Chapter 4: The Theory of Market Inefficiency

Li Feng explained:

"'Shi' is easiest to understand; it refers to the momentum of a stock. A truly powerful stock has a powerful aura that no one else can match. It marches northward, slaying gods and killing Buddhas."

"'Quality' is a bit difficult to define. It refers to the quality of a stock. You can also think of it as a person's character. A person with good character can never be too bad. Similarly, a high-quality stock can never fall too low because, like a person, it has a bottom line."

"The bottom line is the dividend rate and profit growth. Do you understand?"

Zhao Xinyue frowned, thought about it seriously, and said apologetically:

"I've gotten a little understanding of the 'momentum' of stocks, but the 'quality' is even more confusing. What's a dividend yield? What's profit growth? I'm a complete novice when it comes to stocks, so please don't look down on me."

Li Feng pondered for a moment and said:

"Think of stocks as a company. The company's annual dividends are its profits. If the company performs well, its profits will increase significantly. If the company performs poorly, its profits will decrease. Is that clear?"

"I think I understand a little bit. Then tell me which stocks to buy." Zhao Xinyue seemed to understand and asked.

"If there's a company that pays a generous dividend of around 4%, far exceeding the 3% one-year deposit interest rate, and it's performing very well, with profits growing by 20% or even more than 50% year after year, and it promises to never go bankrupt, would you invest?"

Li Feng showed a meaningful smile on his face.

The stock market is a magical place that can price listed companies every day.

Some people say that the market is efficient and all good and bad news are reflected in stock prices.

However, Li Feng believes that the market is effective in the long term, but ineffective in the short term, and it often goes crazy, sometimes giving companies too high a valuation and sometimes giving them too low a valuation.

Investors should take advantage of the market going crazy to find sectors and stocks that have been mistakenly killed, buy them and hold them patiently, and wait for the market to go crazy again to discover the true value of the company.

"Is there such a good thing?" Zhao Xinyue couldn't believe it.

She pondered silently: This year's dividend is 4%, and even if profits only grow by 30%, next year's dividend will be 5.2%. The year after that, if profits grow again, the dividend will be 6.76%, and the year after that, it will be 8.788%...

This is simply a hen that lays golden eggs.

And it will never go bankrupt.

Only a fool wouldn’t vote!

"Patient No. 1, stop keeping me in suspense and tell me which stock to buy!" Zhao Xinyue asked anxiously.

"These are the stinky bastards that everyone looks down upon!" Li Feng said, pointing at the screen.

"Ah!?" Zhao Xinyue opened her mouth in surprise, as if she couldn't believe it.

After a few seconds, she came to her senses and asked in confusion, "No way, such a good stock, no one has discovered it? No one wants to buy it?"

"Facts speak louder than words!" Li Feng said solemnly:

The first quarter reports just released by the five major banks show that their profit growth is around 15%.

The four small banks had even more exaggerated results. The lowest profit growth was 30.29% for Pudong Development Bank, while the highest profit growth was 58.74% for Industrial Bank!

There is a saying that the quarterly report of bank stocks determines the performance of the whole year.

Based on this profit growth, the current dividend yield is around 4%!

"These are all public data and anyone can check them," Li Feng added.

"Since the performance is so good, why do they keep falling?" Zhao Xinyue calmed down and asked, looking at the K-line chart of China Merchants Bank on the computer screen, which was heading south and falling continuously.

The K-line chart shows:

In less than half a year, China Merchants Bank's share price fell from 8 yuan to more than 6 yuan, and the decline has not stopped yet.

A simple calculation shows that the stock price has dropped by 15%, which means the stock price has dropped by 15%.

Will it fall again in the future?

What if it falls again?

Thinking of this, she felt a little overwhelmed and found it difficult to understand.

Li Feng also looked at the K-line and sighed, "There are too many reasons for the decline. The European debt crisis, the Basel Accord, the financing crisis, the bear market, it's endless..."

"In short, the market makers would tell all sorts of ghost stories in various ways, scaring retail investors into fleeing and selling their stocks at a loss."

"It's because of these ghost stories that there are such outrageous prices."

"It has formed a clear mistaken killing plate."

“This is an opportunity!”

"Are you sure?" Zhao Xinyue asked with a raised eyebrow.

"Almost exactly! You'll know when you try it."

As he spoke, Li Feng's ten fingers flew, and he bought 100 shares each of China Merchants Bank, China Minsheng Bank, Shanghai Pudong Development Bank, and Industrial Bank.

Instant deal.

Cost of China Merchants Bank: 6.76 yuan; cost of China Minsheng Bank: 2.67 yuan; cost of Shanghai Pudong Development Bank: 3.52 yuan; cost of Industrial Bank: 5.25 yuan.

"Just buying this much? 100 shares each?" Zhao Xinyue opened her mouth wide in surprise.

Li Feng smiled and let go of the keyboard, explaining

"If you don't learn from the tiger, how can you get a tiger cub?"

"This is just preparatory work before buying. I have a problem. If I want to track a stock, I must hold a position to feel at ease. Now I have circled the banking sector and selected these four stocks, but I still need to study carefully before choosing which one to bet heavily on."

Zhao Xinyue shook her head upon hearing this and muttered, "How troublesome! I have to look at the general trend to select stocks, make preparations, and fight with the bankers..."

"Making money is never that easy," Li Feng sighed. "Don't underestimate stock trading. It's just buying and selling. But the effort involved is much more than going to work."

The two were talking.

Suddenly, another nurse came in with a mischievous smile on her face:

"Patient number one, our Xinyue is a famous beauty in the hospital. She graduated from college and is still single. If you want to pursue our Xinyue, you'd better hurry up!"

"Sister Xiaoxia, what are you talking about?" Zhao Xinyue blushed, glared at Su Xiaoxia, and ran out of the door.

Su Xiaoxia was over thirty years old, but still had her charm. She walked in slowly and continued to gossip:

"Patient No. 1, would you like me to help you find a matchmaker?"

Li Feng's heart moved and he was about to agree.

He suddenly shut up again, his expression slowly becoming gloomy. "Li Feng, Li Feng, what do you have? A house or a car? Not to mention, you're still burdened with a debt of half a million. Now is not the time to talk about love."

Shaking his head, Li Feng shook the idea out of his mind, tapped the keyboard lightly, entered familiar stock codes one by one, called up K-line charts and reports, and studied them carefully.

Next to her, Su Xiaoxia had already checked all the instruments and administered fluids. The patient's indicators were excellent, which was reassuring. Ideally, he would be able to be discharged in two days.

After looking around, Su Xiaoxia sat in a corner and looked quietly at the young man on the hospital bed.

His face was angular and his eyes were very focused. His hands skillfully struck the keyboard, making rhythmic sounds, as if he was playing a pleasant piano piece. He exuded an indescribable magic.

It's no wonder that the arrogant Zhao Xinyue was tempted by worldly desires.

She bought him food and asked about his past.

It’s really good.

Time passed like water minute by minute, and all the information of the past three years was basically completed in Li Feng's mind.

A rough outline of the stock market slowly emerged in his mind.

This made him feel much more at ease.

As his mind relaxed, Li Feng felt his eyelids getting heavier and heavier, and he fell asleep unknowingly.

In his dream, he vaguely saw a nurse in white clothes, walking towards him gracefully, with her eyes smiling like crescent moons.

———

To commemorate my first investment in China Merchants Bank, where I held the stock for a full ten years.