Chapter 81 Buy Low and Sell High in Stock Trading
In the trading room next door, Zhao Xinyue was also stunned. The trading software was filled with the limit down on the entire screen, all in green. He turned a page, and it was still a page. He turned another page, and it was still a page of limit down, as if it were happening again yesterday.
For three consecutive days, the stock price dropped by one or two hundred points every day, and almost a thousand stocks hit the daily limit!
There are only more than 2,000 stocks in the entire A-share market, which means that nearly half of the stocks hit the daily limit, and trillions of market value evaporates from the entire market every day.
Looking at the Shanghai Composite Index, it has fallen by nearly 30% in just 14 trading days!
"This, this, if it keeps falling like this, won't the index crash?" she murmured. "How can I trade stocks like this? This, this stock, is it still worth trading?"
Lin Menghan looked at the falling K-line of the Shanghai Composite Index A, and then looked at the nearly 30 pages of stocks that had hit the limit down on the brokerage software. She felt a chill running up her spine, making her tremble all over.
She couldn't help but look at Li Feng and said, "This market is too crazy. This, this..."
The two seemed stunned. They felt that the stock market in front of them was so crazy and unfamiliar. It seemed to have changed its appearance, like a vicious bear, choosing its prey.
Li Feng nodded and said, "That's why I asked you to come and monitor the market these few days, even if it means taking time off."
"If a stock investor wants to truly mature, he or she must go through the trials of a bear market. Only then can one truly understand the fear and ruthlessness of the stock market, and then develop awe and respect for it. The Shanghai Composite Index has fallen sharply in recent days, which is quite frightening, but it is still slightly worse than the bear market in 2008. That year, the index plummeted from 5212 points to 1664 points in one fell swoop, a drop of more than 4,000 points!"
Hearing this, Zhao Xinyue swallowed hard and said, "No, it won't fall to 1664 points again, right?"
Li Feng shook his head and said, "Definitely not. During the super bull market of 2005-2007, the index rose sixfold from its lowest point of 998 points. However, this time, from its lowest point of 1974 points, it has only tripled. A sharp rise will be followed by a sharp fall. This time, the index hasn't risen that much, so it's naturally not going to fall that low."
After a pause, Li Feng continued, "There are ups and downs. This is the real market. In the stock market, if it rises too much, it will fall, and if it falls too much, it will rise again. This cycle of highs and lows has been going on for decades. Now, many stocks have fallen a lot from their highs, but they are just returning to where they should be."
"When we trade stocks, we must ensure we buy at the low point and sell at the high point, not the other way around."
Lin Menghan listened very carefully.
Zhao Xinyue pouted and said, "Everyone knows that stock trading is about buying low and selling high? Just tell me how to buy low and sell high!"
Upon hearing this, Li Feng praised:
"Xinyue, that's a very good question! The essence of stock trading is to buy low and sell high, but to solve this problem, we must first distinguish between low and high."
"The stock price is low, is it low?" Li Feng continued to ask.
"This? When you bought Kweichow Moutai in 2013, you said that low-priced stocks are not necessarily cheap, and high-priced stocks are not necessarily expensive...it depends on the intrinsic value of the stock." Lin Menghan added.
Li Feng gave her an affirmative look, tapped his fingers lightly on the keyboard a few times, and then opened the K-line chart of Wuliangye and continued to analyze:
"That's right. The same stock can have different highs and lows in different dimensions. For example, Wuliangye's current price is 21.57 yuan, which is high compared to last year's price, but low compared to 2012. But when we trade stocks, we're trading the future. When we talk about highs and lows, we're referring to whether they're high or low relative to the future. We want to buy stocks that are low relative to the future."
Zhao Xinyue became even more confused. She not only pouted but also frowned.
Lin Menghan seemed to be thinking about something, and asked, "Who can predict the future? Isn't this just metaphysics?"
Li Feng responded:
"You're absolutely right. Stock trading, to a certain extent, is metaphysics, a form of probability. Because selling stocks involves the future, and predicting the future is full of various variables, but within these variables, there are still patterns to follow."
"This requires an analysis of the entire A-share market. Within this market, individual investors, including institutional investors, various funds, and private equity firms, can be broadly divided into two main schools: value investing and price speculation. Accordingly, within this market, there is a clear distinction between these two types of stocks, commonly known as "two stocks," "eight stocks," or "blue-chip stocks" and "theme stocks."
"When we speculate in the stock market, including buying low and selling high, we also need to categorize it according to the market. Let's start with the theme stocks that are most prevalent in the market. They can also be called speculative stocks, restructuring stocks, news stocks, etc. The most typical characteristics of these stocks are small market capitalization, high PE, and hot themes. To put it bluntly, the greatest value of most of these stocks is their hype value and shell resources. Many market makers, even public and private equity funds, institutions and listed companies, collect chips at low prices, take advantage of various eye-catching hot spots to speculate, and cut retail investors like leeks."
