Where will you go wrong in the future?

Investment logic is the direct driver for buying stocks.

For value investors, good fundamentals and reasonable valuation are only necessary conditions for investment. More and more companies are eligible, so there are usually some direct factors, such as the launch of new products, expansion of production capacity, completion of channel sorting, etc., that push you to make decisions to open or increase positions.

But that's not enough.

Agree with the same logic, as long as you think it makes sense, but if you want to invest according to one logic, you must find the “counterlogic” of this logic.

For example, in industry trends, downstream demand has exploded, corporate production capacity will expand drastically, and revenue and profit will grow rapidly in the next year or two. This is an investment logic that all investors like.

However, there is a hidden “counterlogic” to this logic, because the boom belongs to the entire industry. Leading orders are too late to be fulfilled, penetrating into second- and third-tier enterprises. Small enterprises that previously struggled on the brink of death have regained vitality, some companies are furiously expanding production, some companies are expanding their advantages in some segments, and the concentration of leading CR3/CR5 companies has declined. These are all common phenomena in booming industries.

It is conceivable that after two years, the industry will fall into overcapacity. Coupled with the advantages of some second- and third-tier companies that have established market segments, the leading advantage will be challenged, and the competitive landscape of the entire industry will deteriorate.

This phenomenon has occurred many times in the previous mobile phone industry chain, communications and other industries, and is currently being developed in parts of lithium batteries, photovoltaics, and semiconductors.

Many people think this is two years from now. It's too early to think about it now, but as the share of institutional investors gets higher and more efficient, they almost always “kill valuations” ahead of time when the industry is at its peak. Stock prices stagnate or even fall. Every quarter's excellent earnings report is released, which is the day every band reaches its peak. On the surface, it is an earnings game; in fact, it is the market's early pricing of future industry troughs.

In any investment logic, there is a corresponding “counterlogic” hidden:

To develop a new product, its “counterlogic” is a failure in R&D;

Major new products are launched. The “counterlogic” is that sales are poor, or sales are good, but the sales volume of old products is affected;

The “counterlogic” of expanding production capacity is that the yield rate is slow to meet standards;

Being close to big customers, their “counterlogic” is a loss of operational autonomy, a huge increase in accounts receivable, and even big ups and downs in performance

...

Therefore, the “counterlogic” is summed up as follows: it is necessary not only to know why to invest, but also to know where the future is most likely to “go wrong”.

Logic and counterlogic: taking price increases as an example

Any business decision of an enterprise has certain risks and the possibility of failure. The “counterlogic” of investment logic is a common cause of failure in this decision. If you want to find this “cause of failure,” you need to understand the causes and consequences of this decision.

Take our favorite “price increase” logic for consumer goods as an example. As soon as many investors see signs of the company's price increase, they think that performance will increase dramatically, but “price increase” is a very complicated business act. Even if Maotai's price increase affects consumption, it just doesn't necessarily affect sales. Therefore, the “counterlogic” of price increase logic is not as simple as price increase failure affecting sales.

First, it is necessary to distinguish between industrial products and consumer goods. The “price increase” of industrial products, as long as the customer is notified by a letter of price increase, is usually an event-driven investment logic, but consumer goods are not that simple and direct. Most products do not directly increase prices, but there are various alternatives:

1. Upgraded packaging, new packaging at a new price, old packaging at the old price but gradually reduced supply. Most liquor increased in price;

2. Cancelling or reducing terminal promotions. Previously, “buy 2 get 1 free”, but now they are no longer being delivered, which is equivalent to a price increase;

3. Promote products with higher prices and reduce marketing support for low-end products. This is a relatively moderate price increase;

4. Do not increase the terminal price, but increase the batch price for dealers or reduce rebates, and guarantee the interests of dealers without reducing sales volume by optimizing the number of dealers.

The logic of consumer goods price increases has this counterlogic.

1. The counterlogic of upgrading the new package

Liquor upgrading can not only drive revenue and profits, but also promote brand image upgrading. It is the core growth logic of branded liquor.

Well, its “counterlogic” is that new packaging and new flavors are not accepted or improperly priced, causing core customers to switch to other brands, or be sniped by strong competitors at the same price, or entering a price band where their brand image cannot be supported. As a result, they are all priceless. Coupled with the decline in sales of old products, it is ultimately reflected in performance that both revenue and profit have declined, inventory has risen, and upgrades have failed.

Historically, Wuliangye and Luzhou Laojiao have both experienced blind price increases and failures. In recent years, due to the upgrading of liquor consumption and the gap in price bands left by Maotai's continuous price increases, most new product upgrades have been successful, but in the future, if Maotai prices stagnate and consumption upgrades slow down, the probability that the industry will interpret “counterlogic” will greatly increase.

2. The counterlogic of “reducing promotional” price increases

Direct terminal promotion usually occurs in highly competitive categories, so there is a high risk of canceling the promotion. Unless most brands act in a unified manner or CR2's leading brands launch, this phenomenon usually only occurs amid sharp increases in raw material prices throughout the industry, and the continuation is questionable.

Price increases driven by raw materials are usually difficult to cover rising costs. The impact of “price increases” on performance is not current, but after raw material prices fall back, of course, products that have been successfully raised in price will not recover their original prices. At this point, it can drive up profits. For GLEMI, it is only when each wave of materials rises and falls back, that is when the profit growth rate rises.

