The overall valuation of A-shares has finally stabilized and is 17% lower than 1664 points.

In the last three trading days of 2023, A-shares stopped falling and rebounded.

As Warren Buffett said, "We don't have any view on whether the market is going up, down, or sideways in the near or medium term, and we never have any such views." "But for stock markets all over the world, mean reversion is the ultimate master of the stock market. Every super bear market means that a big bull market is right behind, and after each big bull market, there will be a long bear market to pay for the last round of crazy bills.

The Shanghai Composite Index has hovered below 3,000 points in 16 years, which makes many investors feel the difficulty of investing. The current valuation of A-shares is 17% lower than in 2008 when the Shanghai Composite Index was at 1,664 points. Greed should prevail over fear, as the wise man said, "He who is now decayed may regain his glory in the future, and he who is favored now may be eclipsed in the future."

Greed and fear control the market in turn. In the history of A-shares, the four-year bear from 2001 to 2005 was followed by the mad bull market from 2005 to 2007, and it was precisely because of the national carnival rise from 2013 to the first half of 2015 that there was a long period of consolidation and decline since the summer of 2015. Similarly, in the history of the U.S. stock market, the five-fold rise from 1920 to 1929 was followed by a 25-year bear market in which the bubble burst, a 10-year bear market in the 70s, and an unprecedented 20-year bull market in the 80s and 90s.

A-share valuations have reached record lows

As of Friday's close, the Shanghai Composite Index traded at a dynamic price-to-earnings ratio of 11.09 times, 17% lower than the overall valuation of the Shanghai Composite Index at 1,664 on February 16, 2008.

The Shanghai Composite Index at 1664 points on February 16, 2008 was the lowest point of the last bear market. Statistics show that the current dynamic valuation of the CSI 300 Index is 10.51 times, 18% lower than the Shanghai Composite Index at 1664 points, the current dynamic valuation of the Shanghai 50 Index is 9.2 times, 28% lower than the Shanghai Composite Index at 1664 points, and the current valuation of the CSI 800 Index is 11.36 times, 12% lower than the Shanghai Index at 1664 points.

The current valuation of A-shares is nearly half lower than the last bull bubble. Statistics show that on June 12, 2015, when the Shanghai Composite Index was 5178 points, the corresponding dynamic valuation of the Shanghai Composite Index was 21.32 times, while the current dynamic valuation of the Shanghai Composite Index was only 11.09 times, which means that A-shares are nearly half cheaper than the previous peak. The CSI 300 core index, which represents blue chips, is 46% cheaper than it was at 5,178 points, and the latest valuation of the small and medium-sized composite index, which represents small and mid-cap stocks, is 20.07 times, compared to 85 times the valuation of the previous high, and the valuation of small and medium-sized stocks has shrunk by nearly 77%.

Stocks are bonds dressed in stocks, and the ability of stocks to pay dividends is the ultimate ability to support the stock market, and the current dividend yield of A-shares is more attractive than that of bond assets. In terms of dividend indexes, the latest dividend yield corresponding to the dividend index is 4.325%, the latest dividend yield corresponding to the SSE 50 index is 2.9868%, and the corresponding dividend yield of the CSI 300 is 2.2654%. The current yield on 10-year Treasury bonds has fallen to 2.592%, and the current dividend yield of the A-share core index is more attractive to funds.

Investing requires a holistic view

The Shanghai Composite Index fell below 2,900 points at the end of this year, and when pessimism hit, there were always voices that A-shares were not suitable for value investment and long-term investment. However, if we calmly analyze from a global perspective, the key to the outcome of the investment lies in the investor's own choice.

A very representative example is that the Shanghai Composite Index contained only 8 stocks at 100 on December 19, 1990, and unfortunately 3 of these 8 stocks have been delisted in the past 33 years. If an investor buys 1,000 yuan each of the 8 stocks at 100 points in the Shanghai Index, the current value is 4.93 million yuan.

However, due to the fact that these eight stocks were frantically chased by funds when they were first listed at the end of 1990, the trading volume was scarce, and some stocks rose dozens of times in the first year. Assuming that investors bought 1,000 yuan each of these 8 stocks in equal proportion on December 19, 1991, one year after they were listed, the current value is 87,000 yuan. The portfolio has an annualized return of 7.76% over a 32-year period.

For a portfolio, the biggest loss in value of a stock is 100%, but the upward movement of other stocks in the portfolio is unlimited. Even though the other three stocks have already suffered a devastating delisting, the value of the overall portfolio far exceeds the original purchase cost.

This asymmetrical decline and rise is also the secret of investment, which is what Warren Buffett said "basil will wither and flowers will bloom", and investment itself is a game in favor of investors.

Although the Shanghai Composite Index has waged a "defense war" at 3,000 points in 16 years, the real economic returns of listed companies are not bad. Since February 16, 2007, when the Shanghai Composite Index first climbed to 3,000 points, the net profit attributable to the parent of companies with comparable data has increased by 4.7 times, and the annualized growth rate from the income of the real economy is 11.15%.

But since the Shanghai Composite Index first climbed 3,000 points, A-shares are valued two-thirds cheaper. On February 16, 2007, the dynamic P/E ratio of the Shanghai Composite Index was 37.34 times, while the current dynamic valuation of the Shanghai Composite Index is only 11.09 times. The current valuation of 3,000 points has shrunk by 70% compared to the first valuation of 3,000 points, which means that the 16-year "defense war" of 3,000 points is "paying" for the original crazy valuation, and the annualized return of the 16-year valuation is -7.25%.

The extreme change in valuation is the result of the psychological collective of all investors, and the behavior of each investor in it has led to the change in valuation, which is the biggest reason for the change from 3000 points to 3000 points in 16 years.

However, the current downturn is also setting the stage for the next bull run. From a dialectical point of view, every round of big bears will be followed by a round of bull market, and every round of bull market will be followed by a round of bear market. Fear and greed must be reversed, and mean reversion must occur. Excessive prosperity is the biggest cause of depression, and excessive depression is also the greatest prerequisite for prosperity. The U.S. stock market did not rise for nearly a decade from 2000 to 2008, and the 20-year bull market that followed was brewed, and the big bear of the U.S. stock market in the 70s of the 20th century also brewed the 20-year bull of the 80s and 90s of the 20th century.

A-shares are in emerging markets, and volatility will be crazier than those in mature markets, which is determined by unchanging human nature. In a very low valuation range like the end of 2023, greed must prevail over fear, and what investors need to do now is build up huge positions in good stocks instead of being intimidated by fear.

The manuscript originated from Brokerage China

Editor-in-charge: Peng Bo

Proofreading: Wang Jincheng