By Yang Delong, Chief Economist of Qianhai Open Source Fund
On Monday, March 1, the Shanghai and Shenzhen markets showed an overall rebound. Last week, the A-share market experienced continuous adjustments under the influence of negative internal and external factors. In particular, leading white horse stocks, which had a relatively large increase in the previous period, declined significantly. The adjustment of Bailong Ma's stock was mainly due to the large increase before the holiday season and the return of profits; it was not a change in fundamentals. Therefore, I have always advised everyone that every round of sharp decline is an opportunity to bottom out high-quality stocks, and nothing more.
After a week of adjustments, some of the bottom reading funds have already begun to allocate stocks with excellent performance. Most sectors and individual stocks rebounded on Monday, proving once again that high-quality stocks are already the target of capital pursuit. Of course, today's rebound does not necessarily mean that adjustments are over; the market may fluctuate repeatedly in the future, but the stage of rapid decline and concentrated investor panic release is over.
Judging from liquidity, although the central bank has recovered some of its capital around the Spring Festival, this does not mean that liquidity will be tightened. In fact, steady growth this year is already an important policy goal. Relevant central bank officials also said that they are paying more attention to price instruments rather than quantitative instruments, which means that liquidity will remain reasonable and abundant this year. In the medium to long term, maintaining reasonable and abundant liquidity is conducive to reducing financing costs and promoting the development of the real economy.
Chen Yulu, deputy governor of the central bank, also said that one of the most important dimensions of improving the social financing structure is to speed up the construction of multi-level capital markets, increase the proportion of direct financing, especially equity financing, and carry out the next step of reform and development work around the overall goal of building a standardized, transparent, open, dynamic and resilient capital market. Only by vigorously developing the capital market can more residents' savings share the results of reform and opening-up, and at the same time enter the market by buying funds, increase the share of institutional investors, and allow the capital market to better support the development of the real economy.
The relationship between the real economy and the economy is mutually reinforcing and has a good interactive relationship. In other words, a prosperous economy is conducive to promoting the prosperity of the capital market; conversely, a prosperous capital market is also conducive to improving the long-term development of the real economy. Now that the pace of economic transformation is gradually speeding up and emerging economies are gradually rising, this is more dependent on the development of capital markets.
Similar to the US Nasdaq market, a number of great technology companies have been nurtured through financial support for new economy enterprises. The China GEM and Science and Technology Innovation Board targets the US Nasdaq. A registration system has now been implemented to allow more new economy companies representing the direction of economic transformation to be listed. This is undoubtedly beneficial to China's economic transformation. It is eagerly anticipated that GEM and the Science and Technology Innovation Board can truly become the Chinese version of the Nasdaq, so that the capital market can better support the real economy.
Over the past 40 years of reform and opening-up, China's economy has achieved long-term development. In particular, leading enterprises in various industries are a real result of reform and opening-up. In 2016, I proposed the concept of Bailongma, that is, Whitehorse stock plus industry leader, which highly summarizes this group of good companies with both performance and leading positions in the industry, mainly in the fields of consumption, new energy, technology, etc. Well, the equity value of these Bailongma shares is scarce, and most of the good companies in China have already gone public.
Buying shares in these good companies through the capital market, or indirectly holding shares in these good companies through the purchase of funds, is an important way to increase personal wealth. Just as investing in the property market over the past ten years or so has changed the fortunes of many people, buying high-quality stocks or funds in the next ten years will also be an important way for many people to change their fortunes.
When investing, we must adhere to a long-term approach, adhere to value investment, be a good shareholder of the company, or buy high-quality funds in order to seize the opportunities in the A-share market. There is no longer a bull market like the one in the past that has been rising and falling. The bull market in the future is a structural advantage. Capital will increasingly favor leading stocks in the industry, underperforming stocks and themed stocks will go unnoticed. The more mature the A-share market, the higher the share of institutional investors, the more obvious this trend is.
Therefore, it is recommended that investors must be deeply aware of the changes in the current market ecology and insist on being good shareholders in order to seize opportunities in the midst of market fluctuations. No one can predict short-term market fluctuations, and even medium- to long-term fluctuations are difficult to predict. Stock god Buffett has stated many times. I don't know the market trend next month or within a year, but what I know is that buying a good company is the key to investing. That is worth thinking deeply about.
Buffett's annual letter to shareholders, which has received attention from investors around the world, has been published. According to the letter, the 90-year-old Omaha prophet Buffett is still a firm believer in the American dream. He said that we should never short the US. Despite some serious interference, America's economic progress has been amazing, and our unwavering conclusion is that we should never gamble on America's loss.
Buffett is lucky to have been born in the US because the past 50 years or so have been more than 50 years of rapid economic development in the US, which has also achieved Buffett's miracle. His company, Berkshire Hathaway, has more assets than any other company in the US.
