Certainty always has a premium.

There is one in decision psychology.The "prospect theory" holds that people always tend to make more definite choices in the face of uncertain returns.For example, in this example, you have two options to choose from:

A: make a steady profit of 50,000 yuan

B: there is a 90% chance of earning 60,000 yuan and a 10% chance of getting nothing.

If calculated rationally from the point of view of probability, option B is more valuable (60.90% 0.010% 5.4 > 50,000), but in real life, most people will choose the winning option A.

Certainty always has a premium, because we know that predictions are often unreliable. The so-called "certainty" refers to those factors that are less dependent on prediction and can be simply linearly extrapolated.

When someone gives birth to a baby girl, she will grow into a girl, which is 100% certainty; she will marry and have children, this is high certainty; because her mother is beautiful, she will also be very beautiful, this is low certainty.

Many people like to laugh at the inaccuracy of institutional forecasts, and indeed, the actual results of most companies deviate from forecasts by at least 30%.

But it is precisely because of this that we need to study "certainty", because it is certainty that determines the degree of deviation of the final performance. Performance is unpredictable, but the degree of possible deviation is predictable, and the latter is "deterministic research".

What we need to do is to gain insight into the subtle changes between prediction and reality from the fundamental conditions, grasp the differences of opinion between institutions, and then give play to the advantages of retail investors in "making a small U-turn." in this way, no matter through research or through trading, you can make a lot of money.

Here are the seven factors related to certainty that I have summarized before. I talked so fast that many readers did not understand or misunderstood them, so I wrote another article today to sort out these seven factors again. because in my investment system, the demand for certainty is almost omnipresent.

Certainty of stock and increment

If a company wants to grow continuously and more steadily, it depends on two aspects:One is whether the stock can be maintained, and the other is to see where the increment is.It's like if a student wants to move up the rankings, he or she must first keep the superior subjects, and then raise the score on the inferior subjects.

So, I divide these seven factors into left and right columns.The left represents the incremental certainty of a company, and the certainty of the stock on the right.

Most of the excellent companies, the core asset companies in the stock market, can always do well the "stock certainty" on the right, and only those good companies in the stage of rapid growth can do well the "incremental certainty" on the left.

Many people tend to miss the focus in fundamental research. In fact, most organizations have performance forecasting models. I think, if you canFocus on its certainty from these seven aspects, and then borrow the research results of the organization, your research will be more effective.

Deterministic factor of increment

A1, Industry Space

This indicator refers to how much room for growth the company can have in its industry in the future.

Take the liquor and dairy industry of Maotai and Yili as an example. Liquor belongs to an industry with almost zero growth, while dairy products will continue to grow by more than 5% a year in the future.

Some people may not agree with the growth rate of spirits, because the high-end consumption of spirits has led to a high growth rate of high-end spirits represented by Mao Wuli, but what we are doing now is a "certainty" study, not a "growth rate" study. the low growth of the industry itself constitutes the uncertainty of the growth of specific companies, corresponding to the business logic, if the number of drinkers does not grow, the growth of people who drink high-end spirits is prone to a ceiling.

Similar to spirits are the real estate of Vanke and Poly, the contradiction between the high growth of leading companies and the doomed low growth rate of the industry in the future.

It's not that this kind of company is bad, but we must understand.The industry is a subtractive item, which may not matter when the market is good, but as soon as the market reduces its risk appetite, it will give you a look.This is the significance of deterministic research.

In particular, changes in business logic will lead to changes in industry space. Sany's construction machinery used to be a cyclical industry, but because of its growing competitive strength, it began to expand globally, and the industry space opened up at once. Similar changes have taken place in Longji and Tongwei in the photovoltaic industry.

This part I give is between plus or minus 10%, only empirical data (the same below).

A2, industry concentration

This indicator refers to the market share of the top few in the industry, and the lower it is, the higher the certainty of the future growth of the leading companies in the industry.Because the general trend in most industries is to concentrate, leading companies will harvest more market share.

Of course, the premise of scoring on this indicator is that the listed company belongs to the leader and is the company that will harvest its share in the future, not the one to be harvested.

It was said earlier that real estate lost points in the industry space, but this item got the points back, because the concentration of real estate is still relatively low, and the policy is obviously unfriendly to small and medium-sized real estate companies, and financing is becoming more and more difficult. Harvesting by companies such as Vanke Poly is a matter of high certainty.

A3, management / category

The first two factors are industry-related and shared by all companies.But who can get the biggest growth cake depends on the competitiveness of the business, which examines the personality factors of business growth.

Since the predicted growth rate of the organization has already reflected the core competitiveness of the product, there are generally two factors that have a great impact on certainty.One is the level of management, the other is the ability to expand categories.

After the arrival of Zhongju Hi-tech in Baoneng, short-term performance and products have not changed much, but the valuation has improved significantly, the most important reason is the market expectations for management improvement.

After most companies have done the equity incentive plan, the valuation will be significantly improved. In fact, the equity incentive will increase the management costs and affect the performance of the evaluation period, but because it improves the certainty of growth, it is regarded as positive as a whole.

