The Founder and CEO of JD.com, Richard Liu, was arrested on serious accusations in the United States. The price of JD.com's stock has been punished as a result of the arrest. Whether Mr. Liu will be charged and tried in court is as yet unknown. A surprising and unpredictable event such as this will test any investment thesis. However, successful investing requires maintaining a disciplined approach to investment decisions.
The situation at JD.com underscores two key investment principles: (1) only invest in companies with an enduring moat that is not dependent upon exceptional management, and (2) always invest with a margin of safety (i.e., at a price that is less than the estimated intrinsic value of the company).
Warren Buffett has said that one should only buy a company that a fool can run because eventually a fool will run it. Although Richard Liu's talents have been instrumental in building the company, JD.com is a well established company as the second largest e-commerce company in China with about 160,000 employees. It is no longer dependent upon the talents of any one individual. Even a significant outcome in the present case should have relatively little effect on the underlying, long term, intrinsic value of the business.
As noted in a previous post, JD.com was already selling at a discount to a reasonable estimate of its intrinsic value before the incident. Although there is no way to predict short term price movements that result from unpredictable events, a margin of safety increases the return on investment or limits losses if new information represents a fundamental change that justifies selling a stock at a loss. Unless the current situation causes a significant reduction in the intrinsic value of the company, the stock of the company may now be purchased at an even greater margin of safety.
Disclaimer: the author owns shares of JD.com. The author has received no compensation for writing this article.
This website uses cookies. By continuing to use this site, you accept our use of cookies.