Rebuilding investment logic from perception to actual combat

Views 2155 Aug 9, 2023

Choose the technical analysis school or the value investment school?

"Jian Zong" and "Qi Zong"

The Huashan School in The Smiling、Proud Wanderer has the difference between "Jianzong" and "Qizong": Jian Zong is based on practicing "sword", emphasizing "fast", and Qizong is based on practicing "Qi" and emphasizing "strong".

Jian Zong started quickly and made rapid progress, but to a certain extent, it was very difficult to make progress; Qi Zong started slowly, but his stamina was endless.

Jian Zong is very talented and savvy, so people with personality like Linghu Chong, who went from Qizong to Jianzong, immediately made great progress. Qizong is stupid kung fu, and everyone can achieve something as long as they make progress step by step.

There are also two factions in the stock market. "Jian Zong" is the trend technology school, or "technology school" for short. Because they invest in stocks according to graphics, pay attention to fast in and out, and seal the throat with one sword, they are called "Jianzong". It is also said to be "speculation", "short-term speculation" and "theme speculation".

"Qizong" is the value investment school, referred to as "price school", because it is based on corporate financial statements and fundamental analysis as the basis for buying and selling, most of them are medium-and long-term investments, so it is called "Qizong".

When the "technical school" looks at the picture, it is easy to get started and make rapid progress, but it is easy to be obsessed with it. Many people think they are a genius after they have made money once or twice in a certain way, but as soon as the "wind" changes, they immediately lose all their trousers.

The "price faction" wants to make an in-depth study of the enterprise's business model and to withstand the loneliness of "staying away from the market." therefore, there is the saying that "value investment is not understood until after the age of 40."

These two factions are also irreconcilable in China's securities market, but unlike the Huashan School, investors have been trying the methods of the two factions for a long time, even if you become a big disciple of the "technology school" like Linghu Chong. You can also suddenly turn to the "value school".

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Value faction: do you want to make Mr. Market's money?

Before the middle of the 20th century, there was no difference between technocrats and valuers in the stock market. everyone chose stocks according to fundamentals and speculated in pictures, until a man named Benjamin Graham appeared. he put forward a theory called "Mr. Market":

There is a Mr. Market who quotes stocks every day, but he is very emotional. Sometimes the price he quotes is excruciatingly high, and sometimes the price he quotes is ridiculously low. The best way is to ignore Mr. Market's emotional offer and figure out the true value of such things for yourself.

As soon as the "Mr. Market" theory came out, the "value school" became independent from the old stock investment circle, and Benjamin Graham became the founder of this school.

And Graham's proud disciple Warren Buffett spread the concept of "value school" into the mainstream of the American investment community. Buffett further believes that the value of the company is not immutable, and that the best way is to find "great companies" with long-term and steady growth and let their money grow with them.

Graham still wants to "pick up the leak" to make some money from Mr. Market, and Buffett's partner Munger thinks that even if Mr. Market asks a normal price, as long as it is a great company, it can be bought.

From Graham to Buffett and Munger, the core idea of the "value school" is becoming clear: don't make Mr. Market's money, make money for the growth of the company.

Therefore, the unique learning of the "value school" is to analyze the intrinsic value of the company, which is commonly known as "valuation".

There are many methods of valuation, but they are all simplified from the most primitive method, which is Buffett's most respected "discounted cash flow method". In short, all the cash that the company can earn and recover in the coming decades will be converted to its current value according to the "discount rate".

According to this line of thinking, the key to a company's valuation is not only how much money the company earns now, but how long the money can be earned, also known as "certainty". Those businesses that can make money steadily for a long time, Buffett called it a "moat", such companies, either like Coca-Cola Company, have a strong brand, or have invisible user stickiness like American Express.

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The determination of growth is more important than the rate of growth.

The "value school" is a "well-known and decent" in foreign stock investment, and it also has a large number of fans at home, while a number of domestic "long-term growth" companies, such as Maotai, Gree, Hengrui, Haikangwei and so on, have also verified that the "value school" can survive in China.

But even in foreign countries, the "value school" does not dominate the world, because the "value school" has four extremely fatal defects, which will be analyzed in detail later, just to talk about the point mentioned earlier-- the threshold is too high. You let a young man fresh out of school to understand the business model? Let an old shareholder who came from the fifties and sixties to understand the operation of the company? Difficult!

Therefore, the advantage of the "technical school" in looking at the picture shows that "the EMA diverges attention, breaks through the pressure level to buy, holds along 10 antennas all the way up, breaks 10 antennas to sell", how low the threshold is!

However, before you choose the "technical school", it is suggested that you still need to know a little bit of the theoretical basis of the "technical school". If you do not understand the theory, you will never know the real meaning behind those technical indicators.

