introduction
Evidence that mainstream public offering institutions have mainstreamed the leek profit model
Teacher Dong:
I propose that the deep-seated cause of China's capital market problems does not lie in the initial public offerings (IPOs) of listed companies, nor in the reduction of major shareholders, but in the fact that institutional investors in the secondary market have formed a leek cutting profit model, and this leek cutting profit model has been widely spread, which is the real root of China's capital market.
However, few people share this view, and most people still habitually follow the views of experts such as Professor Liu Jipeng, attributing the problems of China's capital markets to IPOs and major shareholder reductions.
I will now prove the correctness of my point again with data and facts.
China is exempt
Let's take a look at this once highly sought-after stock in China. It once experienced a rapid upward trend, soaring to 400 yuan, but then fell sharply, and has since fallen by 80%. At its peak, the stock earns 215 times, and even after falling 80%, the P/E ratio is still as high as 44 times. This shows that a professional institution, an institution with tens of billions of dollars, actually bought a stock with a price-earnings ratio of more than 200 times, and then even if the stock fell by 80%, the price-to-earnings ratio was still as high as 44 times, which is a serious lack of professionalism. No one with a slight sense of risk would buy this stock, but shockingly, it is the main heavy stock of public funds.
In the process of the mutual fund's purchase of China Exempt and its share price showing such a tragic trend:
Who lost money? Be an investor in a public fund;
Who profited? It is the public fund company itself.
When the share price of China Exempt soared, the net value of the public funds with heavy positions in China Exempt naturally rose at the same time, so everyone began to think that these fund managers were eternal gods and put money into these funds. This further strengthens these funds and raises their management fees, resulting in investors suffering a total loss, capital markets absorbing this loss, and all profits flowing into the pockets of public fund companies.
Is the trend of China's share price very similar to that of the Shanghai Composite Index (6124). Such an index can show a lightning rod-like trend, first rising several times sharply, and then falling rapidly.
So who is driving this trend in individual stocks?
There is no doubt that mainstream money is driving this trend. Although there are also one or two hundred million retail funds, they cannot influence the trend of the market, and it is the mainstream institutions that really have pricing power. The tracking of each individual stock is usually dominated by mainstream institutions, especially when unusual trends occur.
This abnormal trend is often driven by mainstream funds, first a short mad bull, and then a long repair. As is the trend shown by stocks such as China Exempt, fund managers benefit and investors and the secondary market suffer. It should be pointed out that China Exempt is not an isolated case, and similar situations are not uncommon in the market.
Aier Ophthalmology
Once, I participated in a show with the secretary of the board of directors of Aier Eye. At that time, the secretary of the board of directors of Aier Eye thought that Aier Eye was a safe and reliable investment, but I immediately put forward a different view, I thought that Aier Eye had serious risks and bubbles at that time.
Aier Eye was considered the safest option at the time because it was the fund's main heavy stock. At that time, the prevailing wisdom was that the heavy stocks held by funds would always rise and always be safe, even if their price-to-earnings ratios were tens or even hundreds of times. Aier Eye used to have a price-to-earnings ratio of 234 times, but as long as you have a little risk awareness and a little professionalism, you should not buy stocks with such a high price-earnings ratio. However, it is shocking that our mutual fund has a large position in such stocks. Subsequently, Aier Eye shares fell 60% after peaking, but today, its price-to-earnings ratio is still as high as 57 times, which is still grossly overvalued.
If you look closely, is it exactly similar to the trend of the Shanghai Composite Index (6124 Index)? Is it that in a leveraged bull market, it rises sharply and then immediately falls rapidly, just as it does?
The leek profit model requires heavy stocks
Get out of the rush to lure the public to join
Individual stock movements are all because mainstream institutions inherently need this trend to achieve their leek cutting profit model. If heavy stocks don't soar, then the fund's net worth can't rise quickly, but once heavy stocks soar, the net value also rises, which makes everyone willing to hand over their money to mainstream institutions.
