---
title: "Weng Yinuo of Hongzhang Capital: Top-Down, Ten Keys to Consumer Investment"
description: "Defining a 'good' project first requires a decision-making framework. Although a framework cannot help you accomplish something, it can help you make decisions more effectively. People often ask me: 'Teacher Weng, can you share some good projects with us?' My answer is 'no,' because my 'good' is rarely your 'good.' Without a standard, you cannot say what is 'good.' To define 'good,' we need a 'frame,' that is, a decision-making framework. This framework is not universally applicable; it needs to be constructed by each individual."
author: "翁怡诺"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2019-04-21"
language: "en"
canonical: "https://xinjignxiao.com/en/articles/weng-yinuo-of-hongzhang-capital-top-down-ten-keys-to-consumer-investment-f2f68d27/"
markdown: "https://xinjignxiao.com/en/articles/weng-yinuo-of-hongzhang-capital-top-down-ten-keys-to-consumer-investment-f2f68d27.md"
original_source: "https://mp.weixin.qq.com/s/FR-y2VaJsyBC6d7D1Is7iA"
translation: "https://xinjignxiao.com/zh/articles/%E5%BC%98%E7%AB%A0%E8%B5%84%E6%9C%AC%E7%BF%81%E6%80%A1%E8%AF%BA-%E8%87%AA%E4%B8%8A%E8%80%8C%E4%B8%8B-%E6%B6%88%E8%B4%B9%E6%8A%95%E8%B5%84%E7%9A%84%E5%8D%81%E4%B8%AA%E5%85%B3%E9%94%AE-f2f68d27.md"
attribution: "New Distribution — https://xinjignxiao.com/en/articles/weng-yinuo-of-hongzhang-capital-top-down-ten-keys-to-consumer-investment-f2f68d27/"
usage_policy: "https://xinjignxiao.com/ai-policy.txt"
---

# Weng Yinuo of Hongzhang Capital: Top-Down, Ten Keys to Consumer Investment

> Defining a 'good' project first requires a decision-making framework. Although a framework cannot help you accomplish something, it can help you make decisions more effectively. People often ask me: 'Teacher Weng, can you share some good projects with us?' My answer is 'no,' because my 'good' is rarely your 'good.' Without a standard, you cannot say what is 'good.' To define 'good,' we need a 'frame,' that is, a decision-making framework. This framework is not universally applicable; it needs to be constructed by each individual.