If you look at the category expansion ability, if a company's main products show a growth ceiling and expand to related categories, it is the best way to ensure sustained growth, but new businesses are generally more likely to fail than succeed.Therefore, to judge the category expansion ability of a company, we should not only see the existing successful cases, but also find a clear expansion logic.

For example, Lixun Precision, which started with connectors, was the main source of income 16 years ago, and then grabbed the antenna radio frequency and wireless charging business from others, contributing to profit growth in 17-18; in 2018, Lixun stole acoustic products from Gore and AAC, including the fast-growing single item AirPods.

The core logic of its category expansion is the ability of precision manufacturing and M & An integration.

Deterministic factors of stock

The four elements on the right examine "stock certainty". There is something wrong with incremental logic, which at best affects growth, but if something goes wrong later, performance is likely to fluctuate sharply.

B1, industry pattern

The industry pattern is the market share gap between the top several.The best competition is that there is no competition, and the gap can be widened, which often means that the overall situation of the industry has been decided, and several leading companies have occupied a relatively monopoly position in the market segment, and no one can eat their share, so there is no need to fight a price war. everyone's profits are guaranteed.

The best pattern is oligarchy.For example, Maotai, one of the high-end wines, is the leader of Maotai and Luzhou-flavor respectively with its competitor Wuliangye, and its market share is much ahead, so there is almost no competition.

The second is the Big two and the Big three.For example, Yili in dairy products and Longji in the photovoltaic industry, whose business has been relatively stable, focuses on harvesting the market share of other small players.

The poor competition pattern means that many companies have close market share and strong homogenization of products.This is the case in Vanke's real estate industry.

The worst competitive scenario is that there are oligarchs and two giants in front of the industry, and you are lagging behind in market share.

Competition pattern is the most important factor among the seven factors.

The concept of competition pattern is easily confused with industry concentration. Industry concentration refers to the market share of the top few in the industry. For example, the industry concentration of condiments is not high, but the competition pattern is particularly good, this situation is easy to get a high premium, such as Haitian, Ayre ophthalmology and so on.

B2, periodicity

This factor analyzes the periodicity of growth stocks.(if it is a pure cycle industry, it is entirely price-driven, such as steel, non-ferrous coal, etc., these companies have nothing to do with value investment, let alone valuation premiums and discounts).

Most industries are more or less cyclical. The dairy products represented by Yili shares are weakly cyclical because of the instability of milk prices upstream, and high-end spirits are generally considered to be weak periodic stocks.

Sany heavy Industry, Lixun Precision, user Network, the three companies in the industry itself is cyclical, but the company's business and category expansion ability, weakened its periodicity.

The following companies are cyclical. Vanke Poly (real estate), Tongwei Longji (photovoltaic), Perfect World (entertainment online games) and Hanlan environment (environmental protection) are superimposed with strong policies, which can also be regarded as cyclical.

For cyclical strength, I gave you a 30% discount at most.

B3. Other moats

This is the most important factor in fundamental analysis, and we all know it very well, so I won't explain it any more. What needs to be reminded here is that do not normalize the concept of "moat". Only a small number of A-share companies can talk about the obvious "moat".

B4. Operating cash flow

All valuation methods are derived from the discounted cash flow theory, ifOperating cash flow is lower than operating profit for a long time, the valuation is bound to be discounted.

In general, consumer enterprises have good cash flow, which is an important reason why manufacturing industries are more prone to valuation discounts than consumer stocks.

Stocks such as photovoltaic and environmental protection usually have a big discount because they have more dealings with the government and most of their cash flow is not good.

Even for an excellent enterprise like Lixun, its cash flow is likely to be slightly discounted because its downstream customers are too concentrated.

To pretend to be true is true and false.

After looking at these seven factors, some people must say that at least half of them are very subjective factors. Can the certainty obtained by them be "certain"?

That's a very good question.

Most people subconsciously think that if we want to predict future performance, we have to predict it accurately.

Wrong!We forecast future performance not because we are accurate, but because those large institutions with pricing power are also forecasting.

Theoretically, we cannot accurately predict performance, much less can we accurately predict others, butIf we use the same method and the same system as those who have pricing power, we will be able to do this.

These seven factors are summed up by me from the market pricing of the big white horse with the most institutional participation in the past year or two.The main reference is that when these stocks are extremely overvalued and undervalued, the consistent view of the market is restored to the valuation at that time, roughly quantifying the fluctuation range of each premium discount factor.

For example, in the history of Maotai, PEG fell as low as 0.8 (it was generally predicted that the growth rate in 2013-15 would fall to 10% PE8 times), which was entirely due to cyclical factors.

So I say, when you analyze the valuations of 100 leading companies in different A-share industries, and look back at the whole market, all the complicated stock price changes will become particularly clear.

Many people like to laugh at the inaccuracy of institutions' forecasts, which is smart, as long as their forecasts affect the movement of big money, so they are right even if they are wrong. BecauseIt takes only a few months for performance to be falsified, but it can take years for certainty to be falsified, and before that, both the agency and you have plenty of time to change your mind and adjust your position.

So strictly speaking, certainty works in two ways:

First, performance is unpredictable, but the maximum deviation from performance is predictable.

Second, what is more important than certainty is the methods and views of deterministic research, such as the seven factors in this paper.