Chen Jiahe Chief Investment Officer of Jiuyuan Qingquan Technology
Recently, when my friends and I talked about some rare low valuations in the Hong Kong stock market in the past two years, I said, “Look at the current Hong Kong stock market, there are many very good large Chinese companies with only a few times the PE. With a dividend yield approaching 10%, it’s clearly a huge opportunity.”
A friend asked me: “If this investment opportunity is so obvious, then the Hong Kong stock market is a place where professional investors gather. Why can’t everyone see this opportunity and not push the prices of these stocks back to a reasonable position?”
I thought about it for a while and replied, “So, are Wall Street and the Financial City where professional investors gather? If so, why did so many financial institutions lose money and go bankrupt during the 2008 global financial crisis? ?”
I thought the above conversation was very interesting, so I recorded it for everyone to see. In this conversation, a core question in investment is involved: in this industry, should we trust professionals?
We have professionals in every industry in human society. In the vast majority of cases, we choose to trust the advice of professionals. And, in the vast majority of cases, it’s the right thing to do.
For example, if our eyes are a little unclear and our field of vision is a little dark today, will we ask our good friends to see them, or will we go to the hospital to find a doctor and use professional equipment to examine the retina of the fundus?
If our car breaks down, do we drag it to a 4S shop and have it repaired by a professional, or buy a bunch of parts ourselves and go home and fiddle with the family? Apparently, almost no one other than a car mechanic-turned-driver tries to fix their own car.
If we want to learn tennis, will we play with our own brand, or will we hire a professional tennis coach to teach us? Of course, about tennis, I learned it by myself, but the price in return was not so good. However, I have no plans to eat tennis for my meal.
It can be seen that in almost all daily life, whenever we encounter slightly more complicated things, we will choose to find professionals. And, in these things, professionals generally don’t make too many mistakes and are much better than the average person.
In investing, however, things are different. When there are investment questions, people still, as usual, expect professional investors to give us satisfactory answers. However, in the investment field, professional investors are much more likely to make mistakes than professionals in other fields.
Looking at the events that have occurred in history, we will know that in many cases, the difference between professional investors and ordinary investors is not as big as the difference between professionals and ordinary people in other industries.
More importantly, even if a professional auto mechanic can’t fix the car, he at least won’t convert the car into a bomb. No matter how poor an ophthalmologist is, he will not cut the optic nerve directly with scissors. But when professional investors make mistakes, they can make super huge mistakes.
Look at these big mistakes in history and you’ll see what I’m talking about. During the tech bubble of 2000, many funds around the world that were heavily invested in highly valued tech stocks lost money. In the 2005 A-share bear market, some securities companies unfortunately went bankrupt. During the 2008 global financial crisis, the five largest investment banks in the United States collapsed. During the P2P crisis from 2015 to 2020, many P2P institutions went bankrupt and closed their doors and owed investors a lot of money. In the virtual currency bubble that burst around 2022, many virtual currency investment institutions lost blood.
In response to these situations, there is an in-depth analysis of a book called “Where is the Client’s Yacht”. The name of the book comes from a conversation in which an elite Wall Street investment bank took a friend to the marina, pointed to the row of boats on the marina and said, “This boat was bought by people from this investment institution, and that boat is The guy from that financial institution bought it. Look how nice these yachts are.”
After his friend heard it, he hesitated for a while, and then asked him: “So, where are these investment institutions, financial institutions, and their clients’ yachts? That is to say, have they made money for their clients?”
So why, in many industries, we can trust professionals, follow their instructions, and often get good results, but in the investment industry, we can’t trust professional investors?
Some popular views attribute this phenomenon of “professional investors cannot be superstitious in the investment industry” simply due to ethical issues. It is believed that practitioners in the investment industry have lost themselves in the face of huge amounts of money, thus doing a lot of things that harm others and benefit themselves.
It is true that in any social issue, moral issues are one of the influencing factors. But it is the simplest and crudest way to attribute the problem entirely to moral corruption. Why do students in a class have bad morals when they make investments after graduation, and good morals when they open factories? Why are professional investors morally corrupt in the same high-paying industry, while professional doctors, pilots, and IT engineers have good morals?
In fact, ethical issues cannot explain why there is a phenomenon of “not superstitious professional investors” in the investment industry.
If we assume that most of the hundreds of thousands of practitioners in the investment industry are “bad people”, then we replace all these people and find another hundreds of thousands of “good people” who have never done investment before. Would things get better if you train in finance and take over the industry? Will the new hundreds of thousands be more moral than the original hundreds of thousands enough to change the industry? Obviously not.
The most important reason why you “can’t trust professional investors” is that the investment industry is too complicated.
When the computer program AlphaGo defeated Ke Jie, an excellent human Go master, in 2017, and artificial intelligence finally conquered Go, the most difficult intellectual game for human beings, public opinion once believed that artificial intelligence was omnipotent. But in reality, Go is just an intellectual game, it’s just a 19×19 board. The real world is much more complicated than Go.