Therefore, the counterlogic of this kind of price increase is that the price increase caused terminal sales to drop, causing the entire industry's inventory to be too high. When the pressure to increase the price of upstream materials decreased, it triggered a larger wave of promotions throughout the industry.

3. Counter-logic that mainly promotes high-priced products

This business behavior is common in mobile phones. Similar to liquor, risk or “counterlogic” is also a high-end product with limited user acceptance and a waste of marketing resources. Xiaomi phones have experienced high-end failure before.

It may also cast a psychological shadow over the high-end market, and the next strategy will be more conservative. This is also part of the counterlogic.

4. The counterlogic of only asking for a price

Although it has the same impact on a company's finances as a price increase, strictly speaking, it is more similar to a change in channel policy. Doing a good job can guarantee revenue and increase profits while also optimizing dealers.

Therefore, its risk or counterlogic also lies in dealer backlash, leading to channel turmoil, so once it fails, it is the failure of the entire marketing system, and its losses far exceed those of the first three categories. Especially when industry sentiment declines, the probability of failure is higher. Gree's channel reform is a typical example (of course, it's not over yet; failure cannot be asserted).

In addition, some products that are resistant to storage and have gift attributes, such as high-end liquor and supplements, can directly raise prices. The core logic of this type of price increase is that dealers can also make a difference in stock prices, which is more motivated.

But it also brings about a more serious “counterlogic”, that is, a “demand bubble” caused by dealers stocking up. Once the bubble bursts, companies will discover that they are facing a mountain of inventory piled up through channels. Price cuts can neither increase sales nor affect brand image. They can only spend years digesting channel inventory, causing the company's operating difficulties and even a breakdown in cash flow. The most classic case is Donga Ejiao's failure to raise prices.

Counter-logic Signals and Fundamental Stops

After Buffett finds out he made a mistake, he can change the board of directors, buy a company, and do a series of mergers and acquisitions, but you only have one way — sell it.

The central function of counterlogic is “stop loss” — of course, it's not the kind of price stop loss when it falls a little, but a fundamental stop-loss signal.

The three principles of selling are: expensive, broken logic, and finding a better one. So-called “counterlogical” selling means setting a clear signal that “logic is broken” before investing.

However, actual investment is not that accurate. Stock prices are always interpreting logic and counterlogic at the same time. For example, prices are driven by price increases. The upward trend in stock prices shows that more and more investors are aware of this “price increase” logic, but the decline in the meantime is also that investors are increasingly aware of “counterlogic.”

If “counterlogic” becomes a consensus, the stock price must have fallen beyond human form, and losses cannot be avoided, so the fundamental stop-loss signal is not a direct jump of “counterlogic” from 0 to 1, but rather a point in the “0.1, 0.2, 0.3...” transition pattern.

The logic of increasing the price of liquor requires tracking sales of new products. It is best to be able to quantify it. Once it falls short of expectations, it is necessary to stop this investment.

When the “anti-logic” signal appears, the stock price has usually already fallen for a while. At this point, don't hesitate because of falling valuations. “Broken logic” represents a decline in future performance, and its valuation may fall more and more expensive.

The fundamental stop-loss effect of “counterlogic” is like an “investment insurance rope”. When you feel that you are protected, you can expand your investment horizons and try out some opportunities with higher odds.

However, from another perspective, investment depends not only on the probability of logical implementation, but also on whether the probability that the logic is smaller is “effectively priced”. Once the cycle becomes long, once the logic is realized, the room for growth is measured several times. If the stock price is still very low, it is an opportunity for high odds.

Therefore, the focus of this investment decision is not on logic and the probability of “counterlogic,” but rather whether this “counterlogic” has clear signals (such as high-frequency data of a month-on-month decline in excavator sales), and what is the biggest loss you may experience once a signal appears, where the stock price is likely to be.

Only if you are clearly aware of the future “counterlogic” from the beginning will you carefully select the purchase price, so that when the “counterlogic” starts to be interpreted, there are still profits or fewer losses when stopping losses.

Everyone knows that making money from a definite opportunity causes a “definitive internal volume”. Coupled with hesitation after seeing an opportunity and not being willing to enter until logical determination, the purchase cost remains high. Not only is there no chance, but certainty is a hole.

If you want to break the “inner circle,” you need to have extraordinary choices. Don't be afraid of the uncertainty of “counterlogic”. When logic has just appeared and the stock price is still at the bottom, don't skimp on your imagination; when counterlogic signals appear, no matter how attractive the valuation is, don't hesitate to cut off all fantasies.

If you don't know what a “mistake” is

In fact, in our daily lives and work, we can all prepare two opposite sets of logic in our brains:

When you go to work in the morning, the weather is bleak, and you carry a light umbrella in your bag, even if it doesn't rain, it doesn't take up much space. “Rain/no rain” are two opposite sets of logic that exist in your brain at the same time.

In the plan you submit to your boss, in addition to a main plan, you will also have a contingency plan for when some of these factors change. This also has two opposite sets of logic at the same time.

However, when it comes to investing, many people will show the “one way to the dark” spirit. When they can't hold on, look at the examples of “persevering to the end, making a big profit” in the chicken soup of those investments.

Investors always show “blind confidence” in a direction they know little about, and can only show proper prudence in fields they are very familiar with.

If you don't know what a “mistake” is, there's no point in insisting.

Editor/Jeffrey