one of the most unloved and underappreciated strategies in the marketplace,” wrote Harvey on Tuesday. “However, the style is no longer the technically oversold and underowned strategy it was in years past.”

As we’ve noted, the momentum basket, has recently shifted from being a group of fast-growing companies to include many of the market’s least-volatile stocks. Those are also the ones most dependent on yields going down, explains Bernstein analyst Sarah McCarthy.

So I decided to do a bit work to test these theories.

Continue reading

China Internet Report 2019

I want to share a great overview study of China tech industry landscape of 2019 by South China Morning Post & Abacus. I think the advanced AI usage by Chinese tech companies are highly under-appreciated by the outside world.

This study has many live evidences of what Kai-Fu Lee wrote/predicted in his latest book “AI Superpowers: China, Silicon Valley, and the New World Order” which I recently just finished. Highly recommended and will try to do a review later.

Another interesting trend particularly interests me is the integration of live streaming and shopping. I think this model (temporarily dubbed it as “QVC on steroid” for the sake of western world readers’ familiarity) has huge potential and I plan to study it more.