Buffett's belief in a good company is very firm. In his letter, he said that the history of American railways is interesting. After about 150 years of crazy construction, excessive fraudulent construction, bankruptcy, restructuring, and mergers, the railway industry finally matured and rationalized decades ago. BNFS Railways and Berkshire Hathaway Energy, which he invested in, achieved a profit of 8.3 billion US dollars in 2020 despite a sharp drop in demand during the pandemic.
He is optimistic about clean energy, that is, new energy, and Buffett believes he will become a leader in providing clean energy in the future. New energy is also a direction I have always recommended that everyone focus on. In 2019, I proposed that the replacement of traditional energy with new energy is the general trend, and I suggest that investors must resolutely allocate leading new energy stocks. In the past few years, leading companies in the new energy sector, including photovoltaics and new energy vehicles, have experienced a sharp rise, reflecting this kind of expectation.
As the market recovered, Buffett also absorbed some leading stocks on dips and increased his holdings in pharmaceutical stocks and traditional stocks such as Chevron. Apple is still Berkshire's largest investment in common stock. Although it reduced its holdings to a certain extent last year, it is still the largest shareholder. BYD's increase is huge. It has risen more than 20 times in about ten years since it has held shares, bringing great rewards to Buffett. Buffett's investment in BYD was very successful, which also shows the stock god Buffy's insistence on value investment.
In terms of repurchases, Berkshire has bought back a large number of stocks, which is also reflected in the fact that after many stock prices were relatively high, Buffett would rather buy back his own shares to increase shareholder value. In fact, many high-quality US companies continue to increase earnings per share through repurchases, thereby increasing shareholder value. Last year Buffett bought back about $24.7 billion of Berkshire Hathaway's shares.
Judging from cash reserves, Berkshire already has a lot of cash reserves, up to more than 100 billion US dollars. These are all so-called insurance floating savings funds. For Buffett, holding a large amount of cash can wait for the right time to find better investment opportunities. Buffett also seldom fills his position. It is an important strategy to buy Xinyirong's stock by holding cash and waiting for a good opportunity.
The top companies with market capitalization held by Buffett were Apple, Bank of America, Coca Cola, American Express, Verizon, Moody's, United Bank of America, BYD, Chevron, and Charter Communications.
In his investor letter, Buffett also emphasized that Precision Castparts, which he acquired in 2016, was a big mistake and calculated a loss of 11 billion US dollars. In his letters, Buffett often honestly admits some of his investment mistakes. If this is the case, he can learn lessons from his future investments and not shy away from talking about some of his failures. Because no one is wise, not every investment can succeed.
The precision castparts company that Berkshire bought this time, also a precision machine parts company, paid too much because he was too optimistic about the nominal profit potential of the precision machine parts company, and the precision machine parts company was an upstream company in the aviation industry. Due to the impact of the pandemic on the aviation industry, Buffett cut meat to sell aviation stocks last year, but he still managed to keep up with upstream aviation companies.
Buffett has previously said that he will not allocate companies with wheels and companies with wings, that is, he is not optimistic about automobile stocks and aviation stocks, but in the past, he bought some leading US aviation companies five years ago. He believes that aviation has experienced intense competition and has a certain degree of stable profitability and an oligopoly position, but a pandemic has changed all of this, leading to a deterioration in the prospects of the aviation industry. This has triggered one of the three principles of Buffett's stock sales, which is, deterioration in fundamentals. As a result, he resolutely lost money and sold aviation stocks and promptly admitted his mistakes.
Of course, the loss of several billion US dollars in aviation stocks was far from hurting Buffett's overall investment profit; Apple alone contributed 40 billion US dollars in profit to him. Despite experiencing a sharp decline in US stocks in 2020 and a collapse four times in half a month in March last year, Berkshire still achieved a profit of 42.5 billion US dollars last year, but the increase was only 2.4%, far lower than the increase of the S&P 500.
For companies with assets of nearly 400 billion US dollars, it is becoming more and more difficult to outperform the S&P 500, and it is also difficult for so many good companies to buy in the market. This is also an important problem Buffett is currently facing in investment. Fortunately, over the past few years, he changed his mind in a timely manner and bought Apple and other technology stocks, thus giving him a chance to win back a game and gain a certain amount of profit.
Looking at the long term, from 1965 to 2020, the compound growth rate of Berkshire's US stock market value was 20%, clearly exceeding the 10.2% growth rate of the S&P 500 index. Judging from the increase in market capitalization, from 1964 to 2020, Berkshire's market capitalization growth rate reached 28,000 times, while the S&P 500 was about 234 times. In other words, in the long run, Berkshire still far outperformed the S&P 500 index. This once again proves that stock companies have indeed had extraordinary performance in value investment.