From “knowledge” to “realization”
1/4, cognition and realization, more than one expert
Value investors all believe in the phrase “investment is the realization of cognition”. The truth is that, but in actual investment , the relationship between “cognition” and “realization” is not so simple.
A little-known listed company claims that the products on the current hot track are used to achieve breakthroughs in new technologies, and there are a lot of experts and experimental data. Seeing that the stock price is not expensive, a fund manager excitedly ran to let the researcher take a picture of the performance. .
The researcher pouted, this technical difficulty is not ordinary, and the verification period of downstream manufacturers is required. Even if it is really done, mass production will not be possible within two years, no profit will be generated within three years, and performance will not be able to shoot.
The fund manager decided to wait and see. As a result, the stock hit the daily limit of three first, and then after a period of consolidation, it kept hitting new highs non-stop.
If you think the experts’ words are unreliable, as a result, half a year later, the stock price began to fall all the way, which verified the researcher’s statement.
It is no wonder that many people complain, those who are good at knowing gain the truth, those who are good at realising gain wealth, and everyone has a bright future.
However, before complaining, please think about three questions:
Question 1. For new technologies that cannot bring profits to the company in the past three years and have great uncertainty, shouldn’t they be valued?
Question 2. How does the market price this type of uncertain information?
Deeper Question 3. What is the difference between research and investment? Why don’t the fund companies let more knowledgeable researchers buy stocks directly, but let the information pass by and let the fund managers make decisions?
The most practical question 4, how to let the expert’s point of view help our investment?
2/4. Transaction Pricing and Professional Judgment
The following business information has a common feature:
The product achieves a certain technological breakthrough, and the certification of downstream enterprises will be carried out in the next one or two years
An industry leader who has mastered technology or channel resources joined the company
Enterprises announce their entry into new hot areas and increase investment in the next year or two
The common point of the above information is that it will not have an impact on the performance of the company this year or even next year.
In fact, most operating information will not have a significant impact on the performance of this year and next year , and the valuation method, whether it is PE or PS, is based on the financial information that has occurred (static valuation) and the financial information that is taking place. (Dynamic valuation) as the basis for valuation, therefore, speculation around favorable events that do not affect performance is uniformly referred to as “theme speculation”.
But in fact, quite a few of these changes will have a deterministic impact on future operations. The valuation is the discount of long-term cash flow in the future. A new technology or new product that will bring revenue and profit several times after three years, even if the probability is not high, let’s say it is 20%. One or two daily limits can also be calculated under a specific risk appetite.
For a better understanding example of buying a second-hand home:
Suppose you are interested in a second-hand house and have negotiated the price with the landlord. Before paying the deposit, the city government issued a major plan. The area where this house is located will be included in the planning core area of ”XX New Town”. In the future, there will be a series of The population introduction policy and a series of major configurations such as “schools, subways, parks, hospitals”, etc.
As a result, new properties in the area were temporarily closed for price adjustment, and second-hand properties were raised overnight, so the landlord told you the next day that the previously negotiated price did not count, and the house price would increase by 10%.
The plot is still the same plot, the house is still the same house, the company is still the same company, and the performance of this year is still the same, but the future is not exactly that future, and price increases are normal.
Any information will affect the future value of assets, and then affect the current price in the form of discounting. The so-called “speculation theme” is actually the process of affecting the current price of events with great future imagination but small probability.
The key is how big the impact is.
More importantly, how does the pricing process work?
These two issues are not considered by experts. The role of experts is to analyze the feasibility and economy of the technology itself, but how to price it is determined by “laymen” in the market through a series of transaction behaviors.
3/4. How the market prices “uncertainty”
If you are a retail investor, you have invested in liquor, new energy, semiconductors, and CXO for a long time. However, no matter how many research reports you have read, how many expert researches you have listened to, and how many notebooks you have written, what you understand is only in this industry. Basic knowledge is equivalent to a newcomer who has just entered the industry for a year, and may not even be “quasi-expert”.
In contrast, institutional researchers are mostly true professionals, while industry experts are more fighters among professionals.
