Can I buy "Wu Dalang"?

When some questions are asked, the answer seems to come out.

Everyone knows that "Wu Dalang" cannot replace "Wu Song", but the most common mistake we make in actual investment is--Obviously went out to buy "Wusong", the market turned around and somehow filled the warehouse with "Wu Dalang" and went home.

For example, everyone says that the Haitian flavor industry in condiments is good, the products have taste memory, and consumer stickiness leads to a high repurchase rate, coupled with good management channels, one wants to fill the position for life, but as soon as the K diagram is opened, it has quadrupled in three years, nearly 70 times PE, and then look down, Zhongtorch high-tech, Hengshun vinegar industry, all let you get "afraid of heights", look again, there is really cheap, Lotus MSG, only 30 times PE At least it was a brand that advertised every day, so I bought him.

To buy "Wu Dalang" is essentially to buy "price comparison effect".It has three kinds of mindset:

Mindset 1, talk-Performance to price ratio"Wusong" is good, but it's too expensive. Besides, didn't Wu Song also distribute Cangzhou? Although "Wu Dalang" was shorter, didn't he marry Pan Jinlian?

Mindset 2muri-Game:No matter how good "Wu Song" is, it will fall if it goes up too much, and even if it goes down too much, it will go up.

Mindset 3murf-Dilemma reversalWhy should "Wu Song" be "Wu Song" and "Wu Dalang" be "Wu Dalang" all his life?

Therefore, Hengrui Medicine is too expensive to buy East China Medicine, Shanghai Fosun Pharmaceutical, Yifeng Pharmacy is expensive, buy ordinary people, wholehearted …...

To cite an example, people may think that "Wu Dalang" does not necessarily earn less money, and the latter is also a favorite of retail investors. The stock market is a place that "specializes in all kinds of disobedience". If the strategy of only buying "Wu Song" and not buying "Wu Dalang" will always be effective, no one will buy "Wu Dalang" long ago.

As a matter of fact, there are still a lot of stock markets for "Wu Dalang" to run faster than "Wu Song", which is why many people want to bet on "Wu Dalang".

Therefore, whether we should buy it or not, we still need to analyze the specific problems.

Behind mentality 1: no fundamentals in the short term

These three kinds of mentality of buying "Wu Dalang" correspond to three kinds of investment logic of "short-term, medium-term and long-term":

Mindset 1: "Wu Song" is good, but it is too expensive and not worth it. Didn't Wu Song distribute Cangzhou? Although "Wu Dalang" was shorter, didn't he marry Pan Jinlian?

Mentality 1 reflects a law of the stock market: the short-term trend of individual stocks (within a month) has nothing to do with fundamentals, valuation, ups and downs, but only with the flow of funds.

It is not uncommon for companies that are rubbish to multiply several times in a short time as long as they have enough capital. Therefore, short-term players do not care about "Wu Song" or "Wu Dalang", what is important is the trend and theme of the stock price.

On the contrary, in the market hot topic speculation, the worse the performance of "Wu Dalang", the more like hot money, because "Wusong" is often held by a large number of institutions, once fired high, leading to institutional shipments. And "Wu Dalang" are stained with the light of "Wu Song", on the contrary, it is easy to cause retail investors to follow suit. In the short term, "Wu Dalang" often rises faster, and the most classic is Oriental Communications, which was speculated by hot money in the 5G communications equipment last year.

Although value investors claim to be long-term investments, their human nature is to "look at the short and not the long." often if the stock price does not rise for three days, they will be paranoid. As soon as "Wu Dalang" rises again, their belief will collapse.

In the short term, "Wu Song" may be assigned to Cangzhou and displaced; "Wu Dalang" small and steady operation can also afford to buy a front house.

But in the long run, "Wu Song" 's life is step by step, "Wu Dalang" can only toss about in place; "Wu Song" can become a Liangshan hero when he meets an expensive person, and "Wu Dalang" married Pan Jinlian at the peak of his life. on the contrary, it has brought great disaster to him-Oriental Communications has fallen 64% from its highest point.

However, even from the midline point of view, some "Wu Dalang" may indeed rise better than "Wu Song", which is the stock price phenomenon reflected in mentality 2-mean regression.

Behind mentality 2: mean return

Mindset 2: no matter how good the "Wu Song" is, it will fall if it goes up too much, and it will go up if it falls too much.

Behind mentality 2 is the "mean regression" theory, which holds that stock prices fluctuate around the value center, and any high earnings that deviate from the mean have a tendency to return to the mean, that is, as we often say, "if you go up more, you will fall, and if you fall more, you will go up."

The theory of "mean regression" is widely used in stock market analysis. Many indicators in technical analysis belong to "mean regression", and the most famous "dog walking theory" in value investment also belongs to "mean regression". The difference is that the former is the return of share prices, while the latter is the return of valuation.

Is this theory correct?I think 90% of the companies are established, most of them have no moat and average management level, and their operating conditions depend entirely on the industry, competitors and policy tuyere, and their performance lacks long-term growth, so the stock price also revolves around. "Mean value"fluttering with the wind.

Many senior investors naturally come to this experience: since "Wu Song" will fall and fall more, and "Wu Dalang" will also rise, then, if you can't buy "Wu Song", won't "Wu Dalang" also smell good?