Technical school: it is more important to understand the subject matter than to understand the graphics.

The theory of "technocracy" is also related to the mood of "Mr. Market". The difference is that the "value faction" buys at a low price and sells at a high price. However, the "technocrat" believes that since "Mr. Market" is a psychopath, he cannot guess according to common sense, and there is often a higher price after a high price.

But in fact, "Mr. Market" does not exist. "Mr. Market" is the investors themselves, who sell gold at the price of cabbage when they are afraid and buy cabbage at the price of gold when they are greedy. Therefore, the "technocrat" is a game that "spreads the flowers" and earns money from the emotions of other investors, just like a group of people going hunting together, the "value faction" is aimed at prey, and the "technocracy" is aimed at hunting companions together.

The "technocracy" also has a theoretical basis, the most famous of which is the rabble, a book of group psychology that has nothing to do with investment.

Why do "Mr. Market" or investors often go "crazy"? The rabble says:

"as soon as people arrive in a group, their IQ drops seriously. in order to gain recognition, individuals are willing to abandon right and wrong and use their IQ in exchange for a sense of belonging that makes people feel safe. "

The "technocrats" found that rising stocks are inherently more attractive than falling stocks, so after "Mr. Market" quoted an ridiculously high price, it will attract more attention, and the crowd will gather to a certain number under certain conditions. "consistent blind action" will be formed, and stock prices will accelerate, which is called "trend acceleration", commonly known as "breakthrough".

There are many methods of "technocracy", among which the most mainstream is to look for stocks that show an "upward breakthrough" trend on the graph, including those that break through previous highs, constantly set new highs, and those whose averages diverge upward, and so on. So the "technocracy" is also known as the "trend faction".

So, what are the "certain conditions" for a breakthrough?

It's the subject matter. Real "technocrats" should also focus on the fundamentals of the company, but they focus on the subject matter, not on actual operations and performance.

What is the subject matter? For example, a company intends to invest in artificial intelligence business, as long as it does not generate revenue and actual profits, or the proportion of business is very small, it is called subject matter.

Why is the subject matter more popular than the actual performance? The "rabble" believes that:

"the masses have never really longed for the truth, and in the face of unpalatable evidence, they will turn a deaf ear to it. Anyone who can provide them with hallucinations can easily become their masters. "

Stock speculation is speculation in the future, and the theme is the imagination of the company's future business direction-even though many people know that the possibility of these themes is slim.

The trend of the public's imagination of the subject matter is graphical, so the trend is always in the hazy state of the theme all the way up, and falls back rapidly after the theme is clear.

The master of the "technical school" is only the level of the injustice of the Huashan faction, and only the master of analyzing the subject matter can master the skills of "alone and nine swords".

Therefore, the "technical school" master needs considerable talent, not only a large amount of knowledge reserve, but also macro-economy, industrial direction, policy direction, scientific and technological wind direction, and so on, all need to dabble in, but also need to have a very deep insight into human nature. keenly detect subtle changes in the strength of stock trends.

What is mentioned above is the core idea of the two most basic schools of stock market investment, the "value school" and the "technology school". If you want to know which school you are going to join, we should also make a comparison in the light of the national conditions of the Chinese stock market.

Why "technocracy" is a natural trap for individual investors

Most of the individual investors are amateur investors who can only take a peek at the stock software after work and have to be prepared to press the "boss button" at all times, while the "technical school" needs to pay attention to the market all the time. By contrast, the "value school" can not look at the market at all. From this point of view, amateur investors are born to be part of the "value school".

However, "value analysis" has four congenital defects, so that it has not become the mainstream of individual investors.

First, individual investors want to judge the value of a company only through financial statements and public information, but financial statements are not experimental data, it can be adjusted legally or illegally. This problem is particularly serious in China, where every "white horse thunder" piled up with false financial statements will lead to a large number of "value factions" defecting to "technical factions".

Second, the volatility of China's stock market is too great, that is, the psychopath of "Mr. Market in China" is more severe than that in foreign countries:

When the great bull market was at its best in 2007 and 2015, according to the theory of the "value school", almost all stocks far exceeded its true value. If you continue to stick to the philosophy of this school, you are bound to give up the most lucrative return in the Chinese stock market.

The characteristics of large fluctuations also make it impossible for those institutional investors who have innate information advantages to become a pure "value school". In super bear markets like 2008 and 2018, ordinary individual investors can lie down and pretend to be dead. but the institution has a closing line, the stock price has fallen to a certain extent, even the future "tenfold shares" now have to cut the meat.

The same is true in foreign countries. During the economic crisis of 1929, Graham bought shares at a "clearing price" lower than his net worth, but his position was cut short. Munger's private equity fund was also forced to liquidate in the big bear market in the 1970s. Before he went to Buffett. The reason why Buffett can stick to the idea of "value school" is not because he is strong-willed, but because his money comes from the long-term liabilities of insurance companies.

