Stock Market - Chances Born of Decline: The Most Opportune Time for Portfolio Reallocation in Three Sectors

Chances Born of Decline: The Most Opportune Time for Portfolio Reallocation in Three Sectors
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Chances Born of Decline: The Most Opportune Time for Portfolio Reallocation in Three Sectors

Posted: 29 Jan 2022 11:55 PM PST

Real value investors focus on companies and take a long view.

Many friends asked me whether I think the recent market decline carries systemic risks. Personally, I don't think things are that bad, and the slump is but a normal swing in the stock market. Three main reasons are responsible for the decline.

1.With Spring Festival approaching, some investors withdrew short-term funds to either spend during or cash in before the holiday.

2.Concerned the Fed would raise interest rates, part of foreign capital flowed out of the domestic market, which is also the reason for large net capital outflux.

3.Recently, in response to sharp slides sustained by major funds, many investors chose to redeem their allotments. This prompted funds to sell part of their stock holdings to repay investors. This is why many funds have relaxed purchase restrictions and started buybacks.

(Contributor: 价值十一年 on westmoney)

Four kinds of people fearing a market slump

The recent market decline has scared many investors, but four types of them are the most fearful given my observations.

First, pure profit-seekers who buy stocks base solely on the K-line trajectory; second, people thinking they have bought the wrong stocks and paid more than they should have; third, people borrowing more money to do leverage trading; fourth, people who are in urgent need of money.

The first type of people will only trade by following daily movements of the K-line. They are not experts at investment, nor can they analyze companies. They make bets, only to experience emotional ups and downs as the stock market swings wildly.

They may be fortunate enough to make some money in a bull market, but in a bear or volatile one, their losses will even double previous earnings. Their modus operandi is to chase high in an outburst of optimism whenever the market rallies; and sell low amid a bout of desperation and pessimism when the market plummets continuously.

The pure profit-seekers don't stop until their principal runs out. They have nothing to do with value investing, and I have never seen any gambler of this sort make money for a long time. They might ditch a falling stock like trash but when the bull market comes, they will spend several times the original amount to buy it back.

The second type of fearful investors believe they know value investing and are indeed capable of analyzing companies to choose the right target, but they are neither rational nor patient and do not follow common sense in trading. They either buy a lucrative stock but at a higher price or are frightened by the continuous slump and dare not invest any more. They are not achievers.

Being too faint-hearted and impatient, they appear to be value investors when the market goes well and are sensible enough to swallow the pains from small swings in stock prices. But in the case of extreme events and continued slides, their willpower and rationality will evaporate, and their emotions will get the better of them. Then, they usually will be in a state of self-denial and even doubt the companies and stocks they invest in, wondering whether they make the wrong picks or buy them for the wrong prices. Both scenarios are possible.

At this time, however, people should ask themselves whether they really make a wrong bet or they are just too scared to trade? And as a result, they are poised to perceive all stocks to be over-priced and assume future losses are on the way? Most people belong to this group of investors when markets are going down.

The third type of investors are those engaging in high leverage trading, and they are not true value investors either. Any value investor who knows a bit about investment and sticks to its principles will not increase leverage, let alone high leverage.

A fundamental rule about value investing is that it advises against increasing leverage, since it will not raise the winning rate but only magnify gains or losses. Besides, you spend more for the extra financing. What's worse, there is a risk you might lose everything once the leverage is used.

Adding leverage obviously violates the common sense of value investment, goes against the principles of value investment, and deviates from the risk-aversion concept of value investment.

The fourth group is those who don't need spare money to invest but are in urgent need of money. Those people have no choice but to buy high and sell low. Likewise, they don't have common sense about trading or respect principles of investment.

A typical value investor knows that no one can predict the short-term trend of stocks. There are no rules in short-term market fluctuations. Even if a stock reaches the undervalued range, its price will continue to fall and will not rise immediately. Those who wish to make quick money can only count on luck, which is obviously not in line with the concept of value investing.

Value investors should understand that the stock market is not a place to make quick money. Warren Buffett said it would be foolish to expect stocks to rise next week, next month, or even next year! This is not difficult to understand.

Therefore, real value investors focus on companies and take the long view, and no one will depend on luck as the only tool for investment.

Those who pour their savings for the next three to five years into the stock market are either fools or don't know the common sense.

Best allocation opportunity for three sectors

In the face of the continuous market decline, if you are a skilled investor rather than belong to any of the four groups above, you will not be frightened by market decline, but expect it to slip further. Because for value investors, opportunities are born of decline. Currently, many high-quality companies have hit record lows again.

As long as the slump continues, many companies will see excellent opportunities for portfolio reallocation, such as the consumer, pharmaceutical and Internet sectors, because the valuations of some companies in these sectors are already very low. If the slide persists, great chances will emerge.

Many friends are worried that this year will be a repeat of what the market went through in 2018. But in fact, this year is vastly different from 2018 for both the economy and the external environment now are much better.

If we draw comparisons with previous markets, I think this year things are a bit analogous to the market conditions in 2016, when stocks plunged in January and began to climb slowly in the subsequent few months.

The difference is that the decline in January this year was far less precipitous than that of 2016. I remember that the Shanghai Composite Index in January of 2016 tumbled more than 22%, while the dip this year was less than 10%.

Therefore, don't panic. I think what we've experienced is just normal fluctuations. As for how the A-share market will unfold in the coming weeks, I am more optimistic. As long as we buy stocks of good companies, buy them at prices with large safety margins and invest with spare money, we don't need to be afraid of market dives.

In response, many funds have also started self-purchase plans. According to incomplete statistics, since the beginning of 2022, 22 funds such as Wells Fargo and China Universal Asset Management have announced such plans, with a sum of over CNY600 million involved.

Among them, Hua An Fund's self-purchase is not less than CNY50 million, GF Fund CNY80 million, E Fund CNY100 million, and China Universal CNY200 million.

Funds are repurchasing allotments from investors in quick succession, proving that many companies do have long-term investment value. As value investors, we should not be afraid at this moment but feel excited since opportunities are approaching.

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Huawei is reportedly teaming up with SMIC to build a semiconductor manufacturing facility in mainland China

Posted: 30 Jan 2022 12:32 AM PST