Therefore, the rapid surge of the stock market from individual stocks to indices is actually a major public offering institution in order to create a bubble, stimulate people's greed, and let them give money to institutions. Under normal circumstances, investing 20% of a year's profit is already very good, just like Buffett, everyone will be willing to give him all the money. But if the profit rate is as high as 200% a year, it exceeds the level of the God of Wealth, and who doesn't want to make a lot of money? As a result, mainstream institutions will create a 200% increase in stock prices in a year, but this trend must be frothy at the highs, and valuations as high as 200 times earnings are unlikely to be sustainable. Valuations cannot be sustained, and the process of decline is the process of retail investors losing money, and it is also the process of deteriorating market ecology.
Mainstream funds do not cooperate to invigorate cattle
It's because it's set on the track
Why has the market been unstable since 2023, when the central government proposed to revitalize the market? Why didn't the public fund actively cooperate? Because the current valuation of the public fund's position is too high to exit easily, once it starts selling, the stock price will fall. Although many public fund heavy stocks have fallen by more than 50%, stocks like China Exempt and Aier Eye still maintain high valuations at 40 to 50 times earnings, which cannot be maintained.
Arowana
Let's look at the example of Arowana, whose share price fell from $145 to $34, and Arowana's movement is very similar to the 6124 index. This trend is actually an inevitable result of the institution's profit model of cutting leeks. Their way of cutting leeks is to use extremely abnormal and unsustainable short-term ultra-high returns, such as annual returns of more than 100%, to pool the public's money under their control, and then put the masses in a high valuation range and then charge a management fee every year, so that they can secure the income. However, investors are miserable, and even more frighteningly, this practice destroys the ecology of the market.
When the Politburo proposed to enliven the market, public funds did not actively cooperate, and there were not many funds in China's capital market willing to cooperate. Because once the funds have established a leek cutting profit model, they do not need to cooperate with policies and do not need to follow the law of value. Their leek-cutting profit model requires stock prices to soar, and for their own benefit, they need to let ordinary people stand on stocks with high 200 times P/E ratios, which is not much different from the Ponzi scheme in terms of objective effect, the essence of which has been confirmed in the Chinese A-share market, which is a fact.
The combined harvest of the five major public fundraisings
After these specific cases, look at the strong evidence to prove that the mainstream institutions of China's capital market do not create returns for investors, do not follow the concept of value investment, and are not based on maintaining the stability and health of the capital market, but completely rely on cutting leeks and trample on market stability.
This evidence comes from comprehensive statistics, specifically related to the top five largest A-share equity funds, namely CEIBS Medical, E Fund Blue Chip, Fuguo Tianhui, Great Wall Emerging Growth Hybrid and Xingquan Herun.
How much profit loss have these five public funds caused to their investors in their history? The total loss is huge, not billions of yuan, but China's largest equity public fund, which has created a total loss of 25 billion yuan. This means that China's top five largest equity public funds have failed to generate any overall profits for their investors, and on the other hand, the five largest equity funds have collectively lost $25 billion for their investors.
Under such huge losses, the five largest fund companies have collectively earned 12.3 billion yuan in management fee income.
It is worth noting that among the five major equity funds, the two largest are CEIBS Healthcare and E Fund Blue Chip Select. CEIBS Healthcare lost $26 billion to funders during its lifetime, while E Fund Blue Chip Select lost $7 billion to funders over its lifetime. This data is as of June 30, 2023. The two largest equity public funds failed to create any positive returns for investors, but lost more than 30 billion yuan in total. At the same time, the two funds themselves have earned more than 5 billion.
This is a stark and cruel truth. By disclosing this data, the purpose is to let everyone see that the largest equity fund is not making profits by creating returns for investors, but is creating tens of billions of actual losses for investors, while making billions or even tens of billions of dollars. Is this not conclusive evidence that the mainstream institutional profit model of China's capital market is a leek profit model?