"For example, the Pi Tu Pi stock Liu Bin hyped a few days ago is a typical theme stock that piggybacks on internet finance and exploits retail investors. These stocks often rise rapidly, then plummet, experiencing dramatic ups and downs, just like the goblins in Journey to the West: they appear alluring, but are actually nothing but skeletons. You absolutely must avoid them."
"If you want to profit from this kind of stock, you can only ambush at a low price when the main force hasn't pushed it up, or you can see the general trend and find someone to take over your chips at a high price. But you are not the tapeworm in the belly of the banker, so how do you know when to enter the market and when it will skyrocket? When retail investors see this kind of stock, it is often at its most prosperous and beautiful, and it is also when it is being shipped out and looking for buyers. Therefore, it is really difficult for retail investors to profit from speculating on this kind of stock."
After a pause, Li Feng continued:
"Blue-chip stocks are different. Due to their large market caps, market makers won't easily enter the market. To buy these stocks at a low price, you mainly need to look at the stock's intrinsic value, such as the prosperity of the company's industry, the stock's PE, the stock's dividend yield, and so on. The dividend yield provides a safety cushion for these stocks. Even if there is no immediate increase, the investment can be recovered by collecting dividends alone. If the performance explodes, it will be a Davis double-click of the stock price and PE. These are stocks with limited downward potential and unlimited upward potential."
"So, the most effective way for retail investors to buy low and sell high is to choose these types of stocks, rather than fighting with market makers on theme-based stocks. What do you have as a retail investor? In terms of capital, you don't have as much as the market makers. In terms of technology, can you match the market makers' standards in drawing lines? In terms of information, are you as well-informed as the market makers? Once you can't resist the temptation and play with fire, the end result will be self-immolation."
"You should also know that the most important thing about stock trading is to achieve compound interest and reinvest!" Li Feng continued,
"If you choose to fight the dealer, it is destined to be an extremely difficult, tortuous, and even a one-way road. Even if you win temporarily and make money, sooner or later, a smarter and more powerful sickle will come to harvest you and directly cut off your compound interest accumulation. So you can play for fun, but you can't indulge in it and become unable to extricate yourself. That is a road of no return with an extremely low chance of winning.
"Although the road of value investing is fraught with traps and snares, generally speaking, the success rate is much higher than that of speculation. This is the secret to achieving compound interest and the key to stock trading."
Li Feng said a lot in one breath. Lin Menghan listened with great interest. Zhao Xinyue was confused and pouted louder and louder. She simply stopped listening, walked aside and made a cup of tea for Li Feng.
Li Feng ignored her, took a sip of tea, and continued:
"In the final analysis, stock trading is a game of money and chips, a battle between people. However, it doesn't take place in the wilderness or the forest, but in the stock market. Today, either your funds will be destroyed or mine will be destroyed."
"In this game, speculation means engaging in a close fight with bankers and retail investors, a life-or-death struggle. Value investing, on the other hand, involves playing with companies. As long as the industry in which we invest continues to thrive, with a low PE and a high dividend yield, we are friends with time and the future. Even if we hold on to our investments, we can recoup our investment through dividends alone! Once a bull market hits, we can enjoy the benefits of increased valuations and achieve a Davis Double Hits! This is the right way to invest, the right path to tactical stock trading!"
Zhao Xinyue couldn't help herself and asked, "Li Feng, do you have any basis for what you said?"
Li Feng looked at her, then looked at Lin Menghan, and said seriously:
"Buying low and selling high in stock trading is a very serious issue. If you don't believe it, open your eyes and take a closer look at the current market. Don't just focus on the Shanghai Composite Index or the ChiNext Index. Look beyond these indices and see the blue-chip stocks in the market."
"Look, the Shanghai Composite Index has plummeted 1,492 points from its peak of 5,178 to 3,686, a drop of nearly 30%. Many stocks have hit their three or five limit-down levels, or even been cut in half or more. But look at the blue-chip stocks."
Li Feng pointed.
Lin Menghan first pulled out the K-line charts of the four major banks and the four smaller banks, and then pulled out the K-line charts of famous blue-chip stocks such as Ping An of China, China Life, Kweichow Moutai, Wuliangye, Gree Electric Appliances, and Vanke A, and couldn't help but exclaimed:
"These blue-chip stocks didn't fall at all, and some even rose!"
"It was to rescue the market." Zhao Xinyue retorted.
Li Feng shook his head and said:
"Xinyue, don't just follow the crowd. While it's true that these stocks need to be boosted to support the market, you also have to consider their inherent quality. These stocks haven't risen in years, and they've only risen by around 50% during this bull market, far from keeping up with the growth of their intrinsic value. Take Gree Electric Appliances, for example. Its dividend has already reached 6%, and even the Big Four banks still have a dividend yield of 6%. How can you expect them to fall further?"
"In fact, the entire market has been divided because new investors are entering the market with the help of leverage," Li Feng pointed out.
"During this bull market, the theme stocks most favored by new investors, fueled by leveraged funds, have skyrocketed, sometimes fivefold or even tenfold. Blue-chip stocks, less favored by new investors, have only risen by around 50%. Therefore, this leveraged bull market is also a distorted one."
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