WE THINK: No investment strategy will be effective forever; The commonalities of the most disastrous investment decisions

In the A-share market in July, the market was relatively calm at the index level. The WIMI All A-Share Index rose slightly by 0.27% for the whole month, while the CSI 300 Index slightly declined by 0.57%. However, investors had mixed feelings. Overall, the market has still lacked money-making momentum for some time. In the environment of phased relaxation of trading supervision, the speculation on some concept stocks has gradually heated up, but these "freak stocks" have contributed little to the overall recovery of market sentiment. Since the first quarter of 2021, most fund holders have begun to suffer continuous losses, and by the first and second quarters of 2024, the extent of the losses has reached the psychological limit of many investors, with net redemptions being particularly prominent in these two quarters.

In this issue of WE THINK, we will discuss how to view the large-scale net redemptions that active management public funds have encountered so far this year, as well as the significant adjustments seen in the Japanese and US stock markets.

How should we view the large-scale net redemptions that active equity funds have faced in the first and second quarters this year? Who is exiting the market, and who is entering?

The data shows that in the second quarter of 2024, the active equity funds in the public fund sector continued to face accelerated redemptions. In the second quarter, there was a net redemption of 240.176 billion yuan, of which 23.262 billion yuan were from new fund issuance, while the net redemption from existing funds was 263.438 billion yuan. In the first quarter, investors had a net redemption of 279.7 billion yuan. In the first half of the year, investors had a net redemption of 519.876 billion yuan. The monthly net redemption scale reached as high as 86.6 billion yuan in the first half of the year. The data shows that the redemption of active equity funds did not just start this year - there have been continuous net redemptions since 2022, but the redemption phenomenon has been accelerating in the first half of this year.

At the end of 2021, the total size of public offering hybrid funds was 6.19 trillion yuan. This figure dropped to 3.33 trillion yuan by the end of the second quarter of 2024, a reduction of 2.86 trillion yuan over two and a half years, a contraction of 46%. Due to investor redemptions, fund managers have had to passively reduce their positions, which has led to a negative feedback loop in the stock market decline. Many investors have thus become more pessimistic about the future trend of the A-share market, believing that the market will continue to decline in a negative feedback loop and that it will be difficult to stop. We believe this viewpoint is worth debating.

At the same time as ordinary investors are gradually losing hope and redeeming their funds, although the stock market has been weak in the first half of the year, there has not been a major systemic decline. An important reason for this is that there is a sizeable incremental capital that has started to enter the market in the opposite direction of the outflows. Based on the data at the end of the second quarter and the end of last year, the market value of the ETFs held by China Investment Corporation (CIC) is around 500 billion yuan, which is roughly equivalent to the 519.876 billion yuan of net redemptions by ordinary fund investors in the first half of the year. It is clear that these funds have very likely become the counterparties in the capital market transactions during the first half of the year, with the exchange of chips and capital. As the genuine national team player, CIC has already started to continuously and systematically enter the market, it's just that the market hasn't yet started to form a positive feedback loop and see an upturn. In a sense, this systematic exchange of chips should have one side being wrong and the other being right. Which side is right and which is wrong? Which side do you choose to stand with? This is an important soul-searching question.

Regardless of whether following the national team is right or not, from my 31 years of experience investing in the A-share market, I have never been right when making the same decisions as the general market public. When viewed from a longer time perspective, investment decisions made under this mindset are always the most disastrous and wrong choices!

The latest example of this was at the end of 2020 and the first quarter of 2021. Due to seeing that many funds had achieved very good positive returns in 2019-2020, consistently outperforming the market benchmark by a large margin over those two years, the enthusiasm of the general public for investing in funds gradually heated up, and by the beginning of 2021 it was really "on fire". Particularly, the star funds heavily weighted in consumer stocks and core assets, as well as the growth funds heavily weighted in the new energy sector, were especially favored and pursued. So the general public frantically chased after these two categories of funds. Three years have passed, and the painful consequences of the crowded decision-making at that time can now be seen. After suffering heavy losses and deep drawdowns for three years, the investment logic and performance of these industries have now become seriously problematic. The investors' mentality has gone through a process from hopeful buying in - normal adjustments and adding more - buying more as it keeps falling - giving up on looking after it - company performance exploding, but still not getting out in time to avoid even bigger losses...

This kind of emotional journey is so deeply etched in my memory from my first experience of a bear market in my career. Almost the vast majority of people are common mortals. Our knowledge and capabilities may need to be gained through direct personal experience and enlightenment. If we can avoid resentment and not make the same mistakes again, then perhaps next time we will be able to flow with the changes more smoothly.

In the face of the phenomenon of large-scale redemptions from actively managed public equity funds, while I feel regretful, I see more of the positive side of it. The strongest signal conveyed by this phenomenon is that the A-share market has once again reached the stage of "selling stocks to be comfortable in the short term, but wrong in the long term!" The common characteristic I have observed in successful investors is that they dare to persist in doing the right thing in the long run, even if it is painful in the short term.