**Introduction: Defining a 'good' project first requires a decision-making framework. Although a framework cannot help you accomplish something, it can help you make decisions more effectively.**
People often ask me: Teacher Weng, can you share some good projects with us? My answer is 'no.' Because my 'good' is rarely your 'good.' Without a standard, you cannot say what is 'good.' To define 'good,' we need a 'frame,' that is, a decision-making framework. This framework is not universally applicable; it needs to be constructed by each individual.
**Buffett once said that the hardest part of making investment decisions is establishing a stable framework that does not change with market sentiment.** The 2015 stock market crash left a deep impression on me. If we count ten fingers, some of my close friends lost at least six fingers because of that crash. The core reason was that their frameworks were not firm enough; they swayed with market sentiment. When everyone could easily make money, they abandoned their frameworks and eventually got trapped.
A true framework must be stable, and you must believe in it. The more you trust it, the higher the certainty it gives you.
The following is the consumer investment framework I firmly believe in.
01
Cycles: Over time, you earn money from trends
My entire framework is built top-down. The first point is 'cycles,' that is, the cyclicality of consumer product categories and business formats.
Everything has cycles, with the macroeconomic cycle at the top. Some areas of the macroeconomy are strongly cyclical, such as mining. Consumer goods are divided into discretionary and essential; discretionary consumption is also highly cyclical. Some areas have relatively weaker cycles, such as pharmaceuticals and basic consumption. Of course, although pharmaceuticals are weakly cyclical, they are highly volatile because they are strongly policy-cyclical.
Therefore, when we observe a business model or start a venture, the starting logic is: What cycle is this in? We need to carefully study the cyclicality of this business. Can we see the trend of its future cycles? If you have a judgment about future possibilities, it means you will adjust your decision-making behavior. Over the long term, we earn money from trends. So, understanding the overall cycle we are experiencing on a larger scale is an important foundational judgment.
For example, **in macroeconomics, there are three major cycles: the inventory cycle, the fixed asset investment cycle, and the strongest real estate cycle.** Their lengths are approximately 5 years, 9 years, and 18 years, respectively. Real estate is the most basic consumption, actually driving all consumption. Growth in many areas is related to real estate. For instance, during the financial crisis in late 2008 and early 2009, sales of bedding in supermarkets fell the fastest because new home purchases plummeted during that period. To see the rise and fall of a sector's cycle, it is important to see the underlying factors and patterns.
02
Growth: Find the most fundamental core driver
The second point is 'growth.' Whether investing in stocks or companies, you are investing in the future. What is the future? It is growth or high growth. Further thinking leads to the question: What are the drivers behind growth? Only by understanding the most essential things can you truly understand what you are doing. This is what we often ask ourselves: the so-called **'first principles question': What is the most core driver of a business's growth?**
For example, what is the most core driver of growth in the baijiu industry? There is a book called *Addiction for 500 Years*. If you look at the long term, you will find that businesses that survive multiple cycles capture the most basic aspects of human nature, which are related to addictiveness. Tobacco, spirits, and coffee have repeatedly crossed cycles because they are addictive.
**Addictiveness has several characteristics:**
First, tolerance increases; for example, alcohol tolerance or nicotine addiction grows over time.
Second, soft addictive substances have social attributes. For example, cigarettes, alcohol, and coffee are essentially social tools. Social interaction means fission, contagion, and sharing, leading to a growing user base.
Third, the experience of soft addictive substances is memorable. For instance, the first try is not pleasant: baijiu is spicy, cigarettes are harsh, and coffee is bitter. But you remember the stimulation and short-term pleasure. Soft drinks even become an important way to combat depression.
So, the most core reason for the growth of alcoholic beverages is their unique healing effect on human nature. For example, during the Great Depression after 1930 in the United States, consumption of low-priced spirits did not decline; it actually increased.
Behind every business's growth, there is a most fundamental driver, and we must find it.
03
Growth Path: Grasp the order and rhythm
The third point is the growth path. At the beginning of a venture, everyone has limited resources, so you need to think: What might the future growth path look like?
Many times, the success or failure of a startup is related to the growth path or order. For example, your single-store model might be correct, but your investment intensity might be wrong. For instance, investing 20 million yuan in community fresh food stores is wrong because your capital chain will break when you open the 15th store.
Everyone wants to scale up, but in the process, there will be a **'chain trap'** or **'brand trap.'** This stage is very uncomfortable because the scale is not yet sufficient to support all expenses. But if you survive this stage, the scale business becomes right because costs do not increase linearly with revenue.
Every business has its own internal rules, and its growth path is different. If you see it clearly, you can predict or simulate the growth path of the business. Although the final outcome may not follow that path, during deliberation, you need to at least believe in your judgment at that point. Entrepreneurship and investment are actually about grasping the sense of growth rhythm.
04
Market Capacity: How big can your business be?
The fourth point is 'market capacity.' This is a very important part of the framework: What is the foundation of this business? How large is the capacity?
Based on our experience, almost all founders overestimate what they are doing. Most things are not that 'big'; there are not that many billion-yuan or trillion-yuan markets.
**Some basic rules are:**
The more basic the category choice, the larger the market capacity.
The more trendy a category, the easier it is to explode, but it is likely to be short-cycled.
The stronger a business's ability to connect with consumers, the more basic it is. Of course, this does not mean that basic businesses are necessarily good, because basic things often mean low barriers and intense competition.
Some businesses may be very complex, but they often have stronger explosive power.
In short, each category has its own boundaries. Market capacity is an important issue we need to think deeply about when building the framework from the start.
05
Core Moat: What is the economic moat?
The fifth point is the 'core barrier of the business,' also called the **'economic moat.'** This concept was proposed by Buffett and is determined by many internal factors such as network effects and brands. This is also a perspective in the framework: What is the most core barrier of this business? Is it a scale barrier, a technology barrier, or a brand barrier? If it is a scale barrier, whoever reaches a certain scale first wins; if it is a technology barrier, perhaps breaking through one point can lead to another world; if it is a brand barrier, it is about creating a different feeling through building cognition.
**After finding the core barrier, two more questions arise: First, is the barrier deep enough? Second, is the barrier obviously staged, and at what point might it be crossed by others?**
06
Competition and Evolution of Landscape: Live toward death, start with the end
The sixth point is 'competition and future landscape evolution.' This is also a very important part of the framework: 'live toward death,' deduce the process from the endgame.
