From cognition to actual combat, reconstruct investment logic.
Why not copy the bottom easily? The master will also die of bottoming.
"what is investment?
This is an investment only if there is an in-depth company analysis, a margin of safety, and a satisfactory rate of return.
The rest is speculation. "
Buffett's way
In terms of February 22 valuations and profit growth, U. S. stocks are overbought.
Two weeks later, with the spread of the COVID-19 epidemic, there was an epic sell-off in the global market, with twice-weekly circuit breakers for the first time in history.
The Nasdaq index is down nearly 20% from its high.
The Nikkei index fell nearly 25% from its high.
The shanghai index is the strongest, but it is also down 6.5%.
At this time, the investors in the major WeChat groups began to discuss which stock rose by the limit tomorrow, transformed their value investments one after another, and began to discuss how to make a bottom.
But bottoming is the hardest thing to do.
Mr. Feng Liu, a well-known investor, said that he never copied the bottom.
Because bottom-reading is the strongest behavior, this kind of behavior is similar to everyone thinking that the cinema is on fire and rushing out of the door, but you know that the cinema is not on fire and rush into the cinema.
Once the judgment is wrong, the loss is greater than chasing high.
In history, there are many investment masters who avoided the stock market crash but died of bottom-copying.
A short story
In the United States in the 1990s, there was a fund manager with excellent performance: bill Miller.
How good is his performance?
In terms of return on investment, Reg Mason Asset Management, managed by Bill Miller, achieved an annualised return of 14 per cent between 1991 and 2005, beating the S & P for 15 consecutive years, a record that has surpassed Peter Lynch. ranked first among all funds in the United States.
At its peak, Bill Miller was named the best fund manager by Morningstar, comparable to Chen Guangming now.
Bill Miller's investment idea is to invest in reverse, centralize positions, and bet on high-growth technology stocks.
Under the guidance of this kind of thinking, Bill Miller can not only start to take heavy positions in star companies such as Amazon.Com Inc, Dell, Apple Inc, Netflix Inc (centralized positions, betting on technology stocks) at an early stage, but also before the bursting of the dotcom bubble in 2000. Sharp shift to traditional value stocks (reverse investment).
However, it is such an investment master whose investment skills seem to be perfect, he is on the verge of going bankrupt.
From the picture of Bill Miller's excess return on investment, we can see that the money under his management withdrew sharply during the 2008 financial crisis, and even tried to plunge by 50% in a year.
You may think that Bill Miller withdrew because he did not find the crisis and did not withdraw the funds in time.
However, on the contrary, Bill Miller was aware of the risks early before the financial crisis and decisively reduced his positions. He failed entirely because of the bottom-cutting later.
In our impression, the financial crisis is a decline of 30%, 40%, or halved at most.
But in the 2008 financial crisis, the share prices of many well-known companies fell directly to 10% or less!
Citigroup Inc, for example, has fallen from a peak of $57 to $1. If you hit the bottom by half, or about $25, you'll end up with a loss of nearly 90%.
Bill Miller is one of the bottom hunters.
In August and September 2007, when the Federal Reserve cut interest rates twice in a row, Bill Miller mistakenly believed that the crisis was over and these big companies would not go bankrupt, so he boldly bought Citigroup Inc, Bear Stearns, AIG, Merrill Lynch, Freddie Mac and other companies.
However, in 2008, the financial crisis is still not over, Lehman Brothers collapsed, the U. S. stock market plummeted 37%.
Bill Miller, accustomed to reverse investment, did not correct his mistakes, but bought more and more.
For example, Bear Stearns was bought in March 2008 for $30.
The stock, which once had a share price as high as $154, was finally acquired by JPMorgan Chase & Co with an offer of only $2, and now its stock price chart can no longer be found in the stock software.
AIG shares fell from about $70 to a low of about $1.
The same goes for companies like Freddie Mac, AIG and Washington Mutual, where Bill Miller basically bought all these toxic assets.
There is a Wall Street proverb: newcomers die of chasing high, veterans die of bottom copying.
Bill Miller failed not because he didn't know how to invest, but because he was too good at investing. He knows Citibank and Bear Stearns very well, and he also has a wealth of successful experience in bottoming before, so he dares to pick up the knife.
Unfortunately, in the end, he underestimated the macroeconomic risks and died of bottoming out.
The master who died of bottom copying.
From Bill Miller, we can clearly see that the risk of bottom buying is greater than that of chasing high.
Those who chase high at least know how to cut meat, and bottom hunters will cling to stocks because they are sure they know the company, or even buy more and more as they fall.
Therefore, those who chase high will leave the market at most at a loss, and a little carelessness in bottoming will lead to bankruptcy.
In addition to Bill Miller, there are many other masters who go bankrupt by copying the bottom.
Like value Investment Godfather Graham.
In September 1929, in order to stop the outflow of gold, the Bank of England raised interest rates and London funds were withdrawn from New York.
Wall Street stocks stopped rising because of the loss of capital. On Oct. 29, the Wall Street stock market completely collapsed, and the Dow fell to 198 in just a few weeks after peaking at 381.
After several months of slump, the stock market began to rebound, and by March 1930, it had rebounded to 286 points.
At this time, Graham after close analysis, found that many stocks are already cheap enough, coupled with the market rebound, Graham thought the time for reversal had come, began to increase leverage to bottom.
But the scary thing is that the market then fell another 33%, and stocks became cheaper on a cheap basis.
In the process of falling, Graham managed a fund with a floating loss of as much as 50%.
However, the decline is not over yet. The Dow Jones index continued to fall on its original basis, and it was not until July 1932 that it fell to 41 points, with a maximum drop of 89% from its peak of 381 points.