Whether "mean regression" is useful or not depends on the comparison between "Wusong" and "Wudalang". Many cyclical industries, sunset industries, "Wusong" and "Wudalang" belong to these 90% of the companies, but the scale is different, the "mean regression" strategy is of course possible, cheap is the last word.

That's itThe first kind--

The first kind:The industry track is general, even the bibcock is just a mix of food and clothing, "Wusong" and "Wu Dalang" belong to that 90%.

But if "Wu Song" and "Wu Dalang" belong to 10% and 90% respectively, the strategy of "Buy Wu Dalang" is wrong.The Nasdaq index has risen sixfold in a decade, 70% of stocks are down, and only 7% of companies outperform the index; A shares have also been blue chips since 2017. The "mean" gap between "Wu Song" and "Wu Dalang" will only widen. This is the second kind.

Second, the bibcock is too strong, and the scale of the industry cannot grow. "Wu Dalang" may not even be able to drink soup in the future.

Of course, there is a third kind--

Third: although the scale is not as large as the bibcock, it has its own characteristics, such as Wuliangye and Maotai; or although the whole is not as good as the bibcock, the track is good"Wu Dalang" alsoThe growth rate is no less than that of Wusong, such as the condiment industry.

This kind of stocks tend to have long-term investment value, and "mean return" is a typical middle-line strategy (within a year). For this kind of "Wu Dalang", we should have a better investment strategy.

This is the investment psychology behind mentality 3.

Behind mentality 3: low valuation strategy

Mentality 3murf-unconvinced: why is it that "Wu Song" is always "Wu Song" and "Wu Dalang" should be "Wu Dalang" all his life?

Mentality 3 also makes sense. There are usually two reasons for making long-term money in a stock, one is long-term sustained growth (high growth strategy), and the other is that the valuation of buying is low enough (low valuation strategy).

If in a high-growth industry, give up the high valuation of "Wu Song", choose low valuation of "Wu Dalang", behind it is the "low valuation" strategy.

Among the undervaluation strategies in Europe and the United States, there is a "PB-ROE valuation model", which is to choose low valuation (low PB) investment targets among companies with relatively strong profitability (high ROE).

Is the low valuation strategy effective for A shares? I have seen the Tianfeng Securities Strategy team do a back test. Based on the historical valuation range of the stock, the low valuation strategy can outperform the average market return in two cases:

The first is to hold shares for more than one year, which becomes obvious after three years, while within a year, the low valuation strategy is ineffective.

The second is that the growth rate is at the normal level of 30%, and the low valuation strategy is relatively effective, but when the growth rate is higher than 30% or negative growth, the low valuation strategy is also ineffective.

Therefore, the long-term choice of low-valuation "Wu Dalang", in addition to the good texture of the company itself, had better be the target of steady consumer growth, and be prepared to hold shares for three years.

Low PE does not mean low valuation

The "Wu Dalang" strategy has a cognitive defect, and many people regard low PE as low valuation.

The relatively low-level mistake is to compare PE of different industries and buy a bunch of bank stocks and cyclical stocks. This kind of mistake is quite obvious, and usually it will not be made again after suffering a loss or two.

There are even more confusing mistakes, buying PE levels in the same industry are significantly lower than those of their peers.

Cruelly, low PE does not mean low valuation, and it does not bring us a margin of safety.You can do a simple arithmetic problem.

Suppose the normal valuation of a sector is 30 times, company A's 40 times high PE falls to 30 times normal, down 25%, and company B's 20 times low PE falls to 15 times lower, which is also a drop of 25%.The latter is no less common than the former, and the margin of safety brought about by low PE is an illusion.

To make matters worse, when high PE falls to normal PE, there is no decline in performance, but growth falls from 30 per cent to 20 per cent, while the shift from low PE to lower PE is often accompanied by flat or declining performance, such as a 25 per cent drop in valuations and a 10 per cent drop in performance.

Compare the losses of the two companies:

Losses on high-PE stocks: valuations fell 25%, performance rose 20%, and an one-year loss of 0.75% 1.2-1%.

Losses on high PE stocks: valuations are down 25%, performance is down 10%, holding 2011 is a loss of 0.75% 0.9-1% 32.5%.

Low PE is not equal to low valuation, this mistake is very common, for example, people are always optimistic about Heng Rui, but feel that the valuation has been very high, so people often ask me in the message, East China, Shanghai Fosun Pharmaceutical these can be bought.

If you are optimistic about these targets themselves, there is no problem, buy according to your own logic, but do not buy a low-PE company with a similar business structure because of Heng Ruigui.

There are reasons for low PE and low PE. The problem in East China has now been confirmed and the market has been proved to be efficient. Fosun's "investment company logic" I have said before, many people do not believe. It doesn't matter if you don't believe it, the company is still a good company, but if the fundamentals remain the same, PE will never catch up with Heng Rui. All kinds of funds are not fools, such as medicine is always a hot spot, can be excavated will not be missed.

It is summarized as two points for attention in the strategy of "Buy Wu Dalang":

First, you can think that "Wu Dalang" has more potential, you can buy it, or you can hold it in the middle line based on "mean regression"."Wu Dalang"But you can't buy it because of its low PE.

Second, if you are optimistic about "Wusong" and think it is expensive, then wait patiently. The opportunity will always be given once a year. You must not buy Wu Dalang just because you cannot buy Wusong. This is not investment logic, but cognitive bias.