It was written at the time of the SSE 5 consecutive yang
(The author of this article is Huang Dazhi, a researcher at Xingtu Financial Research Institute)
February 2024 is destined to be a month that can leave a "record" in the history of A-shares, and A-share investors have experienced an unprecedented rollercoaster experience. After spending a Spring Festival, the post-holiday A-shares continued the rally before the Spring Festival with the support of many good news and national team funds, and the Shanghai Composite Index also successfully recovered the "lost ground" of 2900 points, so it can be said that we have probably passed the "stock market crash" since the end of January.
If we look at the performance of the main broad-based indices in the market, in just a dozen trading days from the end of January to the beginning of February, A-shares experienced an atypical stock market crash, the larger the market capitalization of the index, the better the performance, and the CSI 2000 index, which has the smallest market capitalization, has fallen by 33.3% since the beginning of 2024. Although large-cap indices such as the Shanghai Composite Index and the CSI 300 Index are still struggling to maintain, except for a few trading days, more than 4,000 stocks have fallen on average every day, and the wealth of shareholders and basic people has shrunk sharply in just a few trading days.
With the efforts of policies, bailout funds and other parties, A-shares have rebounded strongly since February 5, and investors have also passed that darkest moment. But for investors, the losses caused by this atypical stock market crash are still not fully compensable, and there are many lessons to be learned.
First, the tail risk in investment is not a small probability event, any investor should pay attention to it, ignoring a small probability event will often bring the greatest losses. Generally speaking, when analyzing the data (such as investment returns) in investment, many times we will estimate or examine the probability of a certain event with a normally distributed probability, especially when estimating the risk and return by traditional VAR methods, in this case, the probability of too high or too low return is often a small probability event. Therefore, the "tail risk" of extreme returns should be less common in investments, and most of the time, investors, especially individual investors, tend to ignore the impact of this tail risk on investors, because individual investors neither have the ability to deal with this tail risk, nor can they foresee the occurrence of this tail risk. However, in practice, the distribution of the rate of return of assets is often not a simple normal distribution, but has the characteristics of a sharp peak and a thick tail, which is more like the "28th law" or even the "19th law" in the impression of investors, and the probability of the occurrence of the so-called "small probability event" is often beyond our imagination.
For the market since the beginning of 2024, the tail risk in the stock market has shown the characteristics of "liquidity risk", this liquidity risk in the market at the end of January, due to the concentrated response of many institutions to the redemption pressure and stop-loss behavior, reflected in the price stampede brought about by the concentrated sale of A-share "small and medium-sized bills", representing the small and medium-sized market capitalization of the CSI 2000 and the smaller market capitalization Wind micro-cap stock index plummeted, and the quantitative strategy funds that mainly traded small and medium-sized market capitalization targets were also affected by this. If we ignore this small probability event and fully believe that the Wind Microcap Index has a maximum drawdown of no more than 30% in the past five years (before 2014), then the losses for investors from this round of small-cap stocks will be unbearable.
Second, the first and most important thing in investing should be to face up to your risk tolerance and choose products accordingly.
A friend of the author, who used to work in a brokerage firm and has more investment ability than ordinary investors, lost a lot of money in the market from the end of January to the beginning of February because of his investment in quantitative strategy funds. This friend was promoted by a fund sales agency and chose a quantitative strategy fund under the promotion of "the maximum drawdown in history does not exceed 30%", and as a result, he suffered heavy losses.
In funds, stocks and other investments, the first thing any investor needs to fill in is the "investor risk tolerance rating", but this most important product adaptation questionnaire is often the shortest time for investors, and it is also the least paid attention to, and even the result of completely inconsistent with investors' risk tolerance.
For quantitative strategy fund products, whether the maximum drawdown is 30% or 50%, it cannot change its high-risk nature, and even compared with general equity funds, investors are more difficult to understand, the risk is greater, and the purchase of such products should be prepared to bear more than 50% of the loss, which does not change because of its "historical maximum drawdown does not exceed 30% or 50%". In many products, the sales agency certainly has the responsibility of improper product recommendation, but for our individual investors, if some funds are used to allocate low-risk products, then forcibly matching the seemingly relatively low-risk products such as quantitative strategies, once an extreme situation occurs, the harm to investors is often the greatest and permanent.
Third, investment strategies are like the "law of the dark forest", whoever exposes the thunderstorm and cautiously chases the well-known "lighthouse" in investment. Liu Cixin expounded the "law of the dark forest" in the universe in the novel "The Three-Body Problem", that is, once a civilization is discovered, it will inevitably be attacked by other civilizations. In recent years, this phenomenon has become more and more obvious, once a certain strategy or a certain point is widely known by the market, it is often the result of the strategy thunderstorm or the point being broken down. For example, the "snowball structure product" at many knock-in points such as CSI 500 and CSI 1000 finally ended with all points being knocked in, and the market also happened to start rebounding at the breakdown point. The same is true for quantitative strategy products, behind the continuous realization of low volatility and high return excess returns of quantitative strategies in the past two years, it has also ushered in a similar outcome to the "core asset bull market" in 2019-2021, and most of the core assets that were praised in the sky back then have a maximum decline of more than 50%, and a decline of more than 60% or even 70% abounds. Such an outcome is just like today's small and medium-sized market capitalization targets.
For investors, when they are promoted to accept these mature and well-known strategic products, it is often the eve of risk explosion, and they need to be especially vigilant when choosing.
In the end, there is no eternal chalice in investing, and there is no one-size-fits-all approach. Even Warren Buffett, who is regarded as the god of stocks, has also experienced a maximum loss of nearly 50% for nearly three years, and ordinary investors will most likely experience a market with a decline of more than 50% if they regard investment as a lifelong thing. Any product or strategy can go up or down. For the vast majority of ordinary investors, it is impossible to have the ability to always find products or strategies that meet the market style at the right time, evaluate their risk tolerance and desired returns, formulate a good asset allocation plan and position, resolutely execute, endure short-term temptations, and restrain the fear in trading, which may be the only way to cross the bull and bear.
(The author of this article is Huang Dazhi, a researcher at Xingtu Financial Research Institute)
The views expressed in this article are solely those of the author.