The truth about the operation of mainstream funds
Huge losses and profits from cutting leeks
In the face of such ironclad evidence, how can our capital market improve? These fund companies don't seem to care how much money their funders make, they only care about how much money they can make. For their own benefit, they developed a profit model that suddenly pulled their heavy stocks up at some point, causing their prices to rise several times, and then their net worth rose in tandem. As a result, all the public, seeing their net worth skyrocketing, frantically poured their hard-earned money into these funds.
However, when the public pours their hard-earned money into these funds, the net worth of these funds' heavy stocks is already close to 100 times the price-to-earnings ratio, constituting an absolute high-risk area. But they can feel at ease that they are all graduates of famous schools such as Tsinghua Peking University, and they can let the public invest their pension money in these high-price-earnings ratio stocks, and then watch them automatically fall, causing serious losses. However, these fund companies can earn billions of profits and are revered as one brother and one sister, eternal gods.
This is the truth, and this truth reveals the ultimate reason why China's stock market is so difficult. These largest equity funds, including the eldest and second, are taking a similar approach.
Here, I would also like to point out a deeper question, "Investors should be good people, buy good stocks and get good returns", there is no doubt that this statement is true. However, let's see if there are really people in China's public fund market who are good and rewarded.
Investing investors' funds in companies with a price-earnings ratio of hundreds of times, resulting in the loss of tens of billions of yuan by investors, obviously hurts the interests of investors. Therefore, these people can hardly be called "good people". But what do those who don't really do good people end up accomplishing? Their funds have become larger and larger, becoming industry-guided funds, the highest ranking funds in the industry, and even becoming industry leaders. However, these achievements were based on the huge losses caused to the funders, that is, their customers.
The top five funds have yielded lower returns than the industry average
But the revenue is higher than the industry
The above data, it can shed light on this. The top five public funds together caused losses of 25 billion yuan for investors, while their fund companies generated 12 billion yuan. Then, all public funds together earned 1.3 trillion yuan for investors. This means that the actual investor returns of China's top five fund companies are lower than the industry average. That's the scary part of the problem.
Under normal circumstances, the capabilities of an industry-leading company and the value creation of customers must be higher than the industry average. Otherwise, they cannot be the best in the industry. This is normal business logic. In China's asset management industry, however, this logic has been upended upside down. The funds that hurt their clients the most are doing bigger and bigger, even though they don't do well relative to Treasury yields. But funds that don't lose money struggle to scale. In other words, in China's asset management industry, whoever can pull up customers and lose more money will be able to attract more money. That's why I say that the deep-seated problems in China's capital markets are mainstream institutions.
Mainstream institutions do not increase their own interests by creating wealth growth, nor do they achieve their own interests and development by following the law of value and maintaining market stability. Instead, they invented a leek-cutting profit model.
This profit model inevitably leads to heavy losses for investors, so in the capital market, there is a competition that whoever can make investors lose more can do more. The returns of the top five equity public funds are lower than the industry average, which highlights the seriousness and dire nature of the problem.
In China's public fund industry, there is an anomaly that underperforming companies have a higher market position and larger scale, while relatively better-performing companies are difficult to scale. It's like the song "ugliness for beauty" sung in Dao Lang's song. Good people can get good rewards, but in China's public fund industry, we do not see this phenomenon, but see that the companies that hurt the interests of investors the most have greater influence. This is a worrying reality, the market logic is subverted, the industry logic is subverted, and bad money drives out good money.
Mainstream funds implement the leek cutting model
It is inevitable that the funder will lose
The greater the loss of the funder
The larger the fund, the larger the scale, the worse the return
I would now like to disclose the data of the top ten public fund companies in China. One of the shocking things is that among these companies, there is a public fund that acquires wealth in such an unusual way. The public fund has lost up to $7.5 billion to its investors over the past 16 and a half years, from 2007 to 2023. In other words, in the past 16 and a half years, the public fund has not brought any returns to its investors. What's even more incredible is that the public fund managed to generate $17.3 billion in revenue from its investors, despite not bringing any returns to its investors during this time.
