Recently, as the market continues to fluctuate at the bottom, many institutions or individuals claiming to be buying the bottom have been on the hot searches. For example, a star fund manager subscribed to his own private equity fund for RMB 40 million. There are also public fund managers who said that "in addition to necessary living expenses, their own funds have been fully occupied." There are also well-known macro strategy private equity fund managers who have also publicly stated that they are "long A shares."
Policy announcements, institutional statements, and individual investors are also eager to give it a try. Buffett said to invest against the trend, "Be fearful when others are greedy, and greedy when others are fearful." Under the current market conditions of sluggish sentiment and volatility, many investors have chosen to buy the bottom and wait for a rebound. So, for ordinary investors, what are the common “bottom-buying misunderstandings”?
First, overestimate your risk tolerance. Whether you are purchasing financial products, investment funds or stocks, the first step must be risk assessment. Only by correctly measuring your risk tolerance can you find suitable investment products. However, this most important link is ignored by the vast majority of investors. Many surveys of stock market investors show that more than 90% of investors who enter the market in a bull market overestimate their risk tolerance.
The so-called "buying the bottom" is more about buying when the market is falling. It is a typical left-side trading strategy. However, no one can accurately determine where the market bottom will be. The strategy of trading on the left needs to withstand the market's continued bottoming due to uncertainty, and most bottom hunting will also be accompanied by a considerable decline. However, many people ignore their risk tolerance. Whether it is risk assessment or fantasy before bargain hunting, they believe that they can withstand a 30% or even 50% market drop. Once the market really continues to fall at the bottom, investors' panic, sluggish stock performance and other information will increase the negative emotions of "bottom-buying" investors. The professed "high risk appetite" is often no longer able to tolerate a 10% or even 20% drop. When a real intraday drop occurs, they will often choose to clear their positions and leave the market, treating it as a "stop-loss exit." From a long-term holding strategy of buying the bottom, it has become a "leek" to kill the short-term decline. At the same time, such moments of extreme panic are often the real market bottom. Therefore, there are often many examples of bargain hunters "falling before dawn".
Secondly, there is excessive feedback on information in the market. Compared with the right-side trading strategy, the left-side trading strategy tests human nature more. Whether you can stay calm and hold or even buy the bottom in the extreme panic of the market, whether you can maintain your independent thinking and judgment in the early stage, and follow the established trading strategy, all of these test the investor's thinking and judgment ability. But when the market is flooded with negative news, and even when you open every web page or open every page of a newspaper, all you can see is pessimistic news. You will inevitably be affected by these news and adjust your trading strategy.
For bottom-hunting investors, many times after buying a certain stock or fund, they will pay more attention to the information related to it. Once these news appear in the market, they will be more concerned about the impact of the news on their own positions, amplifying the influence of these news. When such news appears frequently, it will affect early judgment and trading strategies. Therefore, it is often seen in the market that a lot of seemingly irrelevant information in a bear market may cause a stampede-like decline in some stocks. Part of the reason lies in the excessive negative feedback caused by extreme market panic.
There is no reasonable logic in buying the bottom. I think it is worth buying if it falls too much. This is the third common misunderstanding, and probably the most common misunderstanding.
"It has fallen so much, it must have bottomed out" is a saying on the lips of many people. Investors with these ideas always mistakenly use the "pendulum theory" in investment, believing that if the stock price falls too much, it will always rebound, and even the more it falls, the greater the rebound. This is a very wrong way to understand market reversals. We need to know very clearly that the bottom of the market is often related to the bottom of policies, valuations, and economic fundamentals. Therefore, we can see many research reports and articles analyzing the relationship and sequence of various bottoms. And these have nothing to do with how big the decline is or how long it lasts. If the factors that affect market valuation and performance do not get better, or are even expected to get worse, then even if it has fallen for three or even five years, it still does not constitute a reason for a reversal. The most typical one is that the Shanghai Composite Index fell by 40% in just half a year from 6,092 points in October 2007. Many investors also felt that the largest decline similar to history was over. However, the Shanghai Composite Index fell by 50% in the next six months. It was not until November 2008 that the Shanghai Composite Index fell to about 1,700 points before stabilizing and rebounding. The GEM also had a similar situation. The GEM market in 2015 impressed many investors. It fell by 40% in one month. After a brief rebound, it fell by another 30%. Therefore, never use "it has fallen a lot" as a reason for buying the bottom. If the valuation is still too high and the performance does not improve, and it falls by 20%, it may continue to fall by 30%, and then it may continue to fall by 40%. This is why there is such a joke in the stock market: "I wanted to buy the bottom, and I did it on the floor, but I didn't expect that there is a basement, there is hell under the basement, and there are eighteen levels of hell…".
The fourth misunderstanding is not distinguishing between industries and choosing the wrong direction. As mentioned above, the so-called "buying the dip" is based on the judgment of performance, valuation, market sentiment and other factors. But obviously, not every industry, sector, or company has the exact same trend. Perhaps at a certain stage of market reversal, there will be an overall upward trend, but with the differentiation of valuations and performance, there must be some "false reversal" industries and companies. For example, when economic fundamentals improve, consumption often improves first, and corresponding consumption will start to move ahead of other sectors. At the same time, in terms of style, growth stocks generally require the catalysis of high prosperity, so the start of their market often lags behind value-style stocks.
Finally, we must correctly understand "buying the dip". If you are a short-term trader, "buying the dip" and betting on a short-term rebound, do not turn your short-term speculative trading into a long-term one. And if you are a true practitioner of value investing, you need to focus on the future growth of the investment objects rather than short-term behavior. As Buffett said: "Our focus is to try to find companies whose operating conditions can be predicted in the next 10, 15, or 20 years under normal circumstances."
[Note: The market is risky, so investment needs to be cautious. 】
(The author is Huang Dazhi, a researcher at Xingtu Financial Research Institute)
