After bidding farewell to the second worst January in the history of A-shares, the performance of A-shares in February was thrilling and captivating. From February 1st to February 5th, the market continued the weakness seen in January, and A-shares experienced indiscriminate panic selling. At the same time, the trading volume of various ETF funds rapidly increased, indicating a clear sign of funds flowing into the market through ETF funds. The market sentiment was extremely pessimistic and desperate during that phase, with small-cap stocks experiencing severe plummeting and a lack of liquidity. Under the unanimous pessimistic expectations of the market, ordinary investors were reluctant to enter the market against the trend, and the market liquidity crisis occurred in small-cap stocks. The broader market rebounded on the 5th, but on the 6th and 7th, the Wind Micro-Stock Index still experienced a panic sell-off. On February 7th, the Communist Party of China Central Committee appointed Comrade Wu Qing as the Party Secretary of the China Securities Regulatory Commission, and the State Council appointed Wu Qing as the Chairman of the China Securities Regulatory Commission. This personnel appointment was announced after the market closed on that day. February 8th was the last trading day before the Spring Festival holiday. The decision to change leadership was made under critical circumstances, and the determination of the highest decision-making level was evident. On the 8th, the last trading day before the Spring Festival, the Wind Micro-Stock Index rose sharply by 10.54% (after a 9.24% decline the previous day). After the holiday, the stock market continued to rise despite the continued pessimism among most investors. By the end of February, the Shanghai and Shenzhen 300 Index and the Shanghai Composite Index had fully recovered from the losses incurred since the beginning of the year. In February, the Shanghai and Shenzhen 300 Index and the Shanghai Composite Index rose by 9.35% and 8.13% respectively. Most of our products at Rabbit Fund have also turned positive in terms of returns.

Before February 5th, the market was falling continuously, but starting from February 6th, the market continued to rise without a correction. Many investors who sold at the bottom were perplexed and conflicted. They worried about missing out if they didn't get on board, but also feared being trapped if the rebound ended abruptly. As someone who has experienced similar situations, I can understand the mindset of most investors. The core issue lies in two aspects. Firstly, it is difficult to accurately judge the long-term nature of the market, leading investors to be overly sensitive to any market fluctuations and causing them to scatter. Secondly, facing a vast market with over 5,000 companies, investors find reasons to reject both expensive companies with good trends and companies at the bottom whose fundamental prospects have yet to improve. Whether the economy is good or bad, and whether the stock prices are high or low, there are ample reasons to hesitate. What are the underlying reasons behind this phenomenon? In this issue of "We Think," we will explore these two questions.

Is it a rebound or has the bear market already come to an end?

This bear market cycle, overall, began in February 2021, which was the peak moment for core assets. By early February 2024, this bear market had been going on for 1,087 days. Since 2006, there have been five major downturns (bear markets) in the A-share market, and this current cycle is the second-longest, only surpassed by the period from November 2010 to March 2014. The decline of 45% in this cycle is the third deepest, but it is very close to the second deepest decline of 47%. Looking at the duration, decline magnitude, wealth destruction, investor confidence, and the government's attitude and actions in the market, the bottom that emerged in February has already been sufficiently cleared.

Looking back to the beginning of 2021, there was a buzz surrounding core assets, with fund sales reaching new highs. However, by February of this year, not only did equity fund sales decline, but both public and private funds saw existing clients redeeming and cutting losses, unable to be stopped. Reflecting on that time, star fund managers were everywhere, preaching and sharing their secrets to get rich. By 2023, fund managers were apologizing and reflecting on their actions, and in February 2024, even quantitative fund managers came out to apologize, explaining what a 12-sigma rare event is. At the beginning of 2024, media reports emerged of fund net asset values dropping to a few cents or even lower, highlighting the desperate characteristics of the late bear market phase.

As for the qualitative assessment of the future market trend, our viewpoint is clear. It is not a rebound within the bear market; this bear market has already reached its bottom. In other words, the bear market has ended!

Why is it difficult for most investors to buy or sell companies with good or bad business prospects during the market bottom stage?

This question has been examined multiple times, so we are very familiar with it. When we first encountered this question, we found it quite challenging. There may be individual reasons and justifications for each person's difficulty in answering this question correctly. However, I believe there are some common reasons that make it difficult to answer this question accurately during this stage.