Perhaps many people are wondering which public fund company this is, then you can check out "Medicine Goddess" to learn more. However, it's not just this public fund, but the overall return among the top ten public fund companies in China is lower than the average of all public fund companies. Among these top ten public fund companies, those that performed poorly have once again emerged but managed to become leaders in the industry. This means that among the top ten public funds, the key to success is not to create the ultimate return of the investor, but to scale up by causing more and more damage to the interests of the investor.
This is a terrible problem faced by China's capital market, the deep-seated problem of China's capital market is the mainstreaming of the institutional leek cutting model, not at all an IPO is not a major shareholder to reduce holdings, it is a mainstream institution cultivated by preferential policies in the secondary market, does not undertake to maintain market stability, does not bear the creation of capital value growth, does not bear the social responsibility of valuing enterprises according to the law of value, but invents the leek profit method without supervision, and the leek profit method is invented, growing stronger and more popular. Therefore, China's capital market has become the evil soil and source of mainstream institutions cutting leeks, and when mainstream institutions are in this market, wielding combine harvesters to cut leeks, how can it be good from this capital market?
The top 10 public funds have returned below the industry average, highlighting the seriousness of the problem. The key to solving this problem lies in the behavior of institutions, not in the IPO or reduction of major shareholders. Without addressing institutional behavior, China's stock market will still face serious problems even if IPOs are halted or major shareholders are prohibited from reducing their holdings. So the task now is to catch the issue of institutional behavior, as institutions have become Ponzi schemes in some cases, and Ponzi schemes have become the dominant pattern of behavior.
Tell the truth with the courage of a puppet
The real problem is rooted in mainstream institutions in the secondary market, which have lost interest in the law of value and are no longer concerned with valuation. When they pushed Aier Eye's P/E ratio to 234 times, they didn't care about the law of value, valuation levels, or risk. They don't pay attention not because they're unprofessional, but because they know that they can only scale up at 240 times earnings. This is because the current market mechanism rewards institutions that harm investors, irrationally, do not invest according to the law of value, and do not consider valuation.
Similarly, when they pushed up China's price-to-earnings ratio to more than 200 times, they understood that this was the only way to strengthen themselves. As for the losses suffered by the ultimate investors, they do not consider it, because their only concern is their own interests. This behavior has become a common feature of the largest institutional investors and the largest type of institutional investors in this market, making this market destined to be difficult to improve.
The IPO of the major shareholder only inputs the transaction target to this market, not affects the market every minute and every second. In addition, the valuation of the major shareholders at the time of IPO issuance is relatively reasonable, allowing investors to make money at any time. The real leeks are cut by investors in the secondary market, who control the opening price at the time of issuance and continue to cut in normal trading. This makes it impossible for investors to make a profit, the market shows a slow bear after a sharp rise, and then the whole market cannot be profitable, and even policy intervention cannot improve the situation, all due to institutional behavior.
Therefore, the key to solving the problem lies in the behavior of the governance body, not the IPO of the majority shareholder. If the root cause of the problem is not addressed, China's stock market will still face difficulties even if the IPO is halted or major shareholders are prohibited from reducing their holdings. It is important to keep in mind that institutional behavior has become Ponzi schemes, and Ponzi schemes have become a mainstream pattern of behavior. Only by solving this problem can we hope to improve the future of China's stock market.
As a practitioner with 30 years of experience in the securities industry, I have taken great risks for the health and future of China's stock market, challenging the entire asset management industry, especially the powerful public funds. The solution to this problem will be directly related to China's economic and social stability, so I have to express it in my own way, even at great risk. At this critical juncture, the behavior of governance institutions has become the key to solving the problem, and I am determined to tell the truth for the sake of China's future.