A year ago, we felt that although A and Hong Kong stocks were difficult to have a big market, but because the overall valuation was not expensive, especially the Hong Kong stock market had performed almost the worst in the world for four consecutive years at that time, and the economic policy was expected to be relatively moderate, so we felt that it should not be a big deal. risk. As a result, the market was ups and downs, and the war and epidemic control made many people lose control of their emotions. The overall situation was worse than 2018, and it was close to 2008. The valuation of Hong Kong stocks even returned to the level when it returned 25 years ago. Suihan Zhi Songbai No. 1 appeared a deep “V” in March amid the Hong Kong epidemic and domestic spread concerns, and once again reached the bottom of the “V” in the despair of the market after the conference at the end of October. Fortunately, it rebounded sharply in the last two months. A near miss has outperformed the major indexes by a wide margin. We failed to achieve the expected absolute return, but the relative return exceeded 2021, which is a little consolation.
Due to the low absolute rate of return in the past two years, some friends who subscribed at the highest level of net worth may have not made a profit or even lost money (the maximum loss by the end of the year should not exceed 5%). We are sorry for this. We missed some opportunities, such as being short on coal stocks, and we were relatively conservative in the selection of individual stocks before the rebound at the end of the year. We did not allocate private real estate properties and cut off Internet stocks. I also made some mistakes, such as buying chip design stocks and trendy game stocks that I didn’t study clearly, and ended up cutting meat at the bottom. In the first half of the year, I failed to lose some fertilizer stocks at a high level, which made it very uncomfortable for a few months in the middle. Although it was slightly profitable for the whole year, at the end of October, the retracement exceeded that of 2018, which made investors’ experience very bad.
We are relatively optimistic in the coming year. Although the forecasts have been slapped in the face every year, it is really hard to imagine any black swan in 2023 that will be worse than 2022. After the epidemic control is lifted, confidence in investment and consumption should recover quickly. The year-on-year growth rate of profits of most companies will be good, and the market capital is still abundant. Many stocks have the opportunity to double their profits and valuations. Our position portfolio has not changed much at present, and we still use undervalued + reverse selection tickets with low valuation and high performance growth certainty. In addition to continuing to hold telecom operators, real estate property furniture, home appliances, banks, CNOOC, fertilizer, video networks, etc., we We have aggressively increased our positions in pharmaceutical stocks and allocated some consumer stocks. In addition, we continue to pay attention to the opportunities of central state-owned enterprises and excellent manufacturing stocks with improved governance mechanisms.
The ups and downs of the black swan continue
In the past year, we have been focusing on defensive counterattacks to hold stocks with low valuations, high dividends and growth. We also pay attention to the ownership structure and governance structure, and select companies with good business and good industry environment background. A good price allows us to be relatively resilient during the two major market drops, and a good company allows us to firmly hold shares and even dare to increase our positions against the market when encountering a black swan. Peers with better earnings performance in 2022 generally hold stocks with low valuations and high dividends, especially coal stocks, or they are more aggressive in operations when they rebound at the end of the year. It is luck that we can make such a strategic choice, but it is more inevitable under our typical reverse investment style, because at that time the valuation differentiation is obvious and it is easy to choose how to choose.
We never chase hot concepts, nor will we buy excellent companies at high prices. We know that we must buy good ones, but more importantly, we must buy them well. Facts have repeatedly proved that the important reason for the loss of money and the large drawdown is that besides the wrong purchase, the purchase is too expensive, especially for those who have high requirements for the quality of the company and have good fundamental research, and they often have too low requirements for valuation. Their aggressiveness is good when the market’s risk appetite is high. But the most important thing about investing is to live a long life, and try to make all holders continue to make money.
When the war broke out at the beginning of the year, our defensive stocks were not affected very much. For example, telecom operators and offshore oil companies have been sanctioned by the United States, but they have almost no business in the United States. Fertilizers and oil have relatively benefited. When we bought telecom operators and offshore oil companies, the valuations were low at first glance. US capital has been forced to sell and continued to suppress stock prices, while listed companies are increasing dividends and repurchases. Major shareholders are increasing their holdings. There are also catalysts such as A listing and equity incentives. The margin of safety is sufficient, the growth of performance is certain, and the fundamentals and stock price trends are completely opposite. The market’s fault lies in its impatience with the short-term deterioration of the shareholder structure. We know where the market is wrong, so we dare to fight against the market and increase our positions in reverse. Corresponding to this is that we hastily bought chip design companies and trendy play stocks when we did not have a clear research. We did not understand that the continuous decline in stock prices was the fault of the market, and we failed to follow the rules. up to 4 percent.
