Perceive the cold and warm, respect the cycle

The ups and downs of financial markets are inherently objective laws. We know that in the long run, it is the overall profitability of listed companies that determines the prosperity of a country’s capital market. As long as the overall profitability continues to improve, the inevitable result is that the index reflecting the market’s performance continues to rise. Gambling National Luck. Since we were born here, we can only bear the honor and disgrace brought by the national fortune.

The short-term market performance has brought more emotional color. Because there are countless investors behind the transactions in the capital market, greed and fear are human nature. When the overall market is prosperous and various economic data are performing well, the stock price performance is also very good. At this time, investors are in high spirits and full of confidence in the future. At the same time, entrepreneurs are also very optimistic and full of confidence, and they want to expand their operations and reproduction to gain more market share and better performance. When the performance report is disclosed, the growth rate is very satisfactory, and investors are more optimistic and actively buy stocks to earn investment income. Over time, the overall market will form a valuation bubble.

Black swans are one of the components of the capital market, that is to say, large downward fluctuations in the capital market have occurred many times in the past and will continue to appear in the future. We see that there have been many black swan events since the beginning of this year, which have had a certain impact on the capital market. The disturbance of the Russian-Ukrainian conflict on the global supply chain, the impact of the epidemic prevention and control in Shanghai on production and life, and the continuous multi-day period from July to August hot weather, etc. At present, the economic data indicators seen from the macro level are indeed not very ideal, and they are still in a state of weak recovery. When the market lacks confidence and the stock price weakens and forms a downward trend, it will stimulate people’s fear at this time. It is said that when people face losses in investment accounts, and when people face the danger of death, they stimulate the same brain area. We think that when people face death threats, their instinctive reaction is to run away. This can explain why in a bear market, investor sentiment is very low, and many people are reluctant to talk about stocks, or even sell them.

Smart investors move against the market, being fearful when others are greedy and greedy when others are fearful. When the market sentiment is high and optimistic, some people even shout out slogans: “Those who are afraid of heights are hard-working people”, “Good companies don’t need to look at the valuation, just do it right!” They choose to look at the problem rationally and objectively, When the stock price of the company we hold has risen to this position, has it seriously overdrafted its performance for the next few years?

Let me show you a few pictures. Picture 1 is the risk premium of all A shares of Wind. The calculation formula is to divide 1 by the price-earnings ratio of the whole market, and then multiply by 100%, which is the current profit rate of return corresponding to the entire A-share, and then Divide this value by the 10-year treasury bond yield, which is what we usually call the “equity-to-debt ratio”. From the current value, the overall market has been at a low level in the past 10 years; Figure 2 shows the CSI 300 index. The risk premium, compared with the past 10 years, is already historically low at this moment.

Perceive the warm and cold, respect the cycle. The change of seasons in spring, summer, autumn and winter is originally one of the objective laws of nature. For the same reason, the “warm and cold” of the capital market is also one of its components. It is impossible to always go up or down all the time. Prosperity and decline, will also be very peaceful. The current market is in a period of cold winter, and we believe that spring and summer will come again. The extreme cold in winter is when the supply side is cleared. Those investors who hold stocks but cannot survive this winter will be brutally eliminated. Of course, the bottom price is also smashed by them. When we are at the bottom of the cycle, all we can do is believe that tomorrow will be better. As long as the fundamental logic of the companies we hold is correct, then what should come will eventually come.


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