Over the same period, Graham's fund lost as much as 78% and had to be wound up.
Graham then withdrew from the capital markets, made a comprehensive reflection on past investments, and wrote the classic masterpiece Securities Analysis.
The failure of the bottom was also failed by the mastermind Livermore.
Also during the 1929 stock market crash, Livermore saw the timing and made nearly $100 million by shorting the stock market before the crash, when U.S. revenue was only a few billion dollars.
But Livermore didn't stop there.
In 1930, Livermore, like Graham, felt that the market was very undervalued and that an upward trend was taking shape, so he began to leverage long.
But the stock market fell by another 40% between 1932 and 1934.
Livermore, who had just become the richest man, quickly went bankrupt in this market and became a homeless alcoholic in 1934.
Other investment masters, such as Buffett, Soros and Fisher, all have more or less failed bottoming.Therefore, to get to the bottom, the margin of safety is very important.
The margin of safety here includes not leveraging, appropriately diversifying investment targets, and ensuring adequate cash flow to ensure that positions can be held until the rebound.
Then, more important than the margin of safety, you need to know what you are doing.
Many people do not know the operation of a company, do not know the value of a company, just because the stock price falls to the bottom, thinking that after the crisis, the stock price will return to its original position.
This kind of behavior is actually listed on the market is very dangerous.
The first place of value investment is always value. The stock market crash only provides everyone with an opportunity to buy at a low price, the value of the investment target is not enough, still do not buy.
Buffett's success is at the bottom.
Although the risk of bottoming is high, it is indeed an excellent opportunity for asset appreciation.
Whether it is Warren Buffett, or Li Ka-shing, are in the bottom again and again to complete the accumulation of wealth.
We might as well take the case of Buffett's investment in Coca-Cola Company in 1987 to see how to copy the bottom correctly.
The stock market in 1987 was very similar to what it is now. After a profit-driven bull market in the last few years of 1982, it entered a bull market driven by valuation, and many stocks began to become expensive.
In October 1987, the Dow plunged 600 points, or 23%. Coca-Cola Company fell from a high of $51 in September 1987 to $38 in two months, a full drop of 35 per cent.
A year later, in 1988, Buffett began to buy Coca-Cola Company. By the Berkshire shareholders' meeting in 1989, Buffett announced his investment in Coca-Cola Company, totaling US $10, accounting for about 1/3 of Berkshire's total capital at that time.
Ten years after Berkshire's purchase, Coca-Cola Company's market capitalization rose from $25.8 billion to $143 billion. During this period, the company generated a profit of $26.9 billion and paid $10.5 billion in dividends to shareholders.
By the end of 1999, Berkshire's initial investment of $1.023 billion in the Coca-Cola Company stock market was worth $11.6 billion, and the same investment could only turn into $3 billion on the S & P 500.
This investment is Buffett's most classic investment case, if there is no investment in Coca-Cola Company, Buffett will be much poorer than now.
But Buffett dares to take a big position in Coca-Cola Company, not just because its price has fallen.
First of all, Buffett is very familiar with Coca-Cola Company. He started drinking Coke at the age of 5, and over the next 50 years, he witnessed the extraordinary growth of Coca-Cola Company.
Second, Coca-Cola Company's business is very simple, which is to produce syrup based on the formula and then sell it to retailers. Coca-Cola Company more than 100 years of business history, but also make its future certainty is very high.
And most importantly, Buffett saw the value of Coca-Cola Company.
In the 1970s, Coca-Cola Company was full of chaos, not only the management Austin was very arbitrary, which seriously damaged Coca-Cola Company's business efficiency, but also faced various accusations of environmental pollution and monopoly operation.
But in the 1980s, the company's new CEO, Goizueta, reorganized Coca-Cola Company, cutting all projects that had nothing to do with growth and focusing on improving the company's earnings per share and return on assets.
So in the 10 years after Buffett invested in Coca-Cola Company, Coca-Cola Company's return on net assets increased from 20% to 31%, net profit margin increased to 19%, and the company's market capitalization grew at an annual compound interest rate of 19.3%.
This is Buffett's bottom-hunting method, not only because the price is cheap, but because he digs behind the stock and enhances the true value of the business.Summary
90% of investors like to brag about their experience of escaping from the top and making bottom, as a sign of ability.
But in order to make money in the market, do you really need to accurately escape from the top and copy the bottom?
Let's take a look at the stocks that rose best in the five years after the 1987 stock market crash, including Microsoft Corp, Cisco Systems and other companies.
Take Microsoft Corp's share price as an example. In the stock market crash, Microsoft Corp fell from 32 cents to a low of 17 cents, almost halving.
But five years later, Microsoft Corp's share price was $1.92.
In other words, even if you buy Microsoft Corp at the peak, you can still get a six-fold return five years later.
The same is true of Apple Inc in 2008. Even if you buy Apple Inc at the peak of 2008, you can still make a lot of money by holding it up to now.
China's stock market is similar. Blue chips such as Gree, Midea and Maotai all had a big correction in the 2015 stock crash, but even if you buy at the top and hold it until now, there will be a multiple return.
All these examples actually illustrate a problem: stock investment is not a game of guessing ups and downs.
Experts such as Feng Liu and Buffett never consider escaping from the top or making bottom. What they consider is how much the company is worth, how much the expected return is, and how much the margin of safety is.
As long as the margin of safety is calculated before each purchase, whether it is a stock market crash or a bull market, in fact, the impact is not great.
The essence of investment is listed as a game of mining value.
It's not simple financial data, or the fame of the company, but the real value of the company.
Edit / Edward