In fact, if you stretch time long enough, everything will die. We need to have a staged endgame mindset and think backwards: Which things are competition formed in local strategies, and which are competition formed in long-term strategies?
From a competition perspective, there is a very interesting phenomenon: **cross-border competition often has the possibility of dimensionality reduction strikes.** We often find that people in the same industry find it hard to break through together, but completely unrelated groups can create new ways of playing.
For example, from the perspective of category competition, the larger the gap between the cost of goods and the terminal selling price, the more brutal the competition and the higher the requirements for marketing, such as cosmetics or daily chemical products. In contrast, businesses like alcohol or condiments such as Lao Gan Ma are very simple; they just divide regions and sell products without complex competition. If you put people who sell daily chemical products or do cosmetics marketing into a company selling soy sauce or vinegar, they might create some very differentiated products.
Judging the competitive landscape and jumping out of framework competition can help you break free from the constraints of original thinking.
07
Consumer Research: Grasp the core of human nature
The seventh point is consumer research. Consumer research is the most core thing in consumer investment. Whether investing, making products, or building business models, it is all deep thinking about consumers and speculation about human nature.
I once met an old man who started a business at 60 and talked with him for four and a half hours. I asked him: How do you understand the most core driver of consumer behavior among the post-50s and post-60s elderly? He said two extremely brilliant words: **compensation.**
All products designed for the elderly are to help them fulfill their dreams, dreams they did not realize when they were young. These two words explained all my confusion. For example, an elderly person might have had a high school education, and when old, they get a certificate from Jiaotong University and take a photo wearing a doctoral cap on campus. That is fulfilling a dream, that is compensation.
Moreover, the elderly make consumption decisions extremely quickly. When they find a product particularly suitable, they are afraid you won't sell it to them, so they pay in advance. Therefore, the company's cash flow is very good.
Many businesses require understanding the commonalities of the target group and grasping the core of human nature.
08
'Good People': Traits of Super Entrepreneurs
Cyclicality, growth drivers, growth paths, market capacity, business barriers, competition, consumer behavior... These are how to judge whether this is a 'good thing.' In addition, there are 'good people.' Investment is also investing in people; people are a big variable. The 'super entrepreneurs' I believe in often have the following traits.
First, the most core is the ability to learn quickly. This has nothing to do with education level or how many books you have read. Rapid learning is a very core ability.
Second, self-iteration. The first generation of entrepreneurs often have 'killer' intuition; they bet right every time, but later they may bet wrong. Can they recognize that they need to iterate and evolve?
Third, values are very important. At the beginning, it may be a product or a business model that connects, but after reaching a certain scale, it must be values that connect. You can directly control very few things, and you don't have time to communicate with everyone. You need to inspire everyone to jointly realize a certain value. How big a company can become is related to the depth of 'brainwashing' ability.
Other traits include **paranoia**, **non-conventionality**, **super execution**, **long-term perseverance**, etc. These are all reasons why a company can achieve a larger scale. In the entire framework, grasping people is the hardest.
09
'Good Deals': Valuation without liquidity support is meaningless
The above are 'good things' and 'good people.' There is also 'good deals.'
**The first point to judge a good deal is valuation.** The essence of valuation is a game relationship, depending on how much the investor wants to invest and how much the fundraiser wants to raise, and both sides find a fair value they can accept. So, investment is essentially 'buy and settle, admit loss if you lose.' But everyone needs to find a logic to justify their view and affect returns. This logic is a tool to convince yourself and the other party to accept the price.
**Another word is liquidity.** Without liquidity support, valuation has little economic significance; liquidity reflects the true value of wealth. A unicorn company valued at 7 billion may not be that meaningful, but if someone offers you 7 billion to buy 100% of the company, sell it to him immediately. That is liquidity.
In fact, valuation is a ridiculous thing. PE (price-to-earnings ratio) tells everyone that a company's valuation is determined by its profit, such as profit times 10 equals valuation. How ridiculous is that? Because everyone knows with eyes closed that a company's value is not determined by a single financial figure. But the consensus of the world is like this, so you lower your head and say 'yes.' Another logic is the benchmark; market fluctuations also affect valuation.
In addition, the competitive landscape of financing determines valuation, which often happens in the internet field. Changes in the financing environment also change the game landscape. Although fundamentals have not changed, with the push of various capitals, the valuations of some unicorns have multiplied several times. Of course, this effect only occurs in platform businesses where 'winner takes all.'
Let me talk about the exit logic, which is the issue of safety margin. That is, what is the most likely direction for this thing to go? Simply put, it is listing, M&A, and buyback.
In addition to 'whether the valuation is reasonable' and the protection of investment terms, the future exit logic is also an important factor in judging whether a deal is good.
10
Simplify: Final decision only needs 1 page PPT
Looking at the consumer investment process is actually a process from simple to complex, then back to simple.
From simple to complex means that a project can be analyzed from many perspectives. Each of the above points is a perspective for viewing a project. But when each angle has been mined to a certain data feedback, you will encounter a difficulty: you don't know how to make a decision.
The above are all analysis frameworks; what you ultimately need to build is a decision-making framework. Each project can be analyzed to have many advantages and many disadvantages. We need to further simplify this framework, find the few points you think are most important for decision-making among the many, assign different weights to them, and finally form a simplified version of the decision logic.
When closing a project decision, you only need to answer two questions:
First, what exactly am I betting on? Can I explain the bet in only three or four points and assign clear weights to them?
Second, what is the worst risk or worst-case scenario? Risk is not simply a shortcoming or unfavorable factor. Losing a hand is not risk; losing your life is risk.
Extract the most fatal risk, and the other step is sensitivity analysis, which is to analyze the probability of this biggest risk occurring. If it is high probability and fatal, you must be very careful. So, in the final discussion, maybe you only need 1 page PPT, which is about the three sentences with the highest weight for 'what to bet on,' or even just one sentence with a weight over 50%. Subtraction is much harder than addition.
Finally, I want to say that this framework is not important. You can delete everything in it and, through practice, polish out five or six points you believe in to guide decisions. A framework cannot help us accomplish something, but it can help us make decisions more effectively. That's all.
Source: Hongzhang Consumer Research Institute
**-END-**


---

## Copyright and AI use

This article is sourced from New Distribution. Search, quotation, summarization, and model training are permitted, but every use must credit New Distribution and retain the canonical source URL.

Contact: zhaobo258@gmail.com · +86 158 5481 7671