The common characteristics of the most disastrous investment decision choices

After investing in the Chinese capital market for more than 30 years, I have made countless mistakes, but I am fortunate to have survived after making many mistakes. And our team has also become increasingly tenacious. The most important thing is that our team pays special attention to delving into and discussing the essence behind the phenomena. The appearances of investment success and investment failure are infinitely diverse, but if you penetrate through them, the essence of success and the essence of failure both have very strong commonalities. In this issue, let's explore together some of the common characteristics behind disastrous investment decisions. The common characteristics behind successful investment decisions, we can discuss that another time when we have the opportunity.

The most disastrous investment decisions often have the following common characteristics: 

1、Hindsight bias

2、Shortsightedness, being more willing to choose what is comfortable in the short-term but wrong in the long-term.

3、Treating the crowded trading strategy of hot topics as an investment philosophy to adhere to.

Hindsight bias: the vast majority of investors adopt a trend extrapolation thinking pattern. What has made money in the past will continue to do so in the future. Investments that have not risen in the past will not have opportunities in the future either. For example, the core assets and new energy sector in early 2021, which had risen very well in the past, will continue to rise in the future. For example, the high dividend low valuation assets in early 2022, which have not risen for many years in the past, why would they rise in the future? For example, at the end of the first quarter of 2024, US technology stocks and Japanese stocks have risen for many years in the past, and it's fine to buy ETF substitutes even if the premium is a bit higher. For example, A-shares have been falling for the past few years, and capital is still flowing out, why would they be able to rise in the future? These are all characteristics of using the rearview mirror to look at the future. Trends will continue in some stages, and will reverse in other stages!

Shortsightedness: refers to only focusing on the possibility of the trend continuing, but ignoring a very important point - from a long-term perspective, the trend will definitely reverse! It's just a matter of how far the reversal time is from the present. If one only thinks about the wonderful idea of the trend continuing forever, and forgets the risk of trend reversal, then the disaster is not far away.

Never mistake a trading strategy for an investment philosophy and stubbornly adhere to it: Long on a certain industry, long on the assets of a certain country, short on the assets of a certain country... These specific investment strategies all have a time limit! Just like our theory of the four seasons in the stock market at China Europe Securities, each asset and the stock market is similar, they all have their springs, summers, autumns and winters. As the seasons and environment change, the trading strategy also needs to be adjusted in a timely manner to adapt to the changes. Last Friday, Intel's stock price fell by more than 20%. At one time, Intel was the king of the PC era, but now it's in its twilight years. The investment strategy for different stages must change with the seasons and environment! Sticking to an unchanging investment strategy is very dangerous in the long run. Similarly, for the recent hot short-selling of Chinese assets, long on Japan, long on US technology... These popular trading strategies may not be too obsessive about, especially after becoming "popular", which itself means the crowding is not low, and when the crowding is high, the trend reversal is not far away.

Recent Global and Chinese Markets

Recently, there have been significant fluctuations in overseas markets. Although the A-share market has also seen some adjustments, it has shown very strong resistance to declines compared to the US stocks and Japanese stocks. We understand that long on US stocks and Japanese stocks, and short on China, were quite popular crowded trades among overseas hedge funds previously. With the Bank of Japan's announcement of interest rate hikes and balance sheet reduction last week, many of these previously crowded trades have seen reversals, and the short positions on China also face similar unwinding pressures.

Although it is somewhat difficult for Chinese assets to stage a significant rally in the environment of major fluctuations in overseas markets, we should not forget that our economic cycle and stock prices have already released risks for a long time. With the substantial declines in the US and Japanese stocks, is there a possibility that the Federal Reserve will cut interest rates earlier to stabilize market sentiment? We believe there is a certain possibility. The Federal Reserve's response has been very timely and appropriate during the past few major volatility episodes in the US.

For many investors who have been long-suffering in the A-share market, the recent major volatility in overseas markets may have provided them with a very compelling reason to completely sell out of A-shares. In my personal opinion, there is no need to get scared and rush to take medicine just because the neighbor is sick - we didn't follow along when they had a ten-year bull market either. The A-share market still has its own operating logic and its own cycles. Investing in A-shares should still focus on China's economic, monetary, and policy cycles. Repeating the point made earlier, one should not do something that feels comfortable in the short-term but is wrong in the long-term!

Investment Strategy:

We will continue to invest into “high quality” stocks, investing in only the best of the best only for the moment of time, as we believe strong fundamentals are the basis to strive through volatility.

WU Weizhi

2024 August 5

本期《偉志思考》簡體中文版鏈接：

伟志思考 | 没有哪一种投资策略会永远有效， 那些最灾难投资决策的共性