Some time ago, I shared with you that this year is likely to be the first year of A-share index investment.
One of the most important triggers is that the national team continues to buy and buy on the index, which drives other allocation institutions and the people to also start to increase the proportion of index allocation.
Today I will take you to analyze this from a different angle, let's look at the conditions under which the index will outperform most institutions from a macro perspective.
When it comes to this topic, we can't talk about U.S. stocks, because more than 80% of institutions in the U.S. can't beat the S&P 500.
But this hasn't always happened!
We can use Warren Buffett as an example.
In the decades of Buffett's investment career, the annualized rate of return is about 20%, which no one in the world can surpass.
But one strange thing is that after entering the 21st century, Buffett's annualized rate of return is about 10%, significantly underperforming the S&P 500.
Why is this happening.
One of the reasons may be that Buffett's management is getting bigger and bigger, losing its flexibility.
But let's also think about it the other way around, isn't it okay for Warren Buffett to buy the index directly?
The S&P 500 can definitely fit the size of Warren Buffett. After all, nearly half of Buffett's positions are on Apple.
And Warren Buffett often advises people to buy indices directly, but he doesn't buy them, isn't it strange?
Why didn't Warren Buffett buy it himself?
Because he is confident that he can outperform the index!
But as a result, in the last 20 years, he just hasn't outperformed!!
Why?
This has a lot to do with the macro environment in the United States in the last 20 years or so.
There are three major factors that cause Buffett to underperform the S&P 500, resulting in the phased failure of value investing in U.S. stocks!
1. Value investing is ineffective in U.S. stocks
There are two keys to value investing, one is good companies and the other is good prices.
Good companies are always available, but good prices are not always available.
Warren Buffett, as a typical value investor, will act decisively when the price falls very low, and he is less willing to pay a premium for the stock.
A normal stock market will fluctuate up and down periodically, and there is always a chance for the stock price to fall to the floor during a bull and bear cycle.
In the past, Warren Buffett could have seized many of these opportunities.
But in the last 20 years, Buffett has had very few chances.
For example, we can look at the valuation of the S&P 500.
Since 2008, the valuation center has been moving upward.
That's pretty bad, as value investors, we always wait for valuations to fall low enough before we make a move.
But the S&P 500 has not given you a chance at all for more than ten years.
If you don't buy it, you'll be in the middle of it for more than ten years!!
Warren Buffett is actually facing such a dilemma.
Why can't Warren Buffett wait for the opportunity to sell at a low price, and always wait for the opportunity to pick up the leak in the early stage?
Second, the three major macro influencing factors
Previously, I shared with you that when we analyze the capital market and the economy, we need to have incremental and stock thinking.
If a country's GDP is growing, that's a total growth!
But GDP growth does not necessarily mean that the stock market will rise.
It also depends on whether corporate profits as a percentage of GDP increase or decrease. (Stock Competition)
With this in mind, let's look at the situation in the United States.
First, the U.S. GDP is growing
Note that at this time, I am not looking at real GDP, but at nominal GDP (including inflation).
Because when we pay attention to corporate finance, 100 yuan is 100 yuan, and we will not bring up the price factor.
In the last 20 years, the nominal GDP of the United States has mostly been 6%-7%, which is not slow.
Second, the share of corporate earnings in GDP has risen significantly
In 1999, the after-tax profit of US companies was 5.6% of GDP, and in the previous 30 years, this proportion had rarely exceeded this value.
Therefore, at that time Buffett had reason to think that this was an extreme value.
However, in the 21st century, this proportion has increased to 8.7%!
Gross economic output is nothing more than the division of labor (household income), government, and capital.
As the United States enters the 21st century, both the population and the government have taken less.
On the one hand, there is the gap between the rich and the poor, and on the other hand, the US deficit rate is rising.
Then, naturally, the company will get more.
Of the 3.1 points of capital overweight, 1.7 points came from the government and 1.4 points from residents.
We are not very curious, why the interest rate hike can the US stock rise?