When the war entered a stalemate and the panic in the market, especially in the Hong Kong stock market, eased, the performance of defensive counterattack stocks was relatively weak in the middle of the year, and the growth and popular concept stocks had a short-term market. We were more uncomfortable in those months. It is normal for short-term styles to not match. We mainly failed to lighten up chemical fertilizer stocks at a high level, because we do not have a deep understanding of the cyclical fluctuations. It only takes half a year for the entire industry to go from huge profits to losses. The understanding of attributes is not enough, and more importantly, the management is not as good as we imagined. Their understanding of the capital market is poor, and their investment in product technology is not strong enough. As the top holding stock, it fell by two-thirds from its high level, which dealt a heavy blow to our net worth, and we did not dare to add more positions, and we were very passive for a time.
During this period, we also encountered that the chairman of the real estate and property stocks with heavy holdings was arrested because of an incident 15 years ago. The latter caused the stock price to continue to slump for more than half a year, and the former caused our two major holdings to plummet by nearly 30% in a single day. The consecutive black swan incidents have made people lose their temper, but we did not waste the crisis while lamenting. We are sure that it has nothing to do with the fundamentals of the real estate property. When it fell, I added some positions and quickly recovered the decline. After that, the stock price hit a record high again. The real estate stock should rank among the top 3 in the industry for three consecutive years, and it should be the absolute number one cumulatively. Our alpha in real estate stocks is huge. In the past few years, real estate stocks may not have done much better than us.
Managing emotions is more effective than researching companies
Due to the observation that the real estate policy has shifted from a severe suppression of 180 degrees in 2021 to continuous encouragement and stimulation in 2022, we have been reversely increasing our positions in real estate properties and related industry chain stocks in an extremely pessimistic market environment. In the absence of hope for epidemic control and control, the collective emotions of various groups and circles of friends are out of control, especially after the conference is full of extreme discussions, and the topic of immigrants fleeing is hot. We clearly feel that the market has become irrationally pessimistic to the extreme of the pendulum. Therefore, we are firmly optimistic about the market outlook with full reverse and full positions. Among them, Hong Kong stocks, which have performed the worst for five consecutive years, accounted for more than 60% of the position, and the real estate industry chain accounted for more than 40% of the portfolio. We retreated a lot from the sharp drop at the end of October, but we almost regained all the lost ground in November.
Looking back, we managed to be fearful when others were greedy, and we were not fearful when others were fearful. But we haven’t realized that others are fearful and greedy. We have not been able to allocate some private real estate property stocks and bonds that have fallen more before but are likely not to go bankrupt, and have failed to allocate some Internet and severely damaged consumption that are no longer suppressed by policies. share. As a result, we could not outperform the Hang Seng Index in the last two months, let alone the Hang Seng Technology Index, although I personally analyzed and predicted that the epidemic control will be fully liberalized 10 days in advance and I am sure that it will fully stimulate the economy.
In the past few years, from the trade war to the troubles in Hong Kong, from the strong suppression of the platform economy, education, real estate, etc. to the control of the epidemic, the work and life of many people have been seriously affected. Everyone’s experience inductive logic. Confusion, helplessness and even panic over drastic changes in the environment projected on the financial behavior of the capital market. In the smartest and hardest-working investment industry, including many admirable senior leaders, they also lost control of their emotions. The circle of friends and various groups frantically swiped the screen, and most of the information had no nutritional value.
Many pessimists who believe that their values are correct attribute the loss of money to the fault of the leaders, have no realistic analysis of the changes in the world, and have not objectively and rationally reflected on their own mistakes and ignorance outside their circle of competence. The tradition of learning and excellence makes the Chinese people have a strong desire to participate in politics, especially when discussing politics. Most people do not have relevant experience and ability, but they firmly believe that they must be more correct and wise than the top decision-makers, and even think that the top decision-makers are fools A lunatic, completely unaware that these analysis and judgments have clearly exceeded his circle of competence, and also does not accept the fact that he cannot change and influence the policy environment. The market economy continues to accelerate the flow of funds, especially the flow of information, and the fluctuations in market cycles and people’s emotions are correspondingly more intense and frequent. The daily complaints and anxiety have affected investment analysis, judgment and behavior, and the collective pessimism has pushed the market valuation to an extreme.