On the contrary, the greater the fluctuation, the more room for the "technocracy" to play.

Third, the "value school" focuses on the "moat" of "growth companies" and "value companies", which are only part of all listed companies, such as energy, shipping, mining, machinery, aquaculture and other highly cyclical companies. You can't say they're worthless, can you? However, its value is very unstable because of the price fluctuations of bulk commerce. When it is earned, all the money in the world is earned, and when it loses money, it is difficult to doubt life. Naturally, it is very difficult to use the method of "value analysis".

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The profit ups and downs of Baosteel in the past decade

Due to historical reasons, most of China's stock markets are "junk stocks", and listed companies like to evade the delisting mechanism through "asset restructuring". This makes most stocks become "junk stocks-restructuring-blue chip stocks-hollowed out by the restructurers-junk stocks" and "the worse the company is, the safer the stocks are".

Therefore, the "technocracy" has always been the mainstream of China's stock market.

Defect four, such as foreign exchange, futures, commodities and other investment products, their intrinsic value can not be judged, certainly can not use the method of value investment.

Judging from these "four major defects", it seems that we have no reason to turn to the "value school"?

The problem is that the four major shortcomings of the "value school" can be overcome, nothing more than making less money, but the only defect of the "technology school" is incurable-its investment model is doomed to failure.

The "value faction" earns money for the growth of the company, and it is a "positive sum game". As long as the investment time is long enough, those with a high level earn more and those with a low level earn less, while the "technical faction" earns other people's money and has to compensate for service fees. it's a standard "negative sum game."

The rule of the negative sum game is that as long as you stay at the table long enough, most people will earn zero, as long as a fatal loss will make you leave the table forever.

Just as the mass movement is the revolutionaries'"consumption" of the revolutionary masses, in the final analysis, the "technological school" is the hunting of 99% of the retail investors by 1% of the big investors, and the "cutting leek" of the old investors to the new investors every seven or eight years. So, joining the "technical school" is a natural trap for 90% of investors, and it is also the reason why they invest in the stock market and lose money.

Speaking of which, someone must say, can I not stand in line and gather the essence of the two factions?

There is no middle route, but there is an improved route.

Many people try to reconcile the contradictions between the two factions. for example, some people say that we should "choose stocks on the fundamentals and timing on the technical side", and some people advocate "stock selection on the technical side and buying on the fundamentals." as a result, they all hit the face on both sides.

When Yue Buqun in The Smiling、Proud Wanderer talked about the difference between the two schools, many people, including the younger sister, felt that Qi and sword were very important and should go hand in hand. Yue Buqun immediately interrupted this dangerous idea:

"this sentence alone is close to magic. Both are dominant, that is to say, neither is the Lord. As the saying goes, "outline raising eyes Zhang", what is an outline and what is an eye, we must make a clear distinction. "

This is the most fundamental "route problem", and there is no "middle route" to follow.

For example, some people study the fundamentals of stocks, but after buying, they set a stop line with a loss of 10%. The idea of "technocracy" is that the more they go up, the more they buy. Once the trend weakens, they have to sell. "stop loss" is an authentic "technocratic" method.

However, the idea of the "value school" is that as long as the value of the company does not change, the more it falls, the more it buys, so the "value school" often builds positions in a lot of money, falling by 10% after the first purchase, which is exactly the time to buy the second.

There is a fundamental conflict between the two factions in almost all transaction responses, and the so-called "middle line" of many people is actually face-to-face on both sides.

Whether it is the "value school" or the "technical school", they can make money, but more people lose money because they waver and finish building positions on white horse stocks, only to find that the theme stocks have just been cut off to chase hot topics, but they happen to stand guard on the hillside.

The result of betting on both sides is that the kung fu on both sides is too shallow, when being a "value school", the research is not deep enough, it turns to a "technical school", and its understanding of the subject matter and the minds of the public is very superficial.

But there is no middle ground. It does not mean that there is no "improvement route". In fact, China's investment experts will not be pure "value school" or "technology school".

For example, Buffett holds for a long time and shares the benefits of corporate growth, but due to the volatility of China's stock market, many "value school" experts will take advantage of market fluctuations to increase or decrease positions on the basis of long-term holdings. to gain more than the growth of the enterprise itself. This is also considered to be feasible in practice.

In addition, the "valuation method", which is the foundation of the "value school", is itself a very subjective concept, which is inextricably linked to the "theme" of the "technology school". In China, a market full of individual investors, it is often felt that the valuation of 20 times in the first half of the year is on the high side, but it is reasonable to rise to 40 times in the second half of the year, and we can learn from the "theme thinking" of the "technology school".

Edit / Ray

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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