If you look at how desperately the U.S. government is engaged in fiscal easing, you can understand the reasoning. (Our deficit target for this year is only around 3.5%)
Third, interest rates have fallen sharply and have remained low for a long time
Note that the focus here is on real interest rates, not nominal rates.
Although the United States has been raising interest rates in the past two years, the real interest rate is not high.
And although we are cutting interest rates, the CPI has entered negative territory, therefore, our real interest rate is higher than in the United States!
Low interest rates fuel asset bubbles.
As a result, the valuation center of U.S. stocks will continue to rise.
Together, these three macro factors have led to the failure of value investing in U.S. stocks.
And it lasts for a very long time!!
So Buffett can't beat the S&P 500.
Under what circumstances can value investing outperform excess returns?
1. The central bank should not release water;
2. The government should not make profits, and do not play with financial easing;
3. The stock market should be selected by nature (it should be cleared, and if it is not cleared, where will it be able to pick up the leakage?), and the country will continue to prosper.
The U.S. stock market hasn't cleared for a long time.
Every time it is about to collapse, the Fed will stand up and let out the water to care.
Let's take a look at China and A-shares.
First of all, the total GDP is growing, which would have been good for the stock market.
Second, corporate profits as a percentage of GDP are low, and profits are split between residents and the government.
Third, the currency is relatively much more restrained, always emphasizing "stability", and only in 2008 and 2015 was unrestrained.
Please note that when I say that the macro environment in the United States is favorable for American stocks, I am not referring to the overall US stock market, but to the S&P 500 index.
In fact, the divergence of U.S. stocks has been very severe in recent years.
The market capitalization of the top tech companies is growing, while the small-cap stocks are not doing well!
That said, the three factors I've described are in favor of the head of the stock market, the index, not the stock market as a whole.
3. The first year of the index
Comparing the three factors I have introduced above, you can understand why the era of index investing is likely to begin.
First, the mainland's GDP will continue to grow
And the nominal growth rate will be similar to that of the United States in the last 20 years.
Don't look at the fact that the CPI is not up now, as long as the management thinks that it is not very difficult to get the CPI up.
For example, buy A shares (i.e., play QE)
Second, the constraint of a 3% fiscal deficit rate has been broken
This means that the deficit ratio will be higher and higher in the future.
The government will make concessions to enterprises. (Fiscal Easing)
Third, interest rates will continue to fall
This is already a high probability event.
As any country comes to this point of transition, interest rates continue to fall, even approaching zero.
How, after reading this, do you think it's interesting?
But it does pose a challenge for value investing.
You can think about it, if A-shares also change in the future because of these changes, our past investment experience may harm us.
For example, you always want to sell and wait until you hit rock bottom and pick it up.
But it just doesn't fall to that valuation again. You may just be in the air for years or even decades.
Another example is the neglect of small-cap stocks.
In the past, it didn't matter if the fundamentals of small-cap stocks were poor, anyway, more people went to speculate on garbage.
But the national team is playing QE, and unlimited bullets are constantly being bought on the CSI 300, can small-cap stocks still have such great appeal?
In addition, the regulatory policy is also correcting the deviation of the fried garbage.
Once the major shareholders and industrial capital are unable to cut the leeks by pulling up the stock price, who will pull the small-cap stocks?
And if A-shares really enter the era of index investment from now on, the best way is to hold the index and not sell it.
Because the vast majority of institutions will not be able to outperform the index.
In the past, there were many active funds in A-shares that were able to outperform the index, but since then, their era has ended.
And now fund companies don't issue active funds very much, and they are all playing with their lives to issue index funds.
Regulation has also canceled the selection of star funds.
Of course, the future is still unpredictable.
When we think about these things, we also need to rehearse various possibilities in advance, so as to formulate a strategy that is both offensive and defensive.
You can think about how to deal with this possible era of indexation.
How high is the probability of appearing, and how high is the probability of not appearing.
How can I adjust my position to deal with this?
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