However, if you look at the ability to make money, whether you can make money among fund managers has little to do with whether you are an expert in a certain industry or not. If a researcher turns to a fund manager, the rate of return will not be higher than that of a non-research fund manager; Among retail investors, the more professional one is in a certain industry, the higher the probability of making money.
This means that expert retail investors are often closer to market pricing results than institutional researchers and outside experts.
Why is this so?
Just as house prices are set by buyers and sellers rather than by more professional intermediaries, stock prices are also determined by investors, who are laymen in the industry, and set prices through market buying and selling rather than professional research.
Continuing to take the second-hand housing above as an example, to a certain extent, three consecutive daily limit and subsequent fall, you can think of it as a bargain between the buyer and the seller.
The first three daily daily limits seem to be the sellers “asking prices” – you see, this is the biggest opportunity for the city in the next ten years. In the next few years, the house price doubles, and I will increase you by 10%, right?
The adjustment on the side is the counterattack of the buyer – the plan is bullshit, the development zone also had a big plan ten years ago, and the housing price has also gone up, and now it has become a ghost town. The house now has these facilities.
After the adjustment, the rebound to the top of the previous period is due to the persistence and threat of the landlord. Today, there are several times more people viewing the house than yesterday, and the intermediary has made a few appointments for me. Let’s not waste time.
The second fall after the new high is the buyer’s final offer. Planning this thing is really uncertain. Well, I will add 200,000. No matter how high it is, I really don’t think it’s worth it.
A sky-high asking price and a repayment on the spot are the huge fluctuations in the stock price. In the end, whether the house can be sold, and at what price, does not depend on the plan itself, but on the buyer and seller’s perception of information and will to price, pricing power.
Expert retail investors are similar to professional real estate speculators. They have both knowledge of information and experience in transaction negotiation. They are also deterministic interpretations of a certain technology. The certainty of expert retail investors’ understanding is closer to the market transactions. The level of certain cognition, so it can become a short-term price setter; and experts often run ahead of the market cognition, which is why the market always deviates from professional cognition to “speculate the theme”.
This also makes it easy for experts to be slapped in the face by the market in the short term, but if the expert’s perception is correct, the stock price will return to the expert’s perception in the future, just like ten years later, how much the house is worth depends on the planning. How much landed.
To summarize this pricing process:
In the short term, stock price rises and falls are determined by changes in investor perceptions
In the long run, the rise and fall of stock prices is determined by the interpretation of the information itself
The starting point of the stock price is the perception of investors, and the end point of the stock price is the perception of experts.
This process is the process of “cognitive realization”. If we understand this, we can talk about it – how to let the opinions of experts help our investment?
4/4. You are a more professional investor than an expert
First of all, believe that you are more professional than experts in the matter of “investment”.
For a professional investor, there are three levels of “cognition”:
The first layer of cognition: changes in business information itself
Second layer of perception: perceptions of these changes by investors with pricing power
The third layer of cognition: Market style preferences cause the acceleration and deceleration of this cognition.
Cognition is not only about companies and industries, but also the market and counterparties, so what is more important is the behavior of investment and trading itself. Industry experts are likely to be very “cooked” in this matter.
It’s easy to be fooled if you don’t understand at all, but it’s easy to break away from the original intention of investing purely from a professional point of view.
Second, to be able to make “uncertain money.”
The reason why logic is called logic is that it is theoretically reasonable and possible, but it has not been done in practice, that is, uncertainty, and the money earned is from “uncertainty” to “realization”.
On the contrary, if this matter is not too difficult, then the stock price will be in place in one step, and in the future it will be a hedge between the decline in valuation and the increase in performance, and the profit margin will be hard to say. Many times, experts (including many researchers) can’t make money by investing in stocks. It is precisely because they pay too much attention to the certainty of reality and do not know how the market is valued, so they buy high-priced targets.
Again, expert opinions require cross-validation.
Different experts have their own advantageous fields and observation angles, and cross-validation can better shift from a professional perspective to an investment perspective.
Finally, an expert opinion can provide a buying margin of safety.
Experts lose money, at least they know why they lose money, and retail investors lose money is basically buying the wrong company, not missing a company, so, more common than experts losing money is that experts miss out on making big money in industries they are familiar with Opportunities, especially when there are big changes and big opportunities.
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