tech

Why can't you sell stocks because the price is high, or buy because the price is

A fan asked: The valuation and price-to-book ratio of banks are both low, but I see that the stock price is not low in history. Can I still buy it?

I replied: Stock trading has nothing to do with the current stock price.

There is no need to pay attention to the historical stock price and the current stock price when investing in stocks. Comparing which one is higher or lower is of no use at all! Whether it is long-term value investment or short-term speculation, comparing the current stock price with the historical stock price is not very meaningful.

For example, when we do long-term investment: a stock was 5 yuan a year ago and is now 10 yuan. You think the current price is too high, even though its valuation is low now. As a result, to your surprise, this stock rose to 16 yuan after 6 months, and to 36 yuan after a year - isn't this situation often seen?

A stock price that has doubled or increased tenfold does not mean it will not continue to double in the future. Never use whether the stock price has risen too much as a basis for buying or selling.

Advertisement

The same is true for short-term trading. Stock A has already risen by 50%, and stock B has risen by 30%. We must not think that stock B will be easier to rise or have a larger increase in the future. In actual short-term fluctuations, stocks like stock A that have already had a larger increase may have a larger increase in the future.

Since the stock price cannot be used as a standard for judging the decision to buy and sell, what can be used as a standard? Today, I will only talk about long-term value investment here. From the perspective of value investment, the decision-making criteria for buying and selling should be valuation indicators such as the price-to-earnings ratio or the price-to-book ratio, as well as the future development prospects of the company and the industry.

For example, the price-to-earnings ratio of banks is much lower than before. In the case of unchanged development prospects for banks, it indicates that the cost-effectiveness of bank stocks is higher. Although the current stock price may have tripled compared to five years ago, the performance has quadrupled compared to five years ago. The performance growth rate is higher than the stock price increase rate, and of course, the price-to-earnings ratio will decrease, showing a lower valuation. It is more valuable and more worthy of purchase.

Just like Old Wang could produce 10 parts a day before, and his salary was 10 yuan per day. It is equivalent to 1 yuan of salary for each part. A year later, his salary rose to 20 yuan per day, and Old Wang could produce 30 parts a day. It is equivalent to 0.67 yuan of salary for each part. At this time, Old Wang is obviously more cost-effective than a year ago and can create more value for the boss. If the boss fires Old Wang because his salary has doubled compared to a year ago, then the boss is too bad, really not suitable for doing business.Here, wages are equivalent to stock prices, and the income Lao Wang receives for each part he produces is equivalent to the price-to-earnings (P/E) ratio. The P/E ratio = stock price / earnings per share. When we judge whether Lao Wang is more valuable to us, we certainly cannot look at Lao Wang's current salary.

That is to say, even if a stock has increased by 100 times, if the P/E ratio is still low and the company's development prospects are still good, this stock is still worth buying. Even if a stock has fallen by 98%, if the P/E ratio is high and the company's development prospects are bleak, we must absolutely not buy it.

Kweichow Moutai has increased by hundreds of times in twenty years, why is there still a lot of people buying it vigorously now? The reason is that the company's development prospects have always been good, although the company's stock price has risen, but it is basically matched with the growth of performance, and the investment cost-effectiveness is still good.

A stock price has increased by 3 times and then plummeted, not because of the excessive increase, not because the stock price is too high. But because its fundamentals can't keep up with the pace of the stock price increase. If the company's fundamentals have always been good, and the company's stock has always been undervalued, then it is not impossible for the stock price to increase by 100 times in ten years. Overvaluation, and the fundamentals do not support the stock price, is the core reason for the stock price plummet.

A fan friend raised the following question:

Hello Mr. Meng: I often read your articles, I very much agree with your investment thinking, and I also admire your deep insights into the stock market. I would like to ask you a question, I have a bad habit, that is, after seeing the stock I recognize, I can't control my hands, originally planned to build positions in batches, but most of the time it is all invested quickly, I would like to ask, how to control my strong desire to buy stocks I like, and let myself build positions in batches according to the plan.

The main reason for not acting according to the plan is still a lack of deep investment cognition. Deep in your heart, you still think that it may not be a bad thing to invest all at once quickly. Because you have had cases of quickly heavy positions and obtaining higher returns in the past. This approach has been successful. Deep in your heart, you still somewhat recognize this rapid increase method.

This is a lack of deep cognition or vague cognition. When you have a deep understanding of this, it is difficult for you to violate the position-building plan.

How can you have a deep understanding?1. Frequent setbacks and failures

Getting hit often will make you remember. If you frequently suffer losses due to violating the investment plan, you may have a deeper understanding of violating the plan. Note: it's only "possible," not "certain."

2. Think and summarize more

There are also many people who have made countless mistakes in investment, but because they have not summarized and reflected well, their understanding is not profound, and they will continue to make mistakes. Therefore, you need to write self-criticism and write it deeply. You need to find the deep-seated reasons for falling in the same place many times from the root.

3. Take targeted measures and implement them in detail.

After understanding the root causes of your mistakes, you can take targeted measures. The most common method is to carry out "psychological balance." If your mind is full of the idea of "quickly building a position and making a lot of money," it is definitely difficult to control your hands. At this time, you need to actively add some opposite ideas in your mind: for example, recall the examples of your failure to do so in the past, so your strong optimism will be much weaker.

When things are good, think about the bad side, and when things are bad, think about the good side. We will be psychologically balanced and become rational. Just like after a quarrel with your wife, if we think more about the things she cares about us in daily life, our anger will be much less. When we see a good car, we ignite the impulse to buy a car. At this time, if we think more about the child's school expenses, think about the cost of illness and medical treatment in old age, we may give up the idea of buying a car now.

Leave a Reply