As a reverse optimist, although a slightly different point of view will lead to quarrels and even friendship, but it also makes us who cannot fight IQ secretly rejoice. Because although we have to constantly evolve and iterate to adapt to changes in the environment, this makes investing more difficult; but it also makes it easier for us to observe human weaknesses and exploit the extremes of the pendulum of emotions, which makes investing easier. We keep reminding ourselves that when most people have the same views, they have to automatically stand on the opposite side. Even if they are wrong, the losses are limited, because the probability and odds are obviously mismatched. We will resolutely practice reverse thinking and investment, and do a good job in investment system, customer structure, interest binding, physical and mental exercise, etc. to manage and control our emotions. It is obviously simpler and more effective to make directional judgments and obtain excess returns at the two extremes of fear and greed than to study companies diligently in the middle.
Pay attention to the governance structure, pursue interests and win-win
In the summary of last year, we said that the stocks of a certain car and a certain sweeper that brought huge returns to the fund in 2020 were decisively liquidated because they felt that the management was not good enough. Their middle and high-level governance had obvious problems, and they did not understand and respect them. capital market. In 2022, they will all plummet by nearly 60%. Although other auto stocks have also plummeted due to their previous excessive gains, at least they have earned a lot of money from high-level additional issuance instead of riding a roller coaster in vain.
We used to think that well-managed fertilizer stocks performed poorly. Last year, when the prices of coal, fertilizer and fine chemicals fluctuated violently, their deficiencies in the accumulation of vigorously developed fine chemicals and compound fertilizer technologies and their weak capital operation capabilities were highlighted. Can’t lead the technology and don’t understand the capital market is essentially insufficient management. The root cause is that there is no good talent introduction and incentive mechanism. The management pursues the cost-effective route behind closed doors. . Although we have repeatedly put forward suggestions, it is too difficult to educate and change the management, and it was very unpleasant at one time. As a minority shareholder in the secondary market, it may be helpless to follow the trend.
The above-mentioned real estate and property stocks that we have made a lot of money, their excellent management and outstanding stock price performance, in addition to the consistent influence of corporate culture, the main source of motivation is that they have the largest incentive policy among state-owned enterprises. Including a market-based reward and punishment mechanism for hiring up and down once a year, and because the management’s own purchase of stocks and two large-scale equity incentives have a total shareholding of more than 10%, which is much higher than the general level of about 1% in state-owned enterprises . Usually, what our minority shareholders can think of and expect, the management has already thought about or even done it. When encountering a major accident in which the chairman was arrested, the company’s daily operations remained calm as before. The management was able to quickly communicate fully and effectively with the city government and the capital market, increase stock holdings in a timely manner, inject confidence, and quickly launch new products. A round of equity incentives turned crises into opportunities. It is precisely because we have seen the excellent management that we dare to firmly hold shares at the bottom and even increase positions against the market. The so-called faith is based on the same interests.
At present, among the dozens of stocks we hold positions, basically a single major shareholder or a person acting in concert has absolute control, and most of them have relatively sufficient middle and high-level equity incentives or business partner plans. We feel that this kind of equity structure and governance structure is the most suitable for both state-owned and private enterprises in China. We found that after the introduction of equity incentives, the stock prices of state-owned enterprises often have better-than-expected performance. In the future, we will focus on such changes and seize investment opportunities.
In addition to the consistency of interests between large and small shareholders and management, we have also been concerned about whether the interests of the company, employees, and upstream and downstream are win-win and multi-win. Of course, we also hope that our fund investors, managers and other stakeholders can continue to win. Munger often said that the most important concept in work and life is to understand a win-win situation, which is the difference between value and game thinking. We think it is more suitable for us to maximize our strengths and avoid weaknesses than to track the company’s fundamental data faster and more comprehensively, and it is more sustainable and effective. Of course, we can’t be lazy in the company’s analysis and research, because a bank and a leading home appliance stock that have been complacently holding shares for nearly 6 years both experienced a large decline last year, underperforming some peers and seriously dragging down their net worth. The above-mentioned real estate and property stocks experienced three major fluctuations last year. Although there were no dangers, they were enough to cause vigilance. In addition, there were some good opportunities among the peers that they failed to grasp.