For most professional industries, things are relatively simple. A car has only a few thousand to 20,000 parts. If you understand all these parts, professionals can repair the car. An eyeball has only a fixed number of physiological characteristics. Although it is difficult to master, as long as you study and practice more, ophthalmologists can take good care of the eyes.
But how many variables are there in investing? There are 5,000 listed companies in A-shares alone, and each listed company has 500 financial indicators per quarter, which means 2.5 million financial indicators per quarter and 10 million financial indicators per year.
At the same time, various variables in investment will also affect each other. The increase in revenue of this company corresponds to the decline of that company, the profit margin of that company is significantly higher than that of the industry, there seems to be a problem, and so on. If there are 10 million financial indicators, and then a few hundred powers, how many variables will there be? And the news, public opinions, events, data, emotions, and entanglements of interests that break out every day in society cannot even be represented by numbers. How many variables are there?
If the variables of Go are compared to the solar system, then the investment world is the galaxy, or even many galaxies. With such huge variables, even professional investors are bound to make mistakes. And for professional investors who are just human beings, how can we take all the blame? Why should we be superstitious that what they say and judge is not wrong, and that the investment decisions they make must be right?
Between 2020 and 2021, the phenomenon of “stocks with higher valuations perform better” in the mainland stock market. At that time, many people thought that with so many professional investors in the market, how could they make mistakes? People have read so many financial statements, and there must be a reason for their willingness to pay high prices. At that time, it was said that “expensive must be expensive, and cheap must be cheap.” As a result, the subsequent development of the market proved that professional investors may indeed make mistakes. .
Today, we need to remember not to be superstitious about professional investors, and Emperor Jing of the Han Dynasty almost believed in “professional generals” two thousand years ago. Here, let us look at a famous dialogue.
During the Seven Kingdoms Rebellion that broke out in the early years of the Han Dynasty, Liu Bi, the King of Wu who took the lead in the rebellion, was a famous general and could also be said to be a “professional investor” in the army. When Liu Bi was 20 years old, he followed Liu Bang in the war to quell the rebellion of the general Yingbu. He had many military exploits, so he was named King of Wu, and he managed three counties and fifty-three cities.
Over time, even the best relationship may turn against each other. More than 40 years later, when the rebellion of the Seven Kingdoms came, King Liu Bi of Wu took the lead in the rebellion, and brought with him Liu Wu, King of Chu, Liu Sui, King of Zhao, Liu Piguang, King of Jinan, Liu Xian, King of Zichuan, Liu Ang, King of Jiaoxi, and Liu Xiongqu, King of Jiaodong. , launched a rebellion against the Liu family. The army of the princes who participated in the rebellion was as many as several hundred thousand.
For Liu Qi, the emperor at that time and Emperor Jing of the Han Dynasty, Liu Bi was undoubtedly a “super expert” in the military.
In terms of age, Liu Bi was in his 60s at the time, and Emperor Jing of the Han Dynasty was in his 30s. Liu Bi had much richer military experience. In terms of seniority, Liu Bi was the son of Liu Bang’s elder brother, while Emperor Jing was the son of Emperor Wen of the Han Dynasty and the grandson of Liu Bang, the great ancestor of the Han Dynasty. In terms of military merit, Liu Bi was only twenty years old when he helped Liu Bang put down the rebellion of Xiang Yu’s famous general, Ying Bu, and Emperor Jing of the Han Dynasty had not yet been born. In terms of the army, the rebels of the Seven Kingdoms numbered several hundred thousand, no less than the Central Army. In terms of economic strength, Liu Bi has been prepared for many years and has strong financial resources.
So, in the face of Liu Bi’s rebellion, Emperor Jing of the Han Dynasty Liu Qi asked the following words: “The King of Wu casts money from the mountains, boils the sea water for salt, and lures the world’s tyrants and acts in vain. Huh?” Such a capable person as King Wu, he was so well prepared in military and economic terms, and he only rebelled at such a young age, and such a professional rebellion must have been prepared and “planned”? Look at such an old fund manager, with such a long-standing reputation, he has been in charge of money before I was born, how could he be wrong?
However, Wu Wang Liu Bi was really wrong.
In the face of the emperor’s worries, Yuan An, a minister of Emperor Jing of the Han Dynasty, who was the prime minister of the state of Wu and knew very well about King Liu Bi of Wu and the monarchs and ministers of the state of Wu, told Emperor Jing, “It’s not enough to worry about, it’s broken now.” On the battlefield, the “professional rebel army” of the Seven Kingdoms Army was no match for the Central Army headed by Zhou Yafu. The mighty Seven Kingdoms Rebellion was pacified in just three months.
Charlie Munger once said, “No matter how smart people are, they will make mistakes.” Yu, who is fifty years old, is still constantly reflecting on what he did wrong when he was forty-nine years old. And in the super-complex industry of investing, any professional opinion can go wrong, and so can any professional investor.
In view of this, on the one hand, we should learn the investment skills of professional investors humbly, but on the other hand, superstition of professional investors is a must. On the contrary, those who question professional investors and think about professional investment opinions are precisely the most professional things in the investment industry.
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