The main reasons are as follows. Firstly, the overall market trend and the performance of individual stocks are often not completely synchronized. Like many investors, I tend to pay attention to the market trend, and we usually use representative broad-based indices to track and assess the market trend, such as the Shanghai Composite Index, the CSI 300, or the CSI All-Share Index. Broad-based indices represent the average stock prices of all the stocks in the sample, and the probability of perfect synchronization with a specific stock of interest is extremely low. For example, on February 5, 2024, when the CSI 300 Index reached its bottom, we found that a group of companies with high dividends in the coal, oil, and telecommunications sectors, among others, were far from their bottom prices. You may genuinely believe in the potential of these companies, but after waiting for a long time to catch the bottom of the bear market, why would you want to buy these stocks at high prices? We need to remind ourselves that the comprehensive index reflects seasons or weather patterns, but our investment is like farming, not predicting the weather! Different types of plants have different sowing times, which is why not all stocks hit their bottoms on the same day in the market. The biggest problem with focusing on the index to make individual stock decisions lies here! It is appropriate to monitor the index when trading stock index futures, but for individual stock trading, a deeper level of understanding is required. Otherwise, we may end up in the same agony and confusion as we did in the past.

The second reason is that after experiencing a bear market lasting for three years, it takes time to shift our mindset from a bull market to a bear market. The objective world always has two sides, and one can interpret and act optimistically or pessimistically. Therefore, it is the investor's underlying mindset, rather than the objective world, that determines their behavior. Rising stock prices are seen as a positive trend by optimists, and they actively participate in the market. Pessimists, on the other hand, see the rise as an over extension and take precautions, avoiding buying at high prices. In the case of falling stock prices, optimists may see it as an opportunity to buy quality stocks at a discount, while pessimists may believe that the downward trend is not yet over and that selling at any time is the correct approach. The logic behind each choice is impeccable, but only one of the contradictory viewpoints is correct. Whether the bear market mindset or the bull market mindset is correct depends on the individual, but there is only one principle: truly understand and implement the philosophy of the Confucian doctrine of the mean. If one insists on a bear market mindset during a bull market, it can be disastrous, and vice versa. If one maintains a bear market mindset at present, it becomes difficult to take action on any stock. Even if one takes action, it becomes difficult to hold onto it. Of course, whether the future market is a bear market or a bull market is a matter of opinion.

The third reason is that the pursuit of perfection inevitably leads to missing out on what is right. Pursuing perfection is an admirable quality in outstanding individuals, but it can be fatal in investments. Striving to buy at the lowest point and sell at the highest point was my goal before I entered the investment field, but I gradually discovered the error of this approach and began to grasp the essence of investment. In less than a month, both the index and many stocks have already rebounded significantly compared to the low point of panic in early February. Amateur investors often think, "I missed the opportunity to buy when it was 10 yuan, and now it's already 11.5 yuan. If it could adjust back to 11 yuan or below 10 yuan, then I must get in." But don't forget, this stock has dropped from 30 yuan. Compared to the low point of 10 yuan, it has risen significantly, but compared to the high point of 30 yuan, it has also dropped significantly. We can ask ourselves, why didn't we dare to buy this company when it fell to 10 yuan on February 5? If we could go back to that day, would we be willing to buy under the same circumstances? Once we understand this, the answer may become simpler.

Recent A-share investment strategy

In last month's monthly report, we mentioned, "From a rational and calm perspective, the market's accelerated decline is not an increase in risk from a long-term perspective, but rather an accelerated release of risk!" After the stampede in early February, the characteristics of the panic-driven final decline in the bear market have become very clear. Our view of the market is also very clear: the systematic decline in the bear market has ended! However, the end of the bear market and the start of a bull market are not the same concept. We do not believe that the market will enter into a comprehensive and systematic bubble-driven bull market in the near future. At least, we have not yet seen the sufficient conditions that would create the anticipated atmosphere for most people. Even though the systematic bear market may have ended, individual stocks that are still overvalued and have poor fundamentals may continue to experience a bearish market, with the risk of hitting new lows or even delisting still present.

The conditions for the start of a structural bull market should be relatively sufficient. Our portfolio has been adjusted from a neutral level to a slightly aggressive level. In addition to the high-dividend assets that we previously favored, we believe it is now the time to strategically invest in high-quality companies that have become undervalued due to the recent deep market decline. We also see potential in growth stocks, which have been unpopular in the past two years and believe it is time to establish long-term positions in them.

Now it is early spring in March, although the northern regions are still covered in white snow and the southern regions are experiencing chilly weather, it is the right time for spring planting!

Wishing you all a prosperous Year of the Dragon

Wu Weizhi

March 2nd, 2024

本期《偉志思考》簡體中文版鏈接：

伟志思考 | 熊市结束了么？