After the pandemic is over
After experiencing the ordeal in 2022, people have gradually stabilized from confusion, anxiety, anger and panic. It is expected that during the Spring Festival, we will feel the joy of regaining freedom and rebirth. The country has also been fully opened, and confidence in investment and consumption is expected to recover quickly. Rapid growth should be a high probability, and many stocks may have a double-click of profit growth and valuation restoration, which is worth looking forward to.
We still use undervaluation + reverse selection of tickets with low valuation and high performance growth certainty, and we still focus on Hong Kong stocks. For example, telecom operators have high probability odds and are not low. The logic has not been fully deduced and it is worth continuing to hold heavy positions; real estate, furniture, and home appliances Valuation is low, supply is falling, demand is recovering, this year’s performance will be good, and you can continue to hold it; companies such as banks, offshore oil, chemical fertilizers, etc. have low valuations and high dividends, and video network companies continue to grow at a high valuation. Valuation is obviously attractive; we have reversed the pharmaceutical stocks. In the first heavy-weight industry, most pharmaceutical stocks have retreated sharply for two consecutive years, and some have already been valued at a low level. However, this year’s performance growth and long-term logic are relatively certain, and the stock price may double.
We have seen that national policy documents clearly support manufacturing and import substitution, and we will work hard to tap investment opportunities in it. We also see the reform of the governance structure of state-owned enterprises, especially the equity incentives to promote the release of profit growth and the double-click opportunities that call for the market to increase the valuation of state-owned enterprises. The total assets of China’s non-financial state-owned enterprises exceed 200 trillion, and the current ROE and ROA are very low. The substantial increase in vitality and return is enough to make up for the shortfall in the decline in land fiscal revenue. The gap between China’s agriculture and rural areas compared with developed countries is far greater than that of the secondary and tertiary industries and cities. There are also many opportunities for efficiency improvement and investment opportunities.
The three-year pandemic has seriously damaged the interests and confidence of many companies and individuals, but China’s economic aggregate has been growing and has not been harvested by the United States, and the country’s strict control is still in the pot. Chinese business owners have a strong desire to survive, and making money is the common belief of Chinese people. The suppressed confidence and demand will be released under the full efforts to stimulate economic growth. Illness allows us to better understand the meaning of health and exercise, lockdown allows us to better understand the meaning of freedom, harsh external environment allows us to better understand the meaning of conservatism, and brutal competition allows us to better understand the meaning of self-improvement. And pessimism has little meaning in operation and execution. If you look at problems from different angles, your mentality can be more peaceful, and it will accompany us to the extreme.
We have been optimistic during the epidemic, and stocks have made money every year. Personally, in 2022, my red code was changed to green twice on the same day, and my yellow code was turned several times. I went to dozens of cities in nearly 20 provinces. In the end, the whole country was released. I also had mild symptoms and no fever. The house built for rural parents has been successfully renovated after untold hardships. I have found a good way to control my knee injury. The PB in Malaysia is estimated to have reached 330 now. My son has also made progress in his studies and is in good condition. Thanks to the trust of investors and the support of friends and colleagues, we have passed through a difficult year and experienced tests together.
In my opinion, the best medical skill is not to treat intractable diseases with the right medicine, but to take precautions and exercises to prevent diseases. The best investment is not to attack with all your strength or even increase leverage, but to focus on safety margins and then strive for steady progress. A good fund is not about achieving short-term high returns and rapidly expanding its scale, but pursuing sustainable and healthy growth for a win-win situation. We are not as smart and hardworking as others, but we can be more emotionally stable and physically healthy than others. We strive to be ourselves, take good care of our families, and give back to the society as much as we can. In fact, if everyone can do their best, many of the problems we complained about may have been solved naturally. Thousands of sails pass by the side of the sinking boat, Wan Muchun in front of the sick tree, always believe that tomorrow will be better!
The fund has been in operation for more than 6 years, and it has been ranked in the top 1% of similar products for 6 years. We are confident that the cumulative income ranking will rise to a higher level in 10 years, and we will live up to the name of the fund product and the trust of our customers.
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