What are the disadvantages of ———— quality style? How to invest in quality style?
Previous: The Question Asked Countless Times – What is Quality Style? Among the various investment styles, I most identify with and like the quality style, the quality style fund as the portfolio bottom position, long-term holding, keep moving, I believe this style can cross the bull and bear. Some friends think that there is no need to distinguish between quality styles, just to distinguish between value and growth.
I think it is still necessary, the following figure is a representative fund of 3 investment styles, the correlation between msci quality and 300 value is 0.62, and the correlation with growth is 0.78, and the difference between these 3 styles is still quite large.
The chart below shows the historical trend of the three representative indices, and you can also see the difference in their movements.
Some friends may think that the quality style is quite good, and it is also in line with the principle of value investment. In fact, any investment method is flawed and will not always work. Recognizing the advantages is not enough to help hold, and knowing the shortcomings can help hold. Today I will talk about the shortcomings of quality style.
The biggest flaw in the quality style is that the valuation is high for a long time, the yield is low, and it is tepid.
Due to the high certainty of the quality style stock, stable returns, and easy to understand, therefore, the number of people involved is also the largest.
With a large number of participants, it is easy to push up prices, high valuations will reduce the expected yield in the future, and because of the large number of people staring, there are few opportunities to pick up bargains.
For example, Buffett's long-term holdings of Coca-Cola, Wells Fargo (liquidated), and American Express have annualized yields of 7.07%, 7.83%, and 11.2% (excluding dividends) in the past 20 years, respectively.
When the market is too sought after and the valuation is too high, it is easy to cause losses, the most famous of which is the beautiful 50 market of the US stock market.
Buffett bought Kraft Heinz in 2015 and has lost money so far, and Buffett later admitted: "We paid Kraft too much."
Let's take a look at how quality-style stocks are pushed up valuations:
Assuming a stock is good, roe remains stable at 20% for a long time, and the valuation is 20 times. If the valuation remains the same, it can get about 20% of the income per year.
When it was first widely known, the first people to find it were happy to buy because of the more stable annualized yield of 20% per year.
Later, the stock was gradually discovered, and some people felt that such good certainty and stability, as long as it provided an annualized return of 15% per year, I could accept it, so they pushed up the valuation of the stock.
Later, a group of people came, they said, my cost of funds is low, the assessment cycle is long, the investment period is long, I only need to accept the annualized yield of 10% per year, so the stock continues to rise, further overdraft of future yields.
At this time, the valuation may have reached 60 times, and the first two groups of buyers, although enjoying a huge increase in valuation, the return far exceeded expectations, and recognized that it was a good company, but they had to sell the stock:
Because if you continue to hold, as the subsequent valuation slowly declines, although the company is still profitable, the fundamentals are still excellent, but the two offset, can only get 10% annualized return, which may not meet their investment goals.
Second, short-term stocks may face huge fluctuations, and the nature of the funds in their hands determines that they cannot bear this risk.
Third, who can guarantee that their judgment of the future is very accurate? Such a high valuation, there is no margin of safety, in case of misjudgment, Davis double kill will cause huge losses.
Fourth, interest rates are also an important variable, if interest rates increase, the cost of funds will also increase, equivalent to the rate of return fell again.
Those who can accept a 10% yield can't be happy too soon, because there are still people who may be able to accept an 8% yield, and the term of the funds is longer, and they will continue to squeeze out the people in front of them.
In the end, the holders of this high-quality stock are those who can accept high valuations and low yields. These people tend to believe in value investing, with a longer investment period, lower cost of capital, and a long-term vision, many of which are foreign capital.
That's exactly what happened:
Since 2016, foreign capital has entered A-shares in a big way, mainly to buy core asset (quality style) stocks. The following figure shows the stocks held by foreign investors at the end of 2020 with more than 20 billion yuan, which are basically the leaders of all walks of life.
At the end of 2014, the proportion of foreign capital holdings in Moutai in Guizhou (excluding qfii) through the Hong Kong Stock Connect was 3.1%, and as of the mid-report in 2021, the proportion of foreign capital in the Hong Kong Stock Connect increased to 7.63%.
The proportion of foreign capital in midea group, China testing and other stocks even reached the upper limit of 28%.
While foreign capital has brought a round of core asset (quality style) market, it has also pushed up the valuation of these stocks.
One of the representative indices of quality style, CSI Consumption, has significantly outperformed the CSI 300 since 2016 to 2021-10 (red line in the figure below). Pe-ttm (blue line below) increased from 22x at the beginning of 2016 to 40x now (up to 50x at its highest)
High valuations mean a decline in expected future yields. The fact that foreign capital is acceptable does not mean that our domestic capital is acceptable.
Overseas interest rates are low, and some countries have zero or even negative interest rates. And their country is growing slowly and the stock market yields are lower, so they may be acceptable when investing in A-shares with a yield of 10%.
However, since the birth of our domestic capital from A shares, excellent investors have been able to obtain an annualized rate of return of about 20% in the past, and partial stock funds have an average annualized yield of 15%, which they cannot accept is 10%, and ordinary investors cannot accept it.
No, the valuation that has been pushed higher in recent years has made Zhang Kun, a representative fund manager of the quality style, unable to look at it. He said in the second quarterly report of 2021:
In the face of increasingly high price-to-earnings levels, valuation methods for companies are also increasingly using forward (such as 2025 or even 2030) market value discount back to the current year, it seems that only in this way can investors obtain an acceptable level of return.
For some companies, in the case of various assumptions, they may be able to earn a discount rate or a slightly higher yield level than the discount rate in the next 5 years, but if they make a mistake, they may face a 30% or even 50% decline in the stock price.
In the next few years, the degree of competition faced by many industries is likely to be more intense than in the past five years. Looking back at my past judgments, I found that there were many mistakes. The difficulty of judging the competitive landscape of the industry in the next 5 years is likely to only increase. If correct, you may only get a mediocre rate of return, but once you are wrong, you face a lot of losses. In such a distribution of odds, it is obviously a difficult move for investment.
In this case, either do in-depth research in a hot industry to try to gain higher probability certainty, or in a less crowded industry, sacrifice a little probability, take on a little more uncertainty, and get a better odds return.
This round of quality style market, let Zhang Kun feel overvalued to accept, think that the expected yield is too low, willing to reduce the requirements for winning rate, sold some medicine and liquor, bought bank stocks.
However, other fund managers in the quality style, such as Liu Yanchun, An Yun, Guo Jie, and Jiao Wei, still choose to continue to stick to it, who is right and who is wrong? It's hard to say yet.
1, do not always stare at the valuation
If you believe that quality style can create better returns in the long run, then when investing in quality style funds, don't easily sell because of high valuations. It is more important to pay attention to the fundamentals, and the deterioration of the fundamentals should be the main reason to sell.
Xiao Nan said: In the past decade, if you use the pe band as an anchor to do the swing band in the liquor sector, sell high and suck low, then the yield will be much smaller than buying and holding. And there's also a possibility that you don't have a stock in your hand, and while you get out of the car and wait for the stock price to fall down, the car drives up at high speed.
Duan Yongping said: No matter what the reason, it is best not to buy those companies that are particularly good because the pe is a little higher in the short term. When you sell it, it's hard to buy it back. Try to look at it from the perspective of 10 years and 20 years, and the difficulty of decision-making can be greatly reduced. For a great company, sometimes a little price difference is not a problem after 10 years, but missing a good company because of the difference in price can be a big deal.
2, be careful not to buy too expensive, cherish the opportunity to buy when the plunge
No matter how good the stock, buying expensive may also affect the income, when expensive you can not sell, but you can not buy first.
The beautiful 50 of the US stock market is an example, and the core asset market at the end of 2020 is also an example, when some foreign capital is reducing positions, and many retail investors are still shouting "liquor yyds".
The chart below shows the beautiful 50 market of US stocks
3. Patience for a long time
Quality style stocks are characterized by long-term, sustained, stable profits, which may not bring you a lot of growth at once, but it can be very stable. Therefore, it is necessary to hold very patiently, enjoy compound interest, and slowly become rich.
If you want to make quick money, it may not be suitable for the investment quality style. Many people worry that the quality style will be too crowded, but it will not, because most people like to make quick money and lack patience.
Although stocks like Kweichow Moutai were widely recognized as the best stocks more than a decade ago, few people still have the patience to hold them. Some people have counted the length of time that public funds hold Moutai in Guizhou, and there are very few corners that have been held for more than 3 consecutive years.
Bezos asked Buffett: Your investment system is so simple, why don't others do the same thing as you?
BUFFETT replied: Because no one wants to get rich slowly.
Zhang Kun said: Most people only focus on the short-term market, and insisting on value investment requires great patience and discipline. It's easy for the market to underestimate the ability of very good companies to continue to grow, and we have enough patience to grow with these companies.
4. Suitable for retail value investors
The quality style of this investment method, from the mental method, is more suitable for the top masters, because it is very testing cognition, independence and patience. But technically, it's actually very suitable for retail investors.
Because the quality style of stocks is often well known, there is a lot of public information, research is easier, investment logic is simple, and there are fewer changes. Even retail investors who are not good at tracking changes and lack professional knowledge can often understand the investment logic of these stocks and make money.
And in the process of long-term holding, you can also deepen the understanding of these stocks and accumulate research compound interest. A retail investor who has been studying a single stock for more than 5 years can even beat most professional investors with a level of recognition.
In contrast, the quality style is actually not very friendly to fund investors, because the proportion of individual stocks in public funds has a double 10% limit, and fund companies also have restrictions on industry concentration, which affects the performance of fund managers. Therefore, many quality style funds even outperformed the CSI Consumption Index, and even more so, outperformed the CSI Liquor Index.
Therefore, if you are a very patient person who fully believes in the quality style investment method, you can actually invest directly in stocks and play new. Or copy the work of the quality style fund.
In contrast, growth style stocks need to track changes in technology and growth rate; value style stocks need to accurately partial stock value, and the "technical difficulty" of these investments is greater and needs to be handed over to professional investors.
5. Suitable for sustainable investment
Investment methods may become obsolete, or the methods may not be outdated, but their knowledge reserves or learning ability will not keep up.
I really think that quality style is an investment method that can be used for a long time (because it looks far and changes are small), at most it is a decline in yield, but it should still be able to make money, at least it is not easy to lose money.
That's why I'll keep the quality style as a bottom for a long time.
Investment returns depend on cognition, long-term investment must adopt their